Oil prices collapsed today and nearly took the market down ahead of Thursday's OPEC meeting.
Crude oil rose to $76.50 at the open on hopes for a production cut when OPEC meets on Thursday. The rally did not last long once the Rosneft CEO said a drop in Brent prices to $60 would not cause Russia to cut production. There had been rumors that Russia was willing to join with OPEC on a joint production cut so the comments quickly ended that speculation.
Russia produces 9.0 mbpd and given the drop in oil prices they are losing a lot of money that Putin depends on to fund his military aggression and pay the government's bills. Every day Russia loses $315 million dollars because of the drop in crude prices from the June levels. If you do the math that is roughly $2.2 billion a week. That would buy a lot of military arms, ammo and vodka.
A week ago analysts were evenly split on the chance for a production cut but that has moved to favor a cut today. OPEC is expected to either "announce" a 1.0 mbpd cut or claim they are going to enforce existing quotas of 30.0 mbpd, which would be about a 900,000 bpd cut. Neither option will actually reduce the amount of oil because OPEC cheats on production. They will claim one thing and do another. They need the money and with prices so low they actually need to produce more to offset the lack of revenue.
If they were to announce some sort of coordinated action with Russia and Mexico as has been rumored the price of crude would go ballistic on Friday in a thin market.
The drop in oil prices erased the opening gains in the equity markets but by noon stocks were rebounding back into positive territory. Helping to push them higher was a strong bounce in the Q3 GDP. The first revision of the Q3 number rose from 3.55% to 3.9%. That is still below the huge snapback to +4.59% in Q2. If you average the last four quarters of 3.5%, -2.11%, 4.59% and 3.9% to erase the impact of the polar vortex you get a trailing GDP of 3.29% and that is not bad.
However, the estimate for Q4 is only +2.7%. The range of estimates is from 1.2% to 4.2% so there is a significant difference of opinion. Some examples are Deutsche Bank at 4.2%, Goldman Sachs 2.7%, Morgan Stanley 1.7% and Moody's 1.2%.
Q3 revisions were negative for the Q4 outlook. Inventories were revised higher and import/exports were revised lower. Profits rose only +2.1% after rising +8.4% in the prior quarter. However, consumer spending rose from 1.2% to 1.5% in the revision. That was still lower than the +1.75% in Q2.
If the Q4 consensus at +2.7% is correct then the Fed will continue to remain on hold for the foreseeable future. They will worry that the European weakness is weighing on the U.S. economy and they will want to see a couple quarters of above trend growth before hiking rates.
One indicator moving in the opposite direction was consumer confidence for November. The headline number fell from 94.5 to 88.7 and a five-month low. Analysts had been expecting a rise to 97.8. The present conditions component declined from 94.4 to 91.3 and the expectations component declined from 93.8 to 87.0. More than 17.6% of respondents said they saw weaker business conditions over the next six months. That also dimmed expectations for employment. Only 16% of respondents felt that jobs were plentiful.
The decline in confidence was unexpected and especially so since gasoline prices have declined about 50 cents over the last six months. If consumers are losing confidence then the holiday shopping season could fall flat.
Another shocking report was the drop in the Richmond Fed Manufacturing Survey. The headline number fell from October's 20 to 4 for November and the biggest monthly decline in 8 years. New orders collapsed from 22 to 1 and the biggest drop in a decade. Backorders fell from 9 to contraction territory at -2. The only component to rise was inventories from 15 to 20 and that is negative for future growth. The gap between new orders and inventories fell from +7 to -19 and deep into contraction and the largest drop on record. Capex spending plans declined from 25 to 17 and that is down from a high of 38 in September.
This was a significant change in direction and outlook for the Richmond region. They blamed the stronger dollar for weakness in exports and the drop in new orders. The corresponding services survey fell from 27 to 25 and showed that the weakness was only in manufacturing.
The sharp drop in the Richmond Fed survey sent investors running to the bond market. The yield on the ten-year treasury fell to a five-week low at 2.26%. There were some huge block trades to break below the support at 2.3%. One analyst theorized fund managers that had strong gains in the equity market were moving money to treasuries with equities at record highs and the year coming to an end.
After the bell Hewlett Packard (HPQ) reported earnings of $1.06 that was in line with estimates. However, revenue of $28.41 billion missed estimates of $28.76 billion. The guidance for Q4 was for 89 to 93 cents and analysts were looking for 93 cents. For 2015 the company guided for earnings of $3.83-$4.03 compared to estimates for $3.73 so that was very positive. Shares immediately declined to $36 from the $37.83 close.
Who knew a store full of tourist novelties and some greasy country cooking would suddenly be an investor favorite. Cracker Barrel Old Country Store (CBRL) spiked +3% to a new high after posting earnings of $1.42 per share compared to estimates for $1.29. Revenue rose +5% to $683.4 million. Same store sales rose +3.3% thanks to lower gasoline prices that boosted highway traffic. More than 85% of their stores are on interstate highway exits. They raised full year guidance to a range of $5.95-$6.10 compared to prior guidance of $5.80-$5.95. Analysts were expecting $6.02. The company expects to serve 1.4 million meals for Thanksgiving using 24,000 cases of turkey breast. I stop there whenever I am traveling for a decent meal and books on CD to make the drive go faster. If you buy them at one store you can sell them back at another store once you have listened to them. It is as cheap way to pass the time and a novel marketing idea to get repeat traffic for Cracker Barrel.
Tiffany (TIF) posted +4% rise in same store sales but the rest of the earnings were lackluster. Sales in the U.S. rose +10% but sales in Japan fell -12%. Tiffany reported adjusted earnings of 76 cents compared to estimates for 77 cents. Revenue of $959.6 million also missed estimates of $968.9 million. The company cut full year guidance because of the strength in the dollar. Revenue is expected to rise mid to high single digits compared to high single digits in the prior guidance. Since they missed on earnings and revenue and cut guidance you would have expected the stock to decline. However, shares rallied 2.5% on the news.
Tivo (TIVO) reported earnings of 6 cents which missed estimates of 7 cents. Revenue was in line with estimates. Shares declined about 20 cents in afterhours.
Ctrip.com (CTRP) reported adjusted earnings after the bell of 36 cents on revenue of $347 million. The only estimate I could find was 21 cents, which would mean a huge beat but the stock crashed -3.50 after the report.
Analog Devices (ADI) a maker of analog communication chips reported earnings of 69 cents compared to estimates for 68 cents. Revenue rose to $814 million. They guided for revenue in the current quarter to rise +21% to a range of $745-$775 million. The board approved a 37 cent dividend to be paid on December 16th to holders on December 5th. Shares rose more than $1 in afterhours.
After the close the CEO of Herbalife said he was executing 750,000 options that were due to expire in December. The value of the stock at today's close would be about $31.5 million. This could be viewed as vote of confidence in Herbalife. Michael Johnson said he would hold the shares except for those required to pay transaction costs and taxes. Herbalife shares rallied about $2 on the news but then gave it all back.
Twitter (TWTR) was rumored to be in acquisition talks with Shots.com, a selfie sharing social network for Android and iPhones. Shots is backed by Justin Bieber. The app only allows the user to use the front view cameras and you can only take pictures through the app. You can't upload pictures previously taken that exist on the camera. Users can send messages directly to other users.
After the close Hain Celestial (HAIN) announced a 2:1 stock split payable on December 29th to holders of record on December 12th. Shares were up +$1.50 in afterhours. The $109.30 level has been resistance and shares were trading at $110 in afterhours. If it breaks out over $110 I think we could see some short covering and possibly a split run.
The market rally stumbled on the Richmond Fed Manufacturing Survey, the drop in consumer confidence, the sharp uptick in GDP and falling oil prices. The GDP spike brought back worries about the Fed and rate cuts but the Richmond disaster immediately ended those worries and sent cautious investors into treasuries instead of equities.
When oil prices crash it knocks out one of the biggest sectors in the S&P at 11%. With energy down the S&P will always struggle to make any real gains. With oil down -2% for the day that was a huge anchor for the S&P.
Add in the confusion over the economic numbers and the very low volume in a holiday week and there just was not enough buyers to propel the market higher. We were fortunate the declines were not worse. The Nasdaq big caps continued to lead but they closed well off their intraday highs with only a +4 point gain. The Dow lost -3 points and the S&P gave back -2 points. You could hardly call is a landmark day. Even the Russell 2000 traded flat with only a 0.6 point drop. When the Russell is perfectly flat you know there was no volume and no sense of direction.
The S&P extended its record to 28 consecutive daily closes over the 5-day average. That is the most dating back to 1928 when records began. This is eventually going to bite us in the tail when the trend finally ends. We are setting up for a serious dip at some point in the future. Those kinds of gains typically retrace very quickly when the dive klaxon sounds.
There are rarely any major moves to the downside in Thanksgiving week. This is also month end so the bias should remain to the upside. Once into December we could hit a minefield. I still believe fund managers will chase prices over the next couple weeks but they could be overwhelmed if the market trips over some more economic headlines.
The S&P has used 2,065 as support for the last two days so that is our first warning signal if that level breaks. The 2,035-2,040 level would be backup support but I doubt we will see that this week or early next week because of the month end bias.
The Dow ran into resistance at 17,850 for the last three days and came to a dead stop. There is a pattern of slightly higher lows so there are some buyers nibbling on the dips but the resistance is strong. The Dow was handicapped by losses in Exxon and Chevron as well as Goldman and Home Depot. Visa and United Technology helped to overcome those losers.
Intraday support is close at 17,800 with the likely target for the next several days at 18,000.
The Nasdaq 100 squeezed out a minor gain of +4 points to continue leading the broader market. The index hit round number resistance at 4,300 at the open and was immediately knocked back to 4,280. While the spike was sold the dip was also bought and traders fought it out in a 9 point range the rest of the day.
The same story is true for the Nasdaq Composite with another minor gain to a 14 year high. The 4,800 level is the target for the next several days and could be round number sentiment resistance. The gain since the October lows is continuing but the breadth is shrinking. Fewer stocks are participating. Real support is well back at 4,650 so any material selling could knock off a lot of points in a hurry.
The Russell 2000 managed to punch through resistance at 1,180 last week and then stalled at the prior week's high at 1,188. That level may have caused a problem today but I think the next move higher takes it out. I was very encouraged that the Russell held its gains today. That could be a positive sign for the rest of the week. Support is now the prior 1,180 resistance level.
The next two days are historically bullish. Nothing is guaranteed but retail investors tend to shop in the market on these days instead of at the malls. Early next week there should be a positive bias because of month end money but after Tuesday I would expect some profit taking.
Black Friday weekend is expected to lure 140 million shoppers to the malls. Analysts are expecting the best shopping holiday in 3 years. The National Retail Federation is expecting a +4.1% rise in holiday retail sales and the biggest increase since 2011.
Macy's, JC Penny, Walmart and Best Buy will start their holiday specials Thanksgiving afternoon. Best Buy will offer a Samsung 4K super HD 55 inch TV for $899, down from $1,400.
Forty-six million turkeys will be consumed this weekend out of 235 million for the entire year. Doctors warn that eating turkey and drinking wine is a fatal combination if you are driving home immediately after. The combination causes severe drowsiness.
The average person will consume about 3,000 calories at the actual Thanksgiving meal and another 1,500 on snacks and drinks before the meal. Anyone going back for seconds later in the day can pack on another 2,000 calories. That is 6,500 calories and 45% of them come from fat. With that kind of calorie intake everyone needs to go walk the malls over the weekend. A 155 pound person walking at a leisurely 2.5 mph window browsing pace burns about 200 calories an hour. That means you need to shop for 32.5 hours to burn off those 6,500 calories.
Enter passively, exit aggressively!
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