The Dow declined -108 on Monday and rebounded +113 today. The markets are going sideways as we wait for resolution on Greece and the FOMC.
The S&P futures were down as much as -14 points overnight but rebounded to post a nearly 14 point gain by the close of trading. This is an astounding move given the declines in Asia. China's Shanghai Index fell -3.47%. The U.S. markets were helped by the lack of declines in Europe despite impending doom for Greece.
The U.S. futures were also helped by the New Residential Construction numbers for May. The headline number for housing starts dropped -11.1% from the April revision but it was still a 5.1% gain over the same period in 2014. Starts fell from the 1.165 million pace in April to 1.036 million in May. The April number was a rebound from the weather related depression in February and March that averaged 0.927 million.
Analysts were expecting a pace for May at around 1.1 million. Single-family starts declined-5.4% and multi-family starts fell -20.2%.
Housing permits rose +11.8% in May after a +9.8% rise in April. That suggests the pace of starts will continue to rise. The pace of permits is up +34.6% from May 2014. However, single-family permits rose only 2.6% while multi-family permits rose +24.9%.
Housing completions rose from 0.988 million to 1.034 million or a +4.7% rise. The backlog of houses either permitted or under construction is rising and that should support some additional hiring in the sector.
The housing numbers were good and support the claim that the market is improving. With a threatened rise in interest rates late this year and early 2016 there could be a surge of buying interest in order to lock in a low rate.
The calendar for Wednesday is FOMC all day long. There is nothing else to take the focus off the Fed and that means the market will be transfixed by the Fed expectations.
There is actually a positive market bias for Fed meetings where Janet Yellen has a news conference. Her dovish position has tended to give the market hope and news conference days have been somewhat bullish. The Dow rallied +225 points after the post FOMC press conference on March 18th.
The December FOMC meeting was on the 16th and 17th. On the 16th the Dow closed at a six-week low of 17,068. On the 17th the Dow closed at 17,356 for a gain of +288 points and it went on to gain another +700 points over the next four days.
While we can't reasonably expect that kind of repeat performance this week we can at least hope for a positive result. That is probably what powered the market higher today. Call it the Yellen effect. Eventually she is going to disappoint the market but until then traders appear to be gaming the historical trend.
The healthcare sector was in the news again today as UnitedHealth (UNH) was rumored to be making a bid for Aetna (AET) according to the Wall Street Journal. The Journal said UNH sent Aetna a letter proposal over the last "few" days. Aetna shares rallied another $4 after a $5 gain on Monday.
It is tough to know who is making a play for whom. With five major companies all looking to buy/merge we could end up with only three and one of the five would be left without a date to the prom. Anthem (ANTM) approached Cigna (CI) with a $175 offer and was turned down. Anthem was also interested in Humana (HUM). UnitedHealth was also reported to be a potential acquirer for Cigna and Aetna. Aetna was also rumored as possibly being interested in Humana. There is no doubt somebody is going to be acquired and if they do not want to be acquired then they better be looking at acquiring somebody else really fast.
Anthem has 37.5 million members. Aetna has 46 million. Cigna has 88 million members in 30 countries. Humana has 14.2 million members in plans and 7.4 million in specialty products. UnitedHealth is the largest with $115 billion in market cap and more than 40 million members. Clearly Humana is the runt of the litter. The odds are good that two companies will each buy somebody else and somebody will end up alone.
Coty Inc (COTY) shares spiked +19% after news broke they were in a deal with Proctor & Gamble (PG) to acquire their beauty business in a $12 billion transaction. The deal would transfer brands like Gucci, Hugo Boss, Wella, Clairol, Max Factor and Cover Girl to Coty. For P&G it is part of their plan to narrow its focus on its core products. Coty would become the top seller in the perfume and hair care business. Coty markets Marc Jacobs, Calvin Klein, Chloe as well as various celebrity perfumes. The deal would be structured as a "Reverse Morris Trust" to be tax free to P&G shareholders. The assets would be spun off into a separate company which would then absorb Coty in an all share deal.
Coty only has a market cap of $3 billion but they are paying $12 billion for the P&G brands. Of course paying might not be the right word since the P&G spinoff will end up owning a majority of Coty.
UPS closed fractionally positive after saying they were going to discontinue some holiday shipping discounts. The company is going to discontinue free or heavily discounted shipping on large items because they clog up the shipping system at the sorting centers. Larger packages have to be handled manually while smaller packages zip through the automated systems with no human intervention. UPS had discounted the larger packages because of the increased cost to the shippers prevented many from choosing UPS. Now that UPS does not need the business the big packages are a headache.
UPS also announced it was buying logistics firm Parcel Pro for an undisclosed amount. Parcel Pro provides services and insurance coverage for the transport of jewelry, wristwatches and other luxury goods. The increased amounts of insurance coverage allow companies to ship more items in one package making it more cost effective.
While on the topic of shipping Amazon is experimenting with an application that would allow normal people to pickup packages at brick and mortar retailers and deliver them to Amazon customers on their way to other locations. The service would be called "On My Way."
In theory Amazon would enlist the services of regular retailers in high traffic areas to receive packages for customers near their store. Normal people looking to make a few extra bucks would pick up those packages that needed to be delivered and drop them off during their regular travels. Say you passed store A every morning on your way to work and you traveled the same route every day to get to work. The application would select packages that needed to be delivered along that route and you get paid for making the pickup and drop offs on your way to work or on your lunch break. Amazon gets a break on shipping rates and the driver makes a few bucks extra to pay for gas.
Amazon's shipping costs rose +31% in 2014 and that was faster than sales growth. Amazon ships about 3.5 million packages a day. UPS packages cost an average of $8 each. Amazon said the program is in the planning stages and it is possible it will never be implemented.
Box Inc (BOX) shares rose +3.5% after it announced that deep integration with Microsoft Office will transform "Collaboration" for joint customers. Box will let Microsoft Office users create documents in the cloud. Box said customers already have more than a billion Office documents stored in the Box cloud.
Microsoft sells a competing cloud product called OneDrive but CEO Nadella said they have been working to let clients choose a combination of programs that are capable of operating together. "We are agnostic when it comes to who we integrate with" according to Microsoft. Microsoft also has a partnership with Box competitor Dropbox. Box currently has 47,000 paying companies for their cloud storage product. Companies have all employees store their data in the cloud and that makes backup and retrieval significantly simpler.
Monster Beverage (MNST) was upgraded to the Citigroup Focus List and named a "top pick." Citi analysts are expecting "outsized" earnings and revenue growth over the next five years. Citi also said they see "considerable upside" to the share price from the current levels. Citi put a $155 price target on the stock. Shares rose +4% to $132 on the analyst note.
Monster completed a deal with Coke on June 12th to transfer some brands to Coke in exchange for others from Coke and entered into a global marketing agreement. Coke also completed the purchase of a 16.7% stake in Monster for $2.15 billion as part of the brand swap and marketing agreement. I personally believe Coke will eventually buy the rest of Monster.
Gap Stores (GPS) said it was closing 175 stores in an effort to get back to basics and drive traffic to its remaining locations. The company will close 175 of the 675 Gap stores over the next several years. They expect to lose about $300 million in annual sales from the closures. They are also cutting 250 employees from the San Francisco headquarters.
The company plans to renovate and improve its "digital footprint" in an effort to sell more online and engage with customers who are reluctant to shop in the malls. After the closures Gap will have 500 Gap stores and 300 outlet stores in North America. They do plan on closing some stores in Europe but the numbers have not been decided. They are planning on opening new stores in China where growth has exploded over the last 4 years. China ecommerce sales rose +60% in 2014.
United Rentals (URI) was cut from neutral to underperform by Macquarie. United recently warned that the decline in activity in the energy sector was going to be a drag on earnings and it could last all year. Macquarie expects a 10% decline based on recent guidance. United rents tools and equipment and the energy sector was a good customer.
Just a couple days ago activist investor Jana Partners reported it had taken a 6% stake in the firm.
Oshkosh (OSK) cut its profit forecast for the full year because of bad weather in the prior quarter and a delay in launching a new product. The company cut full year estimates from $4.00-$4.25 to $3.75-$4.00. Shares fell -7% on the news.
The indexes seesawed today and recovered what they lost on Monday but all bets are off for Wednesday. Analyzing indexes today is almost a waste of time since we are going to be entirely driven by headlines on Wednesday.
The Greek standoff is nearing the crisis point and Greece is either going to stand their ground and run out of money or the EU is going to blink and give them another interim funding deal in order to kick the can farther down the road. Trying to forecast what will happen in Greece and its impact on our markets is a waste of time
The FOMC is not likely to make any changes to interest rates but they are probably going to strongly indicate that they will raise rates in September assuming no major changes in the economy. Currently analysts are expecting a hike in September and again in March and then several months of watching to see if the rates had any impact on the economy.
In theory the market should have already priced in a September rate hike but constantly optimistic investors are operating with blinders on to the potential for a rate hike. There is a large contingent of analysts that do not believe the Fed will hike until mid 2016 regardless of what they say on Wednesday.
That means the closer we get to a hike either in Fed guidance or the September meeting the more nervous those investors will be. Historically the market normally declines on the first rate hike and then rebounds into rally mode for the next year or so. Of course historically the economy is normally running at about twice the current pace of +2.5% annual GDP so we are starting off with a handicap this time around.
I am not going to try and predict the market movement after the Fed meeting. I mentioned earlier that the prior two press conferences produced significant rallies but now that the trend is established that gives hedge funds something to trade against.
The S&P dipped on Monday to retest the 150-day average at 2074 and that remains solid support. The 2075-2080 range as been tested numerous times and has held every time. The critical levels remain 2065 and 2040. Volume was still anemic at only 5.4 billion shares so no conviction yet.
Dow support at 17,800 has eroded to 17,750 but it still exists. The 17,600 level is still the critical area to watch. The majority of the Dow stocks are still in a down trend although the trends are becoming fairly choppy given the volatility over the last couple of weeks.
The merger talk lifted the Dow out of negative territory this morning with gains in UNH and PG. Gains in crude helped turn Exxon and Chevron positive. Goldman was up on the rally in the bank stocks. Only three Dow stocks gained more than $1 so it would be hard to say it was a bullish day. The gains in UNH accounted for about 20 Dow points.
Despite today's gains the Dow is in a down trend with today only one more lower high in the trend. However, a move over 18,100 would negate that.
The Nasdaq continues to vacillate between 5000-5100 and today was another close right in the middle at 5055. "There is nothing to see here, move along" to pull a phrase out of the first Star Wars movie in 1977. Can you believe it was that long ago? Dang I am getting old.
There was nothing to see on the +25 point rebound in the tech index. The gains came from Netflix, Monster and the biotech sector and that is the same pattern for the last several weeks.
The Nasdaq is holding near the highs but struggling slightly at the lower end of the range. It may be slightly weaker but so far it has not been a problem.
As has been the case lately the Russell 2000 is actually holding the market up. The index gained +8 points today to close at 1269 and only 6 points below a new high. It would be VERY hard to paint any kind of bearish picture for the market with the small caps about to break out ahead of an index rebalance.
To emphasize that point on the small caps the Russell Microcap index ($RUMIC) closed at a new high today. This is the smallest of the small caps and clearly, fund managers are not afraid of the summer doldrums. They continue to nibble away on these stocks as the first six months of the year comes to a close.
It is hard to be bearish given the strength in the small caps but the big caps are still lagging. Rather than try to predict direction before/after the FOMC meeting I would rather wait until next week and see what direction the market decided to go.
Today is my 48th wedding anniversary. I have now been married 2.5 times longer than I was single. My wife and I were talking this morning, yes we still communicate, and going back over the highlights and lowlights of the last 50 years. Since we are still married we obviously had more good than bad and we are expecting plenty additional years ahead.
I was scrolling through the news headlines while we were chatting and saw this one. "Kirk Kerkorian, billionaire investor, dies at 98." I mentioned it to her and said it would be nice epitaph to have when I die. "Jim Brown, billionaire investor dies at 98." I thought she was going to fall off her chair laughing. She said I might make the age 98 part but it would be a miracle to make the billionaire part. She never has taken me seriously and I guess that is why we made it 48 years.
Enter passively, exit aggressively!
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