Headlines will drive the market next week and the direction may be down.
The market is going to suffer from headline overload over the next two weeks and if Friday is any indication we could be looking at another week of losses.
The Dow rallied +52 points on Friday morning and was doing ok considering the weak Nonfarm Payroll report until President Putin said Russia would provide Syria with a missile shield to protect against "external" attacks. The comments immediately crashed the market on worries Russia would enter the fighting using the growing number of Russian ships in the Mediterranean.
The market choked on the comments. The Dow plunged from +52 to -148 in a matter of minutes. Buyers immediately stepped into the gap as the comments were clarified and the market recovered over the next couple hours but the Dow could not hold the gains.
The president is going to have a tough time selling his Syrian attack plans. Currently, of those lawmakers expressing opinions, there are not enough votes to pass the resolution on the use of force in either the Senate or the House. Even some high ranking democrats are against it. The president will speak to the nation on Tuesday night in an attempt to drum up support. Several lawmakers have said the phone traffic at their offices in Washington is 65% to 95% against the attack depending on which lawmaker is reporting the numbers.
The biggest fear is that the president will go ahead with the attack even if Congress does not approve the resolution. The president has said repeatedly he does not need congressional approval to launch the attack. If he fails to get approval and presses the attack to save face over his red line comments in August 2012 the world will condemn the attack. If he has congressional approval the rest of the world will not like it but they are likely to be less irritated because a majority of 535 lawmakers supported it.
The only good thing about Syria being the primary focus in Washington next week is that the various budget committees will have another week to try and work out a compromise before the debt ceiling and budget battles begin flooding the airwaves with ugly headlines.
The ugly headline from Friday was the Nonfarm Payroll numbers. The headline number showed a gain of +169,000 jobs and slightly better than the +162,000 jobs initially reported for July. However, the July number was revised down to a gain of only +104,000, a loss of -58,000 from the prior report. The June number was revised down again to +172,000 from the initially reported +195,000.
That means the three-month average fell to only +148,000 and well below what the Fed said they needed to halt QE. Fed presidents have repeatedly said they wanted to see "sustained" job growth in the 200,000 range before cutting QE purchases. Given the sharp decline in July they will need some very robust numbers for the rest of the year in order to reach that "sustained 200,000" level.
To further cloud the issue the unemployment rate declined again to -7.3%, down from 7.4 in July and 7.6 in June. Obviously it was not due to a surge in new jobs. A whopping 312,000 people dropped out of the labor force in August to bring the labor force participation rate down to 63.2% and the lowest level since 1978. The total number of people not in the labor force rose by +516,000 in August to 90.473 million. The total number of people considered unemployed and willing to work (U6) is 13.7 million.
Some commentators have blamed this decline on the growing number of baby boomers leaving the workforce for retirement. This is NOT true because the fastest growing segment in the workforce is the over 55 segment. Older people are being forced back into the workforce at a rate faster than the baby boomer retirement rate.
St Louis Fed Chart - Labor Force Participation Rate
Not only did the separate Household Survey show the drop in the labor force it also showed a loss of -115,000 jobs in August after a loss of -37,000 in July. This is a different survey from the establishment survey that produces the Nonfarm numbers.
Auto manufacturing added +19,000 jobs in August after a -10,000 jobs drop in July. These numbers are skewed by layoffs to change over plants to the new models. If you remove those numbers from the headline since they are an annual event the headline number would have been a gain of only +150,000 jobs. I contend that laying someone off in June-July for several weeks because the plant is shutdown and then putting them back to work when the plant reopens is not really a new job. However, both Ford and GM have said they were adding workers in Q3/Q4 to keep up with higher demand. I believe the total new hires for GM/Ford for the rest of 2013 is around +7,000 workers.
The recent trend has been for downward revisions so it would be reasonable to assume the +169,000 headline number for August will be revised lower next month.
The market saw the bad payroll number as good news that would either delay QE tapering or reduce its impact. In a survey taken after the payroll release 62% of economists felt it was less likely the Fed would taper in September. The consensus month for tapering to begin was November. If tapering did commence after the September FOMC meeting the consensus for cuts was about $10 billion in the first cut. The economists felt August 2014 would be the end of QE.
Late Friday Esther George, a Fed hawk, called for a -$15 billion QE cut to $70 billion at next week's meeting. At the same time Chicago Fed president Charles Evans said the Fed should not make any changes in September and wait until the economic data improves. The economic outlook will still allow the Fed to taper "later this year" if it continues to improve.
I have said for several months I did not believe the Fed would announce a taper in September because the economy was too weak. We are scraping along the bottom with only the slimmest amount of growth. However, several recent reports have improved and there are signs of improvement in Europe and Asia.
Because of all the Fedspeak over the last six-months the market has already factored in about 80% of the impact of a tapering program according to the analysts surveyed. The ten-year yield is already threatening to break above 3% and has nearly doubled over the last four months as a result of QE tapering expectations. The Fed would be crazy not to take advantage of this situation to announce a minimal tapering and then forcefully claim that future QE cuts would be data dependent and not likely until 2014. This would force rates lower since the topic would be off the table for a couple months.
They need to take advantage of this spike in yields and easing of the bond bubble BUT they also need to force the 30-year rates lower to take pressure off the housing market. This will require a delicate balancing act and a particularly blunt session by Bernanke in the post meeting press conference.
Pimco's Bill Gross said the Fed would taper next week because they have too much reputation capital invested in the buildup to September. They drew a red line on a QE cut in September and now they are committed. Otherwise nobody would believe them next time they drew a red line on rates. Gross believes they will cut $10 billion in a "taper lite" operation rather than a significant cut. Any actual taper will fulfill their taper warnings and still give them the opportunity to stress data dependence in the future.
Another good thing about the Syrian problem is the delay in the president announcing his choice for the new Fed Chairman. The White House said they would not be making that announcement until after the Syrian event had passed. Since Obama's apparent choice is still Larry Summers this will delay the negative market impact from that announcement most likely until October.
On a side note three top democrats on the Senate Banking Committee has already said they would not vote to send a Summers nomination to the floor of the Senate for confirmation. Democrats hold a two-vote majority on the 22 member committee so a defection by three democrats would make it nearly impossible to pass through committee. No republicans on the committee have expressed a positive view on Summers. He is known for controversial statements, abrupt changes in direction and a long list of skeletons in his closet. Barclay's said in a research note "a Summers nomination could lead to an increase in volatility and higher rates." More than one-third of the Democratic caucus sent a letter to President Obama asking him to nominate Janet Yellen instead.
The economic calendar for next week is light on important economics and heavy on Washington headlines. President Obama will speak to the nation on Tuesday night in an effort to sway voters and soften the dissention over the Syrian situation. The House will receive a classified briefing on Monday ahead of the speech.
Apple will be the big news in the stock world next week with the new iPhone announcement on Tuesday afternoon and another announcement from Beijing on Wednesday morning. Apple is expected to announce the iPhone 5S. Does the S mean "Same" as before? They are also expected to announce the iPhone 5C where the C either means Cheap or China or both since it will be a cheaper phone for Chinese consumers. The Wednesday announcement is expected to be the opening of iPhone sales in China through China Mobile (CHL), which has 700 million subscribers, and Apple would be expected to eventually convert 100 million of those customers to the iPhone. For comparison Verizon and AT&T only have about 100 million accounts each.
The big event for September remains the FOMC meeting the following week. The Syrian vote should be over by then and the attack either underway or cancelled. The debt ceiling headlines will start as soon as the Syrian vote is over with the budget battle picking up steam several days later. The next two weeks could be very rocky in the markets.
I am going to touch on a few more points on Syria and why it will impact the market next week. Russia's President Putin said last week he will continue to supply arms to Syria and he will provide a "missile shield" to protect against "external" attacks. It was initially thought he was talking about using his guided missile cruisers in the Mediterranean to shoot down U.S. missiles. Later his comments were clarified to suggest he would renew a suspended contract to supply Syria with advanced anti-aircraft and anti-missile systems.
The U.S. has reportedly intercepted messages from Qasem Soleimani, the head of Iran's Revolutionary Guards, telling Shiite militia groups in Iraq to attack the U.S. embassy in Baghdad in the event of an attack on Syria. The military also said they could see swarm attacks of Iranian fast attack boats in the Persian Gulf.
The U.S. also recalled all embassy personnel in Lebanon and Turkey because of growing threats.
Syria has said they will attack Israel if the U.S. attacks Syria. After reading several analysis of that potential I deem it very unlikely. Not only would retaliation against Israel bring an even larger attack by the U.S. it would also prompt an Israeli retaliation and unlike the U.S. any attack from Israel would be aimed at an immediate regime change. Assad will not want Israeli planes zeroing in on his location. Iran is not likely to launch against Israel as they have previously warned. They will not want to give the U.S. and Israel an excuse to obliterate key Iranian facilities.
That leaves Hezbollah as the major retaliator and that means Jordan, Lebanon, Turkey and Israel could be the targets but at least it will be small scale terrorism and not country against country.
At this point a Syrian attack is slipping farther into the future and becoming less likely unless there is a major change of heart after the president's speech on Tuesday. The danger is an attack by Obama after a failed vote in Congress. That could lead to more repercussions and stir up a mess in the Middle East.
There were comments in the news late Saturday suggesting White House aides were recommending President Obama cancel the request to Congress because it appears the vote will not pass. Rather than face a no vote and then launch the attack without congressional permission the president could cancel the request saying time was running out to act and he was going to launch under his own authority. Does that mean he would have to give back his Nobel Peace Prize?
However, if there is no attack under any scenario then we can expect chemical weapons to proliferate in Syria and potentially spread to countries infested with Hezbollah and Al Qaeda. If there is no significant penalty for using chemical weapons they will spread outside Syria and the rebels in Syria will face them on a daily basis. This is a pivotal point for the 90+ countries that signed on to the chemical weapons ban after World War I. Actions must have consequences whether we like it or not.
Bloomberg is keeping a running count of the potential votes on the attack question. In the House there are 25 members that have said they would support the resolution. There are 182 that have either said no or they are leaning towards no. The vote needs 217 votes to pass. Link to updated charts
Bloomberg House Chart
In the Senate there are 13 yes votes and 12 no votes with 51 needed for passage according to Bloomberg. However, I believe that with a joint resolution it requires 60 on a cloture vote for the motion to proceed and then 51 votes for the actual passage. Opponents can keep the measure from coming to a final vote by preventing the passage of the cloture vote. That would allow some fence sitters from actually having to vote on the actual resolution and then face voter wrath in 2014.
Bloomberg Senate Chart
In stock news teen retailer Quicksilver (ZQK) spiked +31% after reporting adjusted earnings of 10 cents that beat estimates of 6 cents. Revenue fell -3% to $495.8 million and missed estimates of $505 million. Apparently short covering took precedence over the revenue miss.
Smith & Wesson (SWHC) saw its shares decline -10% despite a +25% increase in sales for Q2. Earnings surged to 41 cents from 27 cents in the comparison quarter. The company said increases in manufacturing capacity combined with a strong demand for firearms resulted in increased market share. Shares dipped on the sales forecast for the current quarter of $137.5 million and 21 cents in earnings. The summer quarter is not normally a strong quarter for guns but Q4 is normally very strong.
The Obama gun rush is beginning to fade as efforts to pass more gun laws have proved futile. Ammo is starting to show up on retailer shelves once again and prices are slipping from the hysteria levels seen over the last year. Retailers are actually glad the hysteria is fading because now they have inventory to sell. It has been very difficult to acquire merchandise since all the manufacturers were severely backordered.
Mattress Firm (MFRM) fell -15% after reporting adjusted earnings of 43 cents compared to estimates for 51 cents. Higher expenses from acquisitions weighed on the earnings. The company guided for $1.75 to $1.83 for the full year and the prior outlook was $1.90 to $1.98. Analysts were looking for $1.96. They missed on earnings, revenue and guidance.
Analyst upgrades included STZ to buy at BAC. DEO was upgraded to buy at Citi. ETFC upgraded to buy at Goldman.
SPLK was initiated with a buy at Canacord Adams. UA was initiated at hold at Jefferies. URI was started at buy at Longbow. Zillow (Z) was started at hold at Deutsche Bank.
Amazon (AMZN) is rumored to be close to a deal to offer free smartphones without a contract. The plan has some hurdles since Amazon wants to offer the phones with a stripped version of the Android operating system like they use on the Kindle tablets. Unfortunately most manufacturers have contracts with Google to make only Google-approved devices with the pre-loaded Google apps.
Amazon is rumored to be linking the free phones to an Amazon Prime account in order to get more merchandise sales from phone customers. The new Kindle Fire tablets, the cheap versions, have an Amazon shopping interface that offers you products when you sign on. I would expect the phones to have the same kind of impulse shopping setup. I am sure there are many people that would opt for a free Amazon phone with no contract and put up with a few unsolicited ads. The Prime account gives them access to thousands of movies, millions of books and assorted other products for free. Amazon has the potential to disrupt the Apple/Samsung grip on the phone market. Free is a very strong marketing tool when high end phones today cost $400-$600. Since the carriers would not have to eat the equipment cost they could offer cheaper monthly rates and that would squeeze profits for Apple and others.
The U.S. markets managed to post a gain for the week with the major indexes adding over 1%. The Dow was the exception with a .76% gain. Wednesday was the big day with the rest of the week simply treading water.
The S&P rallied to downtrend resistance and the 50-day average at 1665 and was immediately stopped. The S&P closed with a fractional gain on Friday but it was -10 points off its high. Given the comments out of Putin and the huge headline risk next week I think it was a good performance.
The 100-day average has returned as initial support at 1640 but we traded down to 1630 on four days the prior week. That is the critical support level that generates some decent fear if it breaks.
I still believe we have risk to 1560 in September. However, if we can get by some of these headlines without much of a drop I would quickly turn bullish. The markets have been showing relative strength despite the declines of the last three weeks. Volume has been dismal with about a 5.4 billion share per day average over the last week. With the holiday out of the way we should see volume pick up next week.
I would watch 1630 and 1665 for direction. A move outside of that range could gain speed quickly.
The Dow managed to touch upper resistance at 15,000 intraday and dip to lower support at 14,800 all on low volume. The 220 point range was headline driven and that gives you an idea how next the next two weeks should play out. The Dow is particularly responsive to headlines and there will be a bunch and most of them will be negative.
As soon as the Syrian problem has passed the debt ceiling will take center stage and both sides have already staked out their positions. The democrats claim they will not negotiate without strong tax hikes and the republicans demand $1 or more in cuts for every $1 in debt ceiling increase and no new taxes. We have seen this movie before and we know how it will end. A compromise will be reached at the last possible minute but not until the headline war has left the market a smoking ruin.
I am still expecting to see my 14,400 target reached but a sudden and amicable resolution to the debt problems would be a major market mover. I am not holding my breath.
The Nasdaq was the strongest performer thanks to a +3.8% rebound in the chip sector. There was a fire at a Hynix plant and all the chip companies rallied on the potential for a chip shortage.
You can tell the Apple news was already priced in because AAPL shares only gained +$11 for the week to close at $498. Apple was only a minor benefit to the Nasdaq but the tech index was still strong.
The Nasdaq traded to within 15 points of its multiyear closing high at 3692. With the rest of the indexes working on minor rebounds from much lower levels the tech stocks were leading the parade.
The Nasdaq closed at 3660 and a minor +1 point gain for the day but a +70 point gain for the week. Prior resistance at 3645 became support and after three weeks of consolidation the Nasdaq appears poised to make a new high. That assumes no headline risk. The rebound in techs will give fund managers an opportunity to cash in their gains if the headlines begin to weaken the market.
Support is 3580-3600 and resistance 3685.
The Russell 2000 managed a +1.8% gain but it did not go anywhere. Last Friday the Russell closed at two-month lows and gaining +1.8% from that close only put it back in the middle of its recent consolidation range. The Russell still has major resistance at 1040 and major support at 1012. A breakdown below 1012 should bring on the heavy selling.
My target for the Russell is 950 and possibly 900 depending on the severity of the headlines.
We saw a minor market bounce last week thanks to a delay in attack plans for Syria and new retirement money from the August month end. I cannot emphasize strong enough how headline driven I expect the markets to be over the next 2-3 weeks.
The wild card here is how much of the headline fear has already been priced into the market. The Fed may only taper a little or not at all and push expectations out into 2014 and the markets would celebrate. Washington headlines have not gotten to the ugly stage yet so it is hard to believe anything good will emerge for another couple of weeks. That is the real weight on the market and it really has not been seen as of yet.
Art Cashin warned repeatedly last week that a 3% yield on the ten-year treasury could be a tripwire for the market. The high close last week was 2.98%.
I would start looking for long positions you want to add on any material market dip and then set back and wait patiently for a buying opportunity. I would be very surprised if we did not get one.
Enter passively and exit aggressively!
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"Prudent speculators never argue with the tape. Markets are never wrong, but opinions often are."