The market rallied again on low volume thanks to a lack of negative headlines and strong housing data.
The market got off to a fast start at the open after the New Residential Construction report for July posted blowout numbers. Housing starts came in at 1.093 million in July compared to 0.945 million in June. For single family starts this was an 8.3% rise month to month and 10% rise year over year. For multifamily starts it was a spike of 33% month over month and 50% year over year. June housing starts were revised up from a very disappointing 893,000 to a decent 945,000 units. Clearly the majority of the building today is in multifamily units with activity in that sector very close to prerecession levels. Single family starts are only about half the rate they reached in 2000. We have a very long way to go before the single family rebound is complete. Overall housing starts are up +21.7% over July 2013.
Housing permits rose +8.1% overall with single family rising only +0.9% while multifamily rose +21.5%. Annualized completions rose +4% from 811,000 to 841,000.
The Consumer Price Index (CPI) rose +0.1% and back to neutral levels after rising +0.3%, +0.4% and +0.3% in the prior three months. The inflation bounce appears to have evaporated exactly like Janet Yellen promised. Sharp declines in energy continue to drag down the overall prices. The Core rate only rose +0.1% for the second month. On a year ago basis both headline inflation and the core rate remain close to +2% and within Fed guidelines.
The +0.1% rise in the headline rate was the slowest since February but it is surprising it was not higher. The 12 month run rate for food prices rose to +2.6% and the strongest pace in two years. Record grain crops this year are poised to push food prices lower across the board along with beef prices thanks to the surplus of corn for feeder cattle.
The only event of note on the calendar for Wednesday is the FOMC minutes for the July meeting. The rise of the hawks to prominence over the last couple of months suggests there were probably some heated conversations over policy during the July meeting. With the end of QE so close the next discussion topic is going to be the beginning of the rate hike cycle. Currently most estimates are in the first half of 2015 with the consensus calendar target moving ever closer to Q1.
The Fed's Jackson Hole conference begins on Thursday and Janet Yellen is going to be a featured speaker on Friday. With the equity markets starting to make new highs again there is always the possibility Yellen will try to pop the equity bubble like she did at the last post FOMC press conference when she said small cap and biotech valuations were stretched. She caught a lot of flak for that comment but the markets quickly shook it off.
The market appears to be Teflon coated with nearly every headline having only a minimal impact. Will it also shake off a concentrated attack by an increasingly bearish Yellen?
Apple Inc (AAPL) rallied another $1.37 today to close at $100.55 and a new historic closing high. The prior closing high was $100.30 on September 19th, 2012. The intraday high is $100.72 and it came within 4 cents of that level today.
The date of that last high is no coincidence. Apple shares typically rise to new highs ahead of their new product announcements and then decline sharply on a sell the news trade. The return to triple digit levels brought out the "double top" crowd claiming this was a sell signal for Apple shares. I am not in that crowd. I believe Apple shares will continue rising until the announcement, which is expected on September 9th according to Re/Code and others. That is a Tuesday and the date is still unofficial. The Mirror is projecting a release for sale on September 19th and MacRumors is also projecting the third Friday (19th), which is in line with prior launches. German carrier Deutsche Telekom has been telling retailers the iPhone 6 will be released on the 19th. Chinese web portal Tencent is also quoting the 19th as the release date after an announcement on the 9th.
If you own Apple shares I would be a seller on September 5th.
Do you really like McDonald's coffee or is it just a quick cup on the way to somewhere? If you are just dying for a cup of McDonald's coffee when you climb out of bed then get ready. McDonald's and Kraft Foods (KRFT) are going to start selling the McCafe brand of packaged coffee in grocery stores across the U.S. beginning in early 2015. It will come in 12-ounce bags and single-cup portions including K-cups. Pricing has not yet been disclosed. You will be able to satisfy your coffee cravings at will without waiting in line for a rude server to take your order. That assumes you don't force your significant other to make the coffee for you.
MCD shares are struggling to hold over support at $93 and today's coffee news failed to energize investors.
Home Depot (HD) reported earnings that rose +14% thanks to a strong rebound in its spring selling season. Earnings were $1.52 compared to estimates of $1.44. Revenue rose +6% to $23.81 billion and beating estimates of $23.57 billion. Same store sales rose +5.8% overall and +6.4% in the U.S. alone. Online sales surged an unbelievable 38% for the quarter. Purchases over $800 rose a whopping +20%. The store raised full year guidance from $4.42 to $4.52. That is the second bump this year with the initial forecast at $4.38. Full year revenue is expected to rise +4.8%.
The HD news powered the Dow component's shares to a +5.55% gain of $4.64 and was responsible for about +35 points of the Dow's +80 point gain.
PetSmart (PETM) said today it was planning on exploring a potential sale of the company. This came after activist pressure from several shareholders led by Jana Partners. PetSmart has a market cap of $7 billion and it is unclear who would be a potential acquirer. Jana Partners has reported a 9.8% stake in PETM. Jana called for a sale after what they said was "years of financial underperformance." PetSmart was founded in 1986 and has 53,000 employees with 1,340 stores.
After the bell PETM reported earnings of 98 cents that beat estimates by 4 cents. Revenue of $1.73 billion was in line with estimates. Same store sales fell -0.5%. Guidance for current quarter was 93-97 cents with analysts at 94 cents. Full year net sales are only expected to grow +2%.
SolarCity (SCTY) was downgraded by Robert W Baird to neutral from outperform because of its rising stock price and increasing competition from competitors. Apparently Ben Kallo, the analyst at Baird, failed to read the recent earnings report. Business is booming. They have more business than they can handle and the installed user base is exploding. They are buying a panel manufacturer and constructing a new plant in New Jersey just to keep up with panel demand. They expect to install 65 megawatts in Q3 and CEO Elon Musk said they would be installing gigawatts in 2015. Investors and analysts should bet against Elon Musk at their own risk.
Allergan Inc (AGN) disclosed it had approached Salix Pharmaceuticals (SLXP) on a possible merger to avert a hostile takeover by Valeant Pharma (VRX) and William Ackman's Pershing square Capital Management. Salix is currently in the process of merging with a unit of Swiss-listed Cosmo Pharma. Salix makes drugs to combat gastrointestinal disorders. Salix is merging with the Swiss unit of Cosmo in a tax inversion play. Shares of Salix spiked +15% on the news.
The Ebola epidemic is causing some really crazy headlines. In Liberia armed forces have been given "shoot on sight" orders for anyone seen trying to cross the border from Sierra Leone. The border was closed to prevent the spread of Ebola. The border has 35 "known illegal entry points" according to immigration authorities. The announcement came after residents of a slum near the capital broke into an isolation center and freed 30 Ebola patients. Some Liberians don't believe in the existence of Ebola and think the whole thing is a plot by the government to secure foreign aid. They took the 30 patients and hid them in homes where families will care for them. Obviously this kind of mentality is going to accelerate the spread of Ebola, which has now reached about 2,500 admitted patients and roughly 1,300 deaths. People with Ebola are starting to appear in other countries and the World health Organization said it could take six months or more to quell the outbreak and only IF they could halt travel from affected areas.
In Iraq the ISIS militants have posted some more videos on Monday showing pictures of beheaded Americans and promising to "drown all of you in blood" if the U.S. airstrikes continue. In the videos ISIS said it will attack Americans "in any place" if the raids continue.
Late Tuesday American journalist James Wright Foley was beheaded in a horrific video as a warning to President Obama. The journalist had been missing since Thanksgiving 2012 while working in Syria. He spoke into the camera before his death and gave an obviously coerced speech blaming America. ISIS militants said missing American journalist Steven Joel Soltoff will be killed next if the bombings don't stop. LINK
In Ferguson Missouri last night there were people carrying homemade ISIS banners and Muslim flags. There are numerous twitter feeds urging ISIS followers to travel to Ferguson and form bands to take the battle to America. They promise justice and equality under Shariah law that "you will never get under democracy." Some of the tweets are unbelievable and suggest the rest of the decade could see a lot more unrest even worse than Ferguson.
Headlines in the market are also out of touch with reality. One today started out "Dow flirts with 19,000..." Apparently the hyperbole is getting so out of hand they only missed that flirt number by 2,000 points. The Dow closed at 16,919 today and hardly close to 19,000.
The Dow is still -219 points below its closing high but the sprint over the last eight days has been dramatic. The low on the 7th was 16,333. The Dow has gained nearly 600 points in only 8 days. If this sprint continues to the 17,138 historic high it will be very overbought by the time it gets there and could have trouble pushing through that level.
The key levels for the rest of the week are 16,600 for support and 17,138 for resistance.
The S&P is also moving closer to its recent closing high of 1987.98, call it 1988. The S&P has already done the hard work and a retest of the highs appears to be a foregone conclusion. The big cap techs are leading the charge but the industrials are starting to join the party. The 1988 level is the key for the rest of the week with the psychological 2000 level the next hurdle. The S&P is up +78 points from the 1904 low on August 7th. Support is now 1945.
The Nasdaq broke out to a new 14-year high and shows no indications of slowing. In the winners and sinners list below the winners far outpaced the sinners and Apple is not even in the list. Semiconductors and biotechs are leading the Nasdaq charge.
Support is now 4440 and well below today's close. The prior high at 4485 could now be support but we won't be sure until it is tested.
The NDX encountered light resistance at the close at 4040 after breaking over round number resistance at 4000 on Monday.
The Russell 2000 is the laggard in this parade. The Russell is still below decent resistance at 1165 and well below the highs at 1210. Unless the small caps pick up the pace they could send the wrong signal to the market.
The S&P futures dropped slightly when the ISIS beheading video was released but I don't think that headline will produce any lasting damage to the market. We are all sorry it happened but this is a war. It may not be on our shores, yet, but it is a war and ISIS is far more dangerous than al-Qaeda. The signs in Ferguson are just a hint of what is to come.
The market is very good about ignoring these kinds of events. Lately they have been ignoring a lot more serious events like the Russian invasion of Ukraine, Israel and Gaza and the resumption of bombing in Iraq.
We should be due for some light consolidation ahead of the Fed conference in Jackson Hole but if Yellen gives another dovish speech we could be off to the races again. If she puts on her bear coat and tries to talk down equities it could be an entirely different outcome.
Enter passively, exit aggressively!
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