Positive earnings from companies like Dupont failed to boost the market after economic reports tick lower.
Market Stats Table
Dupont (DD) posted earnings that nearly tripled and raised their guidance due to growing sales and higher prices. Dupont posted earnings of $1.26 per share compared to analyst estimates of only 93-cents. Revenue grew 26% and exceeded estimates by $500 million. Unfortunately a +4% spike in the stock of this Dow component failed to overcome negative economics.
The July Consumer Confidence report dropped to 50.4 and the lowest level since February. This was a -4 point drop from June and a -12.3 point decline since May's 62.7 level. The present conditions component fell only -0.7 to 26.1 but the expectations component fell -6 points to 66.6. Job expectations declined as did home buying intentions. However, people planning on buying cars and appliances picked up slightly. The percentage of respondents expecting the equity markets to decline over the next six months rose to more than 75%.
Consumer Confidence Chart
The Richmond Fed Survey fell sharply by -7 points to 16.0 from June's 23.0 reading. This is down from the recent high of 30 back in April. The new orders component was cut in half from 25.0 to 13.0, down from 41.0 in April. Backorders fell to 1.0 from their high of 16.0 in May. Capital expenditure plans fell from 25.0 to 17.0. Supplier delivery time plummeted from 17.0 to 4.0 indicating the backlog for components has declined sharply. The shipment component dropped from 22.0 to 9.0.
On the positive side the employment component rose to 15.0 from 9.0 and the average workweek rose slightly. Manufacturers appear to be staffing up for the holiday merchandise manufacturing cycle.
Richmond Fed Chart
The drop in the Richmond Fed Survey followed a sharp decline in the Texas Manufacturing Survey on Monday. The Texas Survey declined to -21.0 in July from -4.0 in June. The recent high was +21.1 in April. The pace of decline is very sharp. Numbers below zero are considered economic contraction. As you can see in the table below the decline in activity has been rather dramatic since the April highs.
Texas Manufacturing Survey Chart
Texas Manufacturing Survey Table
The Case Shiller Home Price Indexes showed existing home prices rose faster than previously thought in the three months ending in May. The 20-city index rose +4.6% compared to the same period in 2009. However, this is more than likely a residual effect from the homebuyer tax credit that expired at the end of April. On a month ago basis the cities with the largest appreciation were Boston +1.6%, Chicago +1.2%, Los Angeles +1.7%, San Diego +1.1%, San Francisco +1.7% and Washington +1.5%. The only decliner in the top ten index was Las Vegas at -0.5% MTM and -6.5% YOY.
The major reports due out on Wednesday are the Durable Goods, Fed Beige Book and Oil Inventories.
Also depressing the equity markets was earnings results from US Steel. The company posted earnings of 45-cents before currency issues and that missed analyst estimates of 63-cents. The CEO was asked about the shape of the recovery using the normal V, U or W shaped descriptions. He said, "you can use any alphabet letter you want but the recovery is going to be choppy and take a long time." Also, "We are still not prepared to say there is a turn or that we are getting optimistic again but it feels like there is a little bit more traction in the spot markets in Europe than there is so far in North America." The less than inspiring guidance knocked -6% off the companies share price and caused a panic sell off in all the commodities.
US Steel Chart
AK Steel (AKS) posted results that beat the street by 7-cents on revenues that almost doubled. Shipments doubled to 1.4 million tons on a 9% increase in prices. AKS reported the highest steel shipments since 2008. However, raw materials costs boosted operating costs by 78%. Like US Steel, AKS said there was significant uncertainty in the global markets that will translate into lower selling prices in Q3.
Thanks to the steel companies economic guidance and the drop in consumer confidence the price of gold fell -23 to a new three month low at $1160. The dollar started off the morning at a new three month low but recovered slightly before day's end.
Crude prices declined -1.63 to close at $77.35 after spending three days hugging the $79 level. Crude prices have been solidly over $75 for most of July on hopes of an economic rebound and worries over potential shutdowns in the gulf. Over 28% of crude output from the gulf was shutdown over the weekend on worries that Bonnie would strengthen and cause more damage.
The API inventory report after the close showed that crude inventories rose +3.08 million barrels when analysts were expecting a decline of -2.3 million. The API report is not closely followed by traders but should this carry over into the EIA report on Wednesday we could see another drop in oil prices.
Oil companies are so skittish about a potential disaster befalling their operations and costing them billions that they are shutting down operations at the first sign of trouble. This will likely continue for years until the collective mental scars have healed. There are only a very few companies that could afford the kind of disaster that hit BP. Everyone else would be put out of business with a loss of that magnitude. Diamond Offshore and Ensco said in the last week that there were a lot of deepwater rigs for sale by the smaller companies who see the BP disaster as what could happen to them and they are no longer willing to take the risk. Diamond said they might try to raise some money in order to take advantage of the discounted rig prices.
BP's disaster was a wake-up call for the entire industry and it is going to be an expensive lesson. BP reported earnings today that included $32 billion in charges related to the oil spill and said it planned to sell $30 billion in assets over the next 18 months. Despite claims by analysts and brokerages like Goldman Sachs that the total bill could be as much as $150 billion, the markets were stressed that BP reported a $32 billion charge this early in the process. Wall Street expected a big number but not that big. Unfortunately the numbers will get bigger. BP is facing as much as $18 billion in fines plus so many lawsuits that a conference for lawyers was scheduled for this weekend to determine how best to proceed. Even the SEC has started a probe on how BP handled disclosure to shareholders. I would not want to get out of bed in the morning if I was CEO of BP.
Tony Hayward stepped down as CEO on Tuesday and Robert Dudley will take over as the CEO. I wrote an article on Hayward and the 100-year history of BP and the coming name change last night. You can read it here.
Chart of BP
Earnings for today were fairly lackluster with few high profile results. Buffalo Wild Wings (BWLD) beat the street by 8-cents and gained about $3 in after hours trading. Lower prices for chicken parts and an aggressive store-opening program were credited with the gains. Same store sales were also up +7%. This should be a clear indication that drug companies and hospitals are going to do well in the future since hot wings are just about the most unhealthy food you can eat.
Broadcom (BRCM) reported profits that rose well over 1000% from the comparison quarter. Broadcom reported profits of 52-cents compared to only 3-cents in the comparison quarter. Revenue beat street estimates but only slightly. The CEO said strong product demand and market share gains would drive strong revenue growth in Q3 as well. Broadcom raised its guidance to $1.7-$1.8 billion and analysts were expecting $1.67 billion. BRCM shares did not respond and gained only about 30-cents in afterhours trading.
Earnings for the rest of the week include the rest of the major oil companies as well as Boeing, Amgen, Symantec and Visa to highlight a few. The earnings cycle has peaked and finding big reports to hold up the market is going to become more difficult.
The weak consumer confidence numbers created worry about consumer spending and that caused a decline in Dow components AXP, MCD, HD, WMT and INTC. The increasing worry about a weak consumer and possibly a double dip recession is overshadowing strong earnings from companies like Dupont. Weak guidance from some high profile names like US Steel made it increasingly harder for the major indexes to move over resistance.
The Dow closed barely positive with the S&P and Nasdaq closing barely negative. The Dow Transports posted the biggest decline at -1.3% after KSU and NSC both beat the street but saw their shares fall sharply after the reports. KSU declined by -6% and NSC -2%.
That appears to be the predominate pattern. Report earnings, beat the street and watch your stock price get crushed. This does not bode well for the rest of the week and for the market in August. I have mentioned several times that I expect the markets to show weakness before the end of July. I am running out of days for that prediction to come true but so far that key resistance on the S&P is still holding.
We saw the S&P move over 1100 on Monday but come to a dead stop at the 200-day average at 1113.95. The Dupont news spiked the indexes over that level this morning but the selling was immediate and the S&P retreated to hug the 1113 level the rest of the day.
The 200-day at 1113.95 and the 50% retracement level at 1116 should remain strong resistance. SPX 1115.10 also happens to be where the S&P closed 2009 so a move over 1116 puts the SPX positive for the year.
Volume remains light and that favors the sellers. Volume is a weapon of the bulls and it appears that after three triple digit days on the Dow they have run out of ammo.
I have to admit I was encouraged by the nice upward move on the S&P over the last six days but until it moves over resistance I am not along for the ride. I scanned a lot of charts today and quite a few that were looking bullish last week are showing signs of stress.
We are only eight days away from the Non Farm Payroll report for July and the weekly jobless claims continue to be stubbornly strong. The early estimate for jobs lost is in the range of -250,000. That would be a major drag on the markets and this is already weighing on market sentiment.
If the S&P does weaken the two support levels to watch are 1085 and 1060. A breakout over current resistance targets 1150 but I am not holding my breath. I would be a reluctant long over 1116.
The Dow managed to move over resistance at 10,500 on Monday and hold those gains today thanks to Dupont. After three triple digit gains the Dow is over extended again and running out of news generators to power it higher. Boeing will be one of those remaining news points when it reports on Wednesday.
We saw a similar surge over resistance in June and the Dow tried to move over the 10,500 level for three consecutive days with no success at holding the gains. If Boeing surprises to the upside and provides an upside kick to the Dow then maybe there is a chance for the rally to continue but I remain skeptical. Should weakness appear the support levels to watch are 10,300 and 10,065.
Apple (+4.80) and Google (+3.66) were not able to power the Nasdaq to a gain. There were only 25 Nasdaq stocks that gained more than a buck and there were plenty that did not gain at all. Over 1400 Nasdaq stocks lost ground. Tech stocks are not normally high flyers in the late summer. After the Q2 earnings cycle there is little excitement over tech stocks until the fourth quarter. Despite some good news from chip stocks the excitement already appears to be fading.
The Nasdaq has yet to test critical resistance at 2325 and without any big tech earnings to power the index higher I fear it will not reach that level. That is the June resistance highs and the 100-day average. A move over that level would be bullish. Earnings scheduled for Wednesday include SYMC, CTXS, LRCX, TQNT and AKAM. Those are not exactly market moving tech reports. Support is currently 2225 and 2175.
In summary, I remain skeptical of the rally and still expect the markets to show weakness soon. The Q2 earnings cycle is nearly over and the news events that can power the market higher are dwindling. I will be very surprised if we don't trade lower over the next 2-3 weeks but I would be a reluctant buyer over S&P 1116. We could see some month end money come into the market but the big flows are quarter end not month end.