The market collapsed this morning after Atlanta Fed President Dennis Lockhart said the taper could come as soon as December.
Lockhart said "I don't think circumstances rule out a consideration in December. The January meeting could be more complicated" because of fiscal policy concerns. He said the October employment data was "encouraging" but not "decisive" evidence of a sustainable improvement in the labor market. Despite the volatility in jobs a tapering "could very well take place in December."
The Dow fell -60 points on the news but rebounded after multiple analysts dismissed Lockhart's comments saying it was just Fedspeak and trying to manage expectations. Lockhart had been seen as neutral to dovish in his recent comments until today. He may have been trying to toughen up that image or as analysts believe he was just following the FOMC script to keep the market on its toes.
Less reported comments from the same interview he said inflation was too low to end QE. He said he would like to see inflation move closer to the Fed's target of 2% before the FOMC begins to taper QE. He said inflation was stable but too low and waiting for a rise in inflation would give the Fed more confidence they were not facing a deflationary environment and could safely pull back on QE.
So which set of comments should we believe? I think both. Tapering QE may be on the table at the December but I seriously doubt they will act because of inflation, fiscal battles in Washington, which will be in full bloom during the December FOMC meeting and the lack of evidence for a sustainable recovery. Economics are improving but the numbers are not consistent. Lastly, I doubt the FOMC will vote to begin tapering six weeks before Janet Yellen become the Chairman. At this late stage and with the debt ceiling battle returning on January 15th the Fed should hold firm and wait for the smoke to clear. That means March is the most likely announcement date.
The president of the Minneapolis Fed, Narayana Kocherlakota, said the financial markets remain puzzled by talk about tapering because they know it would be a drag on the already slow pace of economic recovery. Kocherlakota said the Fed was looking at more things besides the immediate economic outlook. He said the Fed is also focused on the "costs and efficacy" of the program. Continuing to buy $85 billion in treasuries each month carries with it a long term cost and a rising risk of unwinding the position at some point. Kocherlakota favors keeping rates low until the unemployment rate hits 5.5%. That is lower than the Fed's official target at 6.5%.
Lockhart is not a voting member this year but Kocherlakota is a voting member.
The economics out today emphasized the unstable outlook. The NFIB Small Business Survey declined for the second consecutive month with a drop from 93.9 to 91.6. July and August were the recent peak at 94.1. Those business owners who expected the economy to improve declined from -10 to -17 after peaking at -2 in August. Those expecting higher sales declined from +8 to +2. Plans to increase hiring declined from +9 to +5. More than 8% of responders reported weaker sales over the last three months. More than 23% reported weaker profits over the same period. The entire report showed declining sentiment among small business owners in October.
Analysts blamed the decidedly pessimistic NFIB report on the two-week government shutdown and the impact on small businesses. For large corporations it was just a blip on the radar. For small businesses they are more dependent on capital and the health of the consumer. The negativity surrounding the shutdown was a drag on consumer sentiment and spending slowed slightly over the period. Also, small businesses are more impacted by the impending Obamacare rules so that is also dragging on their outlook. SBA loans fell -55% during the first half of October.
The Chicago Fed National Activity Index (CFNAI) rose to +0.14 in September after posting a 0.13 in August. This was the first two months in positive territory since February. The three-month moving average rebounded from -0.16 to -0.03. It was the seventh consecutive month in negative territory and reinforces the fact that economic growth is excruciatingly slow and inflation will continue to be very low. Rising mortgage rates weighed on the index as well.
The high point on Wednesday's calendar will be the Bernanke speech at 7:PM. After the Lockhart comments today the Bernanke speech will be closely watched. The next most important event will be the Yellen hearing on Thursday.
In stock news Sarepta Therapeutics (SRPT) dropped -64% to $13.25 after the FDA said the application to market the drug, Eteplirsen, was premature. Regulators cited recent developments that included results of a competitor study. In September GlaxoSmithKline said their potential treatment, Drisapersen, failed in late stage studies to produce a significant difference compared to a placebo. WBB Securities said the application could be delayed up to two years. The study that involved only 12 patients was too small to count on for an expedited approval. The FDA comments were a reality check for SRPT.
Vanda Pharmaceuticals (VNDA) got the opposite reaction after an FDA review recommended that a sleeping drug for the blind, tasimelteon, be approved. The drug helps blind people sleep. Blind people suffer from the non-24-hour disorder where their circadian rhythm is disrupted. Shares of Vanda rallied +96% on the news.
Starbucks (SBUX) lost $1 after the close when it was announced they had to pay $2.2 billion in damages to Kraft for cancelling their coffee sales agreement several years ago. Starbucks also has to pay $527 million in prejudgment interest and attorneys fees. Three years ago Starbucks fired Kraft as their distributor of packaged coffee to grocery chains. Kraft began marketing coffee for Starbucks in 1998 and renegotiated the contract in 2004. In 2010 Starbucks severed the agreement claiming Kraft had not followed the terms of the agreement and failed to work with Starbucks on marketing decisions and customer contacts. Kraft had taken the packaged coffee business from $50 million to $500 million. After Starbucks took back the distribution they rapidly expanded the business from $500 million to $1.4 billion in annual revenue. Starbucks said they would take a charge as a fiscal 2013 operating expense and hold a conference call on the award on Wednesday. Kraft said it would use the money to buy back stock.
Tesla (TSLA) CEO Elon Musk was interviewed by CNBC over the outlook for the Model S, the car fires and stock valuation. Musk said the fires were a non-event and were only being reported because Tesla was innovative new technology. There have been three car fires out of the 25,000 Model S cars produced. One fire was the result of a car running over a large piece of metal at high speed and the metal pierced the battery compartment. One fire was the result of a very high speed crash in Mexico where the car crashed through a concrete barrier at four times the speed deemed as survivable and then crashed through an 18 inch thick concrete wall that tore off all the wheels and most of the outside body and then coming to rest against a tree. The driver and passengers got out and walked away before the car caught on fire. The third fire was not discussed in specifics. All three Tesla owners immediately ordered a replacement Tesla S.
Musk said there is one car fire in gasoline powered cars for every 1,300 vehicles produced. That is more than 200,000 fires a year. Tesla has had three fires in 25,000 cars or one in 8,000. In every case the drivers said they would have been dead or severely injured but the Tesla car protected them. Consumer Protection Board said the Tesla was the safest car they had ever tested.
Musk said the company would be worth several times more than its current valuation as they double and triple their production over the next several years. Does that mean the stock is fairly valued at the $138 close? Maybe not but it does mean we can expect the shares to eventually reach a new high.
American Airlines (AAMRQ) and U.S. Airways (LCC) have won the right to merge and become the world's largest airline after they agreed to give low-cost competitors more access to several key U.S. airports. The agreement with the Dept of Justice is subject to court approval and ends the suit brought by the DOJ. The changes would include giving up 52 pairs of takeoff and landing slots at Reagan National outside Washington and 17 pairs at New York's LaGuardia. The two airlines control 69% of the slots at Reagan and that will be reduced to 57%. The DOJ will select which airlines will be able to buy the vacated slots. LCC bounced but then settled back but shares of AAMRQ rallied +26%.
The NYSE is no longer in control of its own fate. The NYSE was formed in 1792 as a private company. It went public in 2004 ago and as of Tuesday they will be merged into the Inter Continental Exchange or ICE. Goodbye to NYX shares.
Crude oil fell to a four-month low ahead of Wednesday's inventory report. Inventory levels have been rising sharply and the IEA now claims the U.S. will be the largest oil producer in the world by 2016. World oil inventories are now at 58 days of supply and well over the 52.1 day average. The rising dollar and recovering production in Libya, Nigeria and Sudan have been pushing prices lower. Expect gasoline prices under $3 soon.
The Nasdaq posted a fractional gain if 0.13 points but all the rest of the major indexes were lower. It was blamed on the comments from Lockhart but in reality the rally is just tired. After the S&P closed one point below resistance on Monday I thought maybe today would be the breakout that reenergized investors. The taper talk nipped that in the bud and we are back to the range bound consolidation we have been seeing for the last three weeks.
Volume has been very low with only 4.7 billion shares trading on Monday and 5.8 billion today. For an option expiration week it would appear we are going to remain pinned to the current levels for three more days.
The S&P remains firmly stuck under the 1,770 level with 1,773 as resistance. A breakout over 1,775 would be a strong buy signal if it came on high volume. If we just tiptoe over that level as though testing the water with a toe I would not be a buyer. We only want to participate if it is a true breakout. Support is broad from 1750 to 1760.
The Dow did not make a new high today but it recovered from a -60 point drop to close down only -32. Considering the overextended condition this was fairly bullish. There are so many people expecting a decent dip that never appears. Investors are eventually going to become impatient and buy something. Support is 15,600 and resistance 15,800. That gives the Dow plenty of room to vacillate without doing any real harm. The longer we hold at resistance the better chance we have of moving higher. If we start to bleed points over a couple days the outlook would change.
The Nasdaq is struggling with a lower high at 3925. It closed fractionally positive today because of a last minute closing spike. The index held most of the afternoon at 3907 and refusing to give up that support level. When it did not crack it may have been some short covering at the close that provided the lift.
Resistance 3925, support 3907.
The weakness in the Russell 2000 is continuing but becoming more erratic. That could be a sign the selling is almost over. Solid resistance at 1103 and 1108 with 1096 the intraday support on Tuesday.
The market is struggling to hold it gains and doing a pretty good job. It is not pretty but it is the end result that counts. After three weeks of sideways consolidation the natives are going to get restless soon. This is an option expiration week without any major economic events. The odds are very good we will remain pinned to this congestion level until next week.
Enter passively, exit aggressively!
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