Past performance is no guarantee of future results.

Weekly Statistics

Friday Statistics

Everyone expecting the typical August decline was frustrated when the minor 2.5% dip turned into a rebound that took the markets back to their highs. August has been down 5 of the last 7 years and up only 5 of the last 20 years. Those numbers have changed to 5 of 8 and 6 of 21 after the Nasdaq had its best week since the election.

The Nasdaq gained 87 points of 1.4% for the month but the index gained 207 points or 3.3% since the Tuesday morning low. That turned the markets around from weakness to strength as investors bought growth stocks instead of value stocks. Big cap techs and biotechs were the favorites with financials giving an assist on Friday.


Friday was a busy day for economics. The Nonfarm Payrolls were the big headline when they missed the consensus estimates. August produced 156,000 jobs compared to estimates for 185,000. However, August typically misses estimates for a variety of reasons including families trying to cram in a vacation and get the kids back into school. People put off looking for a job until after Labor Day. August headline numbers are normally revised higher by an average of 40,000 jobs.

Revisions to prior months were both negative. June was revised down from 231,000 to 210,000 and July was revised down from 209,000 to 189,000. The pace of job creation has slowed slightly with the three-month average now 185,000. The challenge is the lack of qualified applicants. There are plenty of job openings as we saw in the last JOLTS report with 6.163 million openings. Unless you want to work in a bar, restaurant or construction, the requirements are a higher level of education and computer literacy on a higher level. Being able to type misspelled Facebook posts in a hurry is not a qualification.

The unemployment rate rose one tenth to 4.4% with the broader U6 rate at 8.6%. Only 77,000 people joined the labor force in August compared to 355,000 on average over the prior two months.

Goods producing industries, including construction, manufacturing and mining/energy added 70,000 jobs. Private services added 95,000 but a big drop from the 179,000 in July. Government posted a loss of 13,000 jobs. Healthcare added 16,600 jobs and that sector will continue to grow as the baby boomers gradually lose their health.

The disaster on the Gulf coast will be a hit to jobs in the short term as companies that were damaged lay off workers until they can rebuild. In the long term, it will add to jobs because the rebuilding effort will last for years.


The drop in government payrolls caused a tick lower in the Atlanta Fed real time GDPNow forecast for Q3. The forecast is now 3.2% growth but we still have all the reports in September to factor into the mix.


The ISM Manufacturing Index surprised with a stronger than expected reading. The index rose from 57.2 to 58.8 compared to analyst estimates for a decline to 56.2. This was the highest reading since 2011. Customer inventories declined from 49.0 to 41.0 suggesting stronger orders in the future. The rise in manufacturer inventories from 50.0 to 55.5 will add to GDP growth for Q3. Twelve of the 18 industries reported growth and only 4 reported a decline in orders. Those were food/beverage, metals, apparel and furniture.

Order backlogs rose from 55.0 to 57.5 and the highest level since March. New orders eased off some from the 63.5 high in June but remained over 60 for the third consecutive month.

The hurricane will weigh on the manufacturing sector initially as plants in Texas recover. However, there could be a shortage of raw materials, especially chemicals used in the manufacture of plastic items. Long term, there will be higher demand for products as damaged items are replaced.



One area where manufacturing could surge immediately is autos. Analysts believe between 500,000 and one million cars/trucks have been destroyed by the flooding. The cars are not recoverable because they will quickly rust and mold. Insurance companies will take months to process all the claims but 30-60 days from now, there will be a surge in new car purchases.

Progressive, said they have as many as 500,000 insured cars in the flood area. They do not know how many of them were actually in the flood but the stock is getting hammered by investors fleeing a normally strong company.

Warren Buffett's Geico Insurance unit also has 500,000 insured cars in the area. Buffett said earlier in the week it would be some time before they knew how many claims would be generated. He said they had plenty of capital and would not cause any problems other than a temporary drop in earnings.

He may also have exposure through his reinsurance units, General RE and Berkshire Hathaway Reinsurance. They provide backup insurance for the other front line companies.


The final reading on Consumer Sentiment for August dipped slightly from the initial number at 97.6 to 96.8. That was still well above the 93.4 in July and the largest monthly gain since December. The present conditions component declined from 113.4 to 110.9. The expectations component rose sharply from 80.5 to 87.7. Business sentiment rose from 50 to 56. Overall economic expectations rose from 48 to 54. The hurricane will likely depress sentiment slightly in September but it should rebound quickly once the headlines disappear.


Construction spending for July declined -0.6% after a -1.4% drop in June. Analysts were expecting a 0.5% rise. This was the third decline in 4 months and spending is now 5.6% below July 2016 levels.

The calendar for next week is busy but there is only one report that traders will be watching with interest. The Fed Beige Book report on each of the Fed districts always draws attention but after the strong ISM report on Friday, there is little worry there will be any negative surprises.

There is a lot of Fedspeak this week. Apparently the Fed heads are getting it out of the way before the quiet period begins ahead of the Sept 20th FOMC decision.


CoreLogic is predicting $40 billion in damage for Harvey but insured losses of only $25 billion. Most standard homeowner policies do not cover floods so they will not have to pay claims. The bulk of insured losses will be to businesses and personal auto policies, which normally cover water damage. The actual wind damage was severe in Rockport, a town of 10,000 but was minimal in the Houston area where the majority of the damage was flooding.

Allstate (ALL) has the second-largest homeowner insurance coverage in Texas with a 13% market share. They would cover the first $500 million themselves but have reinsurance for everything over that amount.


There was some good news for Houston on Saturday. Hurricane Irma's mostly likely track has turned north of Puerto Rico and Cuba and will likely hit the East Coast and not enter the Gulf of Mexico. The track could still change but this is the most likely path as of 5:PM on Saturday. This is a category 3 storm with 120 mph winds but is expected to strengthen when it reaches the warmer shallow water.


Apple (AAPL) confirmed its September 12th product announcement and product leaks are becoming a daily event. The names of the new phones were leaked by case manufacturers. There will be an iPhone 8, iPhone 8 Plus and the iPhone Edition, which will be the $1,000 OLED version. Those names came from 9to5Mac, a company that routinely provides quality product leaks. However, iCulture disputed that Edition name claiming it will be called iPhone X. Apple is jumping from the 7 to 8 rather than have the "S" model revisions because they believe the changes are too dramatic for it to be just an upgrade. The screens have been reformatted with no home button and they have wireless charging among some other new features.

Apple shares have been listless for the last couple days. They typically decline a couple days before the announcement on a sell the news trade. With the event still a week away, it is a little early for the weakness but the trend is so well known, there are probably sellers jumping the gun. Apple shares did close at a new high for the last three days but only with minor gains.


Dow (DOW) and DuPont (DD) completed their merger and the combined companies now trade under the symbol DWDP and the name DowDuPont. The new company replaced DuPont in the Dow as of Friday. They announced the merger in December 2015 and the combined companies will eventually break apart into three separately traded entities. That split is expected to happen over the next 18 months and will separate the agriculture, materials science and specialty products divisions.

Dan Loeb of Third Point is on a mission to force DowDuPont to split into more than three companies with the specialty products division alone splitting into four companies because of the diversity of their products. The combined companies have a market cap of $156 billion. Once shares have found a range and built some history, I would be a long-term buyer because the splits will create future value.


Lululemon (LULU) reported earnings of 39 cents that beat estimates for 35 cents. Revenue rose 13% to $581.1 million and beat estimates for $567.0 million. Same store sales rose 7%. The company said analysts warning that athleisure was fading was a misrepresentation. The company is succeeding because they have expanded from yoga pants into multiple lines of attire including a new line of bras that have been successful. They have also been successful in other sports lines including running clothes. Cowen reiterated an outperform with a $68 price target. Shares rose 7%.


Palo Alto Networks (PANW) reported adjusted earnings of 92 cents that beat estimates for 79 cents. The company beat its own guidance for 78-80 cents. Revenue rose 27% to $509.1 million, which also beat estimates for $488 million. Palo Alto guided for 2018 for revenue of $2.125-$2.165 billion and the first time to break $2 billion. They guided for earnings of $3.24-$3.34. Analysts were expecting $2.13 billion and $3.27. They added 3,000 customers in the quarter, the most ever, to total 42,500. Free cash flow was $190 million with $2.2 billion cash on hand. They also announced the CFO was retiring. Shares rallied $14 on the report.


Ambarella (AMBA) reported adjusted earnings of 48 cents that beat estimates for 44 cents. Revenue rose to $71.6 million and beat estimates for $70.7 million. They guided for Q3 for revenue of $87.5-$90.5 million and analysts expected $88.8 million. During the conference call, the CFO warned that revenue could be impacted by lower prices, which cuts market share for the higher priced drones with Ambarella video. They also warned there was a shortage of memory components that could impact camera build schedules. Shares were knocked for a 22% loss.


Nutanix (NTNX) reported a loss of 33 cents that beat estimates for 38 cents. Revenue of $226 million beat estimates for $218 million. The cloud vendor guided for current quarter revenues of $240-$250 million and well over estimates for $232 million. They guided for a loss of 37 cents that matched estimates. Shares spiked $2 at the open but fell back to close flat.


The Q2 earnings cycle is over. Only 2 S&P companies are left to report and those are this week. Of the 498 companies reported, 73.3% have beaten on earnings and 59.2% have beaten on revenue. The blended earnings growth for Q2 was 12.1%. There have been 66 guidance warnings and 45 guidance raises. The forward PE is now 17.9 and the highest since the financial crisis rebound. Hewlett Packard, HD Supply and Dell Technologies are the big dogs for the week.


Stifel's John Baugh wrote that all types of building supply companies could benefit from the hurricane. His best picks were Home Depot (HD) and Lowes (LOW) saying HD saw $550 million in increased sales from Hurricane Sandy. The gains were weighted in the first two quarters but carried on for the next two quarters as well.

He said flooring companies like Mohawk (MHK) and Lumber Liquidators (LL) could see a surge in demand from ruined carpets and warped flooring. He also discussed USG (USG) and Eagle Materials (EXP) because of wallboard and sheetrock demand from water damage. Both companies have larger exposure to the south. He warned that Aaron's (AAN), Conn's (CONN) and Rent-A-Center (RCII) could be hurt because of store closures and from people failing to make payments on waterlogged furniture and electronics. The companies have insurance on the furniture in case it is damaged but there would still be a protracted loss process.

A Wells Fargo analyst warned about expecting too much on the auto replacement scenario. He did the math and said he expects 115,000 new cars to be sold in the Houston area. Group 1 Automotive (GPI) has 23 locations. Autonation (AN) has the second most dealerships in the area at 14. However, not everyone can afford a new car and with the average age of a used car at 11 years, consumers are only going to get a small insurance check for their destroyed car. It will not be enough to actually replace the car with something similar to what they owned because high demand will lift prices on used cars. The auto manufacturers and rental companies have said they are going to ship thousands of "off lease" and end of life rental cars to Houston in hopes of finding a hot market for used cars.

WTI prices fell early in the week as refineries began to go offline and it was apparent inventories were going to rise sharply without offsetting refinery demand. As news of some refinery restarts hit the market on Thursday, prices began to rise off the lows but the inventory reports over the next two weeks are not going to be pretty. Some refineries have restarted, some will be back online within two weeks but a couple could be offline for a month.


The gasoline shortage was very bad in Texas. On Wednesday, there were only 13 stations in the Houston area with gasoline. On Saturday morning, there were more than 100. Tankers are coming in from all along the coast to cover the shortage. Maps from http://tracker.gasbuddy.com/.

Wednesday Gasoline Availability

Saturday Gasoline Availability

Natural gas prices rose sharply the last two days because some of the Gulf production has been offline because of Harvey and the injections into storage have been low. The injection last week was only 30 Bcf to bring the total to 3,155 Bcf. That is only 8 Bcf over the five-year average and -239 Bcf below year ago levels. The ramp of LNG production for export plus the accelerating conversion from coal to gas for electric generation, is consuming more gas per day than in the past. We have plenty but at the recent $2.85-$2.90 average price there is no real incentive to drill. Producers are drilling at a slow pace to save money and just replace the gas lost to production/depletion. Active gas rigs have been flat around 180 for months. Once gas demand pushes prices back over $3.50 the activity will increase.




Markets

The markets are rebounding on the idea that the disaster could unite lawmakers in Washington. The odds are good they will try to package the budget bill, debt ceiling increase and hurricane relief all in one bill. Some would not want to vote for it because of the items in the budget portion but they would be afraid to vote against any bill that has hurricane relief in the tile. This is an opportunity for lawmakers on both sides to get some of what they want while accepting some items they do not want. It would be a win-win for everyone to get it passed early while the disaster is on everyone's mind and still in the headlines.

There is also the North Korean problem. Investors have realized there are no options except for bad ones. Outside countries cannot attack because Kim Jong-Un is holding a trump card with 21,000 artillery pieces aimed at Seoul South Korea with 20 million people in the cross hairs. Japan, the U.S. and the UN can whine all they want but their only option is more sanctions. That takes the North Korean headlines out of the equation for the market. There may be continued knee jerk reactions to headlines but there is no option for action.

Unfortunately, we learned over the weekend that North Korea warned the missile test over Japan was only a prelude to an attack on Guam. They also released a photo of what they said was a thermonuclear warhead they were planning on using on their ICBMs. North Korea actually demonstrated loading the bomb into a nose cone of their Hwasong-14, which can hit the USA. More concerning for those that understand the threat, the Korean Central News Agency warned the "thermonuclear nuke with great destructive power can be detonated even at high altitudes for a super powerful Electromagnetic Pulse (EMP) attack." North Korea has reportedly completed preparations for a high yield nuclear test at the Punggye-ri test site. The test is expected on September 9th, which is the country's anniversary.


The S&P rebounded 48 points from Tuesday's low at 2,428 and stopped just short of new high resistance at 2,480. That was a 2% rebound in four days. As we move into the most volatile month of the year, that prior resistance high could be a formidable wall or eventual support if there is a sudden post holiday sprint higher.

With volume of only 5.1 billion shares on Friday, the conviction was light. We had a three-day weekend for headlines to appear. Earnings are over with only 2 S&P companies left to report. This will be a week for direction to appear and the 2,480 level will be the line in the sand.


The Dow rallied again in a thin market thanks to financials and a broad cross section of companies with only a few losers. The peak at 22,038 came about 12:30 and the index faded as the day progressed with a sharp 32-point decline in the last few minutes. That was probably profit taking from the four days of gains ahead of the weekend event risk.

Resistance is now 22,000 and initial support back at 21,775. The Dow rebounded 365 points in four days from Tuesday's opening low at 21,673 to Friday's high at 22,038. That is a good run and was enough to turn the index positive for the month with a 57-point gain for August as of Thursday's close.



The Nasdaq Composite rebounded 207 points from Tuesday's opening low at 6,228 to Friday's record high close at 6,435. That is a 3.3% rebound in only 4 days. That moved the Nasdaq from a bearish chart to a bullish chart if the index can break over the intraday high from July 27th at 6,460.84. There is always the possibility for a double top to form if that resistance holds.

We are moving into the most volatile month of the year when portfolio managers restructure their portfolios after Q2 earnings and before the best six months of the year, which begin on November 1st. While I would like to believe the Nasdaq will continue higher, the minor weakness in the big cap techs on Friday and the minor decline in the Nasdaq 100 Index, give me a reason to be cautious. I believe it was just weekend event risk caution but we should always be aware of resistance after a big move.





The small cap Russell 2000 is outperforming the rest of the market. The Russell has been up for 7 consecutive days and broke through resistance at 1,388 and 1,400. This should be bullish for market sentiment. The Russell was being lifted by biotechs and financials.


The major indexes were bearish heading into last week. The NK missile over Japan was an opportunity for the bears to seize control and force the market lower. They were unable to do it and once investors realized there was no option to deal with NK they bought the dip. Add in the expectations for a bipartisan budget, debt ceiling, hurricane relief bill in Washington and constant chatter about tax reform and suddenly the bears were running for cover.

This is going to be a pivotal week. If those talking points remain at the front of the conversation, the market could move higher. However, if lawmakers start talking down a combination bill and the threat of a government shutdown increases then the market will take note. The president has had a good week with the disaster headlines taking precedence over political headlines. If he can stay out of trouble and continue pressing his agenda, the market would react positively.

We are entering the most volatile month of the year but every seasonal trend has failed in 2017. I would be thrilled if this one failed as well.

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Random Thoughts


The market has returned to its highs but the number of bulls is shrinking. On a contrarian basis that is bullish but it is still concerning. 75% still believe the market is not going higher.



Effective Tuesday there is a big change in the way trades are settled. Starting Tuesday trades will be settled in 2 days instead of 3. A trade executed on Tuesday will be settled on Thursday. This applies to stocks, corporate and municipal bonds, unit investment trusts and financial instruments composed of those security types. The EU, Hong Kong and South Korea have already switched. Canada, Mexico and Peru will also switch on Tuesday.

Proceeds from a transaction will be available for withdrawal two days after the trade rather than three.

Visit the T2 settlement website for a complete list of the changes.


Dr David Cass interviewed Warren Buffet. There are some really interesting thoughts in the entire interview. In one response he refers to winning the "Ovarian lottery."

Cass: How has your understanding of markets contributed towards your political views?

WB: I would not say knowledge of markets has. My political views were formed by this process. Just imagine that it is 24 hours before you are born. A genie comes and says to you in the womb, "You look like an extraordinarily responsible, intelligent, potential human being. Going to emerge in 24 hours and it is an enormous responsibility I am going to assign to you - determination of the political, economic and social system into which you are going to emerge. You set the rules, any political system, democracy, parliamentary, anything you wish, can set the economic structure, communistic, capitalistic, set anything in motion and I guarantee you that when you emerge this world will exist for you, your children and grandchildren. What’s the catch? One catch - just before you emerge you have to go through a huge bucket with 7 billion slips, one for each human. Dip your hand in and that is what you get - you could be born intelligent or not intelligent, born healthy or disabled, born black or white, born in the US or in Bangladesh, etc. You have no idea which slip you will get. Not knowing which slip you are going to get, how would you design the world? Do you want men to push around females? It is a 50/50 chance you get female.

If you think about the political world, you want a system that gets what people want. You want more and more output because you will have more wealth to share around. The US is a great system, turns out $50,000 GDP per capita, 6 times the amount when I was born in just one lifetime. But not knowing what slip you get, you want a system that once it produces output, you do not want anyone to be left behind. You want to incentivize the top performers, do not want equality in results, but do want something that those who get the bad tickets still have a decent life. You also do not want fear in people's minds - fear of lack of money in old age, fear of cost of health care. I call this the "Ovarian Lottery". My sisters did not get the same ticket. Expectations for them were that they would marry well, or if they work, would work as a nurse, teacher, etc. If you are designing the world knowing 50/50 male or female, you do not want this type of world for women - you could get female. Design your world this way; this should be your philosophy. I look at Forbes 400, look at their figures and see how it has gone up in the last 30 years. Americans at the bottom are also improving, and that is great, but we do not want that degree of inequality. Only governments can correct that. Right way to look at it is the standpoint of how you would view the world if you did not know who you would be. If you are not willing to gamble with your slip out of 100 random slips, you are lucky! The top 1% of 7 billion people. Everyone is wired differently. You cannot say you do everything yourself. We all have teachers, and people before us who led us to where we are. We cannot let people fall too far behind. You all definitely got good slips.

Cass: What was the most difficult negotiation you were ever involved in? How did you develop your strategy going in?

WB: Only really learned negotiations from my dad. People have different styles of negotiation. I do not want to be in a negotiation where it "has to end" at some point. I do not want them to have me by the throat while I have them by the throat. Either we give up or one strangles the other. My style is different from most peoples, just say what I do. If you do that throughout your life then stick to it. I can walk away from anything. I say I will pay $X, and normally this is the best deal. I do not want to lowball, then you counter, and get to $X anyway. You spend time and money doing that. I just say what I will pay, and that works fine once you establish a reputation. You do not want to get in a negotiation that you cannot afford to walk away from. Bargaining with people you love is a terrible mistake. It is destructive. The most powerful force in the world is unconditional love.

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Jim Brown

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