Market sentiment turned on a dime after Fed expectations turned more dovish.
So many excuses, so few facts. The reasons for the market rebound today could fill a thousand word essay. The short list includes a sudden liquidity injection by the People's Bank of China, new surveys and commentary claiming Janet Yellen will not change the language in the FOMC statement along with the end of the cash raise period ahead of the Alibaba IPO.
The People's Bank of Japan injected 500 billion yuan into the top five banks. This targeted QE represented 100 billion to each of the top five banks and has a duration of three months. This is what China calls a Short-Term Lending Facility (SLF) and is the equivalent of a short term QE program and it was unannounced. This came after the Manufacturing PMI fell to 51.1 for August and their GDP estimates slipped to 6.9%.
Multiple surveys of analysts and economists over the potential FOMC statement suggested the furor last week about a language change was a tempest in a teapot. The CNBC survey of 37 analysts found only 41% expected the language to change on Wednesday. Another 24% expected it in October, 24% in December and 11% in January.
Fed reporter Jon Hilsenrath said the Fed will probably keep the "considerable time" language in the policy statement but would likely qualify those words with some additional language. Since the words are tied to the current QE program that is expected to be terminated at the October meeting they will have to change the language in October in some form.
Lastly the period where investors could sell stocks to raise cash before the Alibaba IPO has ended. In order to be sure you had settled cash in your account on Thursday you would have to have sold before the close on Monday. The next big impact from the IPO will be investors putting that cash back into the market if they did not receive any BABA shares from the IPO. This could produce a market bounce on Friday and Monday assuming there are no other headlines.
The only economic report of note was the Producer Price Index (PPI) for August. The headline number was flat at zero after rising +0.1% in July. The core rate, excluding food and energy, was also zero and that was the first time in five months that the core rate did not rise.
Final energy goods declined -1.5% after falling -0.6% in July. This was the 6th decline in seven months. Intermediate unprocessed goods declined -3.3% and core unprocessed goods declined -5.9%. Oil and gasoline prices have been declining for the last three months and oil has hit levels that should be strong support. This suggests the decline in producer prices should be moderating.
The calendar for tomorrow is of course headlined by the FOMC statement at 2:PM and Yellen's press conference at 2:30. At this point the consensus is calling for no material change in the statement and possibly some further dovish comments to put investor minds at ease and take the pressure off rising rates.
The Consumer Price Index (CPI) and NAHB Housing Market Index will be the morning events.
Fedex (FDX) will report earnings before the open and that is normally seen as a proxy for the economy when they update guidance.
The change in outlook for the Fed statement caused a sharp decline on the dollar at 11:30 and commodities rebounded strongly on short covering. Crude oil gained +2% and copper +2.4%. The liquidity injection into China banks was also in play suggesting China was going to do whatever necessary to stimulate their economy.
Chinese e-commerce company Alibaba.com IPOed yesterday with shares soaring +122% to $3.87, up from the issue price of $1.74. Demand for the IPO was strong with the 858.9 million share offering more than 257 times oversubscribed. Alibaba said its share sale was the biggest technology IPO since Google in August 2004.
If that preceding paragraph seems strange in light of the headlines over the last two weeks then you have been paying attention. That was the news headline when Alibaba went public in November 2007 just before the financial crisis. The listing was on the Hong Kong stock exchange. Jack Ma took the company private again in June 2012 when Alibaba bought back all its shares at the IPO price, which was a 45.9% premium over the closing price when the buyback was announced. Jack Ma said the depressed share price had an adverse impact on its reputation with customers. Alibaba paid $7 billion at the time to buy back 20% of itself from Yahoo.
Fast forward to 2014 and Alibaba just raised the price range for Friday's IPO to $66-$68, which would raise about $22 billion. However, if underwriters exercise the 48 million share overallotment option, which is almost guaranteed, it would boost that to $24.3 billion and overtake the Agricultural Bank of China $22.1 billion IPO in 2010 to be the largest IPO ever.
After the bell Adobe (ADBE) reported earnings of 28 cents compared to estimates for 26 cents. Revenue of $1.01 billion was just below estimates of $1.02 billion. They said Creative Cloud subscribers rose to 2.8 million, up +506,000 from the prior quarter. Their guidance for the current quarter was revised to 26-32 cents and analysts were expecting 31 cents. Revenue would be $1.03 to $1.08 billion and analysts were expecting $1.09 billion. Shares declined after the news.
Rackspace Hosting (RAX) fell -16% after the close when it said it decided to stay independent after a strategic review of the alternatives. The company also named the current president Taylor Rhodes as its new CEO. Back in May Rackspace shares rallied +17% on news they were exploring alternatives including a sale. Analysts believe Rackspace was unable to find a buyer in that highly competitive market.
Casino stocks fell again after Morgan Stanley warned the conditions in Macau could get worse. The analyst just returned from a fact finding trip to Macau and he said Macau casinos have not yet found a bottom. FBR Capital said Macau gambling revenue was on a trajectory for a fourth straight monthly decline and its first quarterly decline in years. Additionally a casino smoking ban goes into effect in October and China and Asia populations are still heavy smokers. This will limit time in the casinos by smokers and therefore limit gambling. Shares of LVS fell another -1.6% and MGM -1.7%.
Humana (HUM) shares rallied +3.7% after they said they replaced a $1 billion share buyback with $700 million remaining with a new $2 billion buyback program through 2016. They also announced a $1.75 billion debt offering with $1 billion of that to be used to buy back $1 billion in shares by June 30th 2015 out of the $2 billion authorized.
Apple (AAPL) shares fell slightly after news broke the iPhone 6 would not be available in China until next year because it has not yet received government approvals in that country. Apple still expects to launch in 115 countries by the end of 2014. Apple said iPhone sales over the weekend were more than 4 million units and a record but that was below some analyst estimates. Website issues and the shipping delay may have caused some users to abort their buying effort. Apple still says they will have phones in retail stores this weekend. In the prior two releases they sold 9 million phones in the first weekend the phones were actually available. Apple shares are threatening to fall below uptrend support but so far they have avoided the dreaded post announcement drop. Until they move under $98 the trend is still positive.
Teekay Tankers (TNK) rallied +10% after Deutsche Bank initiated coverage with a buy rating.
ViMicro (VIMC) rallied another 24% to $8.25 after raising estimates last week. Shares were up +14% on Monday. The company provides video surveillance products in China and the USA.
UPS said it was hiring 90,000 to 95,000 temporary workers for the holiday shopping season. This compares to 55,000 hired in 2013 and the 333,000 current employees. The company said it was also adding thousands of additional trucks, trailers, aircraft and portable loading aids for the holiday period. The National Retail Federation has predicted online sales will rise 9-12% and more than the 4.1% increase expected at retail stores. Online sales rose +9.3% in 2013. Obviously margins are going to suffer but they are expecting an even larger burst of holiday packages this year.
Boeing (BA) and SpaceX will split a $6.8 billion award from NASA to build a space taxi and return the U.S. to manned space flight. Boeing will receive $4.2 billion and Elon Musk's Space Exploration Technologies Corp, commonly known as SpaceX will receive $2.6 billion. The companies are expecting to have a working model by 2017. Currently the U.S. pays Russia about $70 million a seat to send U.S. astronauts to the space station on Russian vehicles. It is entirely possible that Russia could announce at any time we are no longer selling seats in retaliation for the sanctions over Ukraine.
SpaceX has a 7 person Dragon V2 capsule that is capable of landing anywhere on earth with the "precision of a helicopter" according to their publicity info. Boeing also has a 7 passenger CST-100 vehicle that has roots in the Apollo missions.
NASA said it would continue to work with other vendors including Blue Origins, which is backed by Jeff Bezos. The problem with these various vehicles is that they are either powered by unproven rockets in the case of SpaceX or Saturn 5 rockets using Russian rocket engines. This is another challenge since Russian rockets are no longer available. The SpaceX Falcon 9 rocket exploded during an August 22nd test. Bezos company Blue Origins is competing to replace the Russian rockets currently in use.
Allergan (AGN), Valeant (VRX) and Bill Ackman's Pershing Square settled a court case today that attempted to halt the special shareholder meeting in December. Now that the meeting is definitely scheduled and the roadblocks for Ackman and Valeant have been removed it is up to Allergan to find some other way to block the takeover by Valeant. About the only option left is for Allergan to buy somebody else really quick to make the Valeant acquisition less affordable for Ackman and Valeant.
Allergan is pursuing separate litigation against Ackman to prevent him from voting his 9.72% stake. Allergan claims Ackman violated insider trading securities laws by joining with Valeant in the takeover attempt. An announcement by Allergan of a pending acquisition is going to crater the stock if it takes the Valeant bid out of play. January put prices are huge because of this possibility.
Endo International (ENDP) made an unsolicited offer of $2.2 billion for Auxilium Pharmaceuticals (AUXL) after the close. The offer values AUXL at $28.10 per share and includes the assumption of their debt. AUXL is suffering from the bad press testosterone therapies have been receiving. Their Testim gel sales are falling and they said they would cut 190 jobs earlier this month. That is 30% of their workforce and part of a plan to save $75 million a year. Endo is transforming itself from a drug company to a drug and medical device maker and has spent about $4.5 billion on acquisitions in recent years. Shares of AUXL rose to $30 in afterhours from the $21.52 close.
It was an interesting day in the market with the major rebound beginning about 11:15 when the Jon Hilsenrath comments hit the wire. From that point on it was straight up until 1:30 and traders began to worry about the analysis of the Hilsenrath comments. Those with alternate views began to share them and the rally faded. The S&P hit 2002 intraday and right back to within 5 points of its closing high.
The selling from last week has been completely forgotten and it should remain a distant memory IF the Fed doesn't spoil the party with a hawkish statement change at 2:PM on Wednesday. The bears that loaded up on shorts last week hoping for a Fed induced correction were squeezed once again and a positive statement from Yellen could send stocks to new highs and cause fund managers to hold their nose and chase them higher.
Support at the 1980 level was rock solid on Friday and Monday and it was touched briefly again this morning. This three day basing should be enough to convince large cap investors the next move is going to be higher, Fed permitting.
The Dow traded up to a new high at 17,167 intraday but faded to close at 17,131. That was only 7 points away from a new closing high. Clearly the Dow is poised for a sprint to higher highs if the Fed retains its dovish posture.
The converging resistance at 17,131 to 17,150 was briefly penetrated but returned before the close. Support on Friday was 16,950 and 17,000 returned as support today.
Only one Dow component was negative today and that was Nike.
The Nasdaq crash on Monday broke strong support at 4550 and today's rebound barely returned the index to that level with a close at 4552. At any other time I would be warning of a continued move lower. However, I am convinced the sell off was a result of the cash raise for Alibaba shares. Everyone that does not receive shares on Friday morning is going to be putting that cash back into the market and those same tech shares that declined on Monday will be back in favor a couple days from now. At least that is my opinion and I am sticking with it until proven wrong.
On a purely technical basis and ignoring all the external events like Alibaba and the FOMC meeting the Nasdaq chart is bearish. Technicians always claim all the current events are already priced into the charts. If that is the case the Nasdaq is in trouble. We will know for sure next Monday if that unspent cash does not come back into the market.
The Russell 2000 chart is bearish as well. The Russell posted a minimal rebound today but it is still a lower high and lower low. The prior support at 1146 did not hold and the Russell dipped to 1141 at the open. The lack of a meaningful Russell rebound is negative for broad market sentiment.
Based on the Russell chart I would have a bearish bias. Small caps typically lead in both directions and they are pointing lower.
The Russell is one day away from a death cross where the 50-day average crosses under the 200-day average. That is typically a sell signal for fund managers.
I am seriously conflicted tonight. With the negative chart patterns on the Nasdaq and Russell 2000 I should have a negative bias. The new high on the Dow and strong rebound on the S&P suggests a big cap breakout ahead. When small caps and large caps disagree I would normally go with the small caps. This is a troubling conundrum. The wild card is the Fed and then the Alibaba IPO disrupting cash flows.
I would NOT be an aggressive buyer or seller of stocks over the next three days. Let's wait for the situation to play out and then follow the market.
Enter passively, exit aggressively!
Send Jim an email
Click the advertisement below for a free trial to the Ultimate Investor newsletter.