The market fought back from an opening decline only to be slammed at the close on news of a Senate filibuster in progress.
While it is not actually a filibuster Senator Ted Cruz has vowed to talk until he is no longer able to stand in an effort to try and convert enough Senate votes to pass the current budget bill and defund Obamacare. Cruz has taken on an impossible mission in trying to prevent the bill from coming up for debate. He believes once it is opened for debate that Harry Reid will strip out the language to defund Obamacare and then try to get it passed on a simple majority vote where only 51 senators would have to approve it.
Even though he has little chance of winning the argument about bringing the bill to the floor Cruz is hoping to use the long winded speech to try and convert a handful of senators to his side before the actual vote on the passage of the bill later. Several high profile republican senators have already said they would not vote with Cruz on the first effort. However, if Cruz is successful in swaying just 2-3 democrats the final outcome could be a lot different. There are 54 democrats including 2 independents that normally vote and caucus with the democrats and 46 republicans. Cruz would have to convert 4 of the democrats and maintain all 46 of the republicans to avoid a loss in the case of a simple majority vote. Cruz can prevail whenever the rules call for a super majority of 60 votes to pass a bill. Some analysts believe he could win a rules vote during the process. Cruz was joined in the marathon speech by Mike Lee, Rand Paul and David Vitter. With four of them in rotation they could talk for a long time but their time limit is noon on Wednesday.
The market plunged at the close because the stakes are rising in the Washington political battle. The more contentious it becomes the greater the chance of a government shutdown. Even if the budget battle ends the debt ceiling battle is right behind it and that promises to be even more contentious. Investors may be starting to realize that this could get ugly. The "everything will work out" mindset may be starting to crack. Clearly anyone who understands politics knows that 3-4 weeks from now the budget resolution will be passed and the debt ceiling will have been raised or even eliminated for 2014. It is how we get from here to there that is unnerving investors.
Other than the headlines from Washington it was a relatively quiet day. Economics disappointed again but that should not be a surprise.
The Richmond Fed Manufacturing Survey for September declined from +14 to zero and the internals were not good. Nearly every component decreased significantly. New orders declined from +16 to +5, Backorders fell from -6 to -7 and the average workweek declined from +8 to -4. The gap between orders and inventories fell from +3 to -6. Employment declined from +6 to -6 and the lowest level since late 2009. This was a very negative report.
However, the Richmond Manufacturing survey has been very volatile in recent months. It is hard to draw any material conclusions until the data breaks out of the recent range. What the survey does illustrate is the lack of a sustained recovery. Orders are fluctuating wildly and growth is nonexistent.
The headline on the corresponding Richmond Services Survey rose only +1 point from 14 to 15. If you exclude retail services the number declined from 19 to 16. Retail employment rose from -10 to +5 so that is a step in the right direction. However, expected services demand over the next six-months declined from 19 to 16. The employment index did rise from +1 to +7 and the highest level in a year.
Consumer Confidence declined to 79.7 from 81.8 amid calls by analysts for a relatively weak holiday season and the growing concern over Washington headlines. Shoppers said they were less excited about the future as the number of full time jobs declines and part time jobs increase. Families are worried about decreasing incomes and the higher cost of medical insurance. Declining gasoline prices and higher home prices were unable to support confidence.
The present conditions component rose slightly from 70.9 to 73.2. However, the expectations component declined from 89.0 to 84.1. Those respondents that felt jobs were harder to get rose +2.5% to 19.7%. Those consumers that believe their income will be flat or shrink over the next six months rocketed from 72.5% to 84.6%.
Two different home price indexes showed prices rose again and according to FHFA they are up +8.8% over the last 12 months. The Case Shiller indexes showed a +12.3% gain in the 10-city composite. No real surprise here.
The calendar for the rest of the week has several reports of note but the GDP and Kansas Fed Manufacturing Survey are the biggest. The GDP is expected to decline slightly in the latest revision. The Kansas Manufacturing Survey has risen for the last two months on the strength of auto manufacturing and it should continue.
Facebook (FB) bucked the market decline with a +2.7% gain to a new historic high. The power behind the move was an upgrade to buy from neutral by Citigroup and the hike in their price target from $32 to $55.
Another plus was news that Facebook, Twitter and other banned social media websites would be allowed and accessible in a planned free trade zone in Shanghai. China heavily censors the Internet and bans sites deemed inappropriate or politically sensitive. This would be a major concession by China. The country also said they would welcome bids from foreign telecom firms for licenses to provide Internet services in the zone.
China blocked Facebook and Twitter in 2009 after the riots in the Xinjiang province where the government said they were fueled by posts on social network sites. The New York Times was blocked last year after saying that Premier Wen Jiabao had amassed a fortune while premier.
The concept behind allowing access in the free trade zone was to allow foreigners who use those services to feel at home in Shanghai. The government wants them to feel like China is an open and bustling economy. Good luck with that.
Applied Materials (AMAT) announced it was buying Tokyo Electron in an all stock transaction for $9.39 billion. The merger will combine the number 1 and 3 companies in the semiconductor equipment market. The number 2 company is ASML Holding (ASML). The merger will create a $29 billion company that could scale into the next big upgrade in chip technology. Analysts say the combined companies could speed the new innovations necessary to make that next leap in technology. Combined revenue over the last twelve months was $12.6 billion of which $7.2 billion was AMAT. The merged company will launch a $3 billion stock buyback to be executed within 12 months of the deal closing. Normally stock in the acquiring company declines on an acquisition announcement. Today AMAT shares spiked +9% on the deal because it is so complimentary.
Cypress Semiconductor (CY) was not so lucky today. The company warned for the next two quarters citing weakness in phone sales, mobile computing and Asian markets. The Q3 earnings forecast was cut to a range of 10-12 cents compared to prior guidance of 17-18 cents. Revenue was cut to a range of $184-$187 million from $201-$207 million. It was even worse for Q4. The company projected revenue of $164-$170 million and well below estimates of $203 million.
The CFO said Asian mobile handset orders were being delayed or reduced to account for slowing sales and rising inventory levels. Shares of Cypress fell -15% on the news and given the severity of the warning there may be more pain ahead.
Barclays downgraded EMC (EMC) and NetApp (NTAP) to neutral saying the share prices were approaching their price targets. The company said new product cycles were behind them and there were fewer incremental catalysts over the next several quarters to warrant multiple expansion. Both EMC and NTAP declined about -1%.
Clovis Oncology (CLVS) fell -$9 after the close after being unable to find a buyer. The developer of cancer treatments put itself up for sale and nobody showed up with an offer. The company said it contacted some potential suitors but found no buyers. Clovis said it is no longer soliciting bids and is considering alternatives. Shares of Clovis more than doubled in price in June amid takeover speculation. The company has several major drugs in initial trials but according to Clovis "they could still fail" so buyer interest is muted until there is an actual product. Clovis has no drugs in production and no revenue. That makes it a tough sale.
Linkedin (LNKD) rallied +6.24 to $246 after Evercore Partners raised the price target from $250 to $280.
Athena Health (ATHN) fell -5% to $108 after Leerink Swan downgraded the stock to market perform. The analyst still likes the stock but said the practice management and medical records space was getting saturated with providers.
Carnival Corp (CCL) fell -7.6% after earnings and guidance failed to impress. Earnings of $1.38 beat lowered estimates of $1.30 but guidance was bad. Q4 earnings were projected in a range of -3 cents to +3 cents compared to prior estimates of 9 cents. The company said revenue would be down 3% to 4% and costs higher. The major impact is the continuing trouble in the Mediterranean and lack of tourist visits to places like Egypt, Turkey, etc. Carnival is recovering from a number of ship mishaps including the Costa Concordia. That ship was finally righted last week and will be towed to a beach where it will be cut up for scrap.
JC Penny shares declined to close at $11.90 and a low not seen since 2001. Apparently JCP is looking to raise additional money either through a loan or a share sale. Would you loan money to JCP?
The yield on the ten-year treasury fell to 2.65% today and a six-week low. In theory that should be good for the equity markets because investors would be looking to shift from treasuries to stocks in search of yield. However, with tremendous uncertainty in Washington it is equities that are being sold not treasuries. The critical area on the ten-year is about 2.45% and the support from July and August. Some analysts believe investors are waiting for that level to sell treasuries again.
I am not going to dwell too much on the major indexes today because it is not the market that is sick. The declines are due to the increasingly negative headlines in Washington and they will probably continue to weigh on the market for the next week and then get worse.
Eventually passing a budget resolution is just the first step in the process. That will be ugly but the real fight will come on the debt ceiling increase. That could start by this weekend or by next week for sure. The House is going to hang an entire wish list of ornaments on the bill and then fight to keep as many as possible. The government is expected to run out of money between Oct 9th-18th so there is a real urgency to get it done. There have been 11 fights over the debt ceiling in the last 20 years so this is nothing new. The House has the responsibility for the purse strings and the debt ceiling is one of their only weapons to fight for lower spending.
The headline volatility is going to be with us for a while. The S&P declined -4 points today and most of that came at the close on the filibuster news. Weak support at 1695 was tested and held. The next support level is 1680 followed by 1630 with a speed bump at 1650.
The Dow lost -66 points and closed at a 7 day low at 15,337 after dropping -80 points in the last 90 minutes of trading. The Dow was the weakest index with two of the new additions accounting for 50% of the drop. Goldman declined -2.28 and Visa -2.90.
The Dow appears poised for a significant drop as the headlines intensify. Initial support is 15,300 but then we could easily see a drop to 14,880 if investors start getting seasick on the volatility.
The Nasdaq Composite bucked the trend. The tech index closed mildly positive with a +3 point gain on back of the gains in AMAT, FB, LNKD, PCLN, NFLX, SSYS and AMZN. The strength in the techs and small caps is refreshing and suggests that fund managers are not too worried about an end of the world scenario developing out of the budget battles.
Resistance on the Nasdaq is 3800 with initial support at 3750 followed by 3700.
The Russell 2000 punched through to a new high over 1080 intraday but could not hold it during the closing drop. The Russell still managed to gain +2.5 points to close just below 1075 and within easy striking distance of a new closing high.
You have heard me say this many times but the Russell strength is very bullish for the overall market. If this trend continues there will be a blowout once the Washington madness ends. Support is 1065 and 1050 with resistance at 1080.
Buy the debt ceiling dip! There will probably be continued weakness into the debt ceiling fight but that is the dip I would buy. The Russell 2000 and Nasdaq are pointing the way but they are handicapped by uncertainty. Once that headline fog clears I think we could see a strong move higher. Repeated earnings warnings, wars and rumors of wars, massive terrorist attacks, threats of QE cuts, etc, etc, have not been able to hold back the Russell and Nasdaq. Let's hope that trend continues. Personally I would love to see a major dip on the debt ceiling fight because I believe it would be a great buying opportunity.
Enter passively, exit aggressively!
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