Sunday begins the year of the Snake in China but Friday was all about Nemo.
Nemo was the major storm hitting the Northeast this weekend with 2-3 feet of snow in some areas. The markets did not close because of the storm but they should have. Volume after lunch was next to zero and only 5.5 billion shares were traded for the entire day. Most of that was on the opening spike. Once the volatility from the opening spike eased the S&P traded in a very narrow 3 point range the rest of the day.
The +8 point gain was enough to produce the sixth consecutive weekly gain and that is the first time the S&P has opened the year with six positive weeks since 1971.
S&P Chart - 3 Min
Thank goodness for Nemo because Friday was a very slow news day. The economic reports were low profile events but the trade numbers did surprise analysts. The international trade deficit improved nearly 20% in December. The headline number was -$38.5 billion compared to -$48.7 billion in November. This was the lowest number since 2010. Expectations were for a minor decline to $46.0 billion.
Exports rose +2.1% while imports fell -2.7%. Net petroleum imports declined from $23.4 billion to $18.7 billion thanks to the increased production in the USA. The U.S. increased its crude production in 2012 by 766,000 bpd. That was the biggest annual increase since 1859. Production hit 7.0 mbpd and the highest level in 15 years. The U.S. imported the least oil in nearly 16 years at 223 million barrels. Exports of refined petroleum products rose to $11.6 billion and helped reduce the deficit to the lowest level since August 2009.
Exports of refined products to Brazil rose by +59% to 255,000 bpd. Exports to Venezuela rose +56%.
The average gas mileage of cars sold in the USA in 2012 was 33.8 mpg. That is up from 29.0 in 2011 and 19.9 in 1978. This is reducing our overall demand for crude in spite of the 15.5 million vehicles sold. The average age of a vehicle in the U.S. is 11 years so there are still a lot of gas guzzlers on the road. Global production in 2013 is expected to be 83 million vehicles. This guarantees that oil consumption will continue to increase every year.
December exports were $186.4 billion, an increase of +2.1%. It was the second highest ever behind September's $187.1 billion. For all of 2012 we imported $2.74 trillion in products and commodities and exported $2.2 trillion.
You may have noticed gasoline prices rising lately. Goldman Sachs warned that global oil markets will remain "tight" this quarter because of "surprisingly robust fuel demand in emerging economies." Rising global demand, disruptions in Canadian supplies and a production cut by Saudi Arabia are accentuating the result of sanctions on Iran.
China reported on Friday that crude imports rose to the highest level in eight months in January because of their economic recovery. They imported 25.15 million tons of crude, a 7.4% increase. That is roughly 5.88 mbpd. Brent crude, the index price for water borne crude, closed at $118.90 and a new nine month high. WTI closed at $95.76. Goldman believes that $23 spread will narrow to $5 over the next six months. The bank expects WTI to rise to $102.50 in three months, $105 in six months and $97 in 12 months.
In the short term that means gasoline prices are going higher and we could see prices approach $4 in the spring. The average price for gasoline spiked +18 cents over the last week to $3.54 per gallon. That is six cents above year ago levels. This is the largest one week increase in gasoline since February 2011. All regions saw prices rise but the Midwest was the highest with a 22 cent gain.
Brent Crude Chart
WTI Crude Chart
The improvement in the international trade deficit probably lifted the Q4 GDP out of negative territory when it is revised next month. Unfortunately the December Wholesale Trade report released on Friday showed inventories declined -0.1% compared to a +0.6% gain in November and estimates for a +0.1% gain. This will offset the GDP gains from the trade report but at least the GDP will be "less negative."
The decline in inventories was due mostly to a -4.3% drop in drugs and a -6.0% drop in farm products. Automotive inventories fell -3.8% while furniture declined -2.5%.
Moody's called the drop in inventories a "wait and see posture" ahead of the fiscal cliff. Manufacturers did not want to have a lot of inventory on the shelves if the cliff debate ended badly. The inventory to sales ratio declined to 1.19 and the lowest level since May. That represents the number of months required to deplete inventories at the current rate of sales.
Helping the U.S. markets on Friday was news that Chinese imports surged +28.8% in January suggesting the recovery was accelerating. Exports rose by 25%.
German data showed the country had a trade surplus in 2012 of 188.1 billion euros that was the second highest in the last 60 years. Exports rose +3.4% to a record 1.1 trillion euros. This suggests the German economy, the biggest in the eurozone, is stronger than previously expected.
The economic calendar ahead is weak again with only three reports that will attract any attention. I highlighted Consumer Sentiment because of the recent sharp declines in sentiment and confidence. That has a direct bearing on retail sales and the stock market.
I highlighted the EU Finance Minister meeting on Monday but there is nothing pressing on their agenda so it will probably be ignored.
Also of note there is a flurry of Fed members giving speeches this week. Three of them will speak on Tuesday. When a Fed member is speaking the market is at risk.
Earnings remain higher than expected with the current forecast for the Q4 cycle to end with 5.4% to 6.8% growth. That compares to expectations of +1.4% just four weeks ago. More than 69% of companies have beaten on earnings but only about 50% have had positive guidance.
We are running out of big names on the earnings calendar. Cisco is going to be the most watched next week but GM and McGraw Hill (S&P) are also going to be important for the market. McGraw Hill will have to disclose more info on the $5 billion suit over subprime ratings. That should produce some headlines.
I am interested to see Cabelas earnings on Thursday to see how the feeding frenzy on guns and ammo impacted their earnings since they are one of the largest firearms retailers.
This is the last major week for earnings. After Dell and Hewlett Packard report the following week the cycle will be complete for 90% of the companies.
The big earnings winner for Friday was LinkedIn (LNKD). Shares of LNKD soared +21% to $150 after posting earnings of 35 cents compared to estimates of 19 cents. Revenue rose +81% to $303.6 million. That was the seventh consecutive quarter LNKD beat analyst estimates. The company raised guidance for revenue to $305-$310 million compared to consensus estimates for $301 million. Gross margins are approaching 90%. The company recently added blogs from successful business people like Richard Branson, Jeffery Immelt, Mark Cuban and others to increase readership on the site. The CEO said the success of the blogs has far exceeded expectations. A dozen brokers were tripping all over themselves to raise the price target on LNKD.
In the "believe it or not" category AOL rallied +7% after posting its first quarter of revenue growth in eight years. The company posted earnings that rose +78% to 41 cents. Revenue rose +3.9% to $599 million and beating the consensus estimate of $576 million. The earnings were powered by a +17% spike in search ad revenue but display ad revenue was flat. Shares spiked +7% but remain well under the highs set in November when they beat estimates on the first rise in search revenue in three years.
Coinstar (CSTR) fell -7% on worries the growth in its Redbox DVD service has reached a saturation point. Q4 revenue in the Redbox segment rose about +10%. That compared to +23% growth in the number of kiosks it had placed in supermarkets, drug stores and other retailers. The company ended 2012 with 43,800 kiosks, up from 35,500 in December 2011. Coinstar only expects to add another 500-1000 in 2013. The company guided below analyst estimates for Q1 partly because there are only 12 DVD titles coming available in Q1. There were 23 new titles last January.
The company is trying to compete with NetFlix by jointly developing a streaming video service with Verizon. The system is in test mode today and should be available to select areas by the end of March. That is going to be a tough fight.
FleetCor (FLT) reported earnings of 82 cents that rose +56% compared to estimates of 75 cents. Revenue rose +45% to $202.6 million. That was well over estimates for $178 million. Gross margin was 75.4%. FleetCor provides specialized payment systems to fleet operators, oil companies and petroleum marketers. The company raised guidance to 82-86 cents compared to analyst estimates at 76 cents. The chart is a beauty but you have to wonder where you would have taken profits along the way.
Caesars Entertainment (CZR) won the New Jersey lotto on Thursday when Governor Chris Christie vetoed a bill that would have allowed online gaming. While that sounds negative there was a catch. Christie listed three conditions that lawmakers could add to the bill and he would sign it. His conditions were an initial 10-year time limit, an increase of the tax on online bets and more money for compulsive gambling programs.
Caesars has four casinos in New Jersey and is the largest casino operator in the state. Caesars has the capability to implement online gaming almost immediately through its partners. An approval in New Jersey is thought to be the next step in getting online gaming nationwide. Three states already have it and seven more are in the process of approving it although every state will have slightly different rules. Caesars spiked earlier in the week when it said it may spinoff the Planet Hollywood casino in Vegas along with a $1.1 billion note and its interactive gaming unit. The new venture would be called Caesars Growth Venture Partners (CGVP). This is an effort to reduce its $20 billion debt that was incurred in a monster LBO in 2008 just before the financial crisis hit.
I think Caesars is going to be a huge short once the headlines fade. The company is way over valued and that $20 billion in debt is a stone around their neck. They would have to sell half of their properties at twice what they are worth to even come close to a reasonable valuation. I like Caesars casinos but after this short squeeze I am ready to hit the sell button for the ride back down.
You knew it was coming and now the battle has begun. Michael Dell is offering $13.65 ($24.4B) to take Dell private in a leveraged buyout. Good luck with that. Southeastern Asset Management started the ball rolling saying it was going to use all of its resources to prevent the acquisition because the price was grossly undervalued. Southeastern believes the valuation should be closer to $24. The company owns roughly 8.5% of Dell's stock. On Friday Harris Associates, Yacktman Asset Management and Pzena Investment Management, which together own 3.3% of Dell's stock also joined the protest party. That makes four of Dell's 20 largest shareholders are protesting the sale and odds are good quite a few more are going to join the revolt. Pzena believes the stock should be worth more than $20 if Dell would hold a Dutch auction. Michael Dell owns 16% of the company.
The terms of the buyout require a majority of shares NOT held by Michael Dell to be voted in favor of the deal. Southeastern believes a breakup of the company would provide more than $20 per share. Southeastern has a cost of more than $20 per share in their 8.5%. They would lose more than $825 million on the buyout. Two other firms, Alpine Capital Research and Schneider Capital have also voiced opposition to the deal.
Michael Dell replied to their complaints saying "The board concluded that the proposed all-cash transaction is in the best interest of stockholders." This battle is far from over.
The fight for Apple's treasure is intensifying. Apple has about $137 billion in cash. David Einhorn wants some of it. Einhorn has sued Apple to try and prevent the company from removing preferred shares as an option in its charter. Einhorn wants Apple to issue perpetual preferred shares that pay a hefty dividend as a way to spin off some of their cash. Apple has "bundled" several unrelated matters into a shareholder vote and Einhorn claims the SEC has rules to prevent bundling. He is seeking an injunction to block a February 27th shareholder vote on the proposal.
The proposal seeks to amend Apples articles of incorporation and provide for majority voting for directors, establishing a par value for Apple shares and eliminate the ability to issue preferred shares. However, several major shareholders have recommended investors vote for the proposal. The California Public Employees Retirement System (CalPERS), the biggest U.S. public pension fund and owner of 2.7 million Apple shares wants shareholders to approve the proposal. The fund said "we don't want Apple cutting a deal on the side with a hedge fund out of fear that a lawsuit will cancel the annual meeting." CalPERS believes all shareholders should share in the $137 billion and not just preferred shareholders that get a sweeter deal.
Moody's Corp (MCO) may be next in line for a suit on subprime ratings. The worry over a potential suit overshadowed a positive earnings report. Moody's earned 70 cents compared to 43 cents in the year ago quarter. Revenue rose +33% to $754 million and well over estimates for $687 million.
Comments from the Justice Dept were exceptionally vague. When asked if Moody's and Fitch were going to be sued as well as S&P the spokesman said "We are here to talk about S&P. We will not comment on whether we do or do not have an ongoing investigation or action against anyone else."
Typically the Justice Dept and other agencies will sue one participant in an area where there are multiple operators. Once they win the suit against the first party then they file on the remaining parties. At that point they have proved their arguments and have case law in their favor. They now have experience in prosecuting their case and the new defendants do not. The odds of a quick settlement in the follow on cases are very strong.
Will Moody's get hit with a suit? I think the odds are 100% but not until the S&P case is over.
Google's Executive Chairman, Eric Schmidt, made an SEC filing late Friday saying he plans to sell 3.2 million shares of Google. He currently owns 7.6 million worth $5.96 billion. He is going to sell those 3.2 million shares over the rest of the year as part of "his long term strategy for diversification and liquidity." Is he calling the top in Google by announcing his plans to sell nearly half his stake? Is he planning on leaving Google in the near future and is taking this opportunity to lighten up? Does he really need the $2.5 billion in liquidity he will get from selling the shares? Google shareholders may vote with their shares on Monday.
AT&T (T) announced an app for iPhone and Android that monitors your motion. If it detects motion in excess of 25 mph it assumes you are driving and will not notify you of calls and texts. If you receive a text it automatically replies back saying you are driving and will respond later. Your calls go directly to voicemail. The purpose of the app is to keep you off the phone while you are driving. I don't know how many people would voluntarily download this big brother app but AT&T claims it has spent millions developing it. Let's hope the government does not decide to make it mandatory. Some states already outlaw talking and texting while driving so this could give them a tool to enforce it.
Over 4700 flights were cancelled because of Nemo. Reports on Saturday claim most of New York was spared the big snows so there should not be any challenges with opening the market on Monday.
The Chinese New Year begins this Sunday and this is the year of the snake. Of the 12 years in the cycle the snake has the worst historical record for the markets. While I never recommending basing your trading plan on the zodiac or similar events the year of the snake has had a tough time. The last snake year was 2001 with a decline of -13.1% for the S&P and it traded as low as -28%. The prior snake year was 1989 and the S&P gained +9.7%. The year prior to that was 1977 and the S&P lost -17.5%. For those history buffs the 12 years in the order of their market returns are pig, sheep, rabbit, dragon, tiger, cow, chicken, monkey, dog, rat, horse and in last place the snake. The Chinese markets will be closed all week for the New Year celebrations.
Despite the low volume and traders leaving early because of the storm the S&P managed to close at a new five-year high at 1517. At the same time the AAII Investor Sentiment Survey for the week showed that bullish sentiment fell to 42.8%, down -5.3% from the prior week but more importantly it was down 10 points from the 52.3% reading two weeks ago. Bearish sentiment rose +5.5 points to 29.6%.
The Institutional Investor sentiment survey saw bulls rise to 54.7% while bears declined to 21.1%. The spread has not been this wide since June 2011 and just prior to the 18% market correction.
If you need more convincing a market top is near here is the Barron's cover. Proclaiming record highs, breakouts and bull markets on the cover of a major publication is typically seen as the signal to abandon ship because the bulls are "all in" at that point.
Another item contrary to the current bullish sentiment was the decline in the Gallup Job Creation Index. The index fell to 16 for January. That is an 11 month low. If it falls one more point it will be nearly a two year low. Gallup surveys workers asking them, "based on what you have seen, would you say that, in general, your company is 1) Hiring new people, 2) not changing the size of its workforce, or 3) letting people go and reducing the size of the workforce. Of those surveyed 32% said hiring, down from 36% in mid 2012, and 16% said firing. (32-16 = 16) The firing level has been relatively flat at 16-17 since early 2012.
This bodes ill for the pace of hiring in February and that is especially true since the sequestration debate is ramping up. If sequestration takes effect the CBO expects the country to lose 1.4 million jobs in 2012.
Gallup Job Creation Index
Despite the attempts of numerous analysts to call a market top the market continues to rebound from every single dip. Eventually that will end but until it does we need to follow the trend.
The very low volume on Friday did not keep the internals from being very positive. The advance/decline line on the S&P was almost 4:1 advancers to decliners.
The first chart below shows a broadening pattern at the top of a multi-month rally. Typically this type of a pattern suggests indecision and a pending retracement. The intraday swings become more pronounced with alternating gains and losses. Overall the trend is still up but the index is struggling to make higher highs. The S&P did make a higher high on Friday so the trend is still alive. A drop back below 1495 would be a lower low and a signal the trend has failed.
S&P Chart - Daily
The longer term chart has shown a pretty convincing pattern with each touch of the uptrend resistance since the 2011 lows. When the index nears resistance the index goes sideways for a couple weeks then fails. It is more pronounced this time because we are also at five year highs. The 1500 level is now key support and 1520-1525 is the next resistance target.
S&P Chart - Daily
The longer term uptrend resistance (prior) at 1495 is now support.
The Dow chart easily illustrates the increase in volatility. Note the short candles in the two weeks prior to February. There were constant gains but they were steady not erratic. Once into February the trend changed. The uptrend stalled and the Dow has not made any upward progress since Feb 1st.
However, the Dow closed near its highs on Friday when there was ample opportunity for profit taking ahead of the weekend. I consider this bullish. We could view this weeklong pattern as consolidation before a higher move as opposed to stalling before a pending correction. Fortunately the pattern gives us a clear set of indicators for market direction. A breakout over 14,015 on decent volume is bullish while a decline below 13,850 suggests it is time to exit longs.
Dow Chart - 90 Min
Dow Chart - Weekly
Dow Chart - Daily
The Nasdaq is about to complete the "in spite of Apple" rally with a breakout over 3200. When you consider Apple has been down significantly more than up in recent weeks the Nasdaq has had to slowly creep higher while taking a daily beating by the Apple bears. With Apple, Google, Priceline and ISRG all up big on Friday the index was finally able to break out of the three weeks of congestion at 3150 and challenge final resistance at 3200. I say final resistance because that level is the 12 year high dating back to November 2000. Once through 3200 the minefield clears and the uphill battle should not be so intense. New highs tend to produce more new highs. Support is now well back at 3140.
Nasdaq Chart - Daily
The Russell 2000 finally broke out of two weeks of congestion at 905 to close at a new historic high at 913. JP Morgan raised their targets on the small caps saying the strength in the rally was better than expected. Now the 900-905 level should be strong support for any future correction.
Russell 2000 Chart - Daily
The Dow Transports finally broke out of their consolidation pattern just over 5800 and surged to a new high on Friday. They continue to defy gravity and higher fuel prices. Eventually this run is going to crash and burn but there are no signs of that today.
Dow Transports Chart - Daily
While we are worrying about new highs on the S&P or Apple moving back over $475 the stakes are a little higher in Asia. Japan and China are close to war over a chain of disputed islands. Twice in January Chinese naval vessels targeted Japanese navy vessels with their fire control radar. Turning on your fire control radar is a hostile act. The ship on the receiving end is suddenly thrown into a strong defensive posture with fear of an imminent attack. Sometimes the first response is to launch an attack of your own in order to beat the attacker to the punch. In today's navy battles it normally takes only one hit to knock a vessel out of combat. Nobody wants to wait until they are fired upon before formulating a response. It is a testament to the commanders on the Japanese side that they held their fire while expecting a missile to appear at any moment. The escalation of hostility between China and Japan is not getting much press now but you can bet the report of a shooting battle and loss of vessels would turn the market upside down very quickly.
Also, the tensions on the DMZ in Korea are increasing. In recent days the South Korean troops have received orders to return fire immediately against DPRK forces. The standing order today is to "respond immediately to any enemy provocation and punish automatically until the enemy surrenders." Since North Korea has never surrendered from Korean War in the 1950s they are not likely to surrender now. With North Korea testing nuclear weapons and long range missiles and the new premier toughening his stance against the South and the outside world this powder keg has a short fuse.
These events are a world away from us but should either one erupt it could cause an immediate market response.
Remember when 10-year Treasury yields were 7.28% in 1994? A one point increase in interest reduces the value of your bond by 7-11%. Money will eventually come out of bonds but not until the manufactured problems in Washington go away and the Fed starts talking about an end to monetary policy. That is at least May and the new debt ceiling date assuming they don't kick the can(s) farther down the road.
Meanwhile fund managers are stuck between a rock and a hard spot. Even if they wanted to take stock profits now ahead of a potential correction there is no other investment vehicle that offers any return. They don't want to switch to bonds with yields rising. They don't want to buy commodities with the currency wars making those markets more volatile. They can't just hold cash because if the market continued climbing they would be stuck buying back in at a higher level. That means fund managers are stuck holding their stock positions even though the market looks toppy. At least if stocks go down they go down for everybody and fund managers have the safety of the comparisons to other managers. If everybody goes down for the same reasons then there is no specific blame to be placed. It was not me, it was just the market.
The first day of the February expiration week has been down five of the last eight years. Expiration Friday has also been down more than it has been higher but only fractionally. In this expiration cycle the vast majority of option positions are calls and they are in the money. This could produce a negative bias as the cycle expires and positions are closed.
The S&P has gained for six consecutive weeks. That trend will eventually fail. Picture a roulette table where black has appeared for six consecutive spins. At that table the majority of money will now be bet on red in anticipation of a trend change. In 1998 I saw a table in Mesquite Nevada with a run of 21 consecutive black numbers. Small fortunes were lost betting on that trend change that never came. The market can remain irrational far longer than we can remain solvent.
Don't fight the Fed and the other global central banks.
Enter passively and exit aggressively!
Send Jim an email
"We can't tax our way out, cut our way out or grow our way out of our current debt problem."
Senator Alan Simpson
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