Janet Yellen put a sell rating on social media and biotech stocks. Who knew she was a stock analyst and a Fed head?
The Empress of the Doves showed her hawkish side today by calling out two sectors as being overvalued. The exact statement in the report was this. "Valuation metrics in some sectors appear substantially stretched particularly for smaller firms in the social media and biotech industries, despite a notable downturn in equity prices for such firms early in the year."
The statement was in a report that accompanied her prepared testimony to the Senate Banking Committee this morning. The market did not catch it immediately but eventually some analysts noticed it and the opening rally was immediately reversed.
The Biotechnology Index ($BTK) dropped -2% on the news. Some analysts said they appreciated her comments because it showed the Fed was concerned about a market bubble as a result of five years of Fed stimulus. Other analysts were dismayed by the comment since the Fed has failed nearly 100% of the time in projecting future economic events. Why should we think they will have a better record in predicting stock movement? Stocks are valued differently by different people. Some biotech stocks may be undervalued because of their future drug pipelines while others may be permanently overvalued. For the Fed to basically issue a sell signal on two sectors was a shock to the investment community. The last time the Fed Chairman tried to burst a stock bubble was in 1996 when Greenspan gave his "irrational exuberance" speech.
The break from tradition by Yellen poses a new problem for investors whenever she speaks. You never know when she might say the "ABC sector is overvalued now." For example if you are in energy and she dumps on that sector it will not be fun. On the flip side I doubt she is ever going to say "(XYZ sector is now oversold and undervalued."
We can always speculate the Fed was short Russell futures going into the announcement. I am joking of course.
If the Fed believes biotechs and social media are overvalued then what do they think is fair value? You can't just throw out a comment like that without finishing the thought. If you are going to play stock analyst then give us a complete report.
We have entered a new era in Fed communications and it may be laced with market potholes. Instead of just worrying about rate announcements now they may be making market calls with no track record of success. That means the market will be even more tentative ahead of important speeches.
Obviously Yellen is aware of the criticism against the Fed creating asset bubbles and she is trying to take some wind out of the markets with the call on social media and biotechs. It worked today but will it work in the future? Do we really want the Fed making market calls? Personally I would appreciate it if they would just stick to the economy and try to get that forecast right for a change.
Economic reports were mixed again with the good news coming from the NY Empire State Manufacturing Survey. The headline number spiked from 19.3 to 25.6 for July. This was a four-year high. This was well over expectations for a decline to 17.1 although the internals were not that positive.
New orders were flat at 18.4 and inventories declined from 9.7 to -3.4. Backorders declined from -1.1 to -6.8 and well into contraction territory. Prices paid rose from 17.2 to 25.0 and prices received rose from 4.3 to 6.8. However, the employment component rose from 10.8 to 17.1 suggesting employers were hiring. Unfortunately the hours worked component declined from 9.7 to 2.3. This suggests companies are cutting back on hours per person and hiring more "less than 30 hours a week" workers to avoid the Obamacare expenses.
The six-month outlook component fell from 39.8 to 28.4 and that is really negative when coupled with the sharp rise in prices paid.
Retail sales for June came in below estimates at +0.2% compared to the consensus for a +0.6% gain. However, April was revised higher from +0.5% to +0.6% and May was revised up from +0.3% to +0.5%. Autos were the major drag with the ex-autos headline number rising +0.4%.
The big decliners were building materials -1.1%, food service and drinking -0.3%, motor vehicles and parts -0.3%, furniture and home furnishings -0.1%. Winners were clothing and accessories +0.8%, sporting goods +0.6%, gasoline stations +0.3%, general merchandisers +1.1% and nonstore retailers +0.9%.
The report showed the consumer is still weak and housing may be slowing further with the decline in building material sales. This is one more report providing evidence of a slow growth economy.
Business Inventories for May rose only +0.52% compared to +0.63% in April and estimates for +0.6%. Business sales growth slowed to +0.4%, which should make businesses slow to rebuild inventories. Nobody wants to be stuck with a warehouse of stale products if sales continue to decline. Inventories can rise two ways. They can rise because companies buy more on speculation or they can rise because sales slow and normal reordering starts to push inventory levels higher. Businesses have to forecast sales and order replacement inventory based on those forecasts. If sales continue to slow you can bet they will cancel or delay those orders.
Economics for Wednesday include the Producer Price Index (PPI) and Industrial Production. Neither is expected to move the market. The Fed Beige Book in the afternoon could be a market mover if it shows economic activity declined from the prior report. Analysts expect continued improvement but at a snail's pace.
The big event is the Janet Yellen testimony in the morning. The House members will have had 24 hours to analyze her comments from the Senate testimony today and she will probably be questioned on the bubble call on social media and biotechs. I would expect some more fireworks from the testimony and that normally drags on the market. However, she may try to smooth over the impact from the stock comments and that could remove the investor worry.
The earnings headlines are starting to heat up and some of them are not good. However, so far the impact has been neutral. After the bell today Intel (INTC) reported earnings of 55 cents that rose +40% compared to estimates for 52 cents. Revenue rose +8% to $13.83 billion compared to estimates for $13.7 billion. The company forecast revenue for Q3 of $14.4 billion compared to estimates for $14 billion. Gross margin is expected to be 66% and +3 points above analyst estimates. Intel said it was going to buyback an additional $20 billion in stock over time with $4 billion this quarter.
The CFO said Intel was firing on all cylinders and revenue growth for the full year was now expected to be +5% compared to flat estimates earlier this year. They estimate there are more than 600 million PCs in the U.S. that are more than 4 years old. That is a polite way of saying they are running Windows XP or older operating systems and need to be upgraded.
Intel shares rose +1.30 in afterhours and will lift the Dow at the open on Wednesday.
Yahoo (YHOO) reported earnings after the close of 37 cents that missed estimates by 2 cents. Revenue declined -3% to $1.04 billion compared to estimates for $1.08 billion. Nearly everything said on the conference call was negative except for the Alibaba news. Yahoo said they had signed another agreement with Alibaba to reduce the number of shares they are forced to sell in the IPO from 208 million to 140 million. This is the second reduction they have announced. They entered into an agreement last year to sell a specific number of shares in the IPO and that has been reduced twice. This will leave Yahoo with 75% of their current stake. Yahoo currently has a 23% stake in Alibaba. The company said they were planning on returning to shareholders 50% of the IPO proceeds through buybacks and dividends.
The company forecast revenue in the current quarter of $1.02-$1.06 billion and analysts were expecting $1.1 billion. Ad sales have been declining as Google and Facebook have been gaining market share. Research firm eMarketer expects Microsoft to pass Yahoo as number three in the near future. Mayer said the decline in display advertising was accelerating.
Shares of Yahoo declined from $35.61 to $34.80 in afterhours after a volatile session during the conference call.
CSX Corp (CSX) reported earnings of 53 cents compared to estimates of 52 cents. Revenues rose +7% to $3.24 billion and that was just slightly below estimates of $3.25 billion. Those were record numbers. The earnings were not the important news. CSX guidance is considered a proxy for the economy. The company said the economy was improving strongly and they were increasing their capital spending to $2.4 billion because of the strong demand. The CEO said demand for the rest of the year should be 8% growth with a +7% increase in intermodal shipments. Coal shipments were up +15% thanks to the high prices for natural gas and electric companies rebuilding inventories after a severe winter.
He said shipments of construction materials for housing were up strongly as well as sand and gravel for fracking and cement. It was a bullish call on the economy and suggests the overall outlook is improving. CSX shares were unchanged in afterhours.
After the bell IBM and Apple announced a partnership to develop new applications for iPads and iPhones for the enterprise market. Apple has typically been a consumer product manufacturer and IBM an enterprise marketer. Combining the two together will be a sword in the heart of BlackBerry, which is barely hanging on to its enterprise customers as the saving grace for the company. If IBM and Apple can combine their resources they are going to be tough to beat.
They have targeted more than 100 business applications for the iProducts that will fuse big data and analytics into Apple's ubiquity and usability. Apple's words, not mine. The companies will develop the apps and IBM will sell the iProducts to its corporate customers while Apple sells the apps to its retail customers. The initial apps will be released late in 2014 and continue throughout 2015.
This is a landmark deal with the two giants teaming up to offer products not currently available that will revolutionize the way users interact with the data at the fingertip level. IBM shares rallied +$5 in afterhours and Apple shares rallied about $2. This will be positive for the Dow and the Nasdaq at Wednesday's open. Blackberry shares declined 50 cents to $10.88.
At the open Goldman Sachs (GS) reported earnings of $4.10 or $2.04 billion. That crushed the $3.09 analyst estimates. They earned $1.25 billion in the Investing and Lending segment. That was almost double the $640 million analysts expected. This is a highly volatile segment and is not normally repeatable. Bond trading revenue fell -9% and equities trading revenue declined -11%. The bank said trading clients are the least active in several years. Goldman also received $506 million in financial advisory fees for M&A advice. That is also a volatile number.
Goldman shares only rallied $2 on the earnings report because of all the special situations earnings that are not repeatable from quarter to quarter.
JP Morgan (JPM) posted earnings of $1.46 that declined -8% as fixed income and equity trading revenue fell -15%. Analysts were expecting $1.29 per share. Revenue declined -3% to $24.45 billion. The decline in trading revenue was less than the 20% analysts had expected. Citigroup also posted a 15% decline in trading revenue. JPM said mortgage lending profits declined -38% as it pulled back from the mortgage business in fear of future foreclosures. The bank is becoming much stricter in its mortgage lending to avoid another disaster in the future. Application volumes had declined -54%. Assets at the end of June totaled $2.52 trillion. Shares rallied $2 on the news.
Michael Kors (KORS) was knocked for a 7% loss after multiple analysts stated concerns over the slowdown in retail sales. Citigroup lowered its price target from $107 to $98 saying a survey of 62 retailers suggested that Kors products lacked "newness." More than 17% of the respondents said the stores missed sales targets in the quarter. Barclays said the number of Google searches for Michael Kors declined over the same period in 2013. During the previous 4 years only one week had shown a decline in searches. Barclays reiterated an $82 price target. Maxim analyst Rick Snyder downgraded Kors from buy to hold and lowered his price target from $109 to $85.
After setting a new high on July 3rd the S&P has been relatively flat. The dip to 1,953 on the 10th was the low point and today's high at 1,982 was the high point. The index has been volatile and lacking direction. The 1,980 level has emerged as resistance and we need to close above that level on Wednesday or risk the beginning of a new trend lower.
The material resistance is still well above at 2,000 but I don't see a catalyst to push us that high this week. The earnings have been mostly positive but with the exception of Intel tonight they have been lackluster. Volume picked up slightly to 6.0 billion shares with nearly 2:1 declining over advancing volume. Declining stocks were 4,873 compared to advancers of 2,081. That is hardly a bullish day. Down volume, negative internals with all the indexes negative except for the Dow and the Transports. That does not suggest a positive week ahead.
We could hang in this 1,950-1,980 range for the rest of the week while investors look at two more days of active earnings. If those earnings don't improve significantly I see the S&P breaking support rather than resistance.
The Dow made a new intraday high for the last two days but has failed to close over the 17,068 level for a new closing high. The blue chips are attracting all the money thanks to their liquidity and relative strength.
The afterhours gains in Intel and IBM should be good for about 56 Dow points at the open if those gains hold overnight. While that should insure a positive open the rest of the day could be in doubt with Yellen at the microphone and earnings reports that could be weak.
The Dow has resistance at 17,100, 17,150 and 17,300. The narrowing uptrending wedge is providing less room for the Dow to run and a breakout is imminent. Only the direction is unknown.
The Nasdaq faded fast after the opening spike. It did rebound +26 points from its lows at 4,390 but still ended with a -24 point loss. The Nasdaq deserves to be weak after the six weeks of gains. If it can hold at this level we have a chance of another retest of the highs but the outlook is cloudy. It all depends on the earnings from this point forward.
Resistance is 4,465 and support 4,344 giving the index more than 120 points to wander without changing the trend.
Before I left for vacation last week I warned that the Russell 2000 was at the perfect place for a double top after it closed at 1,208 on July 3rd. Don't look now but the Russell has been the weakest index for the last 7 days and closed at a new 5 week low today.
The Yellen sell signal for biotechs and social media stocks hit the Russell hard. That was like kicking an index when it was already down. The biotechs were already in the ditch with a lot of really steep declines last week. The Yellen comments just pushed them and the Russell 2000 lower.
The Russell closed below the 100-day at 1,157 and right above the 50-day at 1,150. The 200-day is jsut below at 1,130. Any further declines could trigger some serious technical sell signals.
The Russell futures are declining again tonight. It is not a big drop but simply a continuation of the trend. As long as the Russell is weak we can't expect the big cap indexes to surge higher. They may post minor gains but I doubt they are going much higher. We know from experience these things can reverse at any time. We could see the Russell reach a point where traders think it is worth buying and we could be off to the races again. I don't see a catalyst for that this week.
I would be cautious about adding to long positions until the Russell begins to rebound. July is normally the best month in Q3 because of the earnings cycle. If the earnings continue to be lackluster we could see the late summer doldrums arrive early.
Enter passively, exit aggressively!
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