Dennis Lockhart and Carl Icahn doubled up to rescue the market from a loss.

Market Statistics

Atlanta Fed President Dennis Lockhart rescued the markets from a losing position when he said he does not believe the Fed will have enough data by the September 17th FOMC meeting to take any action on reducing QE. He said the economic data is still volatile and does not show the sustained improvement necessary to make a change. "For that reason, I don't think a decision that commits the Fed to a full phase-out of asset purchases and lays out a precise, beginning to end path for doing so would be advisable." This immediately boosted the stock market to an intraday high at 15,504. The Dow had dipped -68 to 15,342 at the open but had rebounded to -31 before the comments.

Lockhart also warned of another "fiscal confidence shock" in the coming months as Congress fights over raising the debt ceiling. "I will need to get comfortable that the employment progress we have enjoyed is not stalling and that disinflation pressures are not building." The Fed has pledged to continue asset purchases until the labor market has improved "substantially." We can expect more Fedspeak headlines as we get closer to the September meeting.

The Lockhart headline helped to offset the negative impact of the July retail sales report. July sales rose +0.2% for the fourth consecutive monthly rise. June sales rose +0.6%, May +0.5% and April +0.2%. The lower July number was due to a slowdown in auto sales and housing-related retailers. Auto sales decline in late summer as buyers hold out for the new models being released in the fall. Dealers allow their inventory to decline so the choices left for active buyers also narrow. Home-related retailers saw sales decline because home sales weakened as interest rates rose. Also, home sales slow as the summer progresses because buyers are more active in the spring because they want to move over the summer and be settled before the kids go back to school.

The positive retail sales suggested the potential for QE tapering has increased. That drove interest rates higher with the ten-year yield rising to 2.715% and the second highest close since August 2011. This sent homebuilders and the equity markets into an early morning dive.

Ten-Year Yield Chart

The NFIB Small Business Survey for July rose from 93.5 to 94.1 to recover most of the June loss of -0.9 points. However, internal survey components were mostly unchanged. Sales were expected to improve modestly and companies were planning on a minor increase in employment. Only 6% of respondents expected the economy to weaken over the next six months. That was up from 4% in June. Seven percent of respondents said they expected the economy to improve. That was an increase of +2% over June.

The pace of economic reports will increase in the days ahead and the Philly Fed Manufacturing Survey on Thursday is still the most important. This will give us a clue as to what to expect from the rest of the regional Fed reports and the August ISM the first week in September.

Economic Calendar

About an hour after the Lockhart comments. Carl Icahn tweeted "We currently have a large position in Apple. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come. A second tweet said "Had a nice conversation with Tim Cook today. Discussed my opinion that a larger buyback should be done now. We plan to speak again shortly."Apple shares immediately blasted off above $470. A few minutes later Apple released a statement saying "CEO Tim Cook had a very positive conversation with Carl Icahn today." The stock jumped again to $494.

Apple recently announced a $100 billion buyback and dividend program over three years but evidently that was not enough for Icahn. Apple is spending $60 billion of that on buybacks.

His tweet and the +$22 spike that resulted added $20 billion to Apple's market cap. Apple has 908.5 million shares outstanding. Carl Icahn is not normally a tweeter. After today's gains where he made over $50 million according to one reporter, he may become an active tweeter.

You have to wonder how the SEC is going to react to the growing number of tweets that are basically the equivalent of touting stocks. The penny stock crowd has thousands of twitterites that pound the message boards relentlessly with stock twits. Now with Icahn and others joining the party the SEC has got to be bouncing off walls in frustration. Is it bad for a billionaire investor to tout his position? It definitely creates a lot of "follow me" trades.

Icahn is having a great year if you ignore the Dell battle. Some of his 19 positions have exploded and produced millions in profits. NetFlix (NFLX) is up +181% and Icahn has reportedly made $1 billion in that position alone. Federal Mogul (FDML) is up +113%, WedMD (WBMD) +131%, Herbalife (HLF) +97% and Chesapeake (CHK) +50%. Freightcar America (RAIL) has been a rough road and down -20% for the year. Dell remains a question mark but he will probably end up with a small profit there.

First there was the iPhone, then the iPad, now the iCahn.

Apple shareholders have Icahn to thank for a very nice payday today. I suspect Icahn is going to have a lot more followers after today. He has accumulated a $20 billion fortune making him the world's 26th richest person. Volume in AAPL shares tripled on the news to 31.2 million.

Apple is expected to announce an iPhone refresh on September 10th and a new iPad with a thinner bezel. Apple's market share in tablets has fallen from 60% to 32%. They are also expected to announce a cheaper iPhone to combat the market share they are losing to the inexpensive Android devices. They are also announcing a new iOS that is said to have many feature additions.

Apple Chart

Other news moving the market was the surprise announcement by the Justice Dept that they had filed suit to stop the $11 billion merger of bankrupt American Airlines (AAMRQ) and US Airways (LCC). The announcement caught everyone by surprise and the entire airline sector declined sharply. Normally when there are antitrust complaints the companies get together and divest some assets in certain areas to reduce their monopoly footprint. Analysts on the conference call today claimed there did not seem to be any common ground or hot spots the companies could cut out to push the merger through. Based on today's news this deal appears dead but we should never say never. Anything is possible if the companies are motivated.

Airlines in general are already less competitive after a surge in mergers and acquisitions over the last 8 years. US Airways and America West in merged in 2005. Delta and Northwest in 2008. United and Continental in 2010. Southwest and AirTran in 2011. The US Air and American deal would have taken the 3rd and 4th largest airlines and turned them into the largest so there is a lot of competitive edge in that deal.

The news caused a -13% decline in US Airways shares and a -45% decline in AMR shares.

US Airways Chart

American Airlines Chart

The JC Penny (JCP) board is breathing a lot easier tonight after activist investor Bill Ackman resigned his board seat. The resignation was part of a deal to resolve the very public battle between Ackman and JC Penny. You would have expected the stock to rise with their thorn removed but JCP shares declined on the loss of an activist intimately involved in trying to rescue the company.

Ackman bought into Penny around $25 and he is the largest shareholder with an 18% stake. He is not going to sell and he said he has had plenty of opportunities. He will be an outside activist monitoring developments on the board and in the stores. The departure will not have any impact on the chain's retail business. The board also reiterated support for CEO Ullman and named Ronald Tysoe as the director to fill Ackman's seat. Tysoe is former vice chairman of Federated Department Stores, which is now Macy's. Penny will name an additional director in the near future. JCP shares declined -4% on the news with $12.50 current support.

JCP Chart

YUM Brands (YUM) reported a -13% drop in July same store sales in China. The decline came after a report that ice cubes used in KFC, McDonalds and local fast food restaurants contained "severe" levels of bacteria and the water used to make ice was dirtier than toilet water. After the report the CEO of Yum's China division said the ice was retested and the incident was a one-time accident. Water quality is an ongoing problem in China. The chain said the year's extreme summer heat was also a factor with McDonalds and Burger King pushing cooler drinks and menu options, while KFC is primarily hot meals.

After 9 months of falling sales after a chicken quality incident in December the chain expects to post positive comps in the fourth quarter. Corn prices are down and wheat prices are falling which will help with food costs. YUM Shares declined -2% on the news.

YUM Chart

If you are an investor in biotech stocks you don't want to keep a profit stop sell order in place. Stop losses are fine but profit stops can be a killer. For instance Osiris Therapeutics (OSIR) reported today that wound treatment drug Graphix showed "overwhelming" effectiveness when used on chronic diabetic foot ulcers. A recent study showed 62% of patients had complete wound closure compared to 21% receiving the standard medical treatment. The drug also produced faster closure with fewer treatments. This is a breakthrough drug and the stock price broke through as well. Shares rallied +138% on the news.

OSIR Chart

Factory production in the 17-nation euro area rose +0.7% in June compared to a -0.2% decline in May. This was below estimates for a +1.0% gain but it was still a gain. This was the first gain in two years. Europe is starting to produce some green shoots as the two-year recession fades.

German investor confidence rose more than analysts expected in August as the country leads the Eurozone out of the recession. The ZEW index of investor expectations rose from 36.3 to 42.0 for July. Analysts were expecting a 39.9 reading. The ZEW current conditions index rose from 10.6 to 18.3 for July.

India raised the import tax on gold for the third time this year in an effort to curtail demand and support the rupee currency. The tax rose from 8% to 10% with the tax on silver imports rising from 6% to 10%. The Finance Minister said they planned on restricting gold imports this year to 850 metric tons to reduce the current account deficit. Dealers said raising the tax will simply force more smuggling and boost the price of gold products inside India. On July 22nd the government said importers may only supply gold to jewelers and to bullion businesses that sell to jewelers. Importers must keep the gold in bonded warehouses and cannot buy more until 75% of their imports have been distributed. Imports surged 87% to 383 tons in the four months ending in July from 205 tons in the same period in 2012. Silver shipments rose +300% to 127.9 billion rupees over the last four months from 42.8 billion in the year ago period. India accounted for 20% of global gold demand in 2012 with 845 tons of gold and 1,963 tons of silver.

Gold gave back a few bucks after four days of gains with a decline to $1321. Resistance remains $1341. Silver has outperformed gold and is very close to a significant test of resistance at $22. Silver is an industrial metal with the majority of annual demand used in making things like solar panels, flat screens, smartphones, computers, etc. When silver is used it is "used up" because very little of it comes back from recycling. If the global economy is accelerating the demand for silver will accelerate and we already consume more per year than is mined. That suggests the prices will go higher relative to gold.

Silver Chart

Gold Chart

The markets were weak in the morning and the Lockhart comments rescued the indexes from a losing day. The iCahn tweet on Apple powered the Nasdaq to a 14 point gain. Remove those two events and it would have been a different close.

Volume remains very light with Monday barely trading 5.0 billion shares. Today saw volume of 5.5 billion shares thanks to the short covering rebound or it would have been a lot less.

The S&P dipped below support at 1685 at the open to hit 1682 before the dip buyers appeared. This was another lower low but the headlines prevented another lower high. The market remains lackluster even after the headlines. Support is being tested on a daily basis and eventually there will be a negative headline that takes us below that 1680-1685 level.

S&P Chart

The Dow also made a lower low at 15,342 and the lowest tick since July 11th. The rebound to 15,500 was immediately sold. The Dow is weaker than the S&P and the gains today came from Boeing, United Technology and Johnson and Johnson. Financials have given up their leading role and we are just waiting for the headline that pushes us down to the next support level at 15,300.

Dow Chart

The spike in Apple pushed the Nasdaq to within one point of the 13 year high close at 3692 set on August 5th. The Nasdaq remains the strongest of the big cap indexes with support at 3650 and the price magnet at 3660. The afternoon spike saw some selling at the close to erase -7 points but the index closed with a 14 point gain.

Apple continued to rally after the close to $493.40 and that should give the index a positive open on Wednesday. Just remember, what goes up on headlines can go down on headlines or the lack thereof. If it were not for the pending announcement of new products on Sept 10th I would look for profit taking on Wednesday. However, with iCahn pushing for a faster share buyback operation we could see hedge funds chasing iCahn into the stock and holding the price up.

Nasdaq Chart

The Russell 2000 did not close in positive territory. That is a significant event. However, it did rebound from the lows to lose less than 2 points. Unlike the Dow the Russell had a higher low and higher high so technically even with the minor loss this was a positive day. The index closed right in the middle of its recent range (1040-1060) at 1050.

If the Russell were to violate that support at 1040 it would be a signal to sell.

Russell 2000 Chart

A lot of traders and analysts are looking for a correction in August-September. I am personally looking for a weaker market as a result of the calendar events in September but not necessarily a correction. Markets can correct without a big decline. It is called consolidation. What we are seeing right now with no real gains in the Dow since July 11th is consolidation.

We could see the markets drift lower as we approach the debt ceiling battle and FOMC meeting but they don't have to suddenly crash -10% to satisfy the expectations of some traders. We could see a 3-5% drift lower with a couple of high volatility days but traders don't seem to be worried about a big drop. The VIX is still hovering around 12 and the dip buyers are alive and well. When the dip buyers evaporate we should be worried.

Enter passively, exit aggressively!

Jim Brown

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