The Dow is still in negative territory for the year at -1.5% but the S&P inched fractionally into the green at +0.1% on Thursday. The Nasdaq is not yet guaranteed a yearly gain but is farther ahead at +6.6%.
Thursday was lackluster as expected on volume of only 2.7 billion shares. Stock news was minimal and all thoughts were on the holiday ahead. The Dow suffered some profit taking as Nike, Exxon and Chevron gave up some gains from the prior sessions.
Economics were also minimal. Jobless Claims came in at 267,000 and only 4,000 below the prior week but still near a 40 year low. This is right in line with the average for the last six weeks.
Natural gas storage for the week ended December 18th declined by -32 Bcf to 3,814 Bcf and slightly less than the -34 Bcf from the prior week. The warm weather is preventing normal usage patterns. Typically, we would have seen declines of about -125 Bcf in each of those weeks. We hit a storage record of 4,009 Bcf four weeks ago. Gas prices traded at a 15-year low on the 17th at $1.68 before rebounding with the short squeeze in crude oil to close at $2.04 on Thursday.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 fell to 1.3 percent on December 23rd, down from 1.9 percent on December 16. After Tuesday's third-quarter GDP revision and Wednesday's personal income and outlays release, both from the U.S. Bureau of Economic Analysis, the nowcast for fourth-quarter real consumer spending growth fell from 2.6 percent to 2.1 percent. The nowcast for real residential investment growth fell from 8.0 percent to 0.9 percent after Tuesday's existing-home sales release from the National Association of Realtors.
The GDPNow forecast by the Atlanta Fed is the most accurate forecast of GDP activity. A drop from +1.9% to +1.3% this deep into the quarter is not a good sign. I am sure the Fed heads on the FOMC all recoiled in horror when the number was released. Note that even the blue chip forecasts are accelerating lower.
As you can imagine the economic calendar for next week is very thin. Only two reports are seen as important and those come on Mon/Tue. The rest of the week is in the "ignore zone" where most traders will be absent from the market and those in the market will be counting the minutes until the market closes. Nobody will be concerned about the economic calendar.
On Wednesday Nike (NKE), Ensign Group (ENSG) and Empire Resorts (NYNY) all split their stock. Nike and Ensign split 2:1. Empire did a reverse split for 5:1 to take their stock from $4.34 to more than $22.
For the full split calendar click here.
There was very little stock news and most of it was puff pieces released by the companies as advertisements. Northrop Grumman (NOC) won a $93 million contract to build a full-scale demonstrator of a new unmanned spy plane that can take off and land on destroyers and frigates. The plane will be a large wing with counter rotating propellers that can land vertically like a helicopter but then transition to horizontal flight in stealth mode.
The drone will give smaller surface ships long distance intelligence, surveillance and reconnaissance capabilities. Northrop has been working on the drone project for several years in a joint program led by the Defense Advanced Research Projects Agency commonly referred to as DARPA. They are responsible for dozens of secret projects that turned into major weapons systems. The variety of current projects that are known, sound like science fiction. For instance, nuclear powered insects that work as surveillance drones. Bullet proof underwear, Pharmed blood, a mass-produced synthetic blood. Exacto bullets that can change course in mid flight, robot pack animals, etc. Current Acknowledged DARPA Projects
Back in late October Northrop beat out Boeing and Lockheed Martin for the new long-range strike bomber contract. Northrop has a lot of experience building bombers and most recently built the B2. The Air Force plans to buy 80-100 of the new bombers and the contract could be worth $80 billion with the first plane expected to enter service in 2025.
Apple (AAPL) asked the court to force Samsung to pay an additional $180 million in the long running patent dispute. The company had already paid Apple $548 million on Dec 14th for infringing on patents and designs in the iPhone. Apple said the extra money is due because Samsung continued to sell some of the models that infringed after the 2012 guilty verdict. Originally, Samsung was ordered to pay $930 million but a U.S. appeals court lowered it by -$382 million saying the phones appearance was not protected by a trademark.
A new rumor from the site MacRumors.com confirms the iPhone 6C will more than likely be announced with the new version of the watch on March 2nd. A presentation from China Mobile hinted at the ship date in early April. The 6C will be a 4-inch iPhone with an aluminum casing like the 5C. There will be 2-3 color combinations and the A9 processor with a 8-megapixel rear-facing camera and 1.2 megapixel front-facing camera.
Apple shares have to get past the January 27th earnings event where iPhone sales for Q4 will be disclosed. This is a make or break quarter for Apple. Rarely a day passes that some analyst is not cutting his sales estimates. The official consensus was 77 million but that is slowly sinking and could be under 70 million by the time earnings are released. Apple shares declined -58 cents on Thursday and are struggling to hold over support at $107.50.
Retailers were bombing the airwaves with ads for their clearance sales this weekend. Last Saturday, called Super Saturday, failed to live up to expectations according to Customer Growth Partners. Super Saturday is normally the biggest sales day of the year and larger than Black Friday. Sales in stores and online rose +4% to $55 billion after a 2.5% gain last year. That put final estimates for overall store and online sales since the November start of the holiday shopping season at 3.1% and below the 3.2% in the prior forecast and 4.1% growth in 2014.
Analysts are hoping last minute sales in the final ten days of the season were increased by low gasoline prices and early gift card redemptions. The National Retail Federation has predicted a +3.7% rise in sales for the season and that is not looking likely at this point.
Market Track said product discounts before Christmas were in the range of 20% to 50% and deeper than in prior years. Advertised post Christmas discounts this weekend were 60-75%. The NRF said store traffic was down sharply due to a large rise in online sales. Forrester Research expects consumers to spend $95.5 billion, a rise of +11%.
FedEx was forced to deliver on Christmas Day and on Saturday in order to process tens of thousands of packages that failed to arrive on time. UPS cut off acceptance of packages from retailers in order to avoid similar problems to last year.
Analytics firm Retailnext, which tracks large chain stores like Best Buy, Walmart and Target said sales dropped -6.7% in the pre-Christmas weekend and store traffic declined -10.4%. However, customers that did visit the stores spent more than in 2014.
Everyone said apparel sales were hurt severely by the lack of cold weather. Record highs were set in 23 states and more than 10,000 individual records were broken for highs in cities and states on Eastern portion of the USA.
Retailers typically see their shares fade after the first few days of January. Best Buy, Walmart and Target all saw gains last week and those gains are likely to erode once we are into 2016.
Amazon (AMZN) captured 39.3% of e-commerce spending from Nov-1st to Dec 6th according to Slice Intelligence. That makes it really tough for brick and mortar retailers.
Chipotle Mexican grill (CMG) closed at a new low last week after news of another E.coli outbreak in four new states. However, only 4 of the 5 new cases had eaten at a Chipotle restaurant. Chipotle has been adamant over the last several days that there is no E.coli in their stores. They claim they have checked, double checked and triple checked their sources and vegetables using the latest methods and nothing has ever been found.
The conspiracy theorists are coming out of the woodwork. E.coli has been reported in Chipotle stores in a dozen states and many of those states are unrelated to the other states in terms of supply chain or suppliers. The last outbreak was a different strain of E.coli according to the CDC and both were "rare" strains. The Norvovirus in the Boston breakout was also "rare" strain and not common in the population.
Also, in all the E.coli outbreaks in a dozen states, not one single employee has ever come down with the illness and they eat there every day and sometimes twice. In prior outbreaks at other chains, the employees got sick as well.
Chipotle is very adamant about not using GMO foods. They have made enemies of Monsanto, Dow and Dupont. All would have the capability to sabotage the food chain for Chipotle suppliers. Chipotle has built their brand on locally sourced, non GMO, organic ingredients and this series of events is killing that model.
What are the odds that two different outbreaks of different strains of a rare E.coli would occur at almost exactly the same time and ONLY impact Chipotle and nobody else? The odds are pretty slim because suppliers sell to more than one company. The suppliers are also in different parts of the country.
I love conspiracy theories and this one is gaining some backers because of the odds against the outbreaks occurring naturally. Corporate sabotage exists and this kind of brand assassination would be very easy to accomplish and it would be relatively inexpensive to do. The damage to Chipotle has been extreme with their market cap cut by more than 35% or -$8 billion.
Chipotle is probably going to announce some startlingly bad numbers when they report earnings on Feb 2nd. Same store sales could decline more than 20%, which is similar to the problems YUM Brands had in China over the last two years. JP Morgan downgraded CMG from overweight to neutral with a $555 price target.
I want to buy CMG but I do not think the damage is over. Investors are going to be fleeing this stock until the earnings and should another outbreak appear the next downdraft could be dramatic because it would give more credence to a brand assassination scheme.
Ambarella (AMBA) was initiated with a buy rating at Craig Hallum with an $80 price target. Shares closed Thursday at $59.
Avago Technologies (AVGO) was upgraded by RBC Capital from outperform to top pick. They raised the price target from $155 to $170. AVGO closed at $146.
BlackBerry (BBRY) was upgraded by RBC Capital to outperform with a $12.55 price target. JP Morgan initiated coverage with a neutral rating and price target of $9. Shares closed at $9 on Thursday.
Best Buy (BBY) was reiterated by Citigroup with a buy rating but they cut the price target from $45 to $38. Shares closed at $30.50.
FedEx (FDX) saw Goldman raise their price target to $182 with a buy rating. This was before the company warned they had thousand of packages that did not get delivered on time. Shares closed at $149.65.
Morgan Stanley upgraded SolarCity (SCTY) to overweight with a price target of $104. That was up from $86. Shares closed at $52 suggesting an upside potential of 80%. However, Deutsche Bank reiterated a buy rating but cut their price target from $80 to $64 so not everyone is on board with the recent rally. Elon Musk bought 307,152 shares in the market on Nov 13th for an average price of $25.35. The timing on that transaction was perfect.
Pep Boys (PBY) said they have amended their agreement with Bridgestone to raise the offer price from $15.50 to $17.00 per share or $947 million. The prior day Pep Boys said Carl Icahn was willing to pay up to $1 billion for the company. Apparently, there were some extenuating circumstances because the board recommended to shareholders to accept the Bridgestone offer and said it no longer considered the Icahn offer to be a "superior proposal." That is what the board had called it just one day earlier. Icahn had offered $16.50 per share.
To date only 44,485 PBY shares had been tendered and Bridgestone extended the deadline to midnight on January 12th. The breakup fee was hiked from $35 million to $39.5 million if Pep Boys breaks the agreement to accept an Icahn offer. Carl cannot lose here. If he buys the company, he merges it with his existing auto parts chain that has four times the revenue as PBY. If he does not buy it then he will get the $17 per share for the 12.12% (6.56 million shares) of PBY he owns at a much lower price.
There was another short squeeze in oil last week. Crude prices touched a new low of $33.98 on Monday and then rallied the next three days. Fuel for the rally came from a decline in inventories on Tuesday evening with the API report and then Wednesday morning with the EIA report. The EIA report showed a decline of -5.9 million barrels. Under informed investors thought this was certainly a sign of things to come. They were wrong.
Refiners are taxed on oil in inventory on December 31st. With millions of barrels in inventory, that tax is millions of dollars. Refiners halt deliveries of crude in late December in order to lower their inventories. Last week crude imports declined -986,000 bpd to 7.33 mbpd. They cut imports by -6.9 million barrels and inventories declined only -5.9 million. The same thing should happen this week and next because the inventories are a lagging number by a week. Inventories should decline. Inventories in the first two weeks of January should move significantly higher as those tankers waiting offshore are moved to the coast to unload.
Nothing else changed. Production rose 3,000 bpd to 9.179 mbpd. Refinery utilization declined from 91.9% to 91.3%. That means they used less oil, not more. Refiner inputs declined -143,000 bpd to 16.47 mbpd. They used less so it would be impossible for inventories to actually decline since U.S. production remained the same. It was all due to the drop in imports because of the taxes due next Thursday.
The active rig count declined another -9 rigs to an even 700. Oil rigs declined -3 and gas rigs declined -6. We are now down -1,231 from the peak last year at 1,931. That is an 18-year low on gas rigs and a 16-year low on oil rigs. Oil rigs are declining but oil production has not declined materially in the last 12 weeks. Oil prices will go lower.
Cue the increasingly tense background music as 2015 comes to a close and the markets are within a mere handful of points of finishing in the green or the red for the year. More than once they have been managed to the point where they close right on the dividing line. In 2011 the S&P closed at 1,257.60 and less than a tenth of a point from the 2010 close. I would not be surprised to see that again this year.
The analyst community is mixed on what to expect for 2016. Some believe we will see a significant correction and some believe we will see double digit gains. Opinions are like noses, everybody has one. The critical breakeven point for the S&P is 2,058.90 and the close for last year. We closed on Thursday at 2,060.99 and about +2 points in the green.
The Dow target is 17,823.07 and we closed on Thursday at 17,552.17 or about -271 points below a positive close for the year.
I would expect market makers and fund managers to try and window dress those averages to create a positive close for 2015. Negative markets are bad for advertising. Even a small gain is positive. Since fund managers are seeing their worst returns since 1998, they have incentive to try and manage the year-end close.
The Nasdaq close for 2014 was 4,736.05. Thursday's close was 5,048.49. It would take a major traumatic event to knock the Nasdaq down -312 points to finish in the red. The Nasdaq should remain positive with its 6.6% gain for the year. The Nasdaq 100 is much better off with a +9.1% gain for the year.
I have written many times about the majority of the market gains in 2015 coming from the top ten stocks in the Nasdaq. The gains did not come from the industrial stocks, energy or retail. The market's gains came from the large cap tech stocks. Window dressing should keep those stock positive for the next several days.
The seasonal trend for next week is bullish early in the week and bearish on the last couple days as traders prepare for early January selling. January is the second worst month of the year over the last ten years. Long term it is a winner but in recent years the trend has been mixed. The average loss for January over the last ten years has been -1% but it has only been negative 5 out of those ten years. However, when it is negative it is significantly negative. The last two years have been negative and the prior three were strongly positive.
The rebound last week was short covering, thanks in part to oil prices, and window dressing. The S&P rebounded to that 2,060 resistance level we have discussed many times in recent months and that is where it stalled. The energy stocks declined on Thursday as traders took profits from the three-day bounce.
You cannot look at the S&P chart and construct a bullish scenario. We have a series of lower highs and a lower low from the prior week. There are multiple levels of overhead resistance culminating in the downtrend resistance at 2,105. It would be a window dressing miracle if we moved over that 2,105 level on miniscule volume next week. That does not mean we will not get there in the weeks ahead. Once into January we have a 50:50 chance of a strong month given the recent history. If we do manage to move over 2,100 and then 2,116 it would trigger significant short covering and price chasing into 2016 and it would be a nice start to the year.
The Dow was supported last week by the Dogs of the Dow strategy. Investors were buying the most beaten down stocks of 2015 in hopes they would outperform in 2016. The coming week could follow the same pattern. However, if oil prices roll over it will drag on Chevron and Exxon and offset any gains in the smaller stocks.
Nike (NKE) split 2:1 on Wednesday and at $63 will have limited impact on the Dow in 2016 after being the top performer in 2015. It is now the tenth lowest priced stock in a price-weighted index. I do expect Nike to recover from its post split depression in January and we do want to own it when that happens.
With the economics worsening, I would not expect the bank stocks to rally next week. That leaves the Dow's progress to bottom fishers and window dressers.
The Dow has the same ugly chart as the S&P with solid downtrend resistance.
The Nasdaq chart is much better looking without the downtrend resistance. There is solid overhead resistance at 5,100 and 5,160 but we were there just three weeks ago and the tech stocks should do well over the next couple of days.
The Nasdaq 100 big caps have resistance at the historic high at 4,737 and only +115 points away from Thursday's close. It is entirely possible that window dressing could push the index back close to that level.
The Russell 2000 is the weakest index with barely any rebound off the lows from last week at 1,120. Since the Russell is supposed to be the strongest index in December, it is not following the plan. The index would need several days of major gains just to put it within striking distance of the strong resistance at 1,200.
The lack of a small cap rally in December could dampen sentiment for the Santa Claus rally. That is the last five days of the year and first two days of the next year. Without the leadership of the Russell that rally could be weak.
On the positive side the Biotech Index is about to reach a three month high. If the biotechs continue to surge over 3,850 they could lead the Nasdaq and Russell higher because biotechs are a major component of both those indexes.
The biotechs gained +3.42% for the week and they are up +11.1% for the year. We could see some significant window dressing in this sector because managers want winners in their portfolio at year-end.
Fundstrat Global Advisors co-founder Tom Lee said there was a 5:1 chance of a double-digit gain in 2016. Lee is looking for a 10-12% rise in the market. He said the markets had to fight the headwinds of the strong dollar, falling oil, declining credit quality and a weak high yield market in 2015. He is impressed that the markets are ending the year flat and sees that as a sign that those problems are now priced into the market.
Oil prices will rise in 2016 but probably not until Q2 and then accelerate later in the year. The credit issues will work themselves out with some defaults but increase conviction on those that do not default.
Lee said the median gain after a flat year is 11%. "We are five times more likely to have a double digit year than another year flat."
Citigroup's U.S. Equity Strategist Tobias Levkovich said the bank's measurements were predicting a 96% probability of an up market in 2016. "We did not start 2015 with the same signals we are seeing for 2016 and that is giving us a lot of comfort."
Bavid Bianco, chief equity strategist at Deutsche Bank said "it is rare for the market to be flat or down two years in a row outside a recession."
Despite the volatility, the analyst community is not backing off their estimates for yearend 2016. Cannacord is the highest at 2,350 followed by RBC Capital at 2,300, Bank America at 2,250, Wells Fargo at 2,245 and Morgan Stanley at 2,175. Just because they put out an estimate does not mean that is where the market is going. I will publish On January 1st the results from the 2015 estimate contest. A survey of multiple strategists by Barron's suggests the equity markets will rise about 10% in 2016. The strategists gave their reasons in an article last week. Full Article
The worst is over for energy earnings. Their horribly bad comps are behind them and now it is simply a matter of waiting for demand to improve and the low prices to take their toll on the high cost producers. There is a 100% chance prices will rise in the years ahead and when that happens equity prices will follow. That sector was about 12% of the S&P-500.
While nobody can accurately predict market direction, the long-term trend is always up with an 8% annual average. Now that the Fed has started hiking rates the uncertainty is gone. Europe and Japan are increasing stimulus in an effort to accelerate their recoveries. After a year of dormancy, it would make sense for investors to bet on equities. With the Fed hiking rates, the bond market should be seeing continuous outflows back into equities. We know treasuries are going to be losers in a rate hike cycle so there is no alternative other than investing in equities or holding cash.
The S&P has not been down two years in a row since 1980-1981. That means it has been 34 years since we had a back-to-back loss and the odds are good 2016 will finish higher. Every dip has been bought. While we may not be back at the highs, we are not that far away. Eventually equities are going to rally and we want to be ready when they do.
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If Elon Musk can launch a rocket to the space station and land the booster upright on a pad for later reuse, programming dancing cars and a light show should be child's play. Never the less it is fun to watch.
Merry Model X-mas from Tesla
The S&P has not ended the year in negative territory in a year ending in "5" since 1875. That is a 140-year-old streak. Yes, statistics are a funny thing. If you look long enough and hard enough you can always find something interesting that has zero to do with market fundamentals.
Saudi air defense systems shot down another ballistic missile fired from Yemen that was aimed at oil installations in the southern part of Saudi Arabia. The missile was aimed at the Saudi Aramco oil compound in Jizan. This was the sixth ballistic missile fired toward Saudi oil facilities in the last week. If the Yemen rebels ever successfully hit a Saudi oil facility, we could see oil prices back over $60 within days.
UPS said it would deliver 36 million packages on Tuesday before Christmas. That is double their normal daily volume. The company said it would deliver nearly 630 million packages between Thanksgiving and the end of December. That is a 10.3% increase from 2014.
FedEx said it processed 26 million packages on December 14th, its busiest day ever.
On Wednesday evening, my UPS delivery did not show up until 7:30 at night. I get a lot of deliveries so my UPS driver and I are well acquainted. I asked him how many packages he had left. I climbed into the truck and the answer was about 150 at 7:30. Most importantly, literally 85-90% were from Amazon. I asked him what percentage of his total packages on a daily basis came from Amazon. He guessed at 65% but during the holidays Amazon made up the vast majority.
Here is a thought I had that night. Amazon has a market cap of $311 billion and UPS $68 billion. Amazon has 5 Boeing 767 freighters and is negotiating for 20 more. They are launching "thousands" of new semi trucks to move products between their 60 warehouses and hubs as well as delivering packages to UPS.
What if Amazon bought UPS? Amazon spent $9 billion on shipping expenses in 2014 and that is probably going to be well over $10 billion in 2015. UPS will do $60 billion in revenue in 2015 and more than $3 billion in net income. Amazon is roughly 15% of that revenue. If Amazon bought UPS they could fully control their deliveries and create another $3 billion in profits plus reduce their shipping costs. While Amazon may not want to take on the headache of shipping one billion packages a year, a rather large number of those packages belong to Amazon.
Stranger deals have happened and that would put one more piece of the shipping equation under Amazon control. Just at thought.
Investors took money out of mutual funds last week at the fastest rate in more than two years. Net redemptions hit $28.6 billion for the week ended December 16th according to the Investment Company Institute (ICI). That was the biggest weekly outflow since June 13th. Investors withdrew $11.1 billion from stock funds, $12 billion from bond funds and $5.6 billion from funds with mixed assets. Mutual funds have seen net redemptions every month since July. They saw net inflows in the first six months of 2015.
The bears are loading up for the mother of all put opportunities. Lyons Fund Management tracks the put/call ratios on the S&P-100 ($OEX) because traders in those options are right more often than they are wrong. The threshold level of 2 puts to every call is seen as a market indicator. Between 1999 and 2014 the ratio has only been over 2.0 on 15 days. On Monday, it rose to 3.3. In 1999 and 2007 the extreme readings were accurate predictors of market tops. However, in 2003 and 2014 when the 2.0 level was breached there was no sell off so the indicator is not infallible. The extreme levels we have today are a warning sign according to Lyons. Smart Money is Bearish
Star Wars, the Force Awakens, is set to become the fastest movie to hit $1 billion in sales. Through Christmas Day, the movie had brought in $890.3 million. This weekend is a big weekend for moviegoers now that shopping is over. Jurassic World hit $1 billion in 13 days. Star Wars is expected to surpass $1 billion on Sunday.
Fandango sold the most Star Wars tickets of any outlet. They said the number of people coming back and buying them to see the movie a second time had increased 40% over the last week.
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