Most of the indexes moved sideways ahead of the FOMC meeting.

Market Statistics

The three major indexes all closed at new highs but it was definitely a battle. There was a $1.3 billion sell side imbalance in market on close orders on the NYSE according to Art Cashin. That imbalance was eventually covered without any major impact in the closing minutes.

The S&P reached its intraday high at almost 2,508 at noon and traded in a very tight 2-point range the rest of the day. Everyone was holding their breath ahead of the FOMC announcement and Yellen press conference.


The morning economic reports were mildly positive but for the most part were ignored because of the President's speech at the UN and the impending FOMC meeting.

New Residential Construction for August dipped slightly from 1.19 million in July to 1.18 million. This was well off the cycle peak at 1.32 million in October. Analysts blamed the decline on the leveling off of construction activity to a sustainable path. Builders have been burned many times in the past by racing to build more homes to fill demand only to have the demand cycle turn and leave them with unsold inventory. Builders are comfortable with the current pace and they are seeing profits rise from the increase in prices due to high demand.

Single-family starts were 851,000 and multifamily starts at 329,000 compared to 838,000 and 352,000 respectively.


August import prices rose +0.6% after a decline of -0.1% in July. The prior five months saw a total decline of -0.2% so the August rise was unexpected. This was the largest gain since June 2016. The lifting factor was fuel prices with a 4.2% jump and 4.8% rise petroleum products. These numbers were before Harvey because the survey period is earlier in the month. Export prices rose +0.6% as well. Over the trailing 12 months, import prices are up +2.1% and export prices +2.3%.

The API inventories after the bell showed a -1.44 million barrel rise in oil that was less than half the 3.9 million barrel analyst consensus. Gasoline inventories fell -5.06 million barrels and distillates fell by -6.13 million and the biggest weekly decline since 2004. The API said 13 refineries are postponing autumn maintenance for several weeks to months in order to produce more fuel and capture the high crack spreads caused by the spike in fuel prices.

Crude prices rose about 50 cents after the API numbers.


The calendar for Wednesday starts with home sales but they will not move the market. The movement will be supplied by the FOMC statement and the Yellen press conference. According to the CME FedWatch Tool, there is 100% chance there will be no rate hike. The only thing they can do to rock the market is to begin quantitative tightening or QT by reducing the amount of securities they are buying each month. Currently that averages about $60 billion. This replaces the securities (treasuries and mortgage backed securities) that mature each month. This has been discussed multiple times and some believe the start of QT could be on Wednesday. Others believe they will wait until December because of the hurricane impact on the economy.



In stock news, T-Mobile (TMUS) and Sprint (S) are back in serious talks once again over a potential merger. T-Mobile is majority owned by Deutsche Telekom and Sprint is majority owned by Softbank. The discussions revolve a stock for stock merger and T-Mobile CEO John Legere is expected to run the combined entity. However, Softbank's Masayoshi Son also wants a say in the company decisions. The challenge is getting regulators to approve a merger between the 3rd and 4th largest carriers in the US. That could reduce competition. AT&T (T) and Verizon (VZ) shares rose on that very idea that competition would be reduced. A deal has been discussed multiple times over the years but never got past the discussion stages.



The disaster for the day was Best Buy (BBY). They held their first investor day presentation in five years and now they are probably wishing they had waited another five years. The guidance was long term but analysts hated it. Best Buy is targeting revenue of $43 billion for fiscal 2021 up from $39.4 billion in 2017. They expect non-GAAP earnings of $1.9-$2.0 billion compared to $1.7 billion in 2017. That would equate to earnings per share of $4.75-$5.00 or roughly a 9% annual growth rate. Analysts were already expecting 2021 earnings at the high end of that range. Investors were underwhelmed and shares fell -9% intraday.


Cloud company Veritone (VERI) has been announcing a new partnership almost daily and the stock is exploding higher. The company focuses on AI in the cloud. They are a new company that went public in May and anybody short this stock is in a lot of pain. There was no news today but shares gained 34%. This is when you need a time machine to go back four weeks when the stock was $8.


Tesla (TSLA) shares fell slightly after Jefferies initiated coverage with an underperform rating and $280 price target. The analyst said Tesla could lose half its value if it cannot reach its production targets. He also worried that margins would decline as a result of product mix and low margins on batteries. He said achievements to date have been visionary but earnings are not going to scale quickly. He sees losses until 2020. This compares to consensus earnings for $5.33 in 2019. Competing analysts now see Tesla as a software company rather than a car company. More than 60% of Tesla's employees are programmers. Even Elon Musk says it is a software company that also makes cars, batteries and solar roofs.

The analyst picked a good spot technically for his sell call. The stock hit the resistance high on Monday and this is definitely an opportunity for a double top pattern to emerge.


Refrigerated foods producer Bob Evans Farms (BOBE) will be acquired by Post Holdings (POST) for $1.5 billion. That works out to $77 per share. The transaction is expected to close in Q1-2018. Post said it would be immediately accretive to revenue and free cash flow.


Warren Buffet has won $2 million in a bet against hedge fund returns. In 2007, Buffett offered to bet any actively managed fund that an index fund would outperform the managed fund over a 10-year period. He proposed the bet in one of his shareholder newsletters. Only one fund manager took him up on the bet. That was Ted Seides, former co-manager of Protege Partners. The bet pitted low cost S&P 500 index funds against a group of Protege's handpicked hedge funds.

The 10-year bet does not expire until December 31st but Seides has conceded. The group of Protege funds averaged 2.2% a year since 2008 and the S&P funds averaged 7%. A $1 million investment in the hedge funds would have earned $220,000 while the same investment in the S&P earned $854,000. The money will be donated to Girls Inc of Omaha, Nebraska. Berkshire Hathaway shares are up 93% over the same period.


News broke late in the afternoon that President Trump was planning on making it easier for US gun manufacturers to sell guns overseas. The president is going to shift oversight of international non-military firearm sales from the security-focused State Department to the trade-focused Commerce Department. This could be a windfall for US gun manufacturers. Since other countries can sell into the US, we should be able to sell to other countries. This is another example of how the president is trying to reduce trade restrictions and benefit US companies.


After the close, FedEx (FDX) shares fell sharply after profits declined 17% because of a June cyberattack on its TNT Express business in Europe. This caused significant delays in shipping and shutdown TNT for a prolonged period. FDX said that "most" of TNT operations are up and running but profits, revenue and package volumes are still down from prior levels.

FDX reported earnings of $2.19, down from $2.65 in the year ago quarter. Adjusted earnings were $2.51 and that was a major miss of estimates at $3.17. Revenue rose 4% to $15.3 billion and also missed estimates for $15.37 billion. They guided for the full year to earnings of $12.00-$12.80 and down from the prior forecast for $13.20-$14.00. Shares fell about $4 in afterhours after an initial $9 drop.


Adobe Systems (ADBE) reported earnings of $1.10, which beat estimates for $1.00. Revenue of $1.84 billion rose 26% and beat estimates for $1.81 billion. They guided for the current quarter for revenue of $1.95 billion and earnings of $1.15. Analysts were expecting $1.95 billion and $1.10 for earnings. Shares fell $5 on the in line revenue guidance.


Bed, Bath and Beyond (BBBY) reported earnings of 67 cents that missed estimates for 93 cents. This was also lower than the $1.11 in the year ago quarter. Revenue of $2.9 billion missed estimates for $3.0 billion. They said the earnings were impacted by an 8 cent restructuring charge, 2 cents due to Harvey and 1 cent due to an accounting change. Shares fell sharply to to $21.50 after closing at $27.02 but recovered to end the session at $24.


Hurricane Maria is going to blow right over Puerto Rico but then turn north and miss much of the Bahamas and Florida. Based on current estimates it could make landfall in North Carolina or anywhere north of there. Hurricane Jose is still loitering off the East Coast and the closer Maria gets the more the two storms will interact. Jose could push Maria onto land, or farther out to sea, or they could combine for an even bigger mess in the NJ/NY area. The yellow X in the bottom graphic is the remnants of tropical storm Lee, which has broken apart.



On this date in 1985, an 8.1 magnitude earthquake hit Mexico and more than 10,000 people were killed. In memory of that earthquake, many building managers held earthquake drills on Tuesday morning. On Tuesday afternoon a 7.1 magnitude earthquake hit just outside Mexico City. The amount of damage is still unknown but I am sure residents were glad they participated in the drill this morning.



Markets

The biotech sector declined -1% to close at a two week low. There was no specific reason other than there were strong gains since late August and traders decided to take profits. The decline in biotech stocks weighed on the Russell 2000 and the Nasdaq. The chart suggests the decline may not be over.


The biotechs were more than likely a drag on the S&P as well and the index gained less than 3 points. Healthcare stocks were also a drag. This was a new high and it was another close over 2,500. Both of those items are bullish.

Typically, the market posts gains on the Tuesday before a Fed announcement so today qualified but the gains were minimal. This suggests traders are more than a little concerned about the outcome.


The biggest decliner on the Dow was UnitedHealth (UNH) on worries the Obamacare repeal might actually happen this time. Lawmakers have come up with what they believe is a better plan and they might actually get it passed. The healthcare stocks were hammered with CNC -5%, AET -3%, MOH -6%, CI -2%, ANTM -2% and UNH -2%. One of the features of the replacement bill is the halt to government subsidies to these healthcare companies.

UNH removed 24 points from the Dow and the financial stocks, energy and telecom added significantly more points. If the Dow can keep the rotation going with new leaders every day, we could see some higher highs.

The next target is 22,500 and round number resistance.



The Nasdaq Composite only gained 6 points and closed right on resistance at 6,460. The index is poised to breakout with any further gains. The big cap tech stocks contributed to the gains but they were still mixed. If you look at the stocks in the winners/sinners list below, there are a lot of biotech/medical stocks in the loser column.

The Nasdaq has been moving very slow since that big short squeeze the prior Monday and it is about time for a large directional move. Let's hope that direction is positive.




The Russell 2000 was the weakest of the broad market indexes because of biotechs. Despite that drag, the Russell managed to post only a fractional loss thanks to the positive input from the financial sector. If the Russell can eventually more to a new high over 1,450 this market could catch fire.


Traders are walking on eggshells and are barely trading. Volume was only 5.8 billion shares and the A/D was almost dead even. I do not know what they expect to happen post Fed and I am in the same boat. I see no reason to put new money at risk until after we see what happens on Wednesday.

There is always another day to trade if you have money in your account.

Enter passively, exit aggressively!

Jim Brown

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