After briefly punching through round number resistance on Monday the Dow and S&P continued their low volume swoon.
The Dow closed down -9 at 15,967 and only 33 points below that round number resistance at 16,000. That is hardly a major correction. The S&P gave back 3.6 points to close at 1,787 and -13 points below 1,800. The Nasdaq did not hit its 4,000 target on Monday, with a 3,995 high, but it has been the hardest hit by the selling. The Nasdaq lost -17 points today to close at 3,931 and -69 points below that round number resistance. The Russell 2000 hit 1,120 on Monday and dipped back below 1,100 intraday today.
While the selling over the last couple days was minor it was still selling. Several analysts were commenting today that the market needs to pull back further in order to be prepared for a post Thanksgiving rally into year end. Analysts are still bullish but they have turned into stock pickers rather than market bulls.
Volume was mediocre and the internals were only slightly bearish. It is hard to draw any hard conclusions from a day like today. The market rally took a rest break. Until volume increases and internals worsen it is just a break. This typically occurs after the indexes hit large round number resistance targets.
The economic calendar was light. The weekly Chain Store Sales rose +0.1% compared to the +1.2% gain last week. This report is noise and it is ignored.
The Employment Cost Index for Q3 rose +0.4% after a +0.5% rise in Q2. Wages and salaries rose +0.3% with benefits surging +0.7%. Year over year growth in overall costs was +1.9%. Growth in benefit costs was +2.3%. The lack of meaningful growth in employment costs gives the Fed a green light in keeping monetary stimulus in force for a long time.
The economic calendar for Wednesday is loaded with material reports. The China PMI and FOMC minutes will be the most watched. Thursday's Philly Fed Manufacturing survey will be the next pothole in the road. If the Philly Fed report declines as expected or worse then the market selling could increase.
There was a blockbuster story out today on the monthly payroll numbers. Back in September 2012 and just before the election the Nonfarm Payroll report and the companion Household Survey surged unexpectedly. I pondered in the market commentary at the time that is would not take much for the people doing the 60,000 surveys a month to shift the direction of the report by a significant amount. Jack Welch, former CEO of GE, tweeted "Unbelievable jobs numbers...these Chicago guys will do anything...can't debate so change numbers." He caught a lot of flak for suggesting the payroll numbers might be bogus.
Fast forward to today and we found out they were bogus. New York Post reporter John Crudele posted a story this week claiming employees were encouraged to fabricate reports in order to make their quotas of surveys. Apparently employees are expected to complete 90% of the surveys they are given each month. They do this by calling or visiting the households on their list. They are supposed to conduct 60,000 surveys a month. When the survey subjects can't be contacted for whatever reason management told workers to "go ahead and fabricate it" to make sure they hit their quotas. This is important because every respondent in the 60,000 surveys represents 5,000 homes when the data if put into the system. Fabricate 100 surveys and give them 1 job each you just influenced the final data by 500,000 people. Influencing the final outcome of the payroll report would be very easy.
Reportedly the New York and Philadelphia regions were constantly having trouble reaching their quotas so they were told to fake it. Employee Julius Buckmon was caught fabricating numbers, a lot of numbers. He produced three times as many "completed" surveys as his peers. He said he simply filled out surveys for anyone that did not answer their phone and he created people out of thin air and gave them jobs on the completed forms. His actions alone could have lowered the unemployment rate but sources now say there were multiple employees doing the same thing. The Census department never told the Labor department about the fraudulent numbers nor did they disclose it publicly.
The Post reporter, Crudele, openly admits he has been suspicious of the Census Bureau for a long time. When the national census was being done in 2010 he openly criticized the bureau for inexplicably hiring and firing tens of thousands of temporary workers. He suspected the turnover of employees was purposefully being done to boost the number of jobs reported every month. Crudele claims he has a long list of evidence and people willing to testify in a real probe. Last week he offered to give all his documentation to the Labor Dept's inspector general. He is still waiting for the Labor Dept to get back to him. Apparently they are not in a rush to investigate the claims. The Census Bureau issued a statement saying "it does not believe there has been any systematic manipulation of data."
Three weeks after President Obama took office in 2009 he transferred the Census Bureau to be under White House control. What was so pressing that three weeks after he took office he had to make such a major change? Obviously the results of the 2010 census would dramatically impact districting and controlling that outcome would influence future elections. Newly installed chief of staff Rahm Emanuel was tasked with overseeing the census. It will be interesting to see where this payroll survey probe ends up. Of course that assumes there will be an actual probe.
Obamacare received another black eye today when a senior IT official, Henry Chao, admitted under questioning by a House subcommittee that 30% to 40% of the HealthCare.gove website had not even been built yet. He said there was no facility for making payments to insurance companies or for actually giving the subsidies to the insurance companies for people who qualify. He said those portions were initially targeted for the October 1st launch date but implementation was eventually cancelled because of problems just getting the basic website running. Chao said numerous other "back office" systems had not yet been built and there was no accounting function yet. A spokesman for CMS issued a statement saying the missing pieces did not need to be functional until sometime in 2014. She said backend tools, financial management, monthly enrollment reconciliation and risk adjustment would eventually be rolled out in 2014. Chao said the enrollment function was now 100% but people could not pay and insurers could not be paid. He suggested it could be a long time before those functions were implemented. The government paid $654 million for the website and they had three years to prepare. SalesForce.com offered to build it for free and run it for free for five years but the president turned them down. EHealth also offered to build it for free and were also turned down.
The big stock news of the day was the announcement of a $13 billion settlement with JP Morgan over the mortgage problems with Bear Stearns and Washington Mutual. The breakdown will be $4 billion in consumer relief and $9 billion in fines and penalties. The settlement has been rumored for weeks but was held up because of disputes over the tax deductibility of the settlement and whether or not the bank would be absolved of criminal liability. At one point Jamie Dimon went to the Justice Dept to negotiate personally with Eric Holder. This deal is in addition to the $4.5 billion settlement made last week with 33 mortgage investment firms.
JP Morgan has $23 billion in loss reserves on the books and Dimon has vowed to put all these problems to rest as quickly as possible to eliminate the drag on the stock price. Holder said they wanted the dollar amount to be large enough that JPM could not just write a check and go on their merry way. $13 billion is a monster amount when the total mortgages sold was only $95 billion. The bank made only a few points on each package so it is not like they are only clawing back the profits. Shares of JPM have been moving steadily higher over the last two weeks on rumors of the deal.
Janet Yellen was in the news again with written comments back to senators from questions posed in the coronation hearing. In one comment to Senator Warren she said, "Monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the federal funds rate has been crossed." She was talking about the 6.5% unemployment rate. One of her tasks is to try and convince investors that tapering is not tightening. "Yellen said it is important to note that the thresholds of 6.5% unemployment and 2.5% inflation are not triggers. That is, once a threshold has been crossed the Fed will not necessarily raise the federal funds rate target immediately." She also said a "strong majority" of Fed policymakers think the QE program has helped spur U.S. growth and hiring, but are aware of potential risks. The Senate Banking Committee will vote on her nomination on Thursday. If she passes it will then go to the full Senate.
Shares of Tesla Motors (TSLA) rebounded +4.50 today after the NHTSA said it was going to open a formal probe into the two fires of the Tesla S. The VP of regulatory affairs at Tesla had earlier invited the NHTSA to come inspect the Tesla S because they had nothing to hide. The NHTSA took him up on his offer. The S is the safest car ever made according to Elon Musk. With more than 25,000 produced there has never been an injury or death in a Tesla S car. The two fires were caused by running over metal road debris at high rates of speed and puncturing the battery compartments from the underside. One car ran over a truck trailer hitch at 70 mph. That would be enough to severely damage any vehicle.
Elon Musk keeps asking why all the excitement and interest about two fires in a Tesla when there are more than 100,000 fires a year and multiple deaths in gasoline cars and nobody seems to care. Shares of TSLA are off -40% since their high at $194 on October 1st. Eventually the faithful are going to come back but one day of gains does not mean the selling is over.
Home Depot (HD) spiked to a high of $82.27 this morning after posting earnings that beat the street and raising guidance. HD posted earnings of 95 cents compared to estimates of 90 cents. Revenue rose +7.4% to $19.47 billion and beating estimates of $19.18 billion. Same store sales in the U.S. rose +8.2%. The company raised 2013 guidance for the third time this year. Guidance rose from $3.60 to $3.73 and full year revenue estimates rose from 4.5% to 5.6%. This was the sixth consecutive quarter of earnings beats.
On the flipside Best Buy (BBY) shares declined -11% after the company warned that margins in Q4 would be ugly. The company said it would have to sacrifice profitability to match rivals discounts in the upcoming holiday season. Best Buy currently has 15% of the U.S. electronics market. The CEO, Hubert Joly, said "We don't think it is illegal, immoral or unethical to grow market share, so that is the focus" with the price cuts. Joly has put in place a permanent plan to match competitor's lowest prices. That plan is going to crush already low margins according to the CFO. In the most recent three months same store sales at Best Buy have risen a pitiful +0.3% that missed analyst estimates of +0.7%. The actual U.S. numbers are a little better with U.S. stores rising +1.7% and international stores falling -6.4%.
It is going to be a tough shopping season. Walmart (WMT) has plans to not only match all competitors prices but to do it in volume. Walmart is going to take the Black Friday ads for Best Buy, Target and Toys R Us and match those prices for the entire week BEFORE Black Friday. That means anyone looking to buy those products will have plenty of time to shop before the competitors ads even begin. This is power retailing at its finest.
Most stores are announcing openings at 5-6:PM on Thanksgiving but Wal-Mart never closes so anyone wishing to eat fast and shop can be done before the competitors even open their doors. Just to be unfair they are going to have additional door buster specials at 6:PM and 8:PM on Thanksgiving. A Walmart executive said "our strategy for Black Friday and the entire holiday season is to win it." I would really hate to be a Walmart competitor.
Walmart warned that profits were going to suffer because of very aggressive marketing in Q4. Shares fell to $72 in early October when the announcement was made. The stock has recovered and could easily breakout to a new high in the week ahead. Size does matter in the retail wars.
The market is in pause mode. That could accelerate into decent profit taking very easily. The S&P rallied from 1760 to 1802 in only four days. That was a gain of 42 points. Since Monday's 1802 high it has given back only -14. In theory that suggests we could easily see a return to the consolidation level of 1765 from the prior two weeks and never break a sweat.
A sharp spike of 42 points after two weeks of consolidation is not unexpected. It was a Yellen induced bounce with visions of QE for many months ahead. Now that cooler heads are prevailing we could continue to consolidate those gains and return to uptrend support in the 1750-1765 range.
The 50-day average is commonly quoted as support but as you can see by the chart it has not been material support in many months. The 100-day average is the most dependable support level but at 1698 it is well below numerous shorter term support levels. If we did dip to the 100-day it would be because of some unexpected event not just profit taking.
However, the S&P is over extended compared to its recent trend. That means we could see additional volatility if sellers begin to appear in volume. Right now investors are content to hold what they have got in expectations of a higher move in December. Whether that is right or wrong remains to be seen.
Unless conditions change I would look to buy a dip in the 1750-1765 range and I would be a seller under 1750.
The Dow remains the strongest and the most overextended index. It is totally unfazed by the moving averages and apparently only mildly irritated by the resistance at 16,000. The -9 point loss for today was noise and it remains very overextended. The components were evenly missed between winners and lowers with the majority showing only fractional losses. Chevron at +1.50 offset Visa at -2.51 and Boeing at -1.38. Those were the only movers of $1 or more.
Given the +1,200 point rally in the Dow I could easily see a retest of 15,800 or even 15,600 before a new leg higher. However, the Dow is not giving us any indication we should expect that.
The Nasdaq is the weakest index and could easily retest support at 3895. Secondary support at the rising 50-day of 3845 would require a worsening of the selling pressure. So far this is just minor profit taking and buyers are waiting on the sidelines.
I have been mentioning the return of the fiscal follies in December and January. The budget negotiations have a December 13th deadline and the debt ceiling debate comes back on January 15th with the actual debt ceiling slamming shut on February 7th. I have mentioned that the dueling headlines would return in early December.
Don't look now but the first salvo has been fired. Treasury Secretary Jack Lew said on Tuesday that Congress must raise the debt ceiling well in advance of the deadline. "The full faith and credit of the United States, whether its bonds or contracts or benefits, has to be honored." President Obama echoed his comments saying he does not expect another standoff that brought the U.S. to the brink of default. Now that the first shots have been fired we can expect the headline wars to escalate in the coming weeks. This will eventually be market negative. With the extreme hostility over Obamacare the two parties are not likely to settle their budget differences without a fight that comes down to a last minute compromise. Be prepared for the market to react at some point in the future. I am not sure the "everything will work out crowd" will be so bullish this time around.
Enter passively, exit aggressively!
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