The long awaited nuclear agreement with Iran was announced this morning. That was the easy part. Now the war of words begins as the various analysts point out all the red lines the administration crossed and Congress begins the task of trying to prevent the deal from being approved.
On the positive side there was very little news from Greece to disrupt the market. Earnings began to flow and investors began to focus on the market rather than European headlines.
On the negative side, the Iranian agreement is drastically different than the one proposed by President Obama when negotiations began. The president said he would not agree to any deal that did not allow anywhere, anytime inspections. That did not happen. Iran was supposed to come clean about its prior nuclear weapons research. That did not happen. Iran was going to be prevented from enriching uranium. That did not happen. Iran was going to be forced to dismantle its uranium enrichment infrastructure. That did not happen with Iran allowed to keep more than 5,000 operating centrifuges. I could go on with the problems but you get the idea.
Basically the U.S. recognized Iran as a nuclear threshold state and will allow Iran to build nuclear weapons with only a 12-month breakout period. Since Iran has never complied with any prior agreement and was caught just a couple months ago trying to buy prohibited nuclear missile technology, there is no reason to believe that Iran will comply with this new deal. This is strictly a political event and will allow Iran to receive up to $140 billion in funds held up by sanctions and those funds will be used for exporting weapons and terrorism to other nations in the Middle East and for acquiring additional nuclear weapons technology.
Ambaddasor John Bolton called the deal a "tragedy." William Kristol of the Weekly Standard said it was a "very good deal - for Iran. We have a deal. It is a deal worse than even we imagined possible. Itâ€™s a deal that gives the Iranian regime $140b in return for â€¦ effectively nothing: no dismantlement of Iranâ€™s nuclear program, no anytime/anywhere inspections, no curbs on Iranâ€™s ballistic missile program, no maintenance of the arms embargo, no halt to Iranâ€™s sponsorship of terror."
Complete text of Iranian agreement
Only a couple days ago the Supreme Leader gave another death to America speech. Today an Iranian court fined the U.S. Government $50 billion for killing Iranian nationals and by assisting Iran's enemies. $50 billion fine
This agreement is going to be in the headlines for months to come. Congress has 60 days to review the agreement and either approve or deny it. However, President Obama issued a veto warning this morning saying he would veto any legislation that did not approve the agreement. This means a minimum of 67% of both houses have to vote against it in order to override a presidential veto.
Investor's Business Daily Editorial Cartoon.
The market rallied despite the Iranian news and some weak economics. The retail sales report for June showed that sales declined -0.3% compared to a previously reported +1.2% rise in May. However, that May number was revised down to a +1.0% gain. Analysts were expecting a +0.3% rise in sales in June. This was the second weakest report in more than a year.
Sales declined in almost every category. Motor vehicles declined -1.1%, home furnishings -1.6%, building materials -1.3%, clothing -1.5%, food service and bars -0.2% and non-store retailers -0.4%. The only gainers were gasoline stations +0.8%, appliances +1.0% and general merchandise +0.7%.
The NFIB Small Business Survey declined a whopping -4 points from 98.3 to 98.1 with every internal component worsening. This is the lowest level since March 2014 and only the third time in history that the headline number declined -4 points or more. In the internal components the earnings trends declined from -7 to -17, expectations for the economy to improve dropped from -3 to -9, plans to increase inventories from +4 to -4 and plans to increase employment fell from 12 to 9. A net of 17% of respondents reported weaker earnings in Q2. In a separate survey, QuickBooks found that small business revenue has declined for seven consecutive months.
The NFIB survey showed more layoffs, weaker hiring and weaker hiring plans for the next six months. This is not a good sign for the U.S. economy since small businesses produce the most new jobs.
Import prices declined -0.1% in June, compared to a +1.3% rise in May. This was in line with consensus and suggests May was an outlier. May was the only price rise in more than a year. This drop back into a decline suggests that inflationary pressures have evaporated again. Imported food prices fell -0.6%, nonfuel imports fell -0.2% while petroleum prices rose +0.8%. With oil prices falling again in July this suggests another negative month when the July report arrives in August.
The three economic reports above will have an impact on the Fed's economic outlook at the July FOMC meeting in two weeks. The Fed may want to hike rates in September but with the economic indicators weakening it may be tough to justify.
Yellen's testimony tomorrow morning will probably not mention the weakening economics. That would go against her position that the economy is strengthening enough to allow a rate hike in September. However, the impact will not be lost on the Fed. They will keep their fingers crossed that the economy rises to meet their projections and allow their bias to be proved correct.
The calendar for Wednesday is busy with the Yellen testimony having the biggest potential to move the market. I will be interested to see if the Beige Book shows any weakness from the last report since that is the Fed's analysis of the economy by region.
Earnings finally began today with several major companies reporting. JP Morgan started the ball rolling with earnings of $1.54 compared to estimates for $1.44. Net revenue fell -3.2% to $24.53 billion. Total assets were $2.45 trillion at the end of June compared to $2.58 trillion at the end of March. They made home loans of $29.3 billion, an increase of +74% but mortgage profits declined because of intense competition. Mortgage revenue declined -1% to $1.71 billion. Shares rose $1 on the news.
Wells Fargo (WFC) profits declined for the second consecutive quarter as expenses rose faster than revenue growth. Low interest rates continue to hamper bank profits. Net interest margin, the amount the bank makes between its cost of borrowing and the interest received from loans, fell from 3.15% to 2.97%. Mortgage banking revenue declined -1% but still accounted for 17% of its non-interest income. Wells made $62 billion in mortgage loans for the quarter. Earnings of $1.03 matched analyst estimates. Revenue rose +1% to $21.3 billion but missed estimates for $21.7 billion. Shares rose 50 cents on the news.
Johnson & Johnson (JNJ) reported earnings of $1.71, which beat estimates by 4 cents, with revenue declining -9% to $17.8 billion but still beating estimates. JNJ said the strong dollar was a major headwind knocking -7.2% off of revenue, as well as falling sales on their Hep-C drug because of strong competition from Gilead Sciences. JNJ raised guidance from $6.04-$6.19 to $6.10-$6.20. Shares declined -50 cents.
CSX reported earnings of 56 cents compared to estimates of 53 cents. Revenues of $3.06 billion missed estimates for $3.12 billion. Shipping volumes declined -1% hurt in part by a sharp decline in coal shipments as well as materials used in drilling oil wells like pipe and frac sand. Expenses declined -9% to $2.05 billion thanks to a drop in fuel costs from $416 million to $263 million. CSX maintained its earnings forecast for 2015 but said the high end of the range could be challenging. Shares rose $1 in afterhours to $33.11.
Yum Brands reported after the bell with earnings of 69 cents on revenue of $3.11 billion. That beat estimates of 63 cents but missed revenue estimates for $3.18 billion. KFC sales rose +6%, Taco Bell up +9% and Pizza Hut up +1%.
Same store sales in China declined -10% and slightly worse than the -8.4% analysts expected. Yum is still trying to overcome a problem with a meat supplier from several months ago. The company is opening 700 new stores in China in 2015. Shares were down about $1 after the report.
Earnings for tomorrow include Intel and Netflix. Intel (INTC) was cut to a sell by Bernstein with a $25 price target. The analyst said datacenter growth was slowing with cloud servers becoming more popular. A cloud server can run dozens of virtual machines rather than having those companies pay for an actual server for each one of the applications.
Netflix (NFLX) reports earnings after the close on Wednesday. However, they split the stock 7:1 after the close today with shares will be worth worth $100.36 each based on the $702.53 close today.
Micron (MU) saw its shares rally +11% to $19.61 state-owned Chinese company Tsinghua Unigroup reportedly was preparing a $23 billion bid that would value Micron at $21 per share. There is virtually no chance of this bid being accepted and no chance of the U.S. approving the sale if it was accepted. That price is roughly 8 times Micron's 2014 earnings. Given the cyber security problems with China and the proprietary technology in Micron products, the U.S. is not going to allow a Chinese acquisition.
Analysts said a real bid for Micron would have to be in the $35 per share range to be worthwhile despite Micron's $20 share price today. Micron was $30 in April. They warned of a slowdown in certain sectors in June but said they expect a rebound in 2016.
Twitter (TWTR) shares rallied +10% intraday when a bogus news alert said the company was negotiating with a prospective buyer. The bogus news alert looked like it came from Bloomberg with the website www.Bloomberg.Market.com recently registered by an anonymous party on July 10th. Having a website, it is easy to cut and paste HTML from a real press release to announce anything you want. The headline "Twitter Attracts Suitors" was also too short for a real Bloomberg headline. In the ten-minute period between the first tweet referencing the news alert until it was disavowed by Twitter and Bloomberg, more than 16.3 million shares traded at an average price of $37.83 or $617 million. Twitter shares opened the day at $35.78.
Amazon (AMZN) is having their 20th anniversary on Wednesday and they are celebrating with "Prime Day." They are offering ridiculous discounts on hundreds of items to account holders with Prime subscriptions. For instance a 40-inch HDTV for $115. Many prices are the lowest ever on Amazon. Starting at midnight there will be thousands of bargains and new ones will be listed every ten minutes throughout the day. They are claiming there will be more deals that on Black Friday. Amazon shares soared to another new high at $465. Click here for details
Crude prices rose +1.17 on the details in the Iranian deal. The first date to get sanctions removed is December 15th when the IAEA certifies Iran has complied with the first set of changes they are required to make. Once that certification is complete the next stage begins where sanctions can be removed. There are some doubts Iran will make the December 15th cutoff so expectations for Iranian oil coming to market are six-months at the very earliest and nine-months the most likely. That took the pressure off the oil market and short covering began.
After the bell tonight, the API oil inventories were reported to have declined -7 million barrels for last week. This caused another uptick in the futures of about 35 cents. Investors and speculators pay more attention to the EIA inventories that come out on Wednesday mornings. A big decline there could really get prices moving.
Today was not a short squeeze! For the first time in a long time the markets did not gap open and then hover at the opening high for the rest of the day. We actually saw some real buyers come into the market and the indexes moved over some critical resistance.
We had a -4% correction from the 2130 high in June on the S&P to the 2044 low last Wednesday. After three days of major short squeezes the market actually has some positive momentum. Today was the first four-day gain for the S&P since January. The S&P has now returned to within 1% of its 2130 high close back in May.
2015 has been a rocky market. We have had the most down days in the first six months since 2003. When you consider that period covers the Great Recession that is an amazing statistic.
The resistance at 2100 was broken at the open and the S&P just continued to creep higher the rest of the day. Investors are so thankful that the Greek disaster is almost over that they are celebrating by adding stocks to their portfolio.
The S&P now faces resistance at 2120 and then 2130. Support is well back at 2080.
The Dow had another good day but did not quite make it to resistance at 18,100 with the high at 18,072. The Dow has a little rougher time in trying to move back to its highs because that range from 18,100-18,165 is very congested. With multiple Dow components reporting this week the index could have some anchors.
JP Morgan added $1 to give the Dow roughly +8 points and Goldman Sachs added $2 or about +15 Dow points. Goldman reports earnings on Thursday.
Support is roughly 17,800 and resistance 18,100 and 18,165.
The Nasdaq crept up to resistance at 5100 by 11:AM and held there the rest of the day with a small buy spurt in late afternoon. Google and Amazon were major contributors. With Netflix and Intel reporting after the bell on Wednesday and Ebay, Google on Thursday there could be some challenges in moving much higher unless those companies knock it out of the park.
If the Nasdaq moves convincingly over 5100 the next major hurdle is 5150 and then the historic high close of 5161.
The Russell 2000 is approaching resistance at 1275 after three days of strong gains. This is going to be a crucial resistance point but the small caps should have better earnings than the large caps because of the lack of dollar exposure.
I am encouraged by the four days of gains and the confrontation with new resistance levels. Assuming Greece does not do anything stupid with their vote on Wednesday and Janet Yellen does not press too hard on the potential for a rate hike we could see further gains. However, I would not be surprised to see some profit taking at these levels. We had a sharp rebound off the lows and it would not be unusual to see some profit taking.
Enter passively, exit aggressively!
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