Wal-Mart announced a $20 billion stock buyback program and lifted the Dow to a new record high.

Market Statistics

Wal-Mart has bought back 30% of its stock over the last 15 years and this two-year buyback for $20 million will add another 8% to that total. The company announced at its investor day it was reiterating guidance for FY-2018 and 2019. For FY-2018 they guided for earnings of $4.30-$4.40. Analysts were expecting $4.37. For FY-2019 they guided for earnings of $4.52-$4.62. Analysts were expecting $4.63. They expect sales to rise around 3% in 2018 to $507.8 billion compared to consensus estimates for $495.6 billion. However, e-commerce sales are expected to rise 40%. The company said costs associated with building out their e-commerce business would decline after 2018. WMT said they now have online ordering at 1,100 stores and would add another 1,000 stores in 2018. Stores with online ordering have a significantly larger number of items and buyers typically buy up to twice that of a regular brick and mortar customer.

Shares rallied to a two-year high and added 25 points to the Dow. This stimulated the index and lifted it to a new closing high. Shares rallied $1.50 on Monday after they announced 30-second returns with a smartphone app. Analysts say Wal-Mart is the only retailer with a chance of competing with Amazon.


The only material economic report on Tuesday was the NFIB Small Business Survey. The optimism index fell sharply from the August peak of 105.3 to 103.0 for September. The "good time to expand" component fell from 27% to 17% and those who felt it was a good time for increasing capital expenditures fell from 32% to 27%. Those expecting sales to improve fell from 27% to 15%. Respondents planning to hire rose slightly from 18% to 19% while those with job openings declined from 31% to 30%. About the only positive was the continued strength in the jobs numbers.

The hurricanes may have had an impact as well as the failure of the healthcare reform. Obamacare is still alive and well for small businesses. Companies are still struggling to find qualified workers. There are plenty of people in the labor force but training is becoming a bigger problem.

Tomorrow we get the FOMC minutes and the hurdle for the week. Analysts will be looking for clues on timing of the next rate hike. The price indexes will also be a clue towards Fed direction because of their inflation content.


We could also see some stagnation in the market on Wednesday as traders worry over potential disappointments from the bank earnings. Expectations are high and possibly overdone. There is the possibility of a market moving disappointment since the bank earnings will influence sentiment for the entire financial sector including insurance companies, brokerages, card processors, etc.


Honeywell (HON) said it would spin off two businesses worth $7.5 billion in annual revenue. The company said it was spinning off the Homes product portfolio and the ADI Global Distribution business and Transportation Systems business into two separate public companies. The Homes/GDI business would have revenue of $4.5 billion and 13,000 employees. The Transportation Systems business would have revenue of $3 billion and 6,500 employees. The remaining Honeywell portfolio would consist of high growth businesses in six industrial markets. They will be keeping the aerospace business.

The company also raised 2017 guidance from $7.00-$7.10 to $7.05-$7.10. Q3 guidance was $1.75 compared to estimates for $1.73. Revenue is expected to rise 3% to $10.1 billion and higher than estimates for $9.9 billion. Shares dropped sharply at the open but recovered slightly to close down fractionally.


Pfizer (PFE) said it was considering strategic alternatives for its consumer healthcare business. The alternatives could be a potential sale of all or part of the business or a spinoff. The business had revenue of $3.4 billion in 2016. The CEO said there was enough distinct elements in the segment to make it more valuable outside of Pfizer. Investors appeared to like the news and share gained fractionally.


Jabil Circuit (JBL) was downgraded by Goldman Sachs from neutral to sell with a price target of $26. The analyst said the street expectations for the semiconductor universe were overly optimistic and Jabil's earnings have been the most volatile. Shares fell 3% on the news.


The sector warning did not impact Nvidia (NVDA) after the company announced a new AI chip designed to drive fully autonomous robotaxis. The new chip called Pegasus is another in the Nvidia Drive PX platform to handle Level 5 driverless vehicles. The chip can perform over 320 trillion operations per second, more than 10 times the performance of its predecessor, the Nvidia Drive PX 2. This chip will drive fully robotic cars without steering wheels, pedals or mirrors. There are already 225 partners developing on this platform and more than 25 are developing fully robotic vehicles. The chip can locate the vehicle within one centimeter of accuracy while tracking people and other vehicles around the car.

Nvidia said "virtually all carmakers, transportation as a service companies and startups are using Nvidia AI in the development of Level 5 vehicles. Shares gained $3.50 to close at a new high.


Palo Alto Networks (PANW) was upgraded from equal weight to overweight by Morgan Stanley and shares spiked $4 on the news. The analyst is targeting $185, up 23% from the prior target. The analyst said a rapidly ramping user base will allow annual subscription growth of 20% through 2020. Palo Alto has actually exceeded that rate in past quarters. In addition, PANW created $705 million in free cash flow over the last 12 months. The analyst said their sales execution issues were now behind them with more than 60% of the sales force now fully productive.


After the bell Barracuda Networks (CUDA) shares fell -6% after the company reported earnings of 17 cents. That matched estimates but was down from the 21 cents in the year ago quarter. Revenue of $94.3 million beat estimates for $93.5 million. Billings in the quarter rose 8% to $108 million. The failure to beat estimates caused a sharp drop in the stock.


Micron (MU) shares fell -$2 to $38.95 after the company announced a $1 billion secondary offering of 25 million shares. The proceeds will be used to pay off $476 million in 7.5% interest rate debt as well as multiple other debt instruments and credit lines. This is a positive for Micron since expenses will decline but the addition of 25 million shares to the float knocked the stock lower. Shares closed at a new high at $41.98 in regular trading.


Apache (APA) shares fell sharply after the company said Q3 production guidance had declined by 2% and Q4 guidance by 4%. The drop in guidance was due to Hurricane Harvey and a delay in gas processing facility start-ups at the new Alpine High field. They also said capex for 2017 and 2018 would be in the range of $3.1 billion and exceed cash flow by $1 billion this year and possibly next year. Shares fell -7% on the news.




Markets

On October 9th, 2007, the S&P closed at 1,565.15. That was a record high close and that record was not broken until six years later. Monday was the 9th anniversary of that pre financial crisis high. In April 2015, a new high was made at 2,134 and that high held until July 2016. Since then the S&P has made dozens of new highs and closed within 2 points of another new high today. The market is significantly improved both in levels and acceleration since that July 2016 high.

We were fortunate today that North Korea did not do anything stupid and the threat, while still there, passed for today. The next date suggested by analysts is October 18th and China's communist party conference. As long as it is just a missile, the market should ignore it.

The S&P is fighting resistance at 2,550 where it has stalled for the last four days. This should be broken soon assuming the FOMC minutes do not disclose a skeleton in their closet and the bank earnings beat estimates by at least a few cents.


The Dow internals were positive and the majority of the gains came from Boeing and Wal-Mart. The $1.50 rise in crude prices helped lift Chevron and Exxon off their lows from last week. JP Morgan reports before the open on Thursday and they are a Dow component. The impact of their earnings will be felt more by the movement in the financial sector than the movement in JPM shares.

The Dow closed at a new high and support is well back at just over 22,500. The index is rapidly closing in on another round number of 23,000 and that could cause some consternation as analysts begin to talk about the overextended conditions.



The Nasdaq posted a minor gain because the support from the big caps was limited. More than half were in negative territory and that damages intraday sentiment. The Nasdaq has resistance at 6,600 and 6,650. We need one good blowout day to kick the big caps back into high gear. They do not begin reporting earnings until next week.




Despite several days of consolidation, the Russell only posted a 4-point gain but it is more notable that the declines from Monday did not continue. That is bullish for market sentiment but it would be more bullish to see the index begin setting new highs again. It is one thing to hold the gains but adding to those gains is always better. I still cannot look at this chart without seeing the potential for a major retracement back to the 1,480 level.


The market is passing time as we wait for the beginning of earnings and the eventual launch of the North Korean missile. Last week, a Russian official, just back from North Korea said they were preparing for a launch in the coming days. Since we know about it in advance, the impact should be minimal.

The bank earnings will focus investor attention on the earnings cycle regardless of whether they beat estimates or not. Next week begins a flood of reports and that should provide market lift.

The Russell "could" fade but it would be a buying opportunity if it happens. Be prepared.

Enter passively, exit aggressively!

Jim Brown

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