Friday's rally was brought to you by Nike with a +7 point gain worth about +35 Dow points. Nike announced a dividend increase, $12 billion stock buyback and a 2:1 split to cause the big jump.
Nike announced a 13% dividend increase to 32 cents and the 14th consecutive year that they increased the dividend. That is not a huge increase or a large dividend but every penny counts. They announced a $12 billion stock buyback to occur over the next four years. That equates to about 15% of the outstanding stock at Thursday's close at $126. That will be slightly less or roughly, 13.3% at Friday's close at $132.63.
Nike also announced its 7th 2:1 split that will occur after the close on December 23rd to holders of record on December 9th. Nike sales are growing at a double digit pace and they expect revenue to rise from the current $30.6 billion a year to $50 billion by 2020.
At Friday's close, Nike shares had a 4.7% weighting in the Dow, which is a price weighted index. The bigger the stock price the higher the weighting. Nike was the sixth largest weighted stock in the index. After the split, their weighting will drop to about 2.7%, which means moves in the stock will have less impact on the Dow. Nike has earnings on December 17th and while I would like to hold positions over the report, that could be dangerous given the recent rebound. All the good news may be priced into the stock.
On the economic front, the Kansas Fed Manufacturing Survey returned to positive territory with a reading of +1. That was up from -1 in the October report. The index has been in negative territory since February with the lowest reading at -13 in May and a post recession low. It has been a long hard uphill climb however, the weakness is not over. The backorder component fell even further into contraction at -17, down from -4 last month. Employment declined from -3 to -8 and new orders fell from +7 to +5. There were more negative components than positive so it was a surprise to see a positive headline number.
The economic calendar for next week is fairly heavy but the GDP report on Tuesday is the only one that could move the market. The two home sales reports, Richmond Fed, Durable Goods and Personal Income & Spending are rarely market movers.
We had an active week for stock split announcements. Ctrip.com, Edwards Lifesciences and Nike all announced 2:1 splits. Maybe this flurry of high profile companies will spur others like ORLY, LMT, PSA, PNRA, PANW, MNST, NOC or even AMZN could get the split bug.
For the full calendar click here.
The earnings cycle is slowing significantly but there are still some reporters. Foot Locker (FL) reported earnings of $1.00 that beat estimates for 94 cents. Sales rose +3.6% to $1.79 billion and slightly beating estimates for $1.78 billion. Same store sales rose a strong +8.7% and easily beating estimates for 6.3%. Shares rallied +6% on the news even after a $2 fade from the highs.
Another stock with low expectations was Abercrombie & Fitch (ANF). The company reported earnings of 48 cents compared to estimates for 22 cents. That was a really low bar for the company to hit. Revenue rose +3.6% to $878.6 million and beating estimates for $862.8 million. All the gains came from the Hollister brand, which accounted for more than half of ANF revenue. Hollister sales rose +3% compared to estimates for a -1.1% decline.
The company warned that Q4 would be flat because of slow foot traffic and high promotions. The CEO said declining mall traffic was a problem for all retailers. Same store sales at the Abercrombie stores declined -5%. Customers complain the men's fashions are "too stodgy" according to the CEO. Shares spiked +25% on the earnings. Can you say "short squeeze?"
Hibbett Sports (HIBB) did a lot better than Dicks Sporting Goods (DKS) in Q4. Hibbett Sports reported earnings of 74 cents compared to estimates for 68 cents. Revenue of $228.3 million missed estimates for $233.4 million but investors did not care. The company gave upbeat full year guidance of $2.87-$2.94 compared to $2.80-$2.90 and the analyst consensus of $2.84. The CEO said the inventory and merchandising strategies have us well positioned for the holidays. It is refreshing to hear a retailer not whine about expectations for a crummy quarter. Hibbett shares rose +16% on the news from a 52-week low. Shorts got squeezed again!
A retailer not spiking higher was Sears Holdings (SHLD). They were scheduled to release earnings on Thursday and it did not happen. Normally when a company fails to report and not announce they are rescheduling it means bad news. The earnings date was listed on multiple websites including Breifing.com. Shares of Sears have declined -10% in the last two days.
Ross Stores (ROST) reported earnings of 53 cents that beat estimates for 50 cents. Revenue of $3.78 billion beat estimates for $2.76 billion. The company guided to full year earnings of $2.45-$2.48. However, they guided for the current quarter at 60-63 cents and that was below the consensus at 64 cents. Analysts were somewhat upbeat about Ross suggesting that the quarter may be tough only for a certain group of retailers. Shares spiked 10% on the news.
Nimble Storage (NMBL) reported a loss of 14 cents but that was much worse than the estimates for a loss of 6 cents. Revenue rose +36% to $80.7 million but also missed estimates by about $7 million. The company guided lower for Q4 with revenue in the range of $87-$90 million and analysts were expecting $99.2 million. The company guided for a loss of 11-13 cents and analysts were expecting a breakeven. Nimble shares fell -51%. Ouch!
Mentor Graphics (MENT) fell -36% after the company reported decent earnings in line with estimates but warned of serious problems. For Q4 the company is guiding for earnings of 47 cents on sales of $336 million. Analysts were expecting 97 cents on $439 million in sales. That would be a -23% decline in sales and -57% decline in earnings. The CEO said the flurry of mergers in the chip sector was reducing the number of customers to a few very large companies.
The earnings calendar for next week is very light with Hewlett Packard headlining on Tuesday. Both of the new HP companies (HPE, HPQ) will report and earnings are expected to be about 51 and 45 cents respectively.
Tuesday will see some more retailers confess with CHS, TIF, DSW, BURL and GES. Deere (DE) closes the earnings cycle on Wednesday. The only material company on Friday is Russian energy company Lukoil (LUKOY). It is a $33 billion dollar company with volume of about 70,000 ADS shares per day. I do not trust the numbers and I doubt many others do either.
Yelp (YELP) rallied +11% after it released a survey showing 64% of Americans plan to shop at local businesses this holiday season. That rises to 69% for those between the ages of 18-34. That is exactly the age group that uses Yelp's business review service to decide where to shop and eat.
Last week Yelp reported earnings that beat on both metrics and said they saw a 22% jump in monthly unique visitors to 89 million. They also saw a 40% increase in page views and a 36% increase in local advertising revenue. Yelp is a current long position in Premier Investor.
Things are not going well for Chipotle Mexican Grill (CMG). Fresh off an E-coli scare in Oregon a couple weeks ago the CDC reported 45 new cases in six states including New York, Minnesota and Ohio. Obviously the problem was not related to some locally grown produce in Oregon. The CDC was never able to find the contaminated food in Oregon but they were looking at locally sourced ingredients. Now it appears this could be in a common ingredient that is shipped to all stores from the main distribution center like jalapenos or cheese. Those ingredients will now undergo a stringent examination but we may never know what caused it. Shares fell -12% on the news. They are now down -$220 since the $757 high in mid October. That is really painful. Fortunately, for us there is probably a buying opportunity in our not too distant future. Once they figure out what is causing the problem it will be replaced and life will go on. I plan to own CMG when that happens.
Tesla (TSLA) said it was voluntarily recalling all Model S cars (90,000) to check the seat belts. The company said it recently found a Model S in Europe where the front seatbelt was improperly attached. The car was not involved in an accident and there were no injuries. However, a seatbelt in this condition would not provide "full protection" in a crash.
Tesla is recalling the cars as a "proactive and precautionary measure." The company has examined more than 3,000 cars to date and the car in Europe is the only one with the improper attachment. Despite the potential for that car to be the only one with the error, they are going to recall the fleet for an inspection. Owners will get a letter asking them to stop by a service center for a visual inspection. Tesla said the cost of the recall was inconsequential since it was a visual inspection only and the fix was a simple removal and reattachment if any problems were located. Shares recovered from a -$9 drop to end with a -$1.79 loss.
Tesla is ramping up the Autopilot software team and advertising for software engineers with no prior car experience required. Elon Musk is personally interviewing the candidates. If you are interested in working directly for Musk the email address is in the tweets below.
The potential Pfizer (PFE) acquisition of Allergan (AGN) is getting closer to reality. The expected acquisition price is in the range of $370-$380 per Allergan share ($150 billion) with Friday's close at $312. Pfizer is negotiating for a 2-3% breakup fee, which could be as high as $4.5 billion. If the acquisition were completed Pfizer would move its headquarters to Ireland and reduce its taxes significantly. With the IRS negative on these inversions since September 2014, there are a lot of regulatory hurdles to cross. I would not rush out and try to buy the May 2016 $325 calls just yet. They are $24 and the devil is in the details in getting something like this completed. However, $375 is a long way from $312 so there is plenty of reward for the risk tolerant.
Crude oil flirted with $40 all week and the expiring December contract dipped to $38.99 at the close on an order imbalance but that is not reality. The January futures contract, which becomes the front month on Monday, closed at $41.46. There will be a rapid adjustment in price early next week to account for all the traders moving into that contract.
Inventories only rose +300,000 barrels last week to 487.3 million and only 4.6 million away from an 80 year high. However, the refinery maintenance cycle is nearly over and utilization rose to 90.3% and the highest level since summer. Refiner inputs rose to 16.08 million barrels per day and the highest level since summer. U.S. production declined -3,000 bpd from an 8 week high the prior week. There are still a record number of tankers waiting to unload in Houston so the inventory levels are going higher in the weeks ahead.
Active rigs declined -10 to 757 with oil rigs accounting for the entire drop. Gas rigs remained level at 193. Oil rigs declined to 564 and more than a ten-year low. Total active rigs were 1,929 the same week in 2014. That represents a drop of -1,172 rigs in a year. In theory U.S. production should be slowing but increases in technology are allowing drillers to maintain and in some situations even increase production. The Saudi Arabian oil minister must be suicidal.
The markets had their worst week of the year the prior week and the best week of the year last week. Volatility has definitely returned. The second week of November lived up to its historical trend with a bearish performance and the third week did as well with the bullish performance. Next week is typically bullish as well so let's hope the seasonal trend continues.
Unfortunately, strong weeks with more than a 3% gain typically are followed by some profit taking. With a little luck, maybe the seasonal trend will overcome the urge to take profits.
The challenge we have now is the triple levels of resistance at 2113-2116 and again at 2,132. After the big rebound from 1,872 to dead stop at 2,116 we did have a textbook retracement of -38%. In theory that should have allowed investors to take profits and establish new positions ahead of the seasonally bullish period. The +3.3% rebound last week began to slow on Thursday and Friday. The S&P closed -8 points off its intraday high but it was still a good day and a good way to end the week. It was option expiration and that always creates some volatility. Volume was light for an expiration Friday at 6.8 billion shares.
If we can move over the Friday high at 2,097 maybe we can find some traction to make a good run at that resistance band. However, if Monday's trading is lackluster we may run out of week before we can win that resistance battle. Monday and maybe Tuesday are the only decent volume days of the week. Wednesday will be a ghost town and Friday even more desolate. Any material moves will have to come early in the week otherwise it will be difficult to break through that resistance on low volume.
The Dow is going to have a challenge next week. The big gains last week came from upgrades on Apple, news from Nike, Home Depot and Walmart earnings, Disney and the Star Wars hype and UnitedHealth talking about dropping out of Obamacare because they cannot make any money.
Each of those events caused big one-day gains in the individual stocks that probably will not be repeated next week. Except for Disney, everything else is now old news. There may be some new headlines on other stocks but with earnings over and everyone leaving for the holiday the news flow will be really slow.
Since the Dow is only a 30 stock index it needs some decent moves in some individual stocks in order to keep the rally alive. I would be thrilled to see some other components step up and show some gains but it is hard to imagine what they would be. Most of those stocks have already used up their headlines during the earnings cycle.
Obviously, there is nothing keeping the various components from creeping slowly higher on their own but nearly half were negative on Friday when the Dow was up +102 at its peak.
We just need to trade what the market gives us and hope for a flurry of unassisted gains.
The Dow peaked at 17,977 in early November and then hovered at the 17,920 level for a week before rolling over. I warned at the time it looked like a distribution phase with volume moderate and mostly negative. Now that the profit taking has run its course, it will be interesting to see if we struggle at 18,000 again this time around. The 18,000 level is purely psychological with real resistance from 18,100 to 18,165. Getting over 18,000 is just the first hurdle.
The Nasdaq posted a +3.6% gain for the week and closed just over the 5,100 resistance level. However, the Nasdaq only closed -8 points off its intraday high with a +31 point gain. The big cap tech stocks are again leading the charge higher. The Nasdaq 100 ($NDX) is only 33 points below its historic high close of 4,719 and -51 points below its intraday high at 4,737. The NDX is showing very strong relative strength and could be our hope for lifting the market over the next couple weeks.
FactSet pointed out that Amazon and Google have been responsible for adding 478 points to the Nasdaq 100 in 2015. That is three tickers, AMZN, GOOG, GOOGL. The Nasdaq 100 index has only gained +419 points for the year. If you exclude those three stocks along with Facebook and Netflix the Nasdaq 100 would be down -5% for the year. This will eventually end badly but probably not until next year.
With Goldman Sachs putting a new target on Apple at $163, Netflix apparently heading for a new high over $130 and Amazon in its favorite quarter the big caps are where it the action is. I hope that continues to be true.
The Nasdaq Composite has serious resistance at 5,160 and that would be the target on any continued rally.
The Russell 2000 small caps continue to lag with only a +2.5% gain last week. There are multiple resistance levels just overhead at 1,194 and 1,200. The most important one is 1,200 and that is 25 points away or +2.1%. That would be a good week under normal circumstances. The small caps are supposed to be strong in the last two weeks of November and middle of December. We really need the seasonal trend to kick into gear or the small caps could be a weight on the broader market.
One factor holding the small caps back is the disparity between the growth stocks and the value stocks. There are two Russell ETFs. The one everyone recognizes is the IWM or Russell 2000 Growth. The other one is the IWN or Russell 2000 Value. Note in the chart below that they traded more or less in tandem until the middle of September. After the late September crash, the value stocks have been lagging significantly. For the year, the growth stocks are up +6.27% and the value stocks are down -3.78%. Most of that disparity came in just the last three months.
We need the value sector to catch fire but the next two months are probably not going to catch up. Fund managers are dying for growth to resurrect their performance for the year. The Dow is dead flat at 0.0% gain for the year and the S&P has only gained +1.47%. Most fund managers were well below those benchmarks. The Russell 2000 is down -2.45% for the year. The fund managers need the next four weeks before the Fed meeting to be robust in hopes of ending the year with a gain in their portfolios. Normally they would do that with the small caps but as I outlined above the Nasdaq big caps are leading the market higher. How long that will last is the $64 question.
I have no prediction for next week. If the seasonal trend holds, the week should be bullish. Honestly, I am worried about that resistance on the S&P and Dow. It would be far too easy for the indexes to creep up to that level and hold there for the rest of the year as they did for the six-months prior to September. The rest of the world is ready to add stimulus and should the Fed hike rates the sharply rising dollar is going to cause even more pain for the majority of the S&P-500 companies.
However, there is a strategy that gets long last week or Monday of next week and then sells on Black Friday because the first week of December is negative more often than not. The strategy wins more than it loses but only by a small margin. I would not recommend it. Since 1987, the Dow has posted gains in 22 of 28 years between next Friday's close and the end of December. The average gain was only +1.2% so do not expect too much in December.
Since 1950, December has gained an average of +1.7% to make it the best month of the year for the S&P and Russell, second best for the Dow and Nasdaq. Small caps tend to outperform in the middle of the month.
The recent flurry of terrorist activities is likely to continue and there is a really good chance of some of it happening in the USA. I seriously doubt the market will ignore a major event in the U.S. the way it did with the recent events in France, Beirut, Egypt and probably Mali. As I write this Belgium is under martial law with the subways halted and everyone has been told to remain indoors.
The defenders of peace have to be vigilant 24 hours, 7 days a week, 52 weeks a year. They need to be right in every decision every day. The terrorists only need to be right once. The increased police presence will only delay the attacks until the pressure has been relaxed.
The U.S. is far too open a society and it makes in inviting target.
I believe this will be a cloud over the U.S. markets for the rest of the year. I hope I am wrong and we continue higher in the weeks ahead.
This is why you should not short low dollar biotech stocks. Joe Campbell was a trader with an account worth about $37,000. He had shorted Kalobios Pharmaceuticals (KBIO) a stock trading for about $2. He went to bed on Wednesday with $37,000 in his account and a short position in KBIO. The company had said it was winding down operations because it was running out of cash while developing two cancer drugs.
After a long office meeting the next day a buddy texted Joe and asking if he was ok since he had been short KBIO. Unfortunately, he was not.
Overnight it was announced that Martin Shkrell, the CEO of Turing Pharmaceuticals had gained control of a majority of the shares of KBIO. The stock rocketed from $2 to $20 and Joe's account turned from +$37,000 to a -$106,000 margin call. Campbell started a GoFundMe account hoping to get some donations from traders having experienced similar circumstances in the past. After 3 days, he closed it after receiving $5,310 in donations but lots of nasty comments from people who thought he should not be begging for money and basically telling him to take a hike.
Small biotech stocks are explosions waiting to happen. You never know when there will be an announcement that either takes them to zero or makes them a hero. Please do not attempt to short low dollar biotechs. It is like playing with dynamite and they can blow up your account and your net worth as well. Use options where the risk is limited to the amount you paid for the put or call.
The Baltic Dry Shipping Index ($BDI) hit a record low on Friday. The index represents the rates being quoted to charter a ship to transport a dry commodity from port A to port B. Hitting a record low means there is an excessive number of empty ships without cargoes that are bidding on available loads. It also means there is not going to be a rebound in the Asian economy over the next several months because these cargoes are booked well in advance in order to have a ship at the port when the cargo is ready to be picked up. The decline in commodity prices will continue until the Baltic Index begins to rebound and indicate an increase in shipping activity.
The Maersk Line cut 4,000 jobs and cancelled orders for new ships while delaying delivery on others. The parent A.P. Moller-Maersk reported a -48% decline in quarterly profits. "It is a bloodbath" claimed an owner of 18 dry bulk ships. "I have been in the business for 25 years and never seen it this bad."
The Commodity Index hit a new 13-year low on Friday and is only 20 cents away from a 16-year low. There is no light at the end of this tunnel.
Germany received 4.37 billion euros in bids for two-year notes at a record yield of -0.38%. That means you have to pay Germany 0.38% to hold your money for two years. Negative bonds are the fastest growing asset class in Europe with about 30% of European sovereign bonds trading with negative yields. The ECB QE program has purchased 1.1 trillion euros since the program started in March at the rate of 60 billion a month. Mario Draghi is set to increase the spending to do "whatever it takes" in December to stimulate the European economy. If he raises the rate of purchases there are fears that sovereign bonds will become scarce and that is driving down the yields.
The Syrian refugee problem is making dozens of headlines every day. We know for a fact that Syrians are trying to sneak into the country. Five with forged Greek passports were arrested in Honduras earlier in the week with maps on how to get into the USA.
On Saturday, two Pakistani men and a Syrian woman were arrested in Honduras near the Nicaraguan border headed towards the USA.
On Thursday a Syrian woman with a forged Greek passport was arrested in Costa Rica after she arrived by plane from Peru.
In Paraguay a Syrian man, traveling with a stolen Greek passport was arrested on Wednesday.
Apparently, it is easy to get to South America with forged documents and then head north.
Six Middle Eastern men were captured with smugglers in southern Arizona last Monday. Five were Pakistani and one Afghan. On the same day, two groups of Syrians were taken into custody at the port of entry in Laredo while trying to gain entrance into the U.S. with fake passports.
The Border Patrol openly admits they only catch a fraction of the people crossing the border illegally. They have admitted more than once that they find discarded Quran's and prayer rugs along the trails that the smugglers use to infiltrate the border. Having those on your person when stopped in the U.S. would immediately identify you as a Muslim rather than a Mexican. Anyone that does not understand that terrorists are walking among us is not paying attention.
The vast majority of refugees trying to gain lawful entry into the U.S. through the president's program are women, children and elderly people. The number is about 70% according to the administration. However, out of 10,000 entrants in this first program, expected to be upgraded to 75,000, there are bound to be a few sympathizers or worse. ISIS has already warned they have infiltrated the refugee horde. They warned over a year ago they were going to create the horde and send them to overrun Europe and they definitely accomplished their goal.
The U.S. is a compassionate nation as is Europe. We always open our gates to refugees from numerous countries and conflicts. However, in a war, and ISIS declared war on us, you have to discover your enemies weaknesses and exploit them. That is exactly what they are doing in Europe and are trying to do to the USA. To terrorists, compassion is a weakness to exploit.
Here is the Syrian refugee problem explained in very simple terms. If there are 10,000 M&Ms in a bowl and only ten have poison that will kill you, how many M&Ms would you eat?
The end of the Affordable Care Act may be in sight. UnitedHealth (UNH) said last week that it would lose $425 million or 26 cents a share from plans sold into the Affordable Care Act exchanges. The company said it was "evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017." UnitedHealth has already pulled back on marketing its exchange products, as open enrollment is currently underway for plans that take effect in 2016.
Other insurers have also been warning of similar problems in their exchange products. Even with premiums doubling and deductibles averaging $3,500 to $5,000 depending on the plan, the companies are still losing money. Anthem, Cigna and Humana have already warned they were losing money on the ACA plans. Mizuho Securities said, "We can expect other participants to guide to the same experience and expect this to impact the managed care group." And, "We expect UnitedHealth and others to exit the public exchanges for 2017 if they cannot breakeven in the first half of 2016. The 2017 plan programs are sold in the last half of 2016. The UnitedHealth CEO said, "We cannot sustain these losses. We cannot subsidize a marketplace that does not appear to be sustaining itself."
This is a huge turnaround for UnitedHealth. They were the company that provided major support for the program when it was being constructed.
UnitedHealth provided the statistics Democratic members of Congress used to sell "bending the cost curve" of medical care.
UnitedHealth conceived of the idea of the insurance co-ops in the first place that would "save an estimated $540 billion in federal spending over 10 years."
UnitedHealth was instrumental in directing Congress toward which types of mandated coverage the ACA would provide.
UnitedHealth said customers signing up for the ACA tended to use more medical care. They also said that people would sign up for coverage, get the expensive care they needed, then drop their policies. The company said the exchange profile (the age, quality, illness ratio) of the exchanges was negative. In other words, too many sick people with pre existing conditions and not enough well people. They expect it to continue to be negative through next year.
Enter passively and exit aggressively!
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"What we think, or what we know, or what we believe is, in the end, of little consequence. The only consequence is what we do."