The last four days saw triple digit moves on the Dow but we finished only 66 points from where we started the week.
The last four days the Dow has fallen triple digits intraday and yet ended back almost where it started. On Monday, the Dow traded in only a 50-point range and one of the narrowest in years. That was a consolidation day while we waited for traders to come back from the holiday weekend. The rest of the week was somewhat bullish with big afternoon rebounds and Thursday's close looked like a setup for a bullish breakout. Unfortunately, the Nonfarm Payroll report killed that breakout and produced another triple digit intraday decline.
The Nonfarm Payrolls shocked the street with a drop to only 38,000 new jobs in May and the lowest number since September 2010. That was down from the previously reported 160,000 in April and initial estimates for 170,000 jobs. However, April was revised down -37,000 to a gain of 123,000 and March was revised down from 208,000 to 186,000. The separate household survey showed a gain of only 26,000 jobs. This was a major hiccup in job creation and suggests the weakness in the economy is accelerating.
Technology jobs declined -34,000, temporary services fell -21,000, construction -15,000, manufacturing -10,000 and energy/mining -10,000. Private companies added only 25,000 jobs. Since September 2014 the energy/mining sector has lost -207,000 jobs.
The headline number would have been worse but the seasonal "adjustment" added 224,000 phantom jobs into the May calculation and that gave us the +38,000 job gain. Without the adjustment, the number would have been significantly negative. There were 231,000 phantom jobs added in April as well. Since 2007, the workforce has grown by 21 million workers but the number of jobs has only risen 5 million. Only 2 million of those were full time jobs.
The unemployment rate plunged from 5.0% to 4.7% because 458,000 workers dropped out of the workforce. This dropped the labor participation rate from 62.8% to 62.6% and close to a 40-year low. The low in 2015 was 62.4% in September. The number of people not in the workforce rose to a record 94.7 million.
The Verizon strike subtracted 34,000 jobs and those jobs will be back in June. Still, adding those back in only lifts the number to 72,000 and still a big miss since the three-month average would only be 127,000 compared to 181,000 last month.
The BLS used the excuse that the response rate to the survey was unusually low at 74% compared to an average of 82% over the last three years. That suggests there could be significant revisions in the coming months. However, note that the revisions this month were negative.
Offsetting the decline in the Nonfarm Payrolls was the ADP Employment on Thursday that showed a gain of +173,000 private sector jobs. However, the separate Household survey on Friday showed a gain of only 26,000 jobs and confirmed the decline in the Nonfarm Payrolls. One of these surveys is wrong. Either the ADP numbers were grossly overstated or the two BLS numbers were vastly understated.
In a separate Pew Research survey, they found that the number of 18-34 year old individuals living with their parents was the highest since the Great Depression at 32.1%. Young adults are having trouble finding good jobs that will support them living on their own or allow them to get married and start a family.
So far, in 2016, there has been a decline of 6,000 full time jobs but an increase of 572,000 low paying part-time jobs. The percentage of men not working between the prime working ages of 25-54 is at an all time high at 4.6% while the 25-34 age group is at 5.7% unemployed.
The ISM Nonmanufacturing Index declined from 55.7 to 52.9 and the lowest level since February 2014. This was the fifth decline in the last six months. The new orders component fell from 59.9 to 54.2 and employment fell from 53.0 to 49.7. Order backlogs fell from 51.5 to 50.0 and exports fell from 56.5 to 49.0. With multiple components falling into contraction territory and the services sector the strongest section of the economy the outlook is not good. This was a May survey so we cannot blame the weak GDP in Q1 for the decline in the sector in May.
Factory Orders for April rose +1.9% compared to +1.5% in March. The gain was in line with consensus estimates. Durable orders rose +3.4% with nondurables gaining only .4%. Capital goods declined -0.6%. The report was ignored because April was a long time ago in market time.
Despite the weak economic reports over the last couple weeks and the weak employment, the Atlanta Fed forecast for Q2 is still showing 2.5% growth. That is up significantly from the +0.8% growth in Q1 but there is still another month left in the quarter. We could easily be well under 2.0% by the end of June.
There is nothing material on the economic calendar for next week except for the Janet Yellen economic policy speech on Monday. You can bet Janet will spend the weekend rewriting her prepared comments after the employment report blew a hole in the carefully crafted "data dependent" rate hike we were expecting in July.
Actually, Janet is probably breathing a sigh of relief that the data turned sour after a rising number of Fed heads began calling for a hike in June. Now she can point to the data and say we are data dependent and it will be appropriate to raise rates when the data improves.
The FOMC meets the following week and nothing is going to change for the better before the meeting. The Brexit vote is the following week and the jobs data allows the Fed to pass on the rate hike without appearing to be politically motivated because of the Brexit event.
JP Morgan (JPM) said the probability of a recession over the next 12 months has risen from 30% to 36%. This is a new high for this economic expansion. Note that since 1969 whenever that probability has reached this level there was always a recession. Secondly, only ONCE since the Depression has a recession appeared that was not triggered by the Fed raising interest rates. Economic expansions do not die of old age but by Fed action.
We are already in a 7-year economic expansion and the average expansion cycle since 1945 has been 59 months or just short of 5 years. The clock is ticking on this current expansion and the bearish impact on the market.
The payroll numbers caused massive buying in treasuries with the yield on the ten-year falling -5.9% in one day to 1.70%. This is nearing a four-year low at 1.65%. There was definitely a flight to quality underway in treasuries on worries the employment numbers were a warning of an impending recession. The JP Morgan recession warning also spurred buying.
Twenty-three countries now have negative interest rates with more than $10 trillion in investments. The German 10-yr Bund closed at a record low yield of 7 basis points. The 2-yr has a negative yield of -0.54% and the 5-yr at -0.41%.
The dollar crashed immediately upon the release of the payroll numbers. If the Fed is not going to hike rates until September or December then the dollar could remain weak and move lower if the economic reports continue to weaken. Gold prices spiked significantly on the drop in the dollar. Crude prices remained weak but would have been significantly weaker were it not for the dollar drop. The Dollar Index declined -1.76% or -1.69.
The CME FedWatch Tool is now showing only a 3.8% chance of a rate hike at the June meeting. Last week there was a 28.1% chance. The July FOMC meeting still has a 31.3% chance of a rate hike, down from 60.7% last weekend. The September meeting is only showing a 43.7% chance today compared to 66.8% last week. The Fed may want to raise rates but the market is betting against it.
In stock news, the gun manufacturers crashed after the FBI reported background checks rose only 2.6% in May compared to 14.4% in April. May background checks totaled 942,970 compared to 918,710 in the prior May. There was little help from politicians in early May with gun control out of the headlines. However, over the last week it has been front and center so I would expect June sales to rise. President Obama went on a rant in filming for a Sunday news show so that should also help. He admitted his presidency had caused more gun buying than any other point in history. Smith & Wesson (SWHC) fell -7% and Sturm Ruger (RGR) fell -4.8%.
Broadcom (AVGO) reported adjusted earnings of $2.53 compared to estimates for $2.28. Revenue rose +119% to $3.541 billion but still missed estimates for $3.550 billion. The revenue was boosted by strong product cycles from broadband and switching systems but was offset by a drop in the demand for disk drives and "premium smartphones." That is code for iPhones but they are prohibited against mentioning them by name. Wireless communications revenue rose +38% because of high demand for the chips. Wired infrastructure revenue rose sharply on demand for routers and switches to 58% of total revenue. Enterprise storage revenues declined -12% to $525 million. The company had $2.041 billion in cash at the end of the quarter and paid a dividend of 49 cents. The Q3 dividend has been raised to 50 cents. They guided for Q3 revenue of $10.75 billion with gross margin around 60%. Shares rallied 5% on the news.
Chipmaker Ambarella (AMBA) reported earnings of 34 cents that beat estimates for 28 cents. Revenue of $57.2 million also beat estimates slightly. They announced a $75 million share buyback effective immediately, which is 5.4% of their market cap. They guided to Q2 revenue of $60-$66 million and the street was expecting $69 million.
The challenge is the residual problems from the Japanese earthquake that shutdown manufacturing for Sony (SNE). The plant reopened on May 21st but the chip fabrication is not expected to resume until the end of August. Sony image sensors are used in mainstream and high-end video cameras that also use Ambarella chips. Analysts expect a strong second half for Ambarella once Sony production resumes. GoPro is also expected to launch the Hero 5 action camera in September and that uses Ambarella chips. Shares rallied 9.4% on the news but they have a long way to go to regain past glory. Friday was simply a short squeeze but several analysts did raise their ratings.
Earnings for next week are scarce but there are several big names still reporting. Valeant is scheduled to report on Tuesday before the open and this is sure to be the topic on trading desks all day. The consensus estimate is $1.42.
On Wednesday Ctrip.com, Lululemon and Restoration Hardware will report. Thursday has Kroger, Oracle and Rite Aid.
The AAII Sentiment Survey spiked significantly from last week. Bullish sentiment rose +12.4% to 30.2% and a six-week high. Neutral sentiment fell -12.1% to 40.8%. Bearish sentiment barely moved with only a -0.3% decline to 29.1%. It is amazing what several days of a bullish market can do to sentiment. Note that all the increase to bullish sentiment came from those previously neutral. The bears barely flinched with only a fractional decline.
Buy the rumor, sell the news. The Biotech Index ($BTK) is up 470 points or 16% since the May 12th bottom. It has been strong support for the Nasdaq and the Russell 2000. On Friday, the ASCO cancer conference opened for a five day run with 35,000 attendees. Also on Friday many of the big biotech gainers leading up to the conference were crushed as traders took profits rather than have some negative conference headline over the weekend cause a massive sell off next week. The BTK fell -2% on Friday when most of the indexes were only marginally negative. The Nasdaq suffered the worst with stocks including REGN -7, EGRX -5, UTHR -5, FPRX -4, AGIO -4, RARE -4, ALNY -4, etc. The Nasdaq losers list this weekend looks like a biotech who's who. The odds are very good this selling will continue next week and that will be an anchor for the Nasdaq.
Traders were sitting on pins and needles all week worried about the outcome of the OPEC meeting on Thursday. As expected, nothing happened. Oil ministers all said they were happy with oil prices and the current upward correction. Since they are getting twice as much for their oil now than they did in February it would make sense the pressure has been relieved.
However, oil prices began to fade after the meeting because those same higher prices are causing some of the OPEC countries to produce more oil. The various outages are being corrected and the temporary balance of production and demand will quickly turn into a glut once again.
August is the highest demand month of the year with about two million more barrels consumed per day than in May, which is the lowest demand month. Saudi Arabia alone burns an extra one million barrels per day to generate electricity for cooling.
Analysts believe oil will be trapped in a $45-$55 range for the rest of the year with the risks to the downside rather than the upside. There are still some analysts that expect $65 and others expect $40 but they are in the minority.
The rising price of oil caused a spike in the rig count and that is not what Saudi Arabia wanted to hear. Active rigs rose +4 to 408. Active oil rigs rose +9 to 325 and the first gain in 11 weeks and only the second gain this year. Active gas rigs declined -5 to 82. Offshore rigs declined -3 to 21 and a new cycle low. Active rigs are down -1,523 from the peak in early 2015.
The prior week rally in the S&P stalled at 2,100 but there is no evidence of a pending decline. Four days last week the S&P declined to 2085-2088 intraday but recovered to close at the highs of the day. Three times the index closed at 2,099 and once at 2,105. That close over 2,100 had the appearance of a setup to push higher and retest the highs but the employment report killed that effort.
However, the constant rebound from those intraday lows and the return to 2,100 still looks like investors are expecting a breakout. Remember, much of those gains over the last two weeks were on the back of the 16% rally in the biotech sector with help from financials and semiconductor stocks. The biotech stocks are likely to decline next week. The chip stocks appear to have run their course after the Applied Materials earnings bounce and the higher production estimates for iPhones.
The financial sector was crushed on Friday as expectations for a rate hike evaporated. Goldman Sachs (GS) was the biggest loser on the Dow at -$3.61 with JP Morgan in second place at -$1.17. There is no reason for the financial sector to rally next week unless Yellen pulls a rate hike out of her purse in the speech on Monday.
The energy sector is also likely to fade as prices move away from $50. The offset there is a falling dollar that will support crude to some extent but concentrated selling in the futures could overcome the dollar impact. Basically, crude prices are going dormant without some new headline and that means energy stocks could also fade.
If we subtract biotechs, financials, chips and energy stocks from the S&P support base there is not much left. Those are major S&P sectors.
The index has significant resistance from 2100-2132 and it has failed at these levels on every test since last May. Eventually those levels will be broken but heading into the summer doldrums does not give me much hope for the coming month. A rally is possible because of the massive dip buying we saw last week but there has also been sellers waiting at 2,100 on every rebound.
The Dow remains under strong resistance at 17,925 and the index has tested lows at 17,700 for the last four days. The Dow has been the weakest index because it did not have a lot of biotech stocks for support. Weak financials and energy next week could be the anchor that pulls it lower. However, we have seen serious dip buying the last three days but the volume was light. They bought the dips but they could not push the index higher. Conviction stopped around 17,800.
The Nasdaq could have tough week ahead if the biotechs roll over as I expect. That sector has been major support and could now be a major drag. The Thursday gains stopped almost exactly at 4,968, which was resistance from April. This could be an ideal spot for a failure.
Without a lot of earnings or events next week, the Nasdaq will be left to find its own way. That direction may not be positive.
The Russell 2000 small caps surprised everyone with the close over major resistance at 1,165 on Thursday. Of course, that was due to the 2.5% gain in the biotechs that day. The Russell dipped back below that resistance on the -2% decline in biotechs on Friday. The Russell will follow the biotechs next week because there is no other sector that can counter the biotech pull. Financial stocks should be weak and energy should be weak and those three sectors should drag the index lower.
Fundstrat's Tom Lee believes we are in for a June Swoon now that the Fed rate hike has been pushed farther into the future. He said a confluence of events were setting up for a perfect storm. He warned the market's three months of gains, weakening financial stocks, high-yield spreads getting ready to widen, the U.S. dollar reversing lower and disappointing economic data is pointing to a less liquid environment for equities. He said a lot of the firm's clients that made money in May are booking profits. Lee is not a bear. His yearend target for the S&P is 2,325.
I would add in the FOMC Meeting on June 16th, Brexit on June 23rd and the apprehension over the political conventions in July.
There is no rule that says the markets have to go down in June but historically, even without all the various events above, the S&P is flat in early June, peaks around option expiration on the 17th and then closes the month at the lows.
However, since 1950 June has been up 33 years and down 33 years with an average return of -0.10%. July has been up 36 years and down 30 with an average return of 0.84%. August has been up 37 years and down 29 with an average return of -0.27%. September is the big change in trend with 29 up years compared to 37 down years and an average return of -0.68%. October flips back to positive despite some very strong declines early in the month. It has been up 41 years and down 25 with an average return of +0.8%. Source
I am neutral for next week with the exception of a potential decline in the biotech sector that weighs on the Nasdaq and Russell. Yellen's speech on Monday could move the market in either direction. Whether the move will be lasting is a coin toss.
If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.
Walmart (WMT) said it was partnering with Uber and Lyft to deliver products to your door on the same day you order them. There will be a $7 to $10 charge for the service. The pilot program will be tested in Denver Colorado and Phoenix Arizona. Sam's Club will also have a pilot in Miami Florida in March.
The deliveries will handle both groceries and general merchandise. Walmart already has a grocery home delivery service in San Jose and Denver. They are planning on adding 14 cities in June. To place an order for home delivery you have to go online and specify a delivery window so the driver does not have to leave the items on your doorstep. Store personnel will pick and pack the order and then call a delivery driver. Walmart stressed there is no payment to the driver on delivery so I am assuming no tips.
Walmart has to do something to combat Amazon. Online sales growth has slowed in 7 of the last 8 quarters. Online sales account for only 5% of total sales. They also said they were experimenting with moving merchandise directly from the delivery truck to store shelves and not keep inventory in the back room. They also said they were "investing in prices" which means they are lowering prices in select areas to compete better with other retail stores.
Are you living in a video game? Elon Musk says it is possible but not likely. He explained to a crowd at the Code Conference that our existence could be a simulation being run by a highly advanced civilization. Seriously, this is from the guy that brought you PayPal, Spacex, Tesla, SolarCity and the Hyperloop.
He said, "The strongest argument for us being in a simulation is the following: 40 years ago, we had Pong. Two rectangles and a dot. Now, 40 years later, we have photorealistic 3D with millions playing simultaneously. If you assume any rate of improvement at all, then the games will become indistinguishable from reality, even if that rate of advancement drops by 1000 from what it is now. It is a given that we are clearly on a trajectory that we are going to have games that are indistinguishable from reality. It would seem to follow that the odds that we are in base reality is 1 in millions." In some circles he would be called crazy.
Musk plans to launch a rocket to Mars in 2018 and then follow it with some supply ships every 24 months until he sends people by 2025. Musk said he did not recommend transporting a human to Mars in SpaceX's Dragon II spacecraft because, for one, the interior space is akin to that of an SUV, which does not make for comfortable space travel. But, perhaps more importantly, the Dragon II does not have the ability to return to Earth. We would have to put that in really small print on the contract. "I mean if you are going to choose where to die, then Mars is not a bad choice," Musk said in response to whether he wanted to end up there. "But it's not some sort of a 'Martian' death wish."
Musk said Google would not be a potential competitor to Tesla in autonomous cars. He said Google has done a great job in showing the potential but they are not a car company. "I would not say they are a competitor." When asked about Apple he said, "They will be more direct." Musk has inside knowledge of Apple's plans because they have hired some Apple engineers and Apple has hired some of his engineers. Musk said Apple will not be in production before 2020. He previously dubbed Apple a "Tesla graveyard" in response to the defection of Tesla employees to Apple.
Facebook has entered the required zone. Tenants in a Salt Lake City apartment complex are "required" to "like" the apartment on Facebook as a condition of their lease. The City Park Apartments posted notices on some resident's doors reminding of their contractual obligation to post a like on the Facebook page and "friend" the apartment complex. The lease also allows the apartment to use pictures of the tenants and their visitors on the apartment's page.
If the tenants do not friend/like the apartment's Facebook page they can be found in breach of the rental agreement and forced to leave.
Over $100 trillion has disappeared from corporate assets. According to John Mauldin and the CIA Fact Book there are 1,656 trillion barrels of oil reserves worldwide. Oil in the ground is a corporate asset or country asset in the case of countries with state owned oil companies. These reserves can be sold to raise cash or they can be used as collateral for loans.
In mid-2014 oil was more than $100 a barrel. In February, it was selling for less than $30 a barrel. That means the asset value to corporations had declined more than 70%. If you multiply the 1.656 trillion barrels of reserves by the $70 drop in prices, more than $115 trillion in asset value evaporated in about 18 months.
The human mind has trouble with very large numbers. It would be hard to quantify in terms everyone could understand on how much money that really is. This is why crude prices are so important to the global economy. Entire countries are struggling today because of the low oil prices. In America alone more than 207,000 workers lost their jobs and more than 100 companies filed for bankruptcy. The "wealth effect" in those countries that depend on oil for their revenue is a real reason why the global economy is so weak. Countries cannot spend money at $40 oil as they could at $100 oil. If your salary were cut by 70% tomorrow, what would your life be like?
North Dakota had a $2 billion rainy day fund two years ago. Today they have a $1 billion deficit because their budget was built on $100 oil and the massive income from all the drilling in the Bakken. That drilling has vanished. As of Friday, there are only 22 active rigs in North Dakota. The tens of thousands of workers have vanished leaving only empty man camps and desolate subdivisions.
Harry Brown, Libertarian presidential candidate in 2000 and no relation to me, listed the top ten ways to preserve your wealth. Never assume your income stream will not stop. Never assume just because you created a lot of wealth in one endeavor that you can recreate it if that wealth was lost. If we could impart that concept to every high school graduate, it would help them immensely. How many times have you seen an article where some famous actor, athlete or past Lotto winner was filing for bankruptcy? Money and fame are fleeting. Plan to keep what you have rather than expect to make it again. How many oil companies are making plans to grow more slowly and save more money when oil prices return? The answer is "all of them."
Enter passively and exit aggressively!
Send Jim an email
"Float like a butterfly, sting like a bee. His hands can't hit what his eyes can't see. Now you see me, now you don't. George thinks he will, but I know he won't.
He who is not courageous enough to take risks will accomplish nothing in life.
The man who views the world at 50 the same as he did at 20 has wasted 30 years of his life.
Service to others is the rent you pay for your room here on earth.
I know where I'm going and I know the truth, and I don't have to be what you want me to be. I'm free to be what I want.
The man who has no imagination has no wings.
It isn't the mountains ahead to climb that wear you out; it's the pebble in your shoe.
Silence is golden when you can't think of a good answer.
It is just a job. Grass grows, birds fly, waves pound the sand. I beat people up.
Don't count the days. Make the days count.
It is great to be humble but humble people don't make much history.
I hated every minute of training, but I said, 'Don't quit. Suffer now and live the rest of your life as a champion'.
Hating people because of their color is wrong. And it does not matter which color does the hating. It is just plain wrong.
Live everyday as if it were your last because someday you are going to be right.
It does not matter if you are a Muslim, Christian or a Jew. When you believe in God you should believe that all people are part of our family. If you love God you cannot love only some of his children.
I am the greatest, I said that even before I knew I was.