After watching the Dow and S&P trade in a narrow range all week on worries over the negotiations with Greece the announcement of a deal on Friday released the indexes to make new highs. While the Greek problem is not over the can has been kicked down the road for another four months. Traders breathed a sigh of relief and celebrated by adding to long positions.
The EU and Greece hammered out a tentative four month extension to their existing bailout program. Apparently Greece caved in to almost everything they said they would not accept. Greece will be supervised over this four month period by the EU, ECB and IMF otherwise known as the Troika. Greece said it would never agree to continue the current bailout program with severe austerity measures and yet when the smoke cleared they were forced to agree. The extension still has to be approved by the parliaments of the EU countries by next Friday but officials expect that to happen.
Greece was backed into a corner because they have no money, major bills were coming due and the banks were hemorrhaging cash. The ECB had been supporting the banks with temporary loans of about $4 billion a week. If Greece had not agreed to the extension the ECB loans would have stopped and the banks would have failed. Greece had no money to pay government workers, military and to keep the government services running. This is why traders had assumed a compromise agreement would be reached because the new government in Greece had no real options except for the nuclear option of leaving the eurozone and crashing their economy even worse.
Shares in the National Bank of Greece (NBG) rallied +22% on news of the bailout deal. However if you look at the last 5-6 days on the chart you can easily see that traders were already betting a deal would get done. Traders have been assuming all week that a deal would happen and that is what kept the indexes from slipping to far below their early week highs.
Once the rumors began to break that a deal had been done the markets rallied with the Dow rising from 17,992 at 12:00 to close at 18,140. Basically 148 points of the Dow's 154 point gain came after the first rumor broke. The Dow close was a new historic high and the first new high for 2015 for the Dow. Even with the big gain and the new high the Dow only gained +121 points for the week.
There were no economic reports of note on Friday. Next week's calendar is highlighted by the Yellen testimony on Tuesday and Wednesday. Tuesday is important because the first day tends to suffer from foot in mouth disease. Sometimes answers to questions don't come out exactly as she would have phrased them in a prepared speech. On Wednesday she will get a chance to correct any mistakes after she has had an opportunity to ponder her Tuesday answers. The actual testimony is the same but the answers to questions are unscripted. Analysts will be watching closely for clues to her rate hike bias to see if it has changed.
There are several housing reports and a couple of Fed manufacturing sector reports. The week ends with a GDP revision and it is expected to decline to just over 2% growth for Q4.
Analysts are starting to worry about Q1 and the impact of the severe weather. You may remember last year that Q1 GDP declined -2.11% in Q1 as a result of the polar vortex shutting down a lot of the Northeast for weeks at a time.
No new split announcements this week.
Other than the news on Greece it was a very quiet day. The highlight in the earnings category was Deere (DE). Earnings were $1.12 compared to estimates for 83 cents. Revenue fell -19% to $5.61 billion. The company said farm income will drop the most this year since the Great Depression. Deere has cut production and laid off hundreds of workers as demand for farm equipment declines. The number of combines sold in the U.S. declined -25% in 2014 and sales of tractors with at least 100 horsepower fell -12%.
Commodity prices have crashed with corn prices falling -50% and soybeans down -40% from the record prices seen in 2012. Farm income is expected to decline in 2015 for the third consecutive year. Deere guided for 2015 income to about $1.8 billion and less than the prior projection in November of $1.9 billion. Shares declined sharply at the open but rebounded to close slightly positive. Warren Buffet said in the recent SEC filing that Berkshire increased its stake in Deere to 5%.
Intuit (INTU) shares rallied +6% after reporting a loss of 6 cents that beat expectations for a loss of 13 cents. Revenue of $808 million beat forecasts of $784 million. For the current quarter the company expects earnings of $2.70-$2.75 and analysts expected $2.90. The real power behind the stock spike was a 50% increase in Quickbooks subscribers compared to a 43% gain in the prior period. TurboTax subscribers rose +19%. Sales from TurboTax rose +54%.
Lab Corp (LH) reported adjusted earnings of $1.65 compared to estimates for $1.63. Revenue of $1.51 billion beat estimates for $1.49 billion. On Thursday the company completed the acquisition of Covance for $5.7 billion. Based on post acquisition metrics the company guided for revenue growth of 40-44%. Full year earnings are expected to be $7.35-$7.70 compared to analyst estimates for $7.33. Free cash flow is expected in the $1.1 billion range. Shares spiked +3% on the news.
Iron Mountain (IRM) reported earnings of 25 cents that missed estimates of 31 cents. Revenue of $778 million missed estimates for $787 million. They guided for full year earnings from $1.15 to $1.30 and revenue from $3.03 to $3.15 billion. This midpoint was a decline from 2014 revenue of $3.12 billion. Shares fell -5% on the news.
The Barnes Group (B), an industrial and aerospace parts supplier, reported earnings of 62 cents compared to estimates for 61 cents. Revenue of $310 million missed estimates for $315 million. They guided to full year earnings in the $2.42 to $2.57 range. Investors must have liked the numbers because shares rose almost 8%.
Cheniere Energy (LNG) reported a loss of 50 cents compared to estimates for a loss of 29 cents. Revenue was $66 million. The loss was related to the early extinguishment of debt and write off of costs associated with that debt. Cheniere is not currently an operating company. They are building the largest LNG export facility in the U.S. in Louisiana and another facility in Corpus Christi Texas. Their first exports are expected in late 2015 and volume will grow as additional trains come online over the next 4 years. Sabine Pass is scheduled for 6 trains with the capacity of 4.5 million tons of LNG per annum each (MTPA). Corpus Christi is scheduled for 3 trains at 4.5 MTPA each.
Cheniere has already presold roughly $7 billion a year in LNG for the next 20 years at Henry Hub prices plus a fee. The cost of natural gas is immaterial to them because they collect a fee per Mcf for acquiring and liquefying the gas. Actually if gas remains cheap they will be at a significant competitive advantage to almost every other LNG exporter in the world. I strongly recommend Cheniere for a long term investment.
Cyberark Software (CYBR) is on fire. Since bottoming at $33 on February 2nd the stock has more than doubled. Analysts are saying that Cyberark, FireEye (FEYE) and Palo Alto Networks (PANW) are the best of breed in the security business. The gains have been powered by funds with Friday's volume over 6 million shares. This is not your father's software security stock. I can't imagine anyone buying this spike but I have been saying that for a week. This looks like a dot com stock back in 2000. They also blew out earnings on two weeks ago with 21 cents compared to estimates for 5 cents.
Salix Pharmaceuticals (SLXP) shares surged again with a +5% gain to $158. Reuters said Valeant (VRX) was close to acquiring the company for $160 per share. The deal could come as early as next week. Salix has been in play for several weeks with various rumored partners but Valeant has always been the top contender. At $160 the deal would be worth $10.2 billion and the largest deal Valeant has ever done and they have done a lot of deals. The CEO recently said they expected to complete several smaller deals in 2015 but did not rule out a big deal. Shire Plc (SHPG) said last week it was also taking the initial steps to bid on Salix. Endo International (ENDP) also said it wanted Salix but the company said no thanks.
Shares of Noodles & Co fell -32% after reporting earnings of 13 cents that missed estimates by a penny. Revenue of $108.5 million also missed estimates of $110 million. The biggest problem was 2015 guidance for growth around 20% when analysts were expecting 34%. Same store sales remained lackluster at +1.3%. Baird downgraded them from outperform to neutral and Janney Capital cut them from buy to neutral.
Rocket Fuel (FUEL) ran out of fuel after reporting a loss of 18 cents compared to estimates for a loss of 25 cents. Revenue of $139.5 million also missed estimates of $145.5 million. The company is a big data, artificial intelligence, advertising placement company. In theory they can mine the data and determine which ads will work in which position. However, costs surged in the latest quarter and revenues did not keep pace. The stock has been on a downward trajectory since January 2014. Shares fell -27% on Friday.
Boeing (BA) is flying high after an entire year of consolidation. On Wednesday the company said it will keep returning significant amounts of cash to shareholders and promised a painless transition from the 777 to the 777X in the next couple of years. Boeing said there would be no decline in production rates on the existing 777 model. The company also signed a new order for (6) 737s valued at $594 million from Alaska Airlines (ALK). Alaska Air is taking delivery of 19 new planes in 2016. Including the new deal Alaska Air has ordered 79 jets from Boeing and is replacing all its 737-400s with 737-900ERs, which carry 25% more passengers on the same amount of fuel.
Last week Boeing announced a $1.6 billion order for (17) 737-800s from Transavia, a subsidiary of Air France. Korean Air also ordered (5) 777 freighters valued at $1.5 billion. Business is booming for Boeing. Sterne Agee reiterated a buy rating with a price target of $196. Boeing will generate $23 billion in free cash flow for the period 2015-2017 and have $16 billion available for buybacks after paying generous dividends.
Next week is small cap earnings week. There are several hundred companies reporting and most I don't recognize. I did pull out more than I expected out of the list and there are some big caps mixed in with the unknowns. There are several retailers including Target, TJX, Sears, Kohl's and Macys. Building supply heavyweights Home Depot and Lowes will tell us how the home selling season is shaping up. Hewlett Packard, Express Scripts, SalesForce.com, Budweiser and Berkshire Hathaway round out the top names.
Apple may or may not be planning an electric car and they have declined to comment on "rumors and speculation." However, Apple has hired so many engineers from electric car battery maker A123 Systems that A123 has sued Apple over the poaching. A123 said Apple was on the verge of gutting A123 completely. The lithium batteries from A123 are found in several hybrid cars including the BMW and Chevy Spark. Apple also tried to hire battery experts from LG Chem Ltd, Samsung Electronics, Panasonic, Toshiba and Johnson Controls according to the lawsuit.
Apple also hired Johann Jungwirth who for six years led research and development for Mercedes-Benz in North America. He joined Apple in September. He specializes in building internet connected cars and autonomous driving.
Elon Musk has also complained that Apple has been hiring away his engineers at a record pace. Musk said Apple was offering $250,000 signing bonuses and 60% increase in salaries to Tesla engineers. Musk also admitted he spoke with Apple's acquisitions team last year but would not disclose the topic.
Based on publicly available employment records Apple has hired dozens of executives and engineers from other auto companies. A longtime engineer at Autoliv, a maker of automobile safety systems, joined Apple to work in their special projects group in January. The special projects car team now has more than 200 employees.
Two vans registered to Apple and covered with sensors similar to the early Google prototypes have been spotted in San Francisco and Brooklyn. This suggests they are experimenting with self driving cars as well.
Analysts believe Apple could not actually produce a car until about 2020 because of all the engineering that needs to be done and manufacturing of the individual parts as well as building the manufacturing facilities.
Apple may not want to admit it but there are far too many signs that they are headed towards producing a prototype car. They may not want to produce it but they could easily license the production to somebody already in the business.
Apple shares rallied to a new high and a market cap of $754 billion. Since January 1st the Nasdaq has gained +207 points and 106 of those points were added by Apple.
All the talk about Apple getting into the electric car business and Elon Musk admitting he spoke with Apple's acquisition team has rocketed Tesla shares higher as well. TSLA shares have gained +13 points in the last two days. Tesla's market cap is only $27 billion and Apple has $180 billion in cash. They could snap up Tesla in a heartbeat and even pay a huge premium and not break the bank. However, I doubt Elon Musk wants to work for Apple.
Crude oil prices declined -$2 for the week to close at $50.34. Two of the factors affecting prices included another surge of 7.7 million barrels into U.S. inventories pushing them to 425.6 million barrels and the highest level since 1930. Cushing inventories rose nearly 4 million barrels to 46.3 million and a six-year high. Cushing Oklahoma is the futures delivery point for WTI.
Secondly it appears China has completed filling their strategic oil reserves and the number of Very Large Crude Carriers (VLCC) either unloading in China or headed for China fell to 62 and the lowest since September 19th. Each tanker carries 2 million barrels. China began filling its reserves in early October when a record 89 tankers were making trips to China with an average of 76. The country imports an average of 6 mbpd in normal times. If China has finished its four month stocking binge then the biggest surplus buyer in the market may no longer be in the market. This would mean that the surplus oil being produced every day has to find someplace else to go.
I have written about this problem over the last couple weeks. When the global tank farms reach capacity and there is no place to store oil the price could drop sharply. This could happen in the weeks ahead.
The U.S. produced a record 9.28 mbpd last week despite the continued drop in active rigs. It will be another 3-6 months before U.S. production slows appreciably because wells that have already been drilled still need to be completed and connected to pipelines and gathering systems. U.S. inventories have grown by 43.3 million barrels (12%) over the last six weeks.
Table for week ended 2/13. Green is a recent high, yellow a recent low.
For the week ended 2/20 active rigs declined another -48 rigs to 1,310 and the lowest since 2009. Oil rigs declined -37 to 1,019 and gas rigs declined -11 to 289 and a new 18-year low. Offshore rigs rose +2 to 54. Since the 1,931 high in September active rigs have declined by -621 rigs (-32.2%) and the fastest decline on record.
Oil inventories are going to continue to rise after the U.S. refinery strike expanded this weekend to include largest U.S. refinery at Port Arthur and others. The Motiva Port Arthur refinery processes 600,250 bpd. The union also included the Motiva Convent, Louisiana plant with 235,000 bpd and the 238,000 bpd Norco, Louisiana refinery. The new strike orders also covered the Shell chemical plant in Norco. If no agreement is reached by Sunday morning 6,550 workers at 15 plants, including 12 refineries accounting for 18.5% of U.S. production will be on strike. That is the largest strike since 1980. In theory the plants will keep running with management operating the controls but the longer the strike runs the more production will be shutdown due to equipment problems and maintenance issues. Gasoline prices will be rising.
Now we have a confirmed breakout to new highs. I warned last Sunday that a new high by only a couple points was not really a breakout. The indexes, with the exception of the Nasdaq, weakened and lost a few points throughout the week while the drama played out surrounding Greece.
The S&P finally surged over the psychological resistance at 2,100 and "should" be targeting the next resistance level at 2,125. The S&P traded in a very narrow 8 point range Monday through Thursday. Friday's open saw a -12 point gap down open to 2,085 related to option expiration and the continued drama over Greece. That one move was larger than the range for the entire week. That dip was immediately bought but the rebound stalled at 2,095 for 90 minutes until the Greek rumors began to break. The S&P range for Friday was 25 points and we closed on the highs.
In theory this combined surge by all the indexes has pushed us over the psychological threshold and we could continue moving higher, headlines permitting.
Support is now 2,090 and resistance 2,125.
The Dow finally punched through the 18,100 level but it is not clear sailing from here. There are multiple longer term uptrend levels of resistance that could cause trouble. One of them is 18,140 and that is exactly where the Dow stopped at the close. The next level is 18,212 followed by 18,325. I would love to see each of those tested next week.
I view the narrow range over the last week as a consolidation phase that built a higher base and could give us a launch point for future gains. The earnings from Dow stocks are now behind us and events like the -$4 drop by Walmart are hopefully in the past.
Support 17,950 and resistance 18,140 and 18,212.
The Nasdaq bulls have been charging higher with the index adding another +62 points to the +149 last week and +109 the week before. The tech stocks are on fire but this week most of the power came from the biotech sector.
Of the +207 points gained by the Nasdaq since December 31st, 106 of those points were due to Apple's gains.
It is even more impressive that the Nasdaq tacked on big gains with GOOG/GOOGL both losing ground for the last four days. That was a huge drag on the index but the Nasdaq was still up for the last eight consecutive days.
However, in the process of looking for plays for the various newsletters I scan between 500-800 charts every weekend. There were a huge number of charts this weekend that contained very large spikes over the last several days. I can't conceive a scenario where these rocket stocks don't pause for several days for profit taking. An example would be Charles River Labs (CRL) and yes I know it is not a Nasdaq stock but it is just an example. Another would be Cognizant Tech (CTSH). The gains on these stocks are begging for a week of profit taking.
The Nasdaq did break through uptrend resistance at 4,929 and did it with authority. However, in order to make it to the 5,132 high set on March 10th, 2000 it will need to rest and eventually build a base at a higher level. I seriously doubt we are sprint another 200 points without profit taking.
There is no clearly defined resistance in our path but 5,000 would be a huge psychological hurdle. Support is 4,890.
The S&P-400 Mid-Cap has spiked well beyond prior resistance and surged to a big new high. The Russell 2000 has not moved as strongly but it still closed at a historic high with a gain of +4 points. I would be perfectly happy if the Russell continued to gain 4-5 points every day. Slow and steady wins the race. However, we could be reaching the point where traders are forced to decide if they are going to catch a shooting star or be left holding a bag of cash on the sidelines.
Now that the Dow has broken out and the uncertainty has eased we could see the small cap stocks accelerate.
The Transports are still fighting an uphill battle but succeeding one step at a time. Until they close over 9,150 it is still a lower high. The old high at 9,217 is the next target with stiff resistance at 9,230. We need the Transports to make a new high to confirm the Dow Industrials high.
Even the NYSE Composite closed at a new high on Friday. The close at 11,108.67 barely eclipsed the old high close at 11,104.72 but it is still a record. The energy stocks and financials have been holding back the NYSE.
The new highs all around and the temporary resolution of the Greek bailout should provide some bullish sentiment for the market. However, our next hurdle will be the Yellen testimony on Tuesday. Yellen has been strongly dovish in the past and you can bet she does not want to trip up this rally. A strong stock market lifts economic sentiment and she needs the economy to be strengthened. She will probably make her token comments about future rate hikes but emphasize the Fed needs to be patient. With the severe winter weather causing analysts to cut their Q1 GDP forecasts and the memory of Q1-2014 hopefully she will maintain her dovish posture.
Goldman Sachs has already cut their estimates for GDP for Q1 as a result of the weather. If it continues as expected over the next two weeks they may cut it even further. They reduced their estimate from +3.0% to +2.8%. It was not a big cut but it is the direction that matters. Add in the $2 billion a day impact from the dockworker problem on the west coast and we could lose a few more points. Add in the dramatic decline in activity in the energy sector and we lose another couple of points. It will be really interesting to see how Q1 really ends up but that final number is 5 months from now.
This time they are calling the waves of severe cold the Siberian Express because they are coming straight over the pole and through the middle of Canada into our Midwest as shown in the NOAA chart below.
The China Business Cycle Index is a composite index of 10 "official" government indicators. Most are probably fictitious to some extent but the composite of all the indicators still gives us a clue to the direction of China's economy. If you consider that some or most of the individual indicators have probably been "adjusted" to show a more favorable outlook yet the overall picture is still bad then imagine how bad it really would be if the data was not adjusted.
The Chinese economy is back at the level of the 2009 financial crisis and the Nasdaq crash in 2001. If we had the real data it would probably show the economy to be back at the Asian crisis levels in 1998 and the low on the chart.
The U.S. markets just made new highs across the board but look at the earnings estimates for 2015 from Morgan Stanley. The S&P forecast has crashed from nearly $135 to $120.62 and some analysts are projecting it could even come in below 2014 levels. Why is the market so bullish when earnings growth could actually be negative in 2015?
The following is an interesting chart from Gerard Minack of Minack Advisors. The Fed is adverse to raising rates unless wage growth is rising. Wages have been flat lining since 2011 and without a jump in wages the Fed is unlikely to hike rates. There are still analysts that believe the U.S. economy is declining rather than growing and expect no rates hikes and QE4 in 2016. (Simon Hunt) Different viewpoints make a market.
Following on that same thought here is a chart from the St Louis Fed showing the falling unemployment rate in blue and wages in red. Since 1985 falling unemployment has been met with rising wage growth. Note the absence of wage growth in the current cycle. Hiking interest rates would be even more damaging to wages.
The FOMC minutes on Wednesday actually showed the Fed may be inclined to be even more patient in considering future rate increases. The Fed said bond yields fell again not only in the U.S. but other sovereign nations. "These moves were attributed in part to a deterioration in market sentiment associated with downward pressure on inflation, increased concern about the global economic outlook, and announced and anticipated foreign central bank policies. The Fed also said "financial uncertainty" in Greece, as well as geopolitical instability in the Middle East and Ukraine, remained as risks to the international outlook. The minutes showed the Fed is inclined to keep rates near zero for longer. On its outlook for raising rates, the minutes indicate that a number of FOMC members saw the risks as weighted towards raising rates too early, with at least one FOMC member recommending more not less monetary policy accommodation
How stable can the world economy be when 90% of the industrialized world economy is anchored by near-zero or negative short term rates? David Rosenberg, chief economist at Gluskin Sheff, believes "worry over global deflation with interest rates at zero is certainly not a confidence builder."
Sam Stovall, chief equity strategist at S&P, put together this table of market moves since 1946 in the six months before and after the first Fed rate hike. Nineteen times the market declined more than 5%. Obviously any accounting for 12 months periods in the market is going to show a 5% drop or more in most years. However, the before column is still telling.
Matt O'Brien published an article in the Washington Post last week showing that global inflation is dead. This is related to a drop in global demand and buying power. Commodities are crashing and interest rates are zero. This chart alone is a very visual case that deflation could be the common enemy in the next world war in the very near future.
MarketWatch posted a series of charts that show the market diverging significantly from the economic fundamentals. The 7 charts are too big to repost here so follow this LINK
After the close on Friday Moody's downgraded Russia's sovereign debt to junk at Ba1 with a negative outlook. The agency cited the falling oil prices, currency issues, the crisis in Ukraine and the potential for additional sanctions. Moody's said, "Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016." Also, "The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service."
The fighting in the Ukraine did not cease and Russia was seen sending additional tanks and artillery into Ukraine as Putin tries to seize more of Ukraine in order to secure a land bridge to the deepwater naval port in Crimea. I am sure nobody actually thought Putin would honor the agreement he signed with Merkel and Hollande the prior week.
The "swag bags" for the 2015 Oscars have risen in value to $167,000 in goodies. The 21 actors/actresses that don't win a best or supporting Oscar will have this year's swag bag delivered to their door on Monday. Included in the bag is a three-night stay at a resort in Tuscany valued at $1,500; a luxury train ride through the Canadian Rockies worth more than $14,500; natural French Mediterranean sea salts worth $1,500; a custom silver necklace inscribed with the latitude and longitude coordinates of the Dolby Theater from Lat & Lo at $150; a "glamping" trip valued at $12,500; a $800 gift certificate for a custom candy and dessert buffet; a $250 Haze vaporizer; a $250 Afterglow personal laser vibrator; a Wellness 360 gift pack worth $1,200; a year's worth of all-Audi A4 car rental from Silvercar valued at $20,000; a Reset Yourself lifestyle makeover package worth more than $14,200; and so much more. The most highly valued item in this year's bag, according to the press release from Distinctive Assets, the bag's creator, is a $20,000 gift certificate to have Enigma Life founder Olessia Kantor fly out to meet with each nominee "to discuss their 2015 horoscope, analyze dreams and teach them mind control techniques."
The CEO of Vice Media, Shane Smith, paid $300,000 to take 11 associates to dinner in Las Vegas in early January. The meal was at Bellagio's Prime Steakhouse and there were $21,000 bottles of wine.
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