The markets struggled all week but S&P closed at a new high on Friday and the Dow missed it by less than 1 point.
All of the major indexes with the exception of the Russell 2000 managed to add to their gains from the prior week but those gains were minimal. In the graphic above the majority of the major indexes gained only single digits for the week.
The stand out was the Dow Transports with a +193 point surge and a clear breakout to new highs. As the Dow transports go the Dow industrials normally follow. The stage could be set for a good week ahead.
The Dow started off in a hole on Friday with a dip to 17,009 after the August Nonfarm Payrolls came in significantly weaker than expected. The August report showed only 142,000 jobs created and the prior two months were revised down -28,000. The three month moving average has declined from +267,000 in June to +207,000 in August. That is a significant decline. An even bigger surprise was the minimal 16,000 jobs that were created in the separate Household Survey.
The unemployment rate declined from 6.2% to 6.1%. The labor force participation rate declined -.1% to 62.8% and a 36 year low. More than 64,000 people dropped out of the labor force in August pushing the number not in the labor force up to 92,269,000.
With the majority of headline forecasts in the 200,000 to 250,000 range the 142,000 number was a big surprise. Almost immediately a flurry of analysts were hitting the wires with negative comments. Diane Swonk, one of the most respected and often quoted economists said something to the effect of "If August created only 142,000 jobs, pigs will be flying." She also called the number a "fluke" in the internals.
Numerous analysts echoed those sentiments but it does not change the number. Everyone expects it to be revised higher next month. That may be true but there were some serious declines in the data. Manufacturing added zero jobs in August compared to +28,000 in July. Construction added only +20,000 compared to +31,000 in July. The retail sector actually lost -8,000 compared to a +21,000 gain in July. Transportation and utilities only managed to add +1,000 jobs compared to a gain of +19,000 in July. The only major gain came from professional and business services, which gained +47,000 compared to +36,000 in July.
Some analysts blamed the drop on the seasonal adjustments. Normally automakers layoff a lot of workers in the summer when they are changing over to new models. In August they hire them back and strange as it may seem those rehires are counted as new jobs. This year the automakers did not shutdown because demand for cars was so strong. When the seasonal adjustment that accounts for the normal rehire process was added it subtracted jobs and produced the unexpectedly low number.
Obviously that is speculation but it could be somewhat correct. However, that would only impact the manufacturing sector and there were no job declines in that line item. There were no manufacturing jobs created according to the report. Hypothetically if there were 20K created and the seasonal adjustment removed 20K to make the total zero it still would not have any a material impact on the overall number.
I was surprised the headline number was that low but I did expect it under 200K. In retrospect quite a few analysts claimed August was the least trustworthy number of the year. Others warned that August was typically a low point for job creation. My question is this. If so many analysts thought August would be a low point and it was so untrustworthy then why were the majority of the forecasts from 220K to 250K? Why were the forecasts so high when everyone "knew" the August numbers were normally low?
Mark Zandi, chief economist at Moody's Analytics, said "August tends to be weak consistently, and it gets revised up consistently." However, his estimate was for 200,000 so his comments and the forecast don't match just like every other complainer.
Zandi was right about the prior three years. In August 2013 the first number was 169,000 and it was revised up to 202,000. In August 2012 the first number was 96,000 and revised up to 165,000. 2011 started out at zero and was revised up to 85,000. However, that is where the pattern ends. In 2010 it was revised down by -4,000. In 2009 it was revised down by -57,000 and 2008 it dropped -48,000 in the revision.
If this was just a U.S. problem then why did Canada post job losses for the month of August? Retail and wholesale employment fell by -26,500. Transportation and warehousing declined -14,700 and manufacturing lost -11,000. Construction rose by 24,400 and government employment rose by 14,000 to reduce the losses for the month but there was a total decline of -11,000 jobs.
Separately the National Retail Federation said industry employment declined -17,700 in August. Could this be a symptom of a bigger trend?
How strong can employment be when 53 million of the 146 million people with jobs are working part time?
Janet Yellen is probably celebrating this weekend. The decline in the jobs numbers take all the heat off the Fed to raise rates. She has constantly advised patience and warned there was still considerable slack in the labor market despite the decline in the unemployment rate to 6.1%. The doves were probably celebrating and the hawks are frustrated. Even if the jobs report was a onetime abnormal event it will be several more months before the Fed can be sure. That means the hawks have to wait for confirmation. If September comes in less than 200K it will kick the Fed's rate hike plans a couple of quarters farther into the future. Less than 12 hours after the jobs report was released the forecasts for the first hike were slipping into Q2 rather than Q1.
The next FOMC meeting is not until the 16th but you can bet it will be the topic of conversation for the next 7 trading days. The Fed economists have access to a lot more data than we do and they will be telling Yellen and the members of the round table exactly why the jobs numbers were so low.
The economic calendar for next week is fairly devoid of important reports. The Retail Sales for August is probably the biggest report since it covers the back to school shopping season. FYI - there are only 107 shopping days until Christmas.
Apple (AAPL) shares did not wait for the announcement next Tuesday to give back their gains. The combination of the iCloud hacking scandal and new product announcements from Samsung and Motorola caused a -$5 drop from Tuesday's $103.74 high. Typically the stock craters after they announce new products. However, Samsung and Motorola stole their thunder this time around. Samsung announced new models of its popular Note along with a virtual reality device that uses the Note for video. The Galaxy Edge Note has a second screen on the side of the device that can be used for navigation by active users. They also announced the Gear S, a wristwatch that will allow users to make calls without being tethered to a smartphone. Apple's rumored iWatch is thought to require a phone to make or receive calls.
Motorola (MSI) announced a new Moto X phone that can be customized in dozens of cases and colors including wood, leather, plastic and metal. They also announced a smartwatch called the Moto 360 for $249. The Motorola watch went on sale on Google's online store, Best Buy and Motorola's website at 12:PM on Friday. It was sold out in all three locations by 1:PM. Just a week earlier LG revealed its new G Watch R smartwatch.
The rush by all these companies to announce all the new products ahead of Apple has definitely put a crimp in Apple's stock gains. Next week instead of being the leader in the space Apple will be faced with differentiating itself from the cheaper competition. Apple will have to make a compelling case on why consumers should pay $800 for the iPhone 6 instead of several hundred dollars less for the competitor's phones.
Apple's security is not what it used to be. The iPhone 6 is already being sold in China. China Mobile has been accepting orders for several days now and they had presold 33,000 by Tuesday evening. By accepting orders online they had to disclose the two new models with a 4.7 inch and a 5.5 inch screen.
The big question now is which way will Apple trade next week. Since it already declined -$5 will it still decline after the announcement or will this be seen as a dip to buy? That probably depends a lot on whether the iWatch requires a phone to perform its functions. Tim Cook claims Apple's new product offerings are the biggest and most diverse ever so it will be interesting to see if this is reality or merchandising hoopla.
Michael Kors (KORS) fell -4.5% after the company said it was holding a secondary offering to liquidate the holdings of its biggest shareholder. Sportswear Holdings Ltd, a founding shareholder, owns a 5.7% stake worth $890 million. The company will hold a secondary offering for that 5.7% and the company will not receive any of the proceeds of the offering. Sportswear Holdings two representatives will also resign from the board. Sportswear has been selling shares of Kors since 2011 and will maintain a relationship with Kors through its ownership in Michael Kors Far East Holdings Ltd. Shares of Kors declined to support at $76.
Alibaba finally filed its IPO papers after the close on Friday. The company is selling 123 million shares at $60-$66 each and they are expected to price on the 18th and begin trading on Friday the 19th. However, officers and early investors are going to sell another 197 million shares making the total offering 320 million. At the high end of the expected pricing it would value the initial offering at just over $21 billion making it the largest ever. The symbol will be BABA and it will trade on the NYSE. The post IPO valuation of the company is expected to be in the $165 billion range. That is larger than 95% of the companies on the S&P-500. Alibaba has more than 279 million active buyers on its websites. Net income tripled to $1.99 billion for Q2.
Alibaba said it would also allow employees and others "close to the company" to buy shares at the IPO price before the stock begins trading. The roadshow will begin on Monday and end on Sept 18th. The founder Jack Ma is expected to participate. Barclays will be the designated market maker for the IPO. Other banks will be co-equal leads on the deal behind Barclays. Those include CS, C, DB, JPM, MS and GS. Goldman Sachs will also be the "stabilization agent" and be responsible for propping up the stock in the market to make sure it does not trade below the offering price. Goldman will also be responsible for deciding whether or not to execute the "greenshoe" option for the underwriters to buy more stock to support demand beyond the original offering. Up to 46 million additional shares could be sold.
The challenge for the market will be the drain on other equities. When an IPO takes $21 billion out of the existing market that money has to come from somewhere and normally it is out of existing equities. We should expect to see selling in Amazon, Ebay, Baidu, Priceline, as well as equities in general. Everyone expects BABA to do well and analysts are already saying the shares could hit $100 in record time. That will entice a lot of traders to dump stocks they currently own and try to buy shares of BABA either in an IPO distribution or on the open market on the 19th. This will drag on the Nasdaq more than anywhere else since BABA is considered a tech stock.
YHOO invested $1 billion in Alibaba nine years ago. They sold some shares in 2012 for $5 billion but today that remaining investment still equates to a 22.6% stake in Alibaba or 524 million shares. Yahoo will sell 121.1 million shares in the IPO. That has been reduced twice in the lead up to the IPO. That will generate about $8 billion for Yahoo and leave them with about a $26 billion stake in BABA at $64 a share. With analysts already predicting a share price in the $100 range this is a real windfall for Yahoo. The company has pledged to distribute half of the after tax proceeds to shareholders and use the rest of the cash for corporate purposes. Buying Yahoo shares would be one way to benefit from any post IPO rally in BABA shares. Some analysts are projecting a $45 share price for Yahoo immediately after the IPO. Other analysts are projecting an immediate sell the news event.
Japan's SoftBank owns 34% of Alibaba and does not plan to sell any shares in the IPO. They believe BABA will rise quickly because of its dominance in the Asian markets. Softbank has investments in more than 1,300 companies in addition to the $65 billion stake in Alibaba. They had $19 billion in cash at the end of June. SoftBank has not rallied in advance of the IPO like Yahoo. This would be another way to play the BABA IPO but SoftBank is carrying the weight of those 1,300 other investments. U.S. investors don't really know how to value SoftBank but the market cap is the key. With a market cap today of $87 billion a rapid rise in BABA shares will quickly send that investment alone to near $80 billion and that means the other 1,300 companies they own are free.
Lastly the Krane Shares Chinese Internet ETF (KWEB) can add the shares on the 11th day of trading. Obviously there could be a giant rally in BABA shares before KWEB can add them to the ETF. I would be very cautious about buying the ETF before the shares are added and after the addition only if the BABA shares are still rising.
Tesla Motors (TSLA) announced that the battery gigafactory would be built in Nevada, just outside of Reno. Nevada promised to wave permit rules and/or accelerate approvals and they are going to give Tesla $1.25 billion in tax breaks and subsidies to get Tesla to build in Nevada. Elon Musk said the money was not the deciding factor. The most important factor was the time to completion of the factory. The factory has to be completed and producing batteries when the Tesla Model 3, mass market vehicle, begins production. With about 6,500 jobs expected to be created that works out to about $200,000 per job in benefits. In return Tesla will build the world's most advanced battery factory and create more than $100 billion in economic impact for Nevada over the next 20 years. Under the agreement Tesla promised to invest at least $3.5 billion in the Nevada project.
This compares to the $8.7 billion Washington State committed to Boeing in 2013 to win a Boeing 777 assembly plant. That is the largest subsidy ever for a corporate deal.
Tesla shares were lower on Friday after Elon Musk said investors often "get carried away" with the stock price. Also, "I think our stock price is kind of high right now." And, "if you care about the long term, I think he stock is a good price. If you look at the short term, it is less clear." Musk should keep his focus on developing products and refrain from talking about the stock price. The last time he said the stock was high it sold off for a month. Shares are up +90% from the $150 close at year end and investors are enjoying the ride. The -3% decline on Friday was minimal but I am sure investors would rather Musk keep his mouth shut on the price.
In each of the last three years Tesla has had a secondary offering to raise money for building plants, charging stations and equipment. With the stock at an all time high and Musk admitting it, there is a really good chance there will be another secondary very soon. They need to raise $3.5-$5.0 billion for the gigafactory alone. Plus they are expanding in Europe and Asia. All those efforts cost money. With the share price so high they would only need to sell 22 million shares to raise $6 billion. There are 124.6 million shares outstanding today.
Family Dollar Stores (FDO) declined a sweetened $9.1 billion ($80.00) offer from Dollar General (DG). FDO said it would be hard to get regulatory approval and there was a good chance the offer would fail to close. The board reaffirmed acceptance of the prior $8.5 billion ($74.50) offer by Dollar Tree (DLTR). Dollar General has threatened to take its $80 offer directly to the shareholders if rejected again. A DG/FDO combination would have more than 20,000 stores. More than 6,000 of those FDO stores would be within 3 miles of a DG location. The FTC has already said that having stores from competing chains so close together it reduces prices for shoppers.
With DG taking over FDO it would immediately raise prices for customers because there would be limited competition. The FTC is already questioning the Dollar Tree bid because of the proximity of some stores to each other. FDO said this would only increase because of the greater density of DG stores. Dollar Tree has said they would divest as many stores as necessary to satisfy the FTC but they have very limited store overlaps. Furthermore the product assortment and pricing of DLTR stores is significantly different than FDO stores.
Here is a really interesting link with some location charts of FDO, DLTR, DG store locations. Trust me, it is interesting. Store Density Maps
FDO and DG shares declined on the news but DLTR rose on their improved chance of concluding a deal.
SanDisk (SNDK) was upgraded from equal-weight to overweight by Morgan Stanley and the price target raised from $110 to $115. The reason for the upgrade was "increased conviction in a more sustainable earnings stream" as SNDK significantly out earns its peers. Analysts see a stronger pricing environment in NAND memory is likely to last longer than originally anticipated. The various new products including multiple versions of smart watches and phones could significantly increase demand. MS believes Apple could create higher demand from the sales of the iPhone 6 alone. Shares rallied +2.7% on the upgrade.
Gilead Sciences (GILD) fell from Thursday's high of $110 to a low of $97.54 on Friday before rebounding. The drop came after news broke that Gilead was in talks to make a cheaper generic form of the blockbuster drug Sovaldi to distribute to poorer countries. With the 12 week course of treatment to cure Hepatitis C costing around $84,000 any talk of a cheaper version is sure to cause investor jitters.
However, this is nothing new. They have done this with other drugs and it increases sales rather than decreases them. Gilead has done this same thing with HIV treatments and this was already expected for Sovaldi. There was also an article suggesting the new plan for a 2 pill a day program for 8 weeks instead of 12 weeks could affect pricing. Again, this is not the case. The shorter treatment would use less pills but also help more patients.
The case for selling Gilead is worthless. This company sells today at a relatively cheap PE of 11 and it has more business than it can handle. The demand for Sovaldi alone is more than they can produce. They have a huge pipeline of more than 30 drugs and I am surprised nobody has tried to acquire them yet. I would continue to be a buyer of GILD on any dip.
For the second week in a row the S&P spiked up at Friday's close to end at a new high. The other eight trading days were lackluster. The S&P hit 2005 on August 26th and it took seven days to gain another 2 points. In theory the two weeks of consolidation built a base for the next move higher.
I expected fund managers to come back from vacation and begin restructuring their portfolios in hopes of adding some gains before the fiscal year end on Oct-31st. The volatility over the last four days definitely could have been managers liquidating some positions ahead of the payroll report with plans to put that money back to work next week. The S&P rose steadily from the 10:45 low Friday morning. The dip buyers are alive and well and there are no economic reports next week to create negative headlines.
Even with the volatility over the last several weeks the S&P has posted consecutive gains for the last five weeks.
Strong support has appeared at 1992 and resistance is the closing high at 2007 and again at 2025.
On the Dow we have seen several support tests at just over 17,000 over the last two weeks. The converging resistance from 17,075-17,150 has also been rock solid. The index closed at 17,137.36 and less than one point from the 17,138.20 closing high in July. Like the S&P the Dow has struggled over the last two weeks as it underwent some consolidation from the August rebound. Wednesday and Thursday both saw strong upward moves at the open followed by selloffs into the close. That is typically a classic distribution pattern that is seen at market tops. On Friday that trend reversed to selling at the open in a continuation of Thursday's plunge and then strong buying into the close. The profit taking may be over and next week could see a breakout.
The resistance is strong BUT the bears have not been able to push the index lower after two weeks of trying. If we do break out I think fund managers are going to be chasing prices with all their available cash. They only have 60 days to add some performance to their fund numbers. Two weeks ago a Bloomberg survey showed that 81% of actively managed funds were lagging their benchmarks. They need to correct that before their fiscal year ends on Oct-31st.
The Nasdaq Composite spiked to resistance at 4,600 on both Wednesday and Thursday at the open. Both days saw solid selling into the close. Friday's open saw support at 4,550 tested for the third time in two weeks and the rebound was strong.
Like the other indexes I believe the Nasdaq is poised to breakout over that 4,600 level. The Nasdaq had three major losers on Friday and still gained +21 points. The buying was broad based and I think it will continue.
Support is 4,550 and resistance 4,600.
The Russell 2000 was the fly in our soup. The Russell sold off hard on Thr/Fri before managing a +3 point gain at the close. In theory the small caps are where fund managers are going to get the most bang for their buck but the buying was lackluster. This has to change if the broader markets are going to continue higher.
On the positive side support at 1160 held with the low at 1160.02. You can't get better support buying that that. Now we need the Russell to push back over Thursday's high at 1180 and lead the markets higher.
The Dow Transports offset the negativity of the Russell with a strong breakout over the prior highs at 8500. The strong surge suggests investors believe the economy is solid and the jobs numbers were bogus. If anything they probably believe the weak jobs numbers will keep the Fed on hold for another quarter and that will be positive for the market.
The Russell 3000 ($RUA) is the 3000 largest stocks in the market. This is a view of the real market not just a small subset as we get with the Dow and S&P. The R3K stalled just under 1200 BUT it did close at a new record high at 1197.45. This is a bullish signal for the market for the broadest index to make a new high at the end of a consolidation week even if it was just by a couple points.
Clearly I have a bullish bias for next week, which is strange for me since September is normally negative. However, that historical trend is negated when August is positive. I think all the historical trends have been negated by the Fed, QE and the TINA trade. (There is no alternative) With bonds approaching the financial suicide level you have to be in equities or cash. David Tepper proclaimed the end of the bond bubble on Friday.
I also believe that once we get to the end of October and the Fed announces the end of QE there will be a reset in the market. Until then the trend is still up. Fortunately for fund managers they can ride the trend until their fiscal year end and then take profits. The FOMC meeting announcement is on October 29th so the two dates coincide almost perfectly.
With bearish sentiment at 27 year lows and the very long term charts suggesting a topping pattern we should be cautious as we approach the end of October.
Monthly Russell 2000
SPY Monthly Chart
German two-year Bund yields went negative again with investors having to pay the government to hold their money.
Spain issued its first 50-year bond, selling one billion euros with a 4% coupon. That is cheaper interest than they paid on their 10-year debt in 2012. Three years ago Spain's 10-year debt was at 7%.
French 10-year bonds are yielding 1.3%.
The ECB cut rates last week and pledged to buy and buy and buy various forms of debt. In response the interest rates for European debt in all forms has fallen to record lows. The market is talking about the ECB buying up to 500 billion euros of asset backed securities but that much debt does not exist. One major ABS manager said it takes him three months to by one billion euros of ABS debt. The ECB is also predicting the TLTRO program could reach one-trillion euros. The ECB brought out its bazooka as Mario Draghi promised but now they have nothing to shoot at. What good does it do to announce a 500 billion QE light program when they will be doing good to buy a billion a quarter? This is more talk by Draghi and in the end very little action.
Historically over the last 100 years the equity markets have averaged a 10% correction once a year and has fallen at least 20% once every four years. Trying to time those bouts of volatility will drive grown men to tears. It has been three years since we had a 10% correction and there have only been two since the recession bottom in March 2009. The bull market just crossed the 2000 day mark. Only three bull markets since 1928 have lasted longer. We are definitely overdue for some serious volatility.
Chart from AWealthofCommonSense.com
The Investors Intelligence report for last week showed that bearish advisors fell to only 13.3% and the lowest level since 1987. Since extremes in this report are normally seen as contrarian indicators this should be an extreme warning of a market top. However, as we know from watching the Volatility Index the swings can remain at extremes for an extended period. There is no magic number that if touched will produce an immediate market reversal. This is simply a warning that everyone has moved to the same side of the boat and conditions can change dramatically if somebody moves to quickly.
Chart from Ryan Detrick
Argentina is becoming Venezuela. Argentina defaulted on its debt again and has decided to follow Venezuela down the rabbit hole of socialization. They raised the minimum wage by +31% to $523 a month despite soaring inflation approaching 60%. They are currently working on legislation to let the government regulate private-sector prices, profit margins and production levels. The bill will allow the government to "establish at any stage of the economic process, profit margins, reference prices, minimum and maximum prices, or all or any of these measures." Already sugar, toilet paper and other commodity items are scarce. Fixing prices and profits will mean their complete disappearance.
Global inflation hit the lowest level since November 2009. If you take the CPI year over year change for 33 reputable reporting countries and average them the number for August was 1.72%. Six countries in Europe have zero inflation or are currently in a depression. They are Portugal, Sweden and Switzerland at zero with Greece, Italy and Spain in a depression.
In 1994 CompuServe advertised their online service where you could connect via a dial up modem and get information on news, sports, weather, shopping and reference materials. In addition to these online options you could get up to 60 emails a month for only $8.95 a month. I get 60 emails an hour today. You might be surprised to know that CompuServe still exists. The 1990s Live
There are conflicting news reports that 11 Libyan airliners were stolen from the Tripoli airport when the rebel group Libyan Dawn seized the airport. There is a considerable amount of confusion regarding these planes and quite a few reports claim that "maybe" the planes were just moved to other locations for safety reasons. However, in recent days pictures of some of the planes and their new rebel owners have shown up on the Internet. There are considerable fears that some of these planes could be used to carry out 9/11 style attacks on the 9/11 anniversary.
However, none of them will be coming to America. The distance is too great, fuel too expensive and without a valid flight plan into U.S. airspace they would be shot down before they reached land. However, there is considerable talk about the planes being used to attack places like Saudi Arabia or Israel or any number of western targets in the Middle East. Despite all the governments looking for these planes only two have been positively located. Those were moved to a "safer" airport.
The U.S. has said it cannot confirm the disappearance of the planes and it is looking at satellite photos in an attempt to locate them. A second State Dept official sought to downplay the reports saying only "We can't confirm that." I am sure the State Dept does not want the public worrying about the unannounced arrival of a terrorist piloted jet.
While Libyan planes may not be our biggest problem next week there is considerable angst about the potential for a large terrorist attack on U.S. soil by Al-Qaeda, ISIS or some other faction trying to make a name for itself. There has been a confirmed increase in chatter from northern Mexico about an attack on U.S. soil from terrorists the cartels helped across the border. This is been common knowledge for the last two weeks. Again, it has been kept low key because of the lack of specificity and the inability to locate any of the potential perpetrators. Let's hope this was just a psychological warfare exercise.
The ceasefire in the Ukraine ended late Saturday when government forces came under artillery fire near the strategic port of Mariupol in eastern Ukraine. Mariupol had been a major rebel target and a key port for Ukrainian steel exports. Observers claim the artillery came from Russian positions.
The EU announced new sanctions against Russia on Friday. Russia's foreign ministry responded angrily on Saturday pledging unspecified "reactions" if they were implemented.
ISIS posted a video of fighters in captured Russian fighter jets in Syria with signs saying we are coming to Russia in these planes to get Putin. A Russian official fired back "They can sit in 2,000 planes but they will never get close to Russia."
What an interesting time we are living in.
Enter passively and exit aggressively!
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The four most expensive words in the English language, "This time it's different."
Sir John Templeton