The Dow continues to flirt with 13,000 but can't seem to make a serious commitment to a long term relationship.
There was very little in the way of economic news to power the markets on Friday. They mostly took a cue from Europe where Spain pulled a rope-a-dope on the EU. Spain was one of the countries that signed the fiscal pact this week pledging to maintain certain deficits and fiscal rules in the future. Then on Friday they announced they were not going to meet the fiscal promise for 2012 of a 4.4% deficit but would see a deficit of 5.8%. In 2011 Spain had agreed to a deficit of 6.0% but after the smoke cleared they actually had a budget deficit of 8.5%. This promise and renege syndrome seems to be the common strategy of the European countries with the highest debt. Greece has pushed it to an art form.
Yields on Spanish debt rose sharply higher while Italian yields improved. Spain is rapidly moving to the top of the list of problem countries. The market did not like the worry that another European country was starting to exhibit deeper problems. Spain is too big to save so a spiral into the economic abyss would be a serious challenge for Europe. Unemployment in Spain rose +2.4% in February, up from 22.85% at year end and under 25 youth unemployment is more than 50%. The young 20 something population just happens to be the ones that riot and protest in the streets. With this many 20+ people out of work can increased civil unrest be far behind? Tens of thousands of students demonstrated in 20 cities last week. What company would ever want to hire anyone when government mandated severance pay is 45 days for every year worked up to 24 years? There was a reform proposal in February to cut that back to 33 days per year.
In the U.S. the only economic report was the ISM New York and that was very positive. Activity in New York City expanded at its fastest pace in nearly a year in February. The ISM Index for NY rose by +6.6 points to 543.1 and the fastest rate since March 2011. The six-month outlook component rose +12.8 points from 64.5 to 77.3. The employment component rose more than 20% from 45.8 to 54.4. The rise in the employment component and the index as a whole suggests the rest of the New York economy is recovering nicely and not being dragged down by the layoffs in the financial sector as a result of new burdensome regulations. The decline in the index to 530.6 in Oct/Nov has been erased and is now hitting a new high.
Moody's ISM-NY Chart
The economic calendar for next week is dominated by employment reports. The ADP report on Wednesday is the first major report followed by the Challenger report on Thursday and Nonfarm Payrolls on Friday. The ADP report showed a gain of +170,000 jobs in January. The Nonfarm Payrolls showed a gain of +243,000 in January and the expectation is for a smaller gain of +210,000 for February. Investors would love to see those jobs numbers continue rising instead of weaken. The employment components of the regional activity reports have been rising dramatically but it remains to be seen if that will translate into Nonfarm Payroll hiring.
On Tuesday the results will be in on the Greek PSI vote. Private sector investors will have voted to accept the 53.5% face value haircut and -70% present value cut on the 200 billion euros of debt. This would reduce Greek's debt by 107 billion euros. If enough voted to accept then Greece can enact the "Collective Action Clause" to force all the others to take the same deal. That threshold is said to be 66% acceptance. If Greece enacts the CAC then the ISDA could declare a credit event that would trigger the $3.25 billion of credit default swaps.
If the swaps are not triggered because of the cleverly worded Greek legislation passed last week then the validity of any credit default swap for sovereign debt would be questioned. That could be bad news for the European sovereign debt market. Private investors may no longer be interested in buying the debt of weak countries if they can't insure it.
With Q4 earnings basically over the stock news was generally focused on individual news events like the YELP IPO. That company is a social media darling that has not yet posted a profit. Yelp makes money by selling advertising on its website where it has more than 25 million reviews of businesses like plumbers, shoe-repair stores, restaurants and nightclubs. Yelp competes with Angie's List but Angie charges for membership and Yelp does not. Analysts believe Google will be a major competitor after its acquisition of restaurant reviewer Zagat. The founder of Yelp said he was not fazed by competition from Google. Of course on the day of a very lucrative IPO what would you expecting him to say?
Shares of YELP priced at $15, well above its expected range and then opened at $22 and closed at $24.50. More than 17 million shares traded and YELP only sold 7.0 million. Clearly there was some churning in progress. YELP raised $96 million and the IPO results values the company at $900 million. Can you say takeover target? Even Yahoo could afford them. Insiders can't sell their shares for six months and their average cost is $1.21 per share. There is going to be a lot of new millionaires six months from now if YELP can hold its gains.
Yelp Chart - 3 Min
Eddie Lampert, the majority shareholder of Sears Holding (SHLD) must not be concerned about his future income potential. It was announced on Friday he bought the Paul Cejas mansion on Indian Creek Island in Biscayne Bay Florida. The cost was just under $40 million. It has 17,000 square feet on 2.7 acres. Indian Creek Island has 41 residential addresses, each a mansion, with the majority of the island a golf course. Lampert is listed as the 117th richest man by Forbes with a net worth over $3 billion. I am sure he was a happy camper on Friday because SHLD shares rallied another +10% to $76. Shares are up +150% since the January low. Lampert owns 22.7 million shares outright as of Jan 12th and his fund RBS Partners owns 48 million. His personal gain on Friday's spike in SHLD was roughly $150 million so dropping $40 million on a vacation home does not seem so extreme. He was reportedly buying shares hand over fist in late January after the stock bottomed at $30 so he probably owns more than the currently reported 22 million shares.
Lampert's New Home
Indian Creek Island
GM reported on Friday they had suspended production of the Chevy Volt for five weeks because dealers were currently overstocked. GM will lay off 1300 workers for five weeks starting on March 19th and running to April 23rd. Sales of the plug-in hybrid fell below estimates in 2011 and GM had estimated they would sell 45,000 Volts in 2012. That estimate has now been changed to "production will match demand." GM only sold 7,671 in 2011 and well below estimates. This year GM sold 603 in January and 1,023 in February. Using the February sales rate would put sales for 2012 at just over 12,000 and well below the initial 45,000 estimate. GM claims it has 3,600 Volts in inventory. The car costs $41,000 before a taxpayer supported $7,500 Federal tax credit. I think it is going to take oil prices well over the current $106 per barrel to make consumers interested in buying this car. GM shares closed flat.
Despite the down market Dow component AT&T (T) rallied nearly +1% to a seven month high on news they were going to clamp down a little more on usage hogs. AT&T is going to throttle down transfer speeds on those users that exceed 3GB of data during the month. This is not news but AT&T is being more vocal about it in an effort to talk down those heavy users. AT&T is hoping the threat of slower transfer speeds will cause many users to go on a self imposed diet. In theory a power user will stay under the 3GB threshold unless they download movies. Users that want to stream movies should try to do it when they have a WiFi network available. Verizon also has instituted a throttle down limit of 5GB. Sprint has no limit because they have no traffic. They are hoping to seduce some of the users away from AT&T and VZ with their no limit plan.
Coal stocks were crushed after Nomura initiated coverage on the US coal sector with a "bearish" view. The analyst said weak gas prices would cause more power plants to switch from coal to gas this summer and that switch could reduce coal demand by 50 million tons in 2012. The analyst started Arch Coal (ACI) and Patriot Coal (PCX) as high-conviction shorts. He still likes coal and gas producer Consol Energy (CNX) and miner Vale (VALE) as high-conviction buys. Peabody Coal (BTU) was not mentioned but it lost -6% on the coal sector negativity. In other news Midwest Generation agreed to shutdown two coal fired power plants in Chicago. They were big polluters because they were built back in the early 1900s and were grandfathered into the Clean Air Act.
Peabody Energy Chart
Shares of Wynn Resorts had a volatile day after a mistakenly filed 8K. The form filed by an "agent" of WYNN stated the casino firm had contracted for a 51 acre plot in Macau to build a new luxury casino complex. Shares spiked $8 but then trading was halted. Wynn filed another 8K claiming the first one was in error and the contract had not yet been published in the official gazette of Macau, which is a prerequisite to getting it approved. Trading was restarted and shares lost -$6 of their gain but almost immediately headed higher as speculators figured the deal was ready to be completed and the official filings had just been done out of order. Wynn is proposing to develop 51 acres of land in the Cotai area of Macau into a complete resort with five-star hotel, gaming areas, retail, entertainment, restaurants, spa and convention center. It is expected to contain 1,500 rooms and 500 gaming tables. Subsidiary Wynn Macau said in September it had accepted the terms and conditions of the Macau government regarding the land for the complex.
Morningstar analyst Chad Mollman said he has a $175 target on WYNN shares. That target goes to $200 if the redemption of the Okada shares is completed. Wynn and Japanese billionaire Kazuo Okada have been battling in the court over Okada's demand to see the internal books on Wynn Resorts. Wynn accused Okada of criminal acts and forcibly redeemed his shares representing roughly 20% of the company. If Wynn can win the court fight over the forced redemption Mollman thinks the company will be much better off.
The biggest news of the day came well after the close at roughly 10:PM Friday night. Judge Carl Barbier said Britain's energy-giant BP and a committee representing more than 100,000 plaintiffs suing over the 2010 Gulf oil spill have reached an agreement although specific terms have not been released. The judge said as a result of the agreement the trial has been postponed again with no date set for a new start. The judge said the settlement will require substantial changes to the current trial plan but he did not elaborate. Barbier did not mention anything about BP talks with the various government agencies about a settlement of the various fines and penalties.
The settlement with the thousands of plaintiffs suing BP will remove a large burden from the trial process. The headlines claim the settlement will cost BP $7.8 billion, be paid out of the existing victims compensation fund and the remainder of the fund money would be returned to BP. Last week the Wall Street Journal said BP was willing to sign over the remaining $14 billion in the victims fund to the plaintiff's committee in exchange for a settlement. On the surface that would appear to be a much better deal for BP and could spike the stock on Monday. BP has already paid out $6.1 billion to more than 220,000 claimants from the $20 billion claim fund.
That does not get BP off the hook for the billions of dollars in fines and penalties related to the oil spill. The initial fine for spilled oil is $1,100 per barrel. If the government can prove gross negligence that rises to $4,300 per barrel. More than 4.1 million barrels of oil leaked from the Macondo well so BP desperately needs to avoid that gross negligence finding. Bloomberg reported on Feb 9th the government did not want to settle for less than the $4,300 number.
Transocean and Halliburton could also see a bounce on Monday but until we know the terms of the settlement the bounce may be muted.
Gold prices imploded last week after Bernanke failed to mention the possibility of QE3 in his testimony on Wednesday. Gold closed on Friday just over $1700 but still in the long term uptrend. There is strong support at $1685 and again at $1600. There is almost no scenario where the Fed won't continue some form of QE program. With the average interest rate on the Federal debt at 2.3% the Fed can't afford to let rates rise. Every point higher costs the U.S. tens of billions of dollars per year more in interest. If the Fed lets rates rise uncontrollably the U.S. becomes Greece in a very short period of time. The Fed must keep rates low to protect mortgage rates until the housing sector has recovered. The Fed is in a rate trap. They can't allow rates to move higher and the only way they can do that is with some additional form of QE. The U.S. needs an inflationary environment to inflate wages and taxes and produce revenue to offset the deficit. I started to say pay down debt but I don't see how that is possible without a monumental change in the economy and government spending. For the next several years the goal is to reduce the size of the annual deficit. All of these factors will continue to make gold and silver good long term investments. Once the Greece problem disappears from the headlines the euro will rise and the dollar decline.
Crude prices declined on Friday after spiking over $110 late Thursday on news of a pipeline explosion in Saudi Arabia. Arch enemy Iran was the one that broke the news complete with pictures. Crude went ballistic until Saudi Arabia said the report was untrue. Iran has a habit of weekly news reports that are bullish for oil. They can claim war games to practice blockading the Strait of Hormuz and get a $2 spike in crude prices almost at will. With the Iranian oil embargo gaining speed we can expect Iran to ratchet up their news events. They would like to scare the U.S. and EU with visions of high prices causing economic collapse in an effort to weaken the coalition sanctions.
Gasoline prices in the U.S. rose to $3.74 on Friday and odd are very good they will be over $4 in the weeks ahead.
Brent Crude Chart
The ECB's LTRO-2 announcement and the Bernanke testimony on Wednesday really roiled the currency markets. The ECB loaned another 529.5 billion euros for three years at 1% to more than 800 European banks. The first LTRO loaned 489 billion to 523 banks. That brings their QE total over the last 90 days to 1.02 trillion euros. The dollar index rallied +1.6% and the euro declined -1.9%. This depressed the U.S. equity markets and commodity futures of all flavors. You saw the impact on gold and were it not for the bogus news on the Saudi pipeline it would have crushed oil as well even more than the decline we saw.
Dollar Index Chart
Turn out the lights, the party is over. That is what the Russell 2000 is telling us this weekend. The Russell failed to follow the other big cap indexes higher and remained in a very narrow consolidation range since early February. It tested the top of that range at 830 as recently as Wednesday's open but when that test failed the bulls left the building.
We always refer to the Russell 2000 as the fund manager sentiment indicator. Apparently that sentiment suddenly soured with the Russell losing -3% for the week while the Nasdaq and S&P posted gains. The Dow was flat.
After failing to make any forward progress for the last month it appears fund managers began taking their chips off the table. The Dow's failed flirtation with 13,000 for the last nine days without any material progress was a sign to small cap investors to lighten the load.
This is a serious warning sign for the market. The decline in the Russell could be the start of the profit taking analysts have been expecting for weeks.
Russell 2000 Chart - 90 Min
Russell 2000 Chart - Daily
The S&P lost -4 points on Friday but gained +4 for the week. It was not a rousing performance but at least it was able to set a new three year high earlier in the week at 1378. It was not able to hold the gains and the S&P is having the same problem with 1370 as the Dow is with 13,000.
The gains have been choppy and minimal and on low volume. Wednesday saw a spike in volume to 8.0 billion shares but Friday declined to 5.9 billion. Declining volume was 3:1 on Wednesday on a high volume day. On Friday it was 2:1 in favor of declining volume.
Uptrend support failed on Friday but it was more of a sideways move than an actual breakdown. The S&P has been moving towards the bottom of the channel for the last two weeks by failing to maintain forward motion. Sideways movement can be a consolidation pattern but we saw what happened to the Russell's month long consolidation.
The S&P has risk to 1340 but it may not be an elevator ride lower. It is said that "markets take the stairs to higher levels but the elevator down." With the active dip buying we have seen lately any further declines could be slow and boring rather than a short, sharp, painful elevator drop. Every dip is going to be seen as a buying opportunity by someone.
S&P Chart - 90 Min
The Dow has collapsed into a very narrow range of 12,935 to 13,015. This 80 point range has seen more traffic over the last two weeks than the American Idol stage. I can't remember when the Dow has been so range bound. Triple digit moves are instantly erased but it is tough going for both buyers and sellers between those boundary markers.
I believe the Dow has risk to 12,750 but I think it would take a new set of negative headlines to push it much lower. A miss on the Nonfarm Payrolls could be that headline.
Dow Chart - 60 Min
Dow Chart - Weekly
If only Jules Verne had actually invented a time machine I would be standing in line for a ticket today. Many times in the market we say "if only" or shoulda, woulda, coulda in reference to some event. I would like to take Mr. Verne's time machine back to December 19th and my only baggage would be a suitcase full of money.
Nasdaq 100 Chart
This has been a big cap rally and especially big cap techs. All of that may come to an end next Wednesday or we could blast off on that date. Apple shares declined -$27 to $374 in the five days prior to the Oct-4th iPhone 4S announcement. There was not nearly as much buzz about the iPhone ahead of that announcement as there is for next Wednesday's event. Everyone thought the October announcement would produce the iPhone 5 but instead we got the 4S. That should have been a disappointment but after dropping -$20 on the news to $354 Apple roared right back to hit $426 only nine days later.
There have been some major moves in Apple shares surrounding their press conferences. This one should be no exception. The topic of this event is expected to be the iPad 3. Rumors say it will sport a quad core processor, possibly an A6, plus 4G LTE communications, higher resolution of 2,048 x 1,536 pixels, a much improved rear facing camera and a larger, longer life battery. I am not an Apple aficionado but with those features I might have to break down and buy one.
The specificity of the rumors has increased the hype over this announcement. Of course that sets up Apple for a major decline if those rumors are not met. Apple shares have been perfectly flat for the last three days at $545.
Apple Chart - 15 Min
Apple Chart - 180 Min
Clearly I would have put part of my suitcase of cash to work in Apple shares on Dec 19th. Since Apple is the major driver with a 15% weighting in the Nasdaq 100 whatever Apple shares do will have a serious impact on the Nasdaq.
Eventually this Apple induced Nasdaq rally will hit a pothole. Next week would be a prime opportunity because the iPad 3 news is definitely already in the market. However, Apple shares have surprised investors so many times to the upside is there anyone left that is willing to sell? With price targets as high as $800 you would have to be thinking "bubble." Qualcomm at $1000 back in the Nasdaq bubble a decade ago is a memory that comes to mind. However, Apple has real earnings, $100 billion in cash and killer products.
I don't want this to turn into an Apple love fest, especially not from me, a confirmed non-Apple techie. I don't own a single Apple product. No iPod, no iPhone. I don't even have an iTunes account. While I may be ready to convert I still have to see the new iPad 3 first. If I am ready to convert there must be millions of other holdouts that will throw in the towel and head out to the Apple store if this iPad meets expectations. Ass to that the millions who will rush to upgrade from the iPad 2 and that will be billions more in sales and it could be enough to send Apple shares over $600.
While the Russell is tanking and the Dow flirting with 13,000 the rest of the market will be waiting for the Apple announcement and the resulting move in the stock as the leader of the Nasdaq.
The Nasdaq could be well over 3,000 by Friday or back at support at 2,900 depending on investor reaction to Apple's news.
Other than Apple, investors will be worried over the Nonfarm Payrolls. Whisper numbers seem to be weakening but I don't understand the reasoning. Weekly jobless claims are at four year lows and regional activity reports show sharp increases in the employment components. Maybe analysts are just afraid of too much hopium in the market and want to hedge their bets.
The Q4 earnings cycle is over and after this week we need to begin stacking the sand bags in anticipation for Q1 earnings warnings. So far there has not been any material changes in analyst earnings estimates although 64% of the S&P lowered estimates for 2012 in their Q4 earnings reports. Maybe those lowered estimates will get us through March without a barrage of bad news and maybe pigs will fly over the Apple product announcement. I would love to see earnings continue on their current track to $105-$110 for the S&P 500 for 2012 but the year is only two months old. I am not from Missouri but I would like to see some proof before I start betting on those earnings.
I heard several analysts last week upping their S&P targets for year end. That is pretty brave given the lowered guidance and rising oil prices. About the only forecasts I would be willing to make would be $120 for WTI oil by July and gold over $2000 by year end. I would love to hear your predictions for 2012. Use the email link below and tell me what you think and no subject is taboo. For all you closet Mayans, this is your chance.
Last weekend I closed with a wish to see the Russell 2000 confirm the rally with a move over 830 and that did not happen. I did not get that 100 pound bag of $100 bills either. Looks like I need a new rabbit's foot.
Send Jim an email
"Black holes are where God divided by zero."