The Nasdaq string of 14 positive days came to an end thanks in part to a collapse in Tesla.
Tesla Motors (TSLA) ran out of power today and desperately needs a recharge. TSLA fell -14% to $109 after price targets were slashed by Goldman Sachs. Tesla was added to the Nasdaq 100 on Monday so it was not a bullish debut.
Goldman issued a report saying Tesla would likely fit into one of three scenarios. The average price for those scenarios is $84. The best case would be an eventual 3.5% share of the global market in its category with a total volume of 200,000 vehicles. Goldman's target price on that scenario would be $113. The worst case scenario would see sales of 105,000 vehicles including 50,000 Model S and 55,000 of the next generation model, which is expected to be cheaper. That would result in a target price of $58. Clearly Goldman did a hatchet job on Tesla and I would bet they had a large short position in the stock beforehand. I would expect Tesla to issue a rebuttal with earnings on August 7th if not before.
The market was weak without the impact of Tesla because of some earnings problems and the potential for market disruption from Bernanke's testimony on Wednesday. The economics were actually good but in this market good economic news is bad news for QE.
The industrial production for June rose +0.3% and the biggest gain in four months. April and May were also revised higher. Manufacturing rose +0.3%, durable goods rose +0.5%, motor vehicles +1.3%, high tech +1.2%, business equipment +0.5% and mining +0.8%. Capacity utilization rose only .1% to 77.8%.
While the June report was better than expected it is still a weak trend. For the entire second quarter industrial production rose only +0.6% compared to a +4.2% rise in Q1.
Industrial Production Chart
The NAHB Housing Market Index soared from 51 to 57 for July. That is the highest level since January 2006. All three subcomponents were up strongly. Current single family sales rose from 55 to 60. Six month expectations rose from 60 to 67 and the highest level since October 2005. Buyer traffic rose from 40 to 45. Sales and traffic are both up +15 points over the last three months alone. The NAHB said the number of respondents to the survey has declined from 402 to 281 indicating shrinkage in the number active builders. Building materials costs have begun to ease after two years of steady gains. Since mortgage rates have risen by more than 100 basis points over the last month the strong Housing Market Index suggests homebuilders are not seeing a material decline in buyers.
NAHB Index Chart
The Consumer Price Index (CPI) rose +0.5 in June compared to +0.1 in May and -0.4 in April. This moved the year over year rate to +1.8% compared to only +1.1% in April. However, energy spiked +3.4% and food +0.2%. Ex-food and energy the core inflation rate only gained +0.2%. The core rate was boosted by a +0.4% increase in medical care as insurers raise prices ahead of Obamacare. Apparel prices exploded higher by +0.9% and the biggest gain in two years.
Foreign investors sold U.S. securities again last month with net outflows of -$27.2 billion. China remained the largest holder other than the Federal Reserve with $1.316 trillion. That was an increase of $25.2 billion. Japan was the second largest at $1.11 trillion but that was a decline of -$27.2 billion following a drop of -$21.8 billion the prior month. Foreign nongovernment investors sold a record $29 billion in Treasury bonds and notes. Net buying by official entities totaled $40.3 billion.
The chart says it all. With the Fed close to ending purchases of treasuries the number of buyers is shrinking. If the Fed halts QE the yield on treasuries is going to rocket higher simply because the biggest buyer in the market will be gone. Overseas investors, the largest buyers other than the Fed, are already cutting back on purchases and are net sellers of U.S. debt.
Moody's Capital Flows Chart
The economic calendar for Wednesday is headlined by the Bernanke testimony to the House and the Fed Beige Book. Something new is happening to the testimony. The House Financial Services Committee requested the text of Bernanke's comments ahead of the actual testimony so they could prepare questions. The Fed is going to release the Bernanke comments at 8:30 with the actual testimony to start at 10:00. I believe this is going to open Bernanke up to an onslaught of pointed questions that could produce some unwanted results.
Remember, Bernanke is assumed to be a lame duck whose term expires on January 31st. He really has nothing to lose by being blunt in his comments over the country's fiscal problems. He has been blunt in the past about the amount of drag the government is inflicting on the economy. This could turn into a hostile testimony since lawmakers have 90 minutes for their staff to come up with questions designed to embarrass Bernanke and give the lawmaker a sound bite to use in his next election campaign.
Traders will also get an hour to digest the comments before the market opens for trading. This could produce a very volatile open.
The Fed Beige Book will be released at 2:PM and that contains the latest economic updates from all 12 Fed regions. That is always a key report for the month since this data is used by the FOMC to determine monetary policy two weeks later.
The earnings calendar for Wednesday is also critical. BAC, AXP, IBM, INTC and EBAY will headline earnings for Wednesday. These companies could set the tone for the rest of the earnings cycle.
Earnings out on Tuesday succeeded in roiling the market although the earnings were not that bad. Coca Cola (KO) reported earnings that fell -4% on a -3% drop in revenue. The company blamed bad weather, global economic weakness, a consumer credit squeeze in Brazil, health issues related to soft drinks and currency translation issues for the disappointing earnings. Sales of carbonated beverages were flat but noncarbonated sales rose +6%. That means Cokes were flat but water products were rising. Adjusted EPS came in at 63 cents and in line with analyst estimates but that was the end of the good news. Revenue fell from $13.09 billion to $12.74 billion. Foreign exchange rates from the strong dollar knocked -2% off the revenue. Sales volume declined -1% in North America and -4% in Europe. Coke said early monsoons in India and flooding in Europe depressed sales in those areas. It sounds like a kitchen sink quarter to me.
Mosaic (MOS) reported earnings of $1.14 compared to analyst estimates for $1.13 but revenue declined -4.5% to $2.69 billion on weak fertilizer prices. Sales volume hit the top of Mosaic's forecast range but the weak prices caused the decline in revenue. The company guided analysts to potash sales of 1.8 to 2.1 million tonnes in Q3 compares to 1.8 million in Q3-2012 and 2.6 million in the quarter just ended. Phosphate sales are expected between 2.9 to 3.3 million tonnes compared to 2.9 million in the year ago quarter. This suggests business is good but the global competition is weighing on prices. MOS shares declined -3.6%.
Business bank and financial products provider Comerica (CMA) reported earnings of 76 cents compared to estimates of 70 cents but the stock declined on weak loan growth. The company said economics in California and Texas were positive with job growth in most markets above the U.S. average. Comerica operated primarily in Texas, Arizona, California, Florida and Michigan. The problem for Comerica was the slowing loan growth. Loans grew only +3% in Q2 compared to +8% in Q2-2012. That says a lot about business conditions. JP Morgan also reported slower loan growth last week. CMA shares were down slightly despite the earnings beat.
Goldman Sachs (GS) profits more than doubled thanks to investment gains and a lower tax rate. Unfortunately traders questioned whether that could be repeated in future quarters and shares declined nearly $3. Goldman's investment segment produced more than seven times as much revenue as in the comparison quarter. With the new rules on how much of a bank's capital can be invested in risk assets the future performance may not be as strong. Goldman's tax rate declined from 32% to 27% because Goldman decided to leave international investment profits permanently offshore. CFO Schwartz said the money earned more in overseas ventures. The CFO told analysts on the call the low tax rate would not be repeated. Earnings rose to $1.86 billion or $3.70 per share. Analysts were expecting $2.82. Net revenue rose +30% to $8.61 billion. They produced their most revenue in fixed income, currency and commodity trading. Revenue there rose +12% to $2.4 billion.
CSX Corp (CSX), the biggest railroad in the eastern U.S. reported earnings of 52 cents compared to estimates of 47 cents. The railroad said higher volume in shipments of coal to domestic utilities rose for the first time since 2010. Surprise, surprise! High natural gas prices do make coal a better fuel.
Coal was the biggest cargo for CSX and total tonnage shipped to utilities in the U.S. increased +9%. Total coal shipped including that destined for export fell -6.3% but that was better than the -10% decline in Q1. Revenue rose +1.9% to $3.07 billion and well over the $3.03 billion estimate. Shipments of oil and chemicals rose +11% and fertilizers +8.9%. Minerals like stone and gravel for construction rose +7.1%. Guidance for full year earnings changed to "roughly flat" from "slightly down" in the last update. Shares of CSX rallied to $25.15 in afterhours trading.
Yahoo (YHOO) reported earnings after the close that disappointed investors. Earnings came in at 35 cents compared to estimates for 30 cents but revenues were light. Revenues of $1.7 billion fell below estimates of $1.8 billion. Ad rates declined along with ad volume. Ad rates fell -12% after falling -2% in the prior quarter. Ad volume has declined for 8 consecutive quarters. Ad revenue declined -11%. Yahoo repurchased $653 million shares of stock in the quarter and that increase their earnings per share. The company plans to buy an additional $1.9 billion in shares.
Yahoo guided analysts to $1.06 to $1.1 billion in revenue in Q3 and cut expectations for full year revenue as well. CEO Marissa Meyer's fairy tale may be ending. Yahoo has been taking the cash from the sale of Alibaba assets and using it to renovate Yahoo and make some acquisitions. That cash will eventually come to an end and Yahoo will have to be increasing ad revenue sequentially or the story is going to have an unhappy ending. Shares are up +70% in the year since Meyer took over but without some positive metrics soon those stock gains are going to evaporate. Yahoo shares declined to $26.45 in afterhours trading.
The Nasdaq 100 winning streak was stopped at 14 and the S&P streak ended at 8. The amount of the declines on the major indexes were minimal. The NDX only lost -2 points, S&P -6 and Dow -32. It was hardly a decline and barely even a speed bump. This was simply caution ahead of the potential Bernanke storm.
The seemingly weekly change in his posture from dove to hawk and back again makes you wonder who is going to show up for the public testimony on Wednesday. Investors were simply taking profits from that long streak of gains rather than leave them exposed on the chopping block.
The S&P closed at 1676 and light support from late last week. Several market technicians see the 1675 level as critical for the market to overcome if there is going to be a more to test 1700 before the seasonal late summer slowdown. If earnings continue to come in weak as we have seen so far this cycle that market slowdown could be sooner rather than later.
Wednesday's earnings from IBM, Intel, SanDisk and Ebay could set the stage for the rest of the cycle.
On a larger note if the current rally survives Bernanke, earnings and the Fed Beige Book on Wednesday we should be good to go for another leg higher. This could be a pivotal day in the cycle. However, some technicians view a pullback to 1650 as positive and a launch point for a late summer rally.
The Dow struggled from the opening tick on weakness in Boeing and Coke. Boeing rebounded on Monday when it appeared the fire in the 787 at Heathrow may have been started by a Honeywell component. On Tuesday the official comments said there were many components being questioned but the fire had been so hot that all the elements in question were difficult to determine blame. Apparently everything in the area was melted and burned. Also, several suits were filed relating to the Asiana 777 crash and Boeing was a target. Obviously if they can draw Boeing into the suit they will have some deep pockets other than Asiana. A 777 was halted just before takeoff in San Francisco after an engine oil leak was discovered. This was the second 777 halted in the last month for engine oil leaks in San Francisco. I have confidence Boeing will weather the storm. Engine oil leaks for planes in service for several years are maintenance issues not a Boeing issue. The engines are made by someone else.
The Dow has stalled at the May highs right at 15,500 for four consecutive days. This is round number resistance that I pointed out in the weekend newsletter as a potential trouble spot. If Bernanke wears his dove mindset to the testimony on Wednesday we could see a relief rally that takes us over that 15,500 level. Otherwise it will continue to be a challenge on weak earnings news.
The Nasdaq has benefitted from a resurgence in Apple to the $430 level, up from $390 in lare June, but round number resistance at 3600 is proving to be a tough level to cross. With tech earnings a highlight on Wednesday the stalemate should be broken in one direction or the other. IBM, INTC, SNDK and EBAY should provide a direction for the rest of the week. Nasdaq futures are trending down after the Yahoo earnings but only marginally. All the index futures are basically flat overnight at 9:PM so everyone is waiting on the Wednesday events and they don't appear to be too worried.
The prior paragraph said it all. Some traders took profits today ahead of the testimony and others are just sitting tight and waiting for the next move higher. Let's hope that bullish confidence is not misplaced. Volume the last three days has been very anemic. Monday managed only 4.8 billion shares and today was 5.5 billion. There is no rush for the exits and nobody chasing prices higher. Everyone is waiting to see how the week plays out.
Enter passively, exit aggressively!
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