The market gave traders a volatility headache with the Dow dropping -99 at the open rebounding to +246 midday and then crashing back to close at -112. That is fine if you were day trading but terrible for investors.
You can blame today's volatility on Russia. The ruble has turned into rubble despite extreme measures by the Russian central bank. Russia is in a full blown currency crisis. After a -10.5% decline on Monday the ruble fell another -19% intraday today. This came despite the central bank hiking interest rates +6.5% to 17% and the injection of $80 billion in a failed effort to support the ruble. The next step in this scenario would be capital controls to prevent money from leaving the country or being converted into dollars or euros. The central bank pushed 3.1 trillion rubles into the banking system using 7 day repos in the second biggest auction since May.
The ruble has fallen from 38 to the dollar to a low of 80 to the dollar at Tuesday's lows. The value of the ruble has fallen -52% this year alone with a -14% drop this week alone. The -49% drop in oil revenue is a killer for the Russian economy. Russia gets 65% of its revenue from oil and the budget is based on $100 oil so they are in a world of pain. The central bank said the Russian economy could decline -4.7% in 2015 if oil prices remained below $60. Net capital outflows for 2014 could reach $134 billion and twice last year's total.
Traders said there were no bids to buy rubles and the decline was likely to continue. Multiple currency dealers halted trading in rubles because of the wild swings.
Apple halted sales of iPhones in Russia because of the currency decline. The online website disappeared and was replaced with a one line message saying "we will be back" and no other information.
Companies with operations in Russia could be expected to report significant hits to earnings as a result of the currency fluctuations. Those companies and their annual revenue from Russia include GM $7 billion, Pepsi $5 billion, Ford $3 billion, Mcdonalds $2.5 billion, John Deere $1.7 billion, Mondelez $1.2 billion, Citigroup $1.0 billion, Abbot Labs $525 million and Visa $471 million. Obviously that list only scratches the surface but suffice to say Russia is going to cause a significant ripple in the Q4 earnings stream.
The sharp decline in the ruble means far less exports into Russia and falling consumer sales as prices are hiked to offset the cheaper currency. With the ruble falling -52% in value over the last year that means the cost of imported goods doubled over the same timeframe because it now takes twice as many rubles to buy the same product. Raising interest rates to 17% is also going to be an extreme drag on business conditions inside Russia. With your money worth 50% less and interest rates 300% higher than a few months ago the Russian economy is going to implode.
This is going to be a significant hit to European countries with large imports into Russia. German is their biggest trading partner and this will be a devastating blow to the German economy. Europe's economic slide will accelerate with the flow of goods into Russia declining to a trickle.
Visualize the European map with Russia as a large economic sinkhole that is expanding around the edges into Europe. With Europe's economic woes increasing there is a much better chance that this will eventually drag the U.S. down as well.
The Russian RTS market plunged -13.17% and the biggest decline since 2008.
It was just announced that Putin was named "Man of the Year" for the 15th consecutive year with 68% of the votes. The closest runner up got 4%. The poll was conducted by the Public Opinion Foundation across 43 regions of Russia. If Russia continues its collapse he will probably get a lot less of the vote next year. However, you have to wonder how much government pressure was applied to the foundation to influence the vote. Truth is scarce in Russia.
The only bright spot in this equation is that the Fed is not going to raise rates for a long time because that would make the dollar that much stronger and further complicate the foreign exchange pressure on earnings and further slow the European countries.
Lastly, Russian banks have about $100 billion in debt that they can no longer roll over as a result of the economic sanctions on Russia. Those banks are prohibited from doing business with U.S. or EU banks so they will have to turn to the Russian government for a bailout. That $100 billion in debt has actually doubled since the ruble is only worth half as much. This Russian currency crisis may be a bottomless pit with no solution and could result in another debt default and/or social unrest. Having a loaf of bread or gallon of milk double in price over just a few months is not going to be unnoticed by the Russian consumer.
Oil prices fell to $53.60 overnight before rallying to $57.15 intraday. The rebound in oil prices powered the market higher but the gains did not last. Crude fell back to $55 just before the close and took the market with it. I published a monthly chart of crude last week showing the 200-month average as prior support. An astute reader emailed me saying crude prices declined -7.42% below the 200-month average in 2009 before rebounding and prices today are -7.4% below the same average today and that appears to be where prices are trying to consolidate. Whether that penetration level will repeat as a bounce point is of course unknown.
It was a light day for economics in the U.S. with new residential construction the only material report. Housing starts for November declined -1.6% to 1.028 million with 677,000 single-family and 351,000 multi-family starts. Housing permits, a forecast of future construction activity, declined -5.2% from 1.092 million to 1.035 million. Total completions declined -6.4% from 922,000 to 863,000.
There may have been some weather impact in the November numbers after that early winter storm came through in the middle of the month.
The big event for Wednesday is the FOMC meeting and the change in the post meeting announcement. Quite a few people expect them to remove the "considerable period" language and replace it with something that is data dependent. Bill Gross said there is no way they will change it because they are not going to raise rates for a considerable period. Jim Grant of Grant's Interest Rate Observer said they will remove it and change their bias to point towards future rate hikes.
I would be really surprised if they went that far. The Fed is very incremental. They do things in micro-steps and only after they have talked about it in their public comments to make sure the market is not surprised. While they have floated the trial balloon on removing the language there is no reason for them to hurry. With commodities in free fall and Russia's implosion likely to knock Europe into a deeper recession in 2015 they have to be careful what they do. They may be the U.S. central bank but they are also the banker for the world. What they do impacts markets around the world and the majority of those markets are in decline today.
The yield on the U.S. ten-year treasury declined to 2.07% on the currency turmoil. This compares to 1.77% on the London Gilt, 0.398% on the German Bund and 0.365% on the Japanese 10-year.
Bill Gross left PIMCO just in time. The $3.3 billion emerging markets fund held $803 million in Russian bonds at the end of September or roughly 21% of its assets. Those bonds have collapsed and become nearly worthless. The fund has declined -8% over the last month.
Bank of England Governor Mark Carney said the evaporating currency markets have the ability to cause widespread havoc especially in emerging markets. Equity markets in Dubai and Saudi Arabia each fell more than -7% and Indonesian policy makers were forced to support the rupiah after it hit a 16 year low.
Of the $15 billion in outstanding currency options on the ruble only one contract worth $5 million with expiration in 12 months is still profitable. The rest are well out of the money at the current exchange rate. New York based FXCM Inc, the third largest currency broker has stopped offering the ruble and Alpari UK has stopped allowing clients to open new positions.
In stock news GE warned that profits were going to be squeezed as a result of lower oil prices because of lower capital spending by oil companies. GE forecast earnings of $1.70-$1.80 compared to consensus estimates for $1.79. The company said it would grow between 2-5% in 2015 and that was also low. For any other company this would have caused an immediate decline in the stock price. GE shares did decline but they only lost a dime.
Federal Express (FDX) said it was buying logistics firm Genco, a specialist in handling product returns. No terms were given but rumors claim it was a $1.1 billion purchase. Genco had $1.6 billion in revenue in 2013. Genco handles more than 600 million returned items per year. With ecommerce growing there will be far more returns in the future.
Boeing (BA) announced a 25% increase in its dividend and boosted its authorized share repurchase program to a whopping $12 billion. Boeing had $4.8 billion remaining on its prior buyback program after spending $6 billion in 2014. The dividend rose from 73 cents to 91 cents. Q3 cash flow was lower than analysts expected but they promised at the time that Q4 would be very strong as deliveries accelerated. These moves appear to be confirming that promise.
Microsoft (MSFT) was cut to neutral by Bank of America (BAC) with a price target of $47. Shares closed at $45 after a -3.2% decline. The analyst said the stock performance since Satya Nadella took over as CEO had made the stock overvalued. Shares had risen +25% since the management change.
Google (GOOGL) shares fell -18 to close under $500 after JP Morgan cut price targets from $670 to $600 and lowered earnings estimates for Q4, 2015 and 2016. The analyst said search was moving more towards mobile and away from desktop. Also Bing was stealing market share and the company had a major contract renewal coming up from Apple that could go to Bing or Yahoo.
Tesla (TSLA) shares are falling as a result of the falling gasoline prices. The theory being that cheaper gas negates the need for an electric car. Unfortunately people are missing the point. Tesla is a luxury car that just happens to be electric. People who pay $100,000 for a car are not really concerned about the price of gasoline.
After the bell Darden Restaurants (DRI) posted earnings of 28 cents compared to estimates for 27 cents. Revenue rose +5% to $1.56 billion compared to estimates for $1.55 billion. Stronger demand in the Olive Garden stores drove the gains. Shares rose $1 in afterhours trading.
Amazon (AMZN) lost $10 after announcing that it had extended the deadline for Prime customers to shop and still get gifts before Christmas. Prime customers can order online before 11:59 PM ET on December 22nd while regular customers have to order by that same time on December 19th. If you live in a dozen major cities you can order as late as 10:AM on Christmas Eve and receive your item the same day for $5.99 shipping. This is a bonanza for procrastinators. Shares fell because of the weak market and a push by Google to shop on Google Shopping instead of Amazon. Google is going to launch a "buy" button on its search pages to compete with Amazon. This would be similar to Amazon's "one-click ordering" button.
It was an ugly day in the neighborhood to twist one of Mr. Rogers sayings. The Dow declined -102 at the open, rallied to +247 intraday and then crashed back to close at the lows of the day with a -112 point loss. The 350 point range ended at the lows and that is not a good sign for tomorrow.
The S&P broke below prior support at 1,985 at the open but spiked to 2,017 intraday on a major short squeeze as crude prices bounced nearly $4 off their lows. When the crude rebound failed and the chatter surrounding Russia increased it was lights out for the S&P and sellers hit it hard at the close.
There is no good news on the S&P decline. The 100-day average is now well behind us at 1,987 and the 200-day is comfortably below at 1,947. With 1,950 as sentiment support that 200-day average may have a chance of slowing the decline. Otherwise we are targeting a retest of 1,900.
The 50-week average at 1,928 would be our best chance of stopping a plunge to 1,900.
However, the S&P futures are up +7 at 8:30 ET. While that is positive the futures have been up strong the last two nights and the market sank anyway.
I have nothing positive to say about the S&P other than it is oversold and now -5% off its highs. In all the prior declines over the last two years with the exception of October, that 5% level was bought and a rebound followed. With tax selling in full bloom and extreme uncertainty coming out of Russia and Europe I would not count on a rebound this time around. This time may be different.
The Dow chart is similar to the S&P with a very large intraday spike that was sold hard to close on the lows of the day. The Dow is now almost -900 points off of its 17,958 closing high on December 5th. That is a -5% drop and other than round number support at 17,000 it could be a long drop to 16,360 or even lower to 16,000. We were just there in October so it is definitely possible. There were far fewer concerns in the market in October than we have today.
Home Depot was a big loser in the Dow after Nomura downgraded the stock on margin pressure and market share gained by Lowe's. Visa, Goldman Sachs, Nike and American Express were down on exposure to Russia. It was not a good day for the international stocks.
The Nasdaq fell -57 points on declines in Google and Apple. Google was downgraded to lose -18 points and Apple fell to a two month low on the halt on sales in Russia. Amazon lost $10 on the Google competition move.
Investors are simply taking profits across the board and these "excuses" just accelerate the trend.
The Nasdaq slid to a stop at the low of the day at 4,548 and just barely over weak support at 4,545. A breakdown here could blow past weak support at 4,485 and begin to target the October lows. Resistance is 4,650, which was prior support.
The Russell 2000 gave back less than a point thanks to a rebound in energy stocks. The 195 energy stocks in the Russell were positive most of the day and that kept the Russell in positive territory until just before the close. The Russell chart is unsupported with 1,115 the next level to watch. Small caps have held up better than large caps because they have less exposure to Europe and Russia.
I would love to tell you to buy the dip but the velocity of the market change on Tuesday afternoon really suggests there is more selling ahead. However, there could have been a lot of option expiration pressures in that downdraft and maybe those pressures have been erased. While that is a pleasant thought it is probably wishful thinking.
We need to follow the trend or wait on the sidelines. With the market already very oversold I see no future in trying to short stocks from here. Our best bet is to wait for a trend change. In this case we should be looking for as bottom that last more than a couple hours. There will be plenty of time to buy the market if a tradable rebound appears.
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