Despite some early weakness on Friday, the major indexes have now posted gains for six consecutive weeks for the first time in 2015. The trend is your friend until it ends.
The first week of November is typically the best week in the fourth quarter. That did not happen this year with the gains two weeks ago significantly higher. I wrote over the last couple weeks that I expected some softness as the week progressed and that is exactly what we got. There was some buying at the close and that was probably short covering since the market failed to actually roll over.
The S&P dipped -32 points from its 2,116 high on Tuesday to the 2,083 low on Friday. The end of day buying lifted the index back to 2,099 and a +20 point gain for the week.
The key now is what to expect for next week and the rest of November. After six weeks of gains, I expect some profit taking to appear but I do expect us to close the month higher.
The big news on Friday was the blowout on the payroll report for October. The Nonfarm Payrolls showed a gain of +271,000 jobs and well over the consensus estimate for +180,000. The August number was revised up +17,000 from +136,000 to +157,000 and the September number was revised down -5,000 from +142,000 to +137,000 for a net revision of +12,000 jobs. October's big spike raised the three-month average to +187,000 and probably enough for the Fed to hike rates in December if the November payrolls are decent.
The separate Household Survey showed a gain of +320,000 jobs to 149,120,000 workers. The civilian noninstitutional population available to work rose +216,000 to 251,541,000.
Manufacturing only added +27,000 jobs while services added +244,000. Construction added +31,000, retail +43,800, professional and business services +78,000, education and healthcare +57,000 and leisure and hospitality +41,000. Private payroll gains were +268,000. Mining/energy lost -4,000 jobs, transportation and warehousing -2,100 and information technology -1,000.
The unemployment rate fell from 5.1 to 5.0% (7.9 million) and the labor force participation rate was flat at 62.4%. More than +313,000 workers joined the labor force as holiday jobs lured some workers back off the couch. The broader U6 measure of unemployment, which more closely represents reality, declined from 10.0% to 9.8% (15.484 million) and a post recession low.
A bright spot was the decline of -269,000 to 5.8 million in the number of workers employed part time involuntarily because they cannot find a full time job.
The Fed has said they want to see "sustained" employment gains over 200,000 per month. After the drop in August/September they will need to see another decent gain over 200,000 for November to feel comfortable about raising rates in December. Anybody with a pulse understands that October's gains had a lot to do with companies gearing up for the holiday shopping season. The Fed should not raise rates based on temporary holiday hiring but they are so locked in on hiking in 2015 they will probably ignore the obvious and hope the analyst community ignores it as well.
The economic calendar for next week is very light with nothing of real market moving importance. The Retail Sales and Producer Price Index on Friday are probably the most important reports of the week.
There were no stock splits announced last week.
The market was pretty calm on Friday despite the big jobs numbers. The only movers were the earnings reporters from Thursday night. Stamps.com (STMP) was the big winner with a +38% spike after reporting earnings of $1.14 compared to estimates for 89 cents. Revenue of $51.7 million beat estimates for $47.8 million. The company forecast revenue of $198-$208 million and earnings of $3.60-$4.00 for the full year. That was up from prior guidance of $170-$190 million and $3.10-$3.50 on earnings.
Core mailing and shipping revenue was up +36% and EBITDA up +71%. They said they would close the acquisition of Endicia on November 18th. They believe that will boost their "high volume and eCommerce shipping" significantly. Endicia is a subsidiary of Newell Rubbermaid and the purchase price is $215 million.
Monster Beverage (MNST) rallied +13% after the company reported earnings of 84 cents that beat estimates for 81 cents. Revenue of $756 million beat estimates of $740 million. Sales rose +19% and gross margin rose from 53.8% to 61.5%. In the June quarter, Monster and Coke were getting the bugs out of their cross distribution agreement and some retailers ran out of Monster beverages. That was resolved and Q3 saw an explosion of sales in the Coke distribution network. Coke will distribute Monster beverages in 28 countries not currently covered by Monster.
After the guidance and positive comments about future marketing efforts the consensus estimates for future quarters are going to be too low. Monster will begin delivering to China in the first half of 2016 using the Coke distribution network and will launch in Russia by the end of 2015. Monster and McDonalds are currently testing Monster beverages in 20 stores in the US. If the test goes well McDonalds could expand it to other stores or open it to all locations. That would be a huge boost in volume for Monster.
Coke owns 17% of Monster and with sales set to surge there is a good chance they will end up buying the entire company to boost their own sagging sales. I would look to buy Monster shares on any post earnings weakness in the coming month.
Skyworks Solutions (SWKS) reported earnings that were in line with street estimates but then raised guidance significantly. During the current quarter they expect to earn $1.60 and over the $1.57 analysts expected. However, the big guidance came with a forecast of $8 in annual earnings in two years, up from their prior guidance for $7.
Everyone has been worried that lagging iPhone sales in 2016 would hurt their revenue. Apparently, Skyworks is not worried. They are expected to be victorious in their acquisition bid for PMC-Sierra (PMCS) and that will add even more to their future earnings. Shares rallied +7% on the earnings guidance.
Qorvo (QRVO) rallied +23% after reporting earnings of $1.22 compared to estimates for $1.11. The company also approved a $1 billion share buyback or 12% of the outstanding shares. Qorvo is also a chip supplier to Apple and Q4 guidance of $1.25-$1.30 was above analyst expectations for $1.26. The company said the inventory correction was about over and analysts believe it will end in 2015. That is another clue that Apple iPhone sales are good enough to consume all the available chip inventories. The CEO said marquee phones from other vendors launching in 2016 and 2017 would further lift the chip market. QRVO shares rallied +23% on the news.
Berkshire Hathaway lost $2 billion on its investment in IBM or 15% of what it paid for the position. Buffett said he has no intentions of selling the position. I am not crying for Warren Buffett because Berkshire reported a net income of $9.43 billion, up from $4.62 billion in the same quarter in 2014. Adjusted earnings of $2,769 per class A share easily beat analyst estimates for $2,720. Revenue rose +15% to $58.99 billion.
Insurance underwriting profits declined -34% to $414 million. However, profits at the BNSF railroad rose 12% to $1.16 billion. Berkshire made roughly $6.8 billion pre-tax on Kraft Heinz or $4.4 billion after taxes. Berkshire financed the merger and is the largest shareholder at 27%.
Berkshire has $66.26 billion in cash and plans to spend about a third of that on the acquisition of Precision Cast Parts (PCP) which is costing Berkshire about $32 billion. Shares of BRK.B declined about $1 afterhours on Friday.
So far, 444 S&P-500 companies have reported earnings and 74% have beaten estimates. Only 46% have beaten on revenue. The blended earnings estimate for Q3 is for a decline of -2.2% and -3.7% drop in revenue. Fifty-six companies have issued negative earnings guidance for Q4 and only 19 have issued positive guidance. Current Q4 earnings estimates are for a decline of -3.7% and a -3.0% decline in revenue.
Bloomberg Chart Source
In the coming week 17 S&P companies will report and one Dow component, Cisco Systems.
You can tell from the lack of color in the graphic below that we are running out of reporters. Monday and Tuesday the builders report and Thursday is retail day with Macys and JC Penny bookending on Wednesday and Friday. After this week, the volume of earnings will decline significantly and the market will be left to pick a direction based on some other headlines.
Typically, there is a period of post earnings depression. All the excitement is gone and traders move on to other stocks and the high flyers tend to fade. Whether that will happen this year with the indexes so close to historic highs is of course unknown but be aware it is possible. It may even be more likely because of the recent gains and the current resistance levels. I would consider a post earnings fade as a buying opportunity.
Noted short seller Jim Chanos pitched Alibaba (BABA) as a short candidate at the Morgan Stanley conference on Friday. Chanos reportedly said accounting concerns at Alibaba would eventually take them lower.
In September, Barron's said it was time to "get real" on Alibaba and a 50% decline could be looming. Barron's said Alibaba's reported growth rate was "highly implausible." The company claims it is growing at a compounded 55% annual growth rate over the last three years according to Barrons. Chinese research firm JCapital Research said Alibaba's financial reports have "broken free of verifiable reality" and have reached levels that do not agree with "Chinese government figures of overall retail sales, consumer spending or online commerce."
Bronte Capital, an Australian based hedge fund said "Alibaba's gross merchandise volume recently hit $470 billion." That implies the average Alibaba shopper spends "$1,200 a year" according to Barron's calculations. In China, the average household spends $2,650 per person per year. That suggests everyone in China is spending 45% of their total outlay on Alibaba. Barron's also highlighted some transactions that appeared shady if not outright illegal and amounted to moving large sums of money from country to country and removing assets from under the Alibaba umbrella.
I am not trying to make a case for shorting Alibaba. I am just reporting the rising number of intelligent people that have done their homework and found out that maybe 2+2 does not equal 4 in Alibaba's accounting. It will be interesting to watch this develop over the coming months and see if it is just a lot of smoke or if there is a smoke screen.
Chanos also recommended a long position in Alibaba competitor JD.com (JD) in order to hedge against a short position in Alibaba. This company is growing about as fast as Alibaba but without the cloudy organizational structure and questionable accounting.
The strong payroll numbers sent the dollar index soaring for a +1.23% gain in a single day. The dollar has been surging since the Fed mentioned hiking rates at the December meeting and the strong jobs appeared to cement that hike.
This is going to make doing business overseas that much more difficult. With 54% of the S&P missing on revenue estimates because of serious dollar conversion losses it is only getting worse. Once the Fed does begin hiking, the dollar index could easily move over 100.00 and a 12-year high. That will be major pain for international sellers.
Gold has fallen from $1,191 in mid October to 1,088 on Friday with a -1.38% drop on Friday alone. Gold could easily drop under $1,000 by the December Fed meeting if the dollar continues to strengthen. A drop under $1,072 would be a five-year low.
Crude prices declined -1.5% on Friday and -4% for the week. Crude inventories continued to build with a +2.8 million barrel gain. That puts inventory levels only 8.1 million barrels below an 80-year high at 490.9 million. There are still five months left in the inventory build cycle while winter demand is low. There is a really good chance we will see $40 oil again. The soaring dollar is doing as much damage on WTI as the rise in inventory levels.
Active oil rigs declined -6 to 572 and another new decade low. Total rigs declined -4 to 771 and also a ten-year low. Unfortunately, US production rose 48,000 bpd to 9.16 mbpd and a five-week high.
Oil is not the only energy commodity at record highs. Natural gas in storage rose to 3,929 Bcf and that ties with November 2012 as the all time high since records were started in 1993.
Propane stocks have risen to 102.4 million barrels and that is also a new high. You may remember in March of 2014 when propane inventories declined to just 25 million barrels and prices soared to more than $4 a gallon in many areas. Some distributors were rationing their deliveries to make sure every customer had enough to last a couple weeks until new supplies arrived. Wholesale propane today is about 54 cents and we can buy it delivered in Colorado for 95 cents. That is a heck of a lot less than the $3.00 I paid in 2014.
Propane is a byproduct of oil and gas drilling. The surge in drilling over the last two years has created a glut of propane just like every other hydrocarbon.
Resistance won. The major indexes have been in a remarkable rally but that run came to a dead stop on Tuesday as resistance finally held and buyers ran out of conviction. With the October window dressing over and the end of month retirement contributions hitting the market on Monday/Tuesday the latter part of the week saw prices fade. With the earnings cycle nearly over there are far fewer catalysts to prompt market moving spikes.
The market even rallied on Yellen's testimony as she again referenced a potential rate hike in December.
The big question traders should be asking is what happens now? What is going to push us higher next week? There will be some earnings from smaller companies and individual stocks should still gain in anticipation. However, the broader market appears heavy. This is normal after six weeks of gains. We should expect some weakness and then the normal Q4 upside bias should take hold. "Should" is the key word.
Goldman Sachs said nearly 25% of all corporate share buyback activity occurs in the last two months of the year. November is typically the busiest month with 13% of annual repurchase dollars being spent. December ties with May for the third most active month with 10% of the annual budget being spent.
November and December are especially active because companies want to finish their programs before year-end. When the blackout period surrounding earnings ends the programs kick into high gear. With monster buyback programs currently in force this suggests the next two months could have some additional market support in the form of corporate buying.
The S&P bounced off resistance at 2,115 on Tuesday and drifted lower the rest of the week. There was no pronounced selling. It was more a lack of buying rather than an abundance of sellers. However, Friday was the highest volume day of the week at 7.7 billion shares. The average volume for the last four days was 7.385 billion shares and the highest average in weeks. Declining volume was significantly over advancing volume the last three days.
The high volume when the last three days were market negative suggests we are in a distribution phase. The smart money and in this case funds that were heavily invested at the end of October, were calmly trimming their positions. In a distribution phase large investors long the market begin to "trim" positions slowly rather than just pull the trigger and dump large quantities of stock. They know the market will crash if they start placing large sell orders at a market top. Instead, they are trying to slip out the backdoor quietly without anyone noticing.
The S&P has initial support at 2075-2079 followed the rising 200-day average at 2,060. Resistance remains 2,115 and 2,128.
The word of caution comes from the MACD and RSI on the S&P and Dow. Both are suggesting there is a market pause in our near future. I showed this chart last week and the last three days have brought the MACD lines closer to a negative cross. The RSI bounced off 70 and the high for the year.
The Dow did not face any material resistance other than psychological at 18,000. On Tuesday, the index reached 17,977 and then 17,964 on Wednesday. However, support at 17,800 was solid and the index closed the week at 17,911 and within easy striking distance of real resistance at 18,100.
There is only one Dow component reporting earnings next week and that is Cisco on Thursday. The banks may be the Dow leaders next week on expectations for a rate hike. Goldman Sachs (GS) soared +$7 on the strong jobs report and the rate hike implications. JP Morgan (JPM) gained +$2. Disney added +$2.67 after reporting earnings on Thursday evening.
I do not see anything on the horizon to keep the individual Dow stocks moving strongly higher. The rally may turn into a melt up rather than a robust rally but I doubt anyone would complain.
The Nasdaq Composite ran into solid resistance at 5,160 with Tuesday's high at 5,163 and Wednesday's high at 5,162. While this was a solid top, the index also found solid support at 5,100 and rebounded +52 points from Friday's low to close at 5,146.
The tech sector has led this rally since early October. The minor weakness over the last three days suggests tech stocks will also lead us higher in the days to come. Priceline has earnings on Monday and that could be either a pothole or a big assist for the tech index.
The Nasdaq is poised to make a new high as long as it can get over that 5,160 level with some momentum.
The Russell 2000 was the star of the broad market indexes last week with a +3.26% gain. The rally in banks, brokers and biotechs helped propel the index to new resistance at 1,200 and that is exactly where it closed on Friday.
Once the Russell crossed over that 1,165 resistance that held it back for two months it rocketed higher and it should continue to make gains as we head into the January effect period.
Support is back at 1,180 and a move over 1,200 could run to the next major resistance at 1,244.
The S&P-600 small cap index is a little farther ahead technically than the Russell and is now approaching decent resistance at 712 from August.
Despite the weakness in the S&P over the last three days, 71.8% of the S&P stocks have a buy signal according to the Bullish Percent Index. This suggests broad based buying has reversed a lot of negative charts over the last month. That percentage was down to only 22.4% in September.
The percentage of S&P stocks currently over their 50-day average rose to 80.8% on Tuesday and declined about 7% over the last three days. This is still bullish but we are nearing historically high levels.
The commodity sector is dying under the weight of the strong dollar. The CRB Index is at the lows for November and not far from the September lows. This is going to continue to push inflation lower and make it difficult for the Fed to justify a December rate hike. They will claim the impact of commodities on inflation is transitory but it is also deflationary. A little decline is good but a large decline is very dangerous.
The cost to ship those commodities is dropping fast and that suggests a serious lack of demand. While the developed countries are supposed to be recovering thanks to massive stimulus, the demand for raw materials is still falling. This suggests the global economy, led by China, is still weakening.
The Baltic Dry Index is currently at its lowest level for November in the history of the index.
I am still in buy the dip mode because typical historical patterns for the next 6 weeks will probably overcome any worries over a slowdown in Q4 earnings, potential rate hikes, global economics and equity bubbles.
The indexes are within rock throwing distance of new highs with the Nasdaq 100 already there. When the market nears new highs, those highs act like a magnet to pull the indexes closer.
Strong Octobers tend to produce weak Novembers but hopefully those new high magnets will overcome that historical trend.
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Tesla's Elon Musk has lost touch with reality. At least that would appear to be the case based on his visions of the future. He said at the Baron Investment Conference on Friday to expect "millions of Teslas and a 500 mile range." Considering Tesla will only produce 52,000 cars this year and his prediction that Tesla will eventually be manufacturing "several million" cars a year, it appears Musk may have lost touch with reality.
He said the cost and the capability of batteries would be the determining factors. An affordable car with a 500-mile range would be a very desirable product. Musk said they could make a 500-mile car today but the cost would be prohibitive. In order to reach his "several million a year" target Musk said Tesla will have to build "many" more manufacturing plants and "many gigafactories" to make the batteries. Musk said the Model 3 is on track to debut in March and will be 20% smaller than the Model S. The S will be similar to a BMW 3 or an Audi A4.
Donald Trump made news last week claiming that President Obama was controlling Janet Yellen and not letting her raise interest rates. That is completely untrue since the Fed is not political in any way. Trump claimed that raising interest rates would sharply hike the amount of interest on the Federal debt. That part is true.
I have written about this many times. A 1% hike in the Fed rate would increase the interest on the national debt by 50% from $400 billion to $600 billion a year. A return to "normal" rates from as recently as 2007 would raise the interest on the debt to $1 trillion a year. The national debt increases by $1.5 billion a day and the interest on the debt goes up by $35 million a day.
South Korean exports declined -15.8% in October. Why do we care? We care because exports from South Korea are shipped all over the world and exports are down -7.5% year to date. Korea has been dubbed the canary in the coalmine for the global economy. Full article with charts
Square Inc, the mobile payments company led by Jack Dorsey, initially targeted a valuation of $6 billion with its recently announced IPO. On Friday, they lowered that to $4.2 billion when they put a price range on their shares of $11 to $13. The IPO will offer 27 million shares of the 323 million that will be outstanding after the IPO. The over allotment of another 4 million shares means Square will actually raise about $400 million. The ticker symbol will be SQ. Revenue in 2014 was $850 million compared to $552 million in 2013. Revenue for the first nine months of 2015 was $893 million with the biggest quarter normally Q4. However, Starbucks has said it will not renew its partnership in 2016 and that accounted for 17% of Square's revenue in 2014.
The AAII Investor Sentiment Survey showed an increase of people moving back into neutral with both bullish and bearish sentiment declining. Apparently, the stall at resistance after six weeks of gains is causing people to reconsider their outlook. AAII Survey
The White House has instructed critical infrastructure officials to prepare for a disaster that could cost more than $2 trillion. This potential disaster is a Coronal Mass Ejection (CME) from the sun. We are hit with small events routinely and several times in recent years we have narrowly missed being hit with major storms that could have fried the electrical grid and taken years for us to recover.
Think of the sun as a spinning top that randomly fires off bolts of plasma in all directions. Fortunately the earth is a moving target. As long as those bolts are pointed away from the earth they are not a problem. Every hundred years or so the direction of the electrical charge and the location of the earth happen to line up and trouble appears.
In most of the major events in the past there was no harm done to the earth because there was no electrical grid and no electronic devices. The last major impact was the Carrington event in 1859. Telegraph systems in North America and Europe were destroyed and operators received electric shocks. Some lines melted from the poles.
A similar sized CME event occurred on July 23rd, 2012 but the direction of the plasma ejection barely missed the earth and there was no damage. NASA did not disclose the information on the near miss until April 28th, 2014. NASA says there is a 12% chance of actually being hit over the next decade.
Lloyds of London calculated that a direct hit similar to the Carrington event would cost the US up to $2.6 trillion and restoring electricity to the US would take years.
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