As the questionable sanctions begin to take effect the U.S. markets became a safe haven for investors.
Multiple events surrounding Crimea provided a lift to the U.S. markets. First in an hour long speech Putin said he has no interest in continuing his aggression into the Ukraine. He is content to annex Crimea and solidify his access to the Black Sea naval port. He said as long as Russians living in the Ukraine were not in danger everything would remains as it is now. While there is always the threat of Russian forces pouring over the Ukraine border the danger to the rest of Ukraine appears to have passed. The comments caused a "Putin rally" in the S&P futures before the market opened.
Pathetically weak sanctions from the U.S., EU and Japan went into effect and now we wait to see how Russia responds and whether they cut back on energy supplies to Europe. That is Putin's big stick in this confrontation. Russia sells about $160 billion a year of gas and oil to Europe. If the sanctions against Russia begin to hurt he may start making noises about restricting the flow of natural gas. I view this as an empty threat since Russia depends as much on that $160 billion in revenue as Europe depends on the gas.
However, when backed into a corner you never know what people like Putin will do. While the risk of a military confrontation has lessened significantly we are moving into another chapter where an economic war will be waged and with Russia's weak economy that may be the most effective campaign. Russia is seen as a third world nation with a first world military even though their military equipment is old and in a general state of disrepair. They still have a lot of equipment with 850,000 soldiers to back it up.
The second factor supporting the market was the FOMC announcement on Wednesday. Aunt Janet, the Empress of the Doves, will hold her first press conference Wednesday afternoon at 2:30 and so far every time Janet Yellen has been speaking on TV the market has gone up. Her constant assurance that rates will stay low and the potential for a guidance change at this meeting helped to encourage investors.
The economics were mixed again with no clear direction. The Consumer Price Index (CPI) rose only +0.1% and below estimates for a +0.2% gain. It would have been even lower but a +0.4% gain in food prices helped push the headline number higher. The energy component declined -0.5% despite the sharp spike in natural gas prices. The headline number has averaged a +0.1% monthly gain since August.
The core rate, ex food and energy, also rose +0.1% with goods prices declining -0.1% and services rising +0.2%. The core rate for the trailing 12 months is +1.6% and the headline rate +1.1%.
The energy sub index declined -0.5% thanks to a -1.7% decline in gasoline that offset a +4.1% increase in fuel oil and +3.6% increase in utility bills as a result of rising gas prices.
The tame inflation in consumer prices should allow the Fed to continue to maintain an accommodative monetary policy for a long time. The Fed has said they would like to see inflation in the 2.0-2.5% range in order to boost employment. They have a long way to go.
New residential construction declined from an annual pace of 909,000 to 907,000 for February. Expectations were for a rise to 910,000. The pace has been flat for the last two months after hitting 1.1 million in November and 1.02 million in December. On the plus side building permits rose +7.7% to a pace of 1.018 million and suggesting there was going to be a boom in construction in the weeks ahead. That pace is approaching the October 2013 post recession high. Of course analysts blamed weather for the lull in construction.
Confirming the weather impact, starts in the Northeast declined -38% with starts rising in the Midwest and South. Completions rose +4.4% to 886,000 annualized. That is 21.9% higher than the same period in 2013.
Treasury fund flows actually rose in January by +$7.3 billion after declining -$45.9 billion in December. Foreign private investors were net buyers of U.S. Treasuries. We can expect that to rise sharply in February and March as a result of the Ukraine situation.
The economic calendar for Wednesday is highlighted by the FOMC announcement and the Yellen press conference. Nothing else will matter to the market unless fighting were to breakout in the Ukraine. Yellen is expected to continue the taper with another $10 billion a month cut to QE. She is also expected to change the guidance to remove the 6.5% unemployment rate threshold they have already said numerous times would be ignored. The market should react positively as long as there are no negative surprises.
In stock news Adobe (ADBE) reported earnings of 30 cents compared to estimates of 25 cents. The company raised guidance as a result of strong acceptance of the cloud based Creative Suite. The company said it added 405,000 paid subscribers to the Creative Suite, which includes Photoshop, Illustrator and Flash. That pushes the total subscription base to1.84 million as of the end of February. Adobe is trying to phase out the boxed versions of software and convert everyone to the subscription model.
Adobe forecast earnings of 26-32% for Q1 compared to estimates of 26 cents. Revenue is forecast at $1.0-$1.05 billion compared to analyst estimates of $990.4 million. The company said it expected to exceed the prior full year forecast.
Earnings were accidentally released on the website during the day and were confirmed by Adobe later. This caught investors off guard and shares were flat after the close.
Oracle (ORCL) reported earnings after the bell that disappointed on all metrics. Oracle reported earnings of 68 cents compared to estimates of 70 cents. Revenue of $9.3 billion missed estimates of $9.4 billion. New license revenue of $2.4 billion missed estimates of $2.5 billion. Shares fell sharply to $37 after the release. Analysts claim Oracle is facing serious transition issues from their legacy business to a cloud business model. Oracle has been buying a lot of new companies with a cloud focus but those acquisitions have yet to move the needle for Oracle. Oracle and SAP are in a race to see who can consume the most cloud companies to both help their business model but also to prevent the other from acquiring that technology.
Goldman Sachs went out on a limb and raised their price target on Tesla (TSLA) from $170 to $200. With TSLA trading at $240 today does that mean they can now put a sell on the company saying their revised target was reached? That new target assumes a -15% decline in the stock price. The consensus target from all analysts is $229.
However, that is not the entire story. Patrick Archambault projected the growth through 2022 when he expects volume to rise to 500,000 cars per year. Tesla expects that volume in 2020. The analyst said the risk is for Tesla to blow up the existing automobile business and become the Apple of the automobile industry. He expects the electric car market to hit 6 million units by 2025 with Tesla having a 55% market share. The analyst said under the Musk is Steve Jobs to the auto industry the stock could surge to $504 in 2017 and then decline from there as the business became more conventional. Archambault qualified his projections by giving multiple alternate scenarios.
Shares of Penn Virginia (PVA) soared +15% after Soros Fund Management disclosed a 9.18% stake in the company. Soros Fund said they believe the company should explore strategic alternatives. The fund said PVA should explore potential acquirers and the fund could seek to interact with the board including putting representatives on the board in conjunction with other investors. PVA was named the top takeover candidate for 2014 by SunTurst Robinson. I would say PVA is headed in that direction regardless of whether they want to or not.
Microsoft (MSFT) shares spiked +4% after saying they were releasing Microsoft Office for the iPad. That 4.4 earthquake in Los Angeles today was actually Steve Jobs rolling over in his grave at the thought of Office on the iPad. CEO Satya Nadella said Microsoft would unveil the app on March 27th. The +1.50 spike in the stock price added $15 billion to Microsoft's market cap. Analysts said if only 10% of the iPad install base subscribed to Office it would add 15 million subscribers and generate up to $1.5 billion in Office revenue per year. iPad's have 36% market share in the tablet market. The last time Microsoft traded at $40 was in July 2000.
The next geopolitical event is likely to come from Venezuela. Air Canada said today it was suspending flights to Venezuela because it could no longer ensure the safety of its operations. At least 29 people have been killed and hundreds injured in the clashes between demonstrators and security forces. In addition the ability to convert Venezuelan bolivars to dollars was becoming increasingly difficult with inflation surging and the official exchange rate only a fraction of the black market exchange rate. Venezuela immediately cancelled Air Canada's ability to operate in the country. Avianca Holdings, Columbia's biggest airline cut service to Venezuela last week. Germany's Lufthansa said it had taken "double digit million euro" losses from payment and currency issues in Venezuela.
The government sent more than 1,000 security personnel and troops in riot gear into opposition strongholds in an effort to stamp out anti government demonstrations. President Maduro claims the demonstrations are funded by the U.S. in an effort to take over the country.
Whatever the reason for the market rally we are not going to complain. The Dow gained +88 points and the S&P +13. The close of 1,872 on the S&P is only -6 points from a new record high. The ugliness of last week's decline has been forgotten and analysts are already talking about 1,900 again instead of 1,740. How quickly sentiment can change.
If the Empress of the Doves says the right things in her press conference Wednesday afternoon we could be at that new high very quickly. A move over 1,878 would immediately have traders targeting 1,900 and the race would be on for stock buyers. Support at 1,840 has been forgotten and the bulls are back.
The Dow continues to lag the broader market in terms of relative strength but a +250 point rebound in two days is nothing to complain about. The Dow only gained .5% today compared to 1.24% on the Nasdaq and 1.4% on the Russell. The Dow has resistance at 16,450, 16,500, 16,550 and the prior high at 16,588. Interim support is 16,320, 16,220, and 16,050. Only three Dow components were negative today and several gained more than one dollar.
The Nasdaq rebounded thanks to the return of the biotechs to the biggest gainers list. After three weeks of declines in biotechs almost the entire top 20 list was biotech stocks. The bog +4% gain in Microsoft helped despite not being in the top 20 list.
The Nasdaq is facing resistance at 4,340 and then 4,350-4,360 before making a new 14 year high. Support would be the level that held up on Monday at 4,280.
The Russell 2000 closed only -4 points below its record closing high at 1,208. The small cap index was the biggest percentage gainer and closed at the high of the day. There was no fear of darkness for the small cap buyers. The odds are very good we will at least see a new intraday high on Wednesday. Support is well back at 1,188.
The question for Wednesday is whether Aunt Janet can say enough to push the markets higher or has the rebound from Friday's lows already priced in her comments. At this point I don't think it makes a lot of difference. The Fed is going to taper unless the economic numbers turn catastrophic. The weather excuse has completely erased earnings as a problem for the market. The Ukraine has turned into a long term economic squeeze that will have no material impact. The Crimean annexation is complete.
About the only thing that could rock the market would be the sudden appearance of the Malaysian airliner in a traffic pattern headed for New York. Stranger things have happened but even the possibility of terrorists stealing the airliner for a later attack has failed to impact the market.
The seasonal pattern for the market is for a gain the last week of March and into April as we head into the Q1 earnings cycle. Without a new disaster that appears to be the path of least resistance.
Enter passively, exit aggressively!
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