Atlanta Fed president Dennis Lockhart said the Fed is more than likely to hike rates in September. "The economy is ready and it is an appropriate time to make a change."
The markets were trying to recover from an early swoon but the Lockhart comments at 1:30 knocked the indexes back to session lows with the Dow closing in on support at 17,500 once again. However, traders bought the dip after about 30 minutes and losses were reduced.
Lockhart said it would take a "significant deterioration" in the U.S. economy for him to not support a rate hike in September. Also, "I think there is a high bar to not acting" in September. "My priors going into the September meeting as of today are that the economy is ready and it is an appropriate time to make a change." Lockhart is considered a centrist on the Fed committee and is one of the five Fed presidents with a vote this year.
When the July FOMC announcement was being debated in the press the conventional wisdom was that a September hike was a coin toss. Analysts did agree that we would see a sharp increase of Fed heads talking up a rate hike ahead of the September meeting if that was their planned date for a hike. The Lockhart comments may have been the first shot fired into the market in an effort to prepare investors for that hike.
The morning economic reports were positive but this is just the warm up for events later this week. The Factory Orders for June rose +1.8% after declining -1.1% in May and -0.7% in April. Orders for durable goods increased +3.4% after declining -2.3% in May and -1.7% in April. Core capital goods orders rose +0.7% and also their first gain since March. New orders in the transportation sector rose +9.3% thanks to a sharp rise in civilian aircraft orders.
The second quarter was not kind to the manufacturing sector and the recovery in June offset what was shaping up to be a serious decline. Even with the June gains, orders are still down -6% below 2014 levels. This report was seen as confirmation the manufacturing sector was starting to recover.
The NY ISM for July rose nearly 6 points to 68.8 from 63.1. The headline number was the high for the year and the third highest since 2011. However, the majority of the components declined. The quantity of purchase component declined from 62.5 to 52.8, regional prices declined from 56.3 to 50.0 and the six-month outlook fell sharply from 78.0 to 69.2. The employment component improved only slightly from 63.4 to 64.8. Anything over 50 represents expansion and a couple of those components declined very close to that threshold. This report was ignored.
The Intuit Small Business Employment Index posted a +0.05% gain, which equates to the addition of about 10,000 jobs. That is a decline from the 25,000 small business jobs created in both May and June. Compensation rose +0.1% and hours worked rose +0.08%.
Employment in New England declined -0.22% with a -0.12% decline in East North Central. The other regions posted gains with the West North Central growing +0.33% and the Mountain region up +0.18%.
Small business employment, the sector that creates the most new jobs, is weakening. The Small Business Optimism Index declined to its lowest level of the year in June. Respondents said they were slowing down on hiring with fewer job openings available. This could have a negative impact on the larger payroll reports later this week.
The ISM Nonmanufacturing for July is due out on Wednesday. Expectations are for a flat report with no gain. However, the ISM Manufacturing on Monday declined from 53.5 to 52.7. The employment component declined from 55.5 to 52.7, which further suggests we could see a miss in the nonfarm payrolls on Friday. The trend in the ISM is not positive and analysts blame this on the stronger dollar.
The forecast for the ADP Employment report on Wednesday is for a gain of +215,000 jobs, down from +237,000 in June. The Nonfarm forecast for Friday has been revised upward from +217,500 last week to +222,000 this week. That is flat with last month's gain of +223,000 jobs. I am expecting the actual number to be less than the consensus.
Apple (AAPL) shares declined another -$3.80 on Tuesday to trade below $114 intraday and close at $114.63. Apple is clearly in a severe technical decline with the stock now $7 below the 200-day average. Apple is in correction territory with a -14% decline from its $133 closing high back in February. The decline has reduced Apple's market cap by more than $113 billion. That is more than the total market cap of companies like Nike (NKE) and McDonalds (MCD) at roughly $96 billion each. Shares have declined -7% in just the last three days.
Analysts claim the decline is due to the soft watch sales and the increased competition for phones in China. New Chinese competitors are making inroads into Apple's market share with cheaper phones. Apple's average phone price is $600. Add in the slowing economy in China and analysts worry sales goals may not be reached.
Apple watch sales were less than half of what analysts expected based on the rise in revenue in the "other" category. Apple did not share any numbers on the watch.
The next material support level is in the $105-$107 range. I would be a buyer there on any rebound.
Netflix (NFLX) broke out to a new high today with a huge $9 intraday gain after Guggenheim analyst Michael Norris initiated coverage with a buy rating and a $160 price target.
That put Guggenheim as the leader with the highest target price but you can bet there will be more upgrades in the near future. The analyst echoed views by others that Netflix will have more than 100 million international subscribers by 2020. They are rapidly building out the network and international growth is now the key.
There are ten times as many broadband accounts internationally than currently exist in the USA and that number is rapidly accelerating. As those broadband accounts increase the lure of video streaming will quickly take hold. The majority of other countries do not have the video infrastructure prevalent in the USA. In any major U.S. community, there are large numbers of multiplex theaters with dozens of films showing at any given time. While some exist outside the U.S., their numbers are not as plentiful. There are also more than 41,000 Redbox DVD kiosks and that do not exist in quantity outside the USA.
New broadband users can skip all the hassle of going to the theater and spending large sums for ticket prices and concessions by subscribing to Netflix.
With Netflix on a content generation binge they are adding to their appeal. House of Cards, Orange is the New Black and other programs are just the start of dozens of new movies and series programs underway at Netflix.
The barrier to entry in this market is growing daily. The faster Netflix grows the bigger the moat that surrounds it and the less likely someone will become a major competitor.
They are also building in a large potential for price hikes in the future. Once they get subscribers hooked on the product, they can raise the price and it will be all profit.
The earnings parade continued with Disney (DIS) the highlight after the bell. The company reported earnings of $1.45 that rose +13% and beat estimates for $1.42. Revenue rose +5% to $13.1 billion and just barely under the $13.2 billion estimate. Disney said the strong dollar hurt revenue at Disneyland Paris. Studio revenue rose +13% thanks in part to the Avengers film, which grossed $1.4 billion since its release.
Media networks revenue rose +5% and Cable Networks revenue rose +5% with Broadcasting up +4%. The CEO said Disney would be selling ESPN content directly to viewers in the future but it would not happen for at least five years. Parks and resorts revenue rose +4%. Consumer products revenue rose +6% thanks to Frozen, Avengers and Star Wars merchandise. The only weak spot was interactive gaming, which declined -$58 million to $208 million. Disney expects that to rebound in Q4.
Disney shares declined -2% in afterhours but any post earnings decline should be limited and seen as a buying opportunity. The Star Wars movie in December is expected to gross $2.2 billion and be the highest opening movie ever. There is also a Frozen sequel in the works.
Disney was recently upgraded with a new price target of $150. The $2 drop in afterhours is not going to last.
Zillow (Z) rallied nearly $7 in afterhours after posting a loss of a penny compared to estimates for a loss of 21 cents. Revenue rose +20% to $171.3 million compared to estimates for $168.7 million. The CEO said they had made great progress with the Trulia acquisition and will have successfully combined all the advertising products by the end of Q3. The company did say that advertisers had spent lower than expected for the quarter. The confusion surrounding the merger of the two companies may have caused the uncertainty. The company expects to save more than $100 million on the synergies from the merger. Zillow now controls 72% of all online real estate listing business with the brands Zillow, Trulia, StreetEasy and Hotpads.
MGM Resorts (MGM) reported earnings of 17 cents that beat estimates for 11 cents. Revenue of $2.39 billion squeezed by estimates for $2.37 billion. Revenue per room in Vegas rose from $135 to $144 with a 96% occupancy rate. That is pretty good in my opinion in this economy. However, Macau gaming revenue declined -34.5% in July. That was only slightly better than the -36% in June. Companies with casinos in Macau are going to be struggling. MGM revenue from China declined -33% to $557 million. MGM shares rallied +10% on the earnings news.
First Solar (FSLR) reported blowout earnings of 93 cents compared to estimates for 36 cents. Revenue of $896 million also blew away estimates for $752 million. The company raised full year estimates to $3.55 billion and $3.30-$3.60 per share. Analysts were expecting $3.4 billion and $2.36 per share. That was a huge uplift in guidance on the earnings portion. They are now planning on shipping 2.9 gigawatts (GW) this year, up from prior estimates of 2.7 Gw. Potential bookings rose from 14 Gw to 16.7 Gw. They are nearly sold out of capacity with only "a few hundred megawatts" of panels available towards the end of 2016. This was a major earnings win and shares rose about 10% to $48.69 in afterhours.
Retailer Etsy (ETSY) reported a loss of 7 cents compared to estimates for a loss of 8 cents. Revenue of $61 million beat estimates for $60 million. However, shares plunged -13% after the report. The company said it was planning to spend more on marketing and hire additional employees. Raising expenses rarely goes over well with investors especially when sales growth is slowing. Revenue rose +44% but that was the slowest the company had ever reported. The new Amazon Handmade store is stealing not only customers but sellers as well. Amazon Handmade
Lending Tree (TREE) spiked +42% after reporting earnings of 63 cents, which beat estimates and the company raised full year guidance for the third time.
Earnings highlights for Wednesday include GoDaddy, Fit Bit, Transocean Offshore, Sodastream, Priceline and Time Warner.
Shire Plc (SHPG) launched a hostile bid for Baxalta (BXLT) of roughly $30 billion. Shire said it made the proposal public after its initial offer was rebuffed. The offer is all stock and after the acquisition Baxalta shareholders would own 37% of the combined company. Shire said it would create a global leader in rare disease drugs with annual sales of more than $20 billion. The offer worked out to $45.23 per Baxalta share. BXLT just went public on July 1st and immediately rebuffed the second offer saying we are just in the initial stages of implementing our growth strategy as a standalone company. Our current stock price does not yet reflect the company's value and prospects.
Crude oil rose +65 cents to $45.82 on an early drop in the dollar. However, the early gains did not last as the dollar spiked sharply in the afternoon. The API inventory numbers out after the close showed a minor decline in crude and gasoline inventories and a slight rise in distillates. The API numbers are normally ignored in favor of the EIA inventories every Wednesday. The two sets of inventories rarely match.
The rise in the dollar in late trading erased some WTI gains. The Dollar Index hit 98 shortly after the close and only 15 cents from a three-month high. The reason for the late day spike was the Lockhart comments about a September rate hike.
S&P 3,200. That is the forecast by Laszlo Birinyi for the next two years. Laszlo is recognized as a fundamental analyst but he does have a long-term buy and hold bias. He said concerns about earnings, revenues, Europe, China, commodities and interest rates are all noise. "If we continue to grow by 11 basis points per day, the S&P will be at 3,200 within 2 years." He said you can ignore 40% of the S&P because the index is pushed higher only about 50% of stocks.
Hopefully he is more accurate this time than he was in 2013. His forecast for year-end 2013 at 2,800 only missed the target by 1,100 points. In December 2007 he predicted Dow 15,000 by the end of 2008. Unfortunately, the noise of the financial crisis killed that forecast with a 6,500 point miss.
He was asked today if he was worried about a correction. He said the market appears to be correcting over time by moving sideways for an extended period rather than one big drop in price. Apple is his biggest position and while he is worried about why the stock is declining he is not running for the exits. He bought Apple when it was in the single digits back in the 1990s. He recommended the stock on TV in December 1997 when it was trading at the split-adjusted price of 47 cents. Where is that time machine when you really need it?
Today's market decline was noise. The S&P returned nearly to Monday's lows on the Lockhart comments but buyers appeared. Monday's low was 2087 and today's low was 2088. This was the third consecutive decline and a break under that 2087 level would probably take us back to 2064 from the prior week. Any material decline would face support at 2075 first but we blew through that last week without even a pause.
What we did see today was a solid stop at resistance at 2100. That level is going to continue to haunt us until this sideways motion eventually ends.
The Dow remains the weakest index with another retest of 17,500 and a very negative chart. The Dow looks destined to retest the support from January at 17,150. The resistance at 17,775 is solid. The majority of the individual stocks in the Dow are in decline. Disney. Microsoft, Home Depot, Pfizer, Travelers, Visa and Nike are the exception. Those are offset by the dozen or so that are not just in a decline but in a crash. Mobile, Exxon, PG, etc, would be examples. Apple erased nearly 30 points from the Dow on Tuesday.
Until the individual Dow stocks begin to trend higher rather than lower the path of least resistance is down.
The Nasdaq is stumbling. With Apple in crash mode it takes a lot of small gainers to support the index. Fortunately, the biotech sector is still alive and Priceline and Netflix are struggling to provide lift. Solar stocks should provide an assist on Wednesday and after five days of declines Apple could find some support. Maybe it will not rebound just yet but hopefully another $4 drop can be avoided.
Support for the Nasdaq is 5075 and 5025. The 100-day average is 5031 but that did not slow it on the July drop.
The Russell 2000 is not showing any life either. The 1240 resistance is still firm and the index closed under support at 1230 today. It was just a minor -2 point break but it counts. The Russell is not giving any clues as to when it will take the lead either up or down. The current market weakness is in the big caps so we just need to wait for a market event to change the malaise we are currently experiencing.
If you only look at one chart, it should be the Dow. The industrials are showing the most weakness and unfortunately the Dow is seen as the health of the broader market. When people say the market was up 65 points today they are obviously talking about the Dow. That is the primary market indicator.
The Dow is in a downtrend and there is nothing to really pull it out until the dozen or so plunging Dow stocks find a bottom. Until they find support it will be tough for the broader market to move higher.
August is historically the worst month of the year for the market and so far it has started off as expected. With Fed heads likely to continue talking up a September rate hike and the dollar about to break out to new four-month highs the outlook for earnings and the market is likely to be lower. Get out your shopping list and start adding to it. Apple at $105, GoPro at $55, Starbucks at $55, Disney at $118, etc. Pick out a few stocks you would like to own at a cheaper price and that makes waiting through the market declines a lot more fun.
Remember, the average analyst target for the S&P at the end of December is 2,231. They may all be wrong but at least that is something to think about.
Enter passively, exit aggressively!
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