That headline is true but only barely with the S&P closing at 2000.02 and it was a struggle at the close.
The S&P is struggling to move over that 2000 level but at least it has not been reactive for sellers. As long as it keeps holding there it will eventually move higher. The markets should have been strong today after the economic reports this morning.
Durable goods orders for July were a blowout with a +22.6% gain compared to estimates at +6.9% and the +0.7% rise in June. The driving force was a +318% increase in nondefense aircraft orders. Excluding transportation orders the index fell -0.8% and core capital goods orders fell -0.5%.
Durable goods shipments increased +3.3% in July. Nondefense shipments rose +3.4% and core capital goods ex-aircraft rose +1.5%. In theory this will be good for Q3 GDP.
Defense orders continued to decline with a -15.3% drop and the second double digit decline in three months. Orders were strong earlier in the year so this is just a cycle problem. The government's fiscal year starts on October 1st so agencies are probably out of money until the next budget year begins in October.
Transportation goods orders rose +74.2%. Orders for vehicles and parts rose +10.2% while transportation shipments rose +7.9%.
The headline gain of +22.6% is just a one month blip thanks to the orders from the Paris air show. Even though this was a one month blip it will dramatically impact the Q3 GDP.
The Richmond Fed Manufacturing Survey rose from 7 in July to 12 in August. That is the highest reading since March 2011. Manufacturing in the Richmond area is on the verge of breaking out of a multiyear consolidation. The new orders component rose from 5 to 13 and the backorders component shot up from zero to 15. Employment declined slightly from 13 to 11 but the average workweek component rose from 3 to 8 suggesting they will be hiring new workers soon. The expected average wage component rose from 23 to 28. Capex spending plans rose from 19 to 27 and that is bullish. It means manufacturers are confident enough about the future they are willing to invest new money. Over the last several years companies have been hesitant to invest money because of economic and political uncertainty.
The corresponding services survey Revenue Index rose from 12 to 21. The gains were driven by retail sales more than the services component. All seven retail sales components posted gains. The component for big ticket items soared with a jump from zero to 28. Shopper traffic rose from 35 to 48.
These were bullish reports and the market should have been excited. While it may mean the Fed could raise rates sooner than expected it would be for the right reason of accelerating growth.
The Texas Service Sector Outlook for August was nearly unchanged with a rise from 22.4 to 22.8. The internal components posted minor changes with employment the only hot spot with a rise from 4.6 to 13.2. The outlook for Texas was flat.
Consumer Confidence for August rose from 90.3 to 92.4 and nearly a seven-year high. Confidence has accelerated to the upside over the last year and this bodes well for the economy. The present conditions component rose from 87.9 to 94.6 and the expectations component declined slightly from 91.9 to 90.9. The percentage of respondents that felt jobs were plentiful rose from 15.6% to 18.2% and that is a huge jump. Those planning on buying a car rose from 12.3% to 12.9%. Home buyers rose from 4.6% to 4.9% but appliance buyers declined from 48.7% to 45.7%.
The economic calendar for the rest of the week is highlighted by the Q2-GDP revision on Thursday and the ISM Manufacturing on Friday. With volume declining every day there won't be many traders around to react to those reports when they come out. That can be good or bad since a low volume market can be volatile if the news is dramatically different than expectations.
Stock news was also pretty slim. The Burger King (BKW) merger with Tim Horton (THI) for $11 billion is now confirmed and if approved will create a $22 billion company with 18,000 stores in 100 countries with sales of $23 billion. Burger King will get a popular breakfast lineup and a cheaper maximum tax rate. The maximum in Canada is 26.5% and they don't tax earnings that are made overseas unlike the USA. BKW earns 40% of its revenue and earnings overseas and that cash is trapped overseas unless BKW wants to bring it back and pay taxes on it.
Warren Buffett went against President Obama by lending Burger King $3 billion to help finance the transaction. Buffett had previously supported the president's anti-inversion campaign. Apparently making money is still important and Berkshire will end up with $3 billion in preferred stock with a 9% dividend out of the deal.
Only two days into the BKW/THI deal and already Moveon.org is sponsoring a petition to scuttle the "Whopper Tax Dodge" and institute a boycott. MSNBC hosts are also calling for a boycott and trying to get burger buyers to switch to Wendy's. On Twitter the #BoycottBurgerKing movement is gaining steam. The thing about boycotts is they don't last. The movements may sound like a good idea to the organizers but they tend to rise and fall quickly. A month from now nobody will remember it.
On the surface analysts and investors like the deal with the shares of both companies rising.
Amazon (AMZN) gained +8 after announcing the purchase of the streaming game website Twitch. The all cash deal for $970 million came after a potential acquisition by Google fell apart. Twitch said they chose Amazon because "they believe in the Amazon community and they share our values and long term vision. They want to help us get there faster." Google wanted to put the Twitch platform under the Google brand and stream the games on YouTube. Users revolted over the potential connection and complained loudly. The Twitch app allows millions of gamers to watch games streamed by over one million hard core gamers. There were 55 million watchers in July. By watching a pro player you can learn the tips and tricks of your favorite game and that makes you a better player. Twitch streams billions of minutes a month and has a rabid following.
The Twitch website has had trouble keeping up with the millions of live streams and Amazon is exactly the instant fix for that with the largest cloud on the planet. Amazon began developing games in 2012 but has yet to produce any heavyweight crowd favorites. They have hired the developers from successful games like Portal and Killer Instinct so they are working on building a portfolio of crowd pleasers.
This was a good deal for Amazon and a good deal for Twitch. Jeff Bezos needs to attract the younger crowd to Amazon because they will eventually turn into shoppers. They will also buy games when Amazon begins to turn them out in volume.
Best Buy (BBY) lost -7% after reporting revenue that declined -4% to $8.89 billion and missing estimates for $8.99 billion. Earnings of 44 cents easily beat estimates of 31 cents but that is where the good news ended. Same store sales declined -2.7% and operating margins fell from 4.5% to 2.7%.
The retailer warned that same store sales would decline in low single digits for the rest of the year and operating margins would continue to shrink due to higher sales of low margin items and strong discounting in Canada and China. The company said sales by online retailers were impacting margins and revenue.
In a recent Nielsen survey 42% of respondents said they would likely buy TVs and cameras online, up from 15% a year ago. Best Buy announced a plan last year to match the lowest prices offered by local and online retailers and that hurt margins. Industry wide consumer purchases of TVs and desktop and notebook computers declined -2.5% in the quarter.
The CEO said he does not expect a "huge lift" from "phones released this year" because so many consumers already have high end phones and contracts. Best Buy is also unsure how much inventory it will receive. As a result they guided for lower sales the rest of the year. He did not specifically mention iPhone but that was the clear topic of the conversation. The CFO said about the lowered expectations "We don't live on wishes and hopes." Shares declined -7% on the news.
Smith & Wesson (SWHC) shares fell -10% after slashing sales forecasts to a range of $530-$540 million, down from $585-$600 million. Projected profits will be 89-94 cents, compared to $1.30-$1.40 in the prior forecast. The company cited high inventory levels and sluggish summer sales. The company said sales of "modern sporting rifles" had seen a drop in demand. That term is the new industry standard for the AR-15 style rifle. Prices have dropped from $1500-$2000 early in President Obama's first term to $600-$700 for the base model today. Price volatility is huge whenever the president makes antigun comments or threatens new rules. He has been called the greatest gun salesman ever. Ruger Firearms (RGR) fell -$3 on the S&W news.
Apple (AAPL) shares declined slightly on the Best Buy phone comments but still closed over $100. The weakness is probably going to be minimal because investors will continue to expect a huge product announcement in September. An Apple supplier said they were starting work on a new 12.9 inch iPad that will be released in 2015. Apple currently makes 9.7 inch and 7.9 inch iPads. Reportedly Apple has been working with suppliers for at least a year to develop a new range of larger touch screen devices. With iPad sales declining it is due for a refresh. The larger screen device could take on more tasks currently done on a notebook or laptop computer. Corporations are expected to be big buyers of the larger devices.
The S&P closed over 2000 by the smallest of margins at 2000.02 after trading just under the 2000 level in the seconds before the close. This is a psychological level and not a real technical event. The real resistance is still well above at 2025-2030. However, psychological levels still matter. The difficulty the S&P has had this week with making any gains over 2000 is evidence there are sellers taking advantage of this milestone to take profits.
At the same time there has not been a rush to sell. I expected at least a minor decline once that 2000 bell was rung and that did not occur. It still might happen since we are struggling to extend the gains but the lack of selling suggests we could be going higher.
Volume yesterday was the lowest non-holiday volume of the year at 4.2 billion shares and today was not much better at 4.4 billion. The closer we get to the weekend the lower the volume will be. The indexes are likely to stagnate and be subject to the whims of hedge fund program trading. They would love to cause a low volume 20 point run on the S&P in either direction but I seriously doubt they will be able to accomplish that. More than likely the markets will continue to creep higher without any material headlines to drive the market.
However, that long streak of green candles over the last two weeks is begging for some profit taking. That could happen at any time but more than likely after Labor Day.
The Dow rallied to a new intraday high at 17,153 but could not hold it. The record close was 17,138 and it could not hold that level either. The multiple bands of converging resistance at the 17,110-17,150 level are strong and the Dow is over extended from its August rebound. Like the S&P the string of green candles needs a dose of red at the top before we surge too much higher.
The Nasdaq is the index with the superiority complex. The tech index just keeps clawing its way higher and every little intraday dip is bought. Actual resistance on the Nasdaq is just over 4600 but it has the same need for some profit taking as the S&P and Dow. The biotechs are powering the recent move but they are being helped by other sectors as well. The buyers are maintaining a bid just under the market and every dip is bought. Support remains 4515.
The Russell 2000 made a critical move today. The index spiked above strong resistance at 1165 on Monday but fell back to close right on that level. Today the Russell opened strong and never looked back to close at 1175. This breakout over 1165 is very bullish. The next material resistance is the old high at 1208. If the small caps are rising again the bulls are back.
People keep asking what is pushing stocks higher. The answer is simple. The Fed is still injecting $25 billion a month into the market and the yields on bonds are still ridiculously low with the ten-year at 2.39%. Add in the rising dollar and falling markets overseas and we are the only market in the world worth investing in today. Overseas funds are flowing in and the Fed is still making sure there is no alternative to stocks.
Obviously this is eventually going to come to a screeching halt but probably not until later this year. There will come a day of reckoning but if the economy accelerates there may be a new reason to buy stocks and that would be rapidly rising profits.
Enter passively, exit aggressively!
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