There were three major drags on Friday's market in addition to a bout of profit taking.
Apple (AAPL) was trading sideways early in the day but at 1:30 a report broke that caused shares to drop from $114.70 to $111.55 and cause a serious market drag. The report from German research firm GFK said according to channel checks in 17 countries iPhone 7 sales were down -25% from iPhone 6 rates. The countries checked did not include the USA.
This would be in stark contrast to the comments from Sprint and T-Mobile saying sales were up +375% in the first weekend in the USA. Apple also reported the initial inventory of iPhone 7s had sold out. However, that specific headline could easily be manipulated by shipping a smaller quantity and then bragging when it sold out. That kind of gimmick is common in all forms of retail sales.
Lastly, a Digitimes article on Friday reported Apple chip suppliers had been told that Q1 orders would be 20% lower than Q4, which was already 20% lower. If the iPhone sales were so strong, why are they making 20% fewer? That could also be explained by the expectations for the 10-year anniversary iPhone reportedly due out in September 2017 and Apple is planning on shrinking the supply of iPhone 7s well in advance. The anniversary phone is rumored to have a large number of new, must have features.
Apple shares fell sharply on the news and this story may have legs that last well into the future. Remember, Apple broke with tradition for this cycle and said they would not report the early iPhone sales. They blamed the blackout on "supply issues" that would limit the available phones for sale. Of course that was convenient if you were expecting lower sales and were planning on shipping a smaller quantity of phones in hopes you could announce a "sell out" that would spur future sales.
If that was not enough to weigh on Apple shares, a Reuters report claims Japanese regulators are considering antitrust action against the company for possible violations that might have helped it dominate the smartphone sector in Japan and gain a 50% market share.
Another big cap tech stock was also dragging the market lower. Facebook (FB) admitted to significantly overstating viewer time on video ads by eliminating videos viewed less than 3 seconds from the overall calculation. While that makes sense in one aspect that artificially inflated the metrics to make it appear Facebook advertising videos had a lot longer viewing rate. One advertiser, Publicis Group SA, said Facebook told them the earlier method likely overstated the average time spent watching videos by 60% to 80% for two years. While the calculation did not impact the billing for advertising, it probably impacted the decisions for advertisers to place ads on Facebook if they thought the viewing time was significantly higher. Facebook shares were down more than 2% intraday and impacted the Nasdaq indexes.
On Wednesday, oil prices soared after Saudi Arabia said they would agree to a production freeze if Iran would agree to a freeze. That was the first time a Saudi official has said they would agree to a freeze. Unfortunately, that lasted about 24 hours and then fell apart. On Friday, another Saudi official cautioned not to expect a deal and the meeting in Algeria next week would be more of a chance to consult rather than reach any agreement. Iranian officials were also said to have refused to freeze production although there was no official statement. Iran has increased production since the end of sanctions from 2.3 million bpd to 3.7 million bpd. Crude prices fell nearly 4% on Friday as the potential agreement was seen to be collapsing before any meetings are even held.
Active rigs rose +5 to 511 with oil rigs gaining +2 and gas rigs rising +3. With oil prices more likely to hit $40 than $50 over the next month, the addition of new rigs should slow.
The combination of those three events helped to push the equity markets lower in an already weak environment. Friday was already expected to be a day for profit taking ahead of the weekend event risk and Apple, Facebook and oil prices simply accelerated the decline.
There were no economic events on Friday. However, next week has so many events I had to leave some off the calendar. Now that the Fed meeting is over the quiet period has ended and the Fed speakers are out in force. There are 11 Fed heads speaking in the first four days and in addition, Janet Yellen speaks twice. We can expect to hear multiple conflicting views on the chance for future rate hikes. Eric Rosengren already got his two cents in on Friday saying the economy needs "modest gradual tightening now." He warned the unemployment rate was going to fall to unsustainable levels that would push up inflation. When employers have to raise wages to compete for workers, it creates inflation.
The outlook for the November meeting is only a 12.4% chance of a hike because it is only 4 working days before the election. The outlook for December is now 54% and it will be interesting to see how it changes after a week of heavy Fedspeak.
The presidential debate on Monday is going to be a hurdle. There is almost no outcome that does not produce market volatility. A knockout by either candidate could produce a significant market move as those sectors seen benefitting from their win, will rise sharply. If Clinton wins the debate the biotech sector and energy sectors will crash along with others. Just expect volatility on Tuesday and if none appears, be grateful.
Since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P. The Monday night debate is going to have about 100 million viewers, or the equivalent of a Super Bowl only with no commercials. This is likely to produce the lowest ratings in a decade for a Monday night NFL game.
The final GDP revision on Thursday will probably be in the range of 1.0% to 1.2% growth and the third consecutive quarter of roughly 1% growth after 0.83% in Q1 and 0.87% in Q4. Any revision under 1% could be market negative.
Another tech stock with a lot of activity on Friday was Twitter. Reportedly, the company has received multiple expressions of interest after Evan Williams said on CNBC two weeks ago the board has to look seriously at any potential offers. I said at the time that sounded like a sales pitch designed to solicit offers. Apparently if you pitch it, they will come. The only two companies named in the news were Google (GOOGL) and SalesForce.com (CRM) but reportedly, there are several others. The stock shot up to a nine-month high at $22.62 on the news. The obvious question is the acquisition price. Since any bid would assume a premium, the obvious target would be $26 and their original IPO valuation at 20 times EBITDA. Twitter may not be worth that on a fundamental basis but they are a unique property and should command at least a minor premium.
In a case of bad timing, RBC Capital downgraded Twitter to sell after the close on Thursday based on a survey of 1,100 advertising professionals. Twitter placed 5th out of 7 in ROI on advertising dollars spent. Some 28% of advertisers planned to cut spending on Twitter and 30% of respondents said they were not allocating any spending on Twitter. RBC cut their price target from $17 to $14. The acquisition news broke right before the open and erased the pre market decline. Twitter traded 194 million shares or 7 times normal volume.
Shares of cybersecurity firm Imperva (IMPV) spiked after news broke that IBM and Cisco Systems may be interested in buying the company. Forcepoint, private company owned by PE firms was also mentioned as interested. Imperva hired Qatalyst Partners to do a strategic review that has apparently paid off. Shares spiked 21%. Final bids are due in two weeks.
Yahoo (YHOO) announced it suffered the second biggest cyber hack in history with records stolen for more than 500 million accounts. We found out on Friday that CEO Marissa Mayer knew of the data breach in July and well before the bidding process for Yahoo ended with Verizon the winner. She did not tell anyone involved in the bidding process about the hack and only told Verizon two days ago. Yahoo claims this was a state sponsored hack but state operators rarely divulge the data or sell it. Currently the data is available for sale on the dark web and that would suggest it was not state sponsored. That excuse is just being used by Yahoo to try and deflect some of the blame. Another option is that there were two separate hacks of Yahoo's servers by two different groups.
The stolen data contained names, email addresses, telephone numbers, date of birth, some passwords, security questions and answers. Credit card numbers, bank account details and payment info was not stolen. If Mayer knew of the attack in July and did not notify anyone, including users, the company could be in breach of SEC rules.
Yahoo has already been sued by a user on behalf of all the other users, accusing the company of gross negligence. They are asking for class action status and this will be one more thorn in Mayer's side.
Finish Line (FINL) reported earnings of 55 cents compared to estimates for 53 cents. Revenue of $509.4 million beat estimates for $493.6 million. Same store sales rose +5.1% compared to estimates for 2.9%. The demise of Sports Authority helped send consumers to Finish Line stores. The company guided to full year earnings of $1.50-$1.56 per share. Analysts were expecting $1.54 per share so that guidance was slightly below estimates. They guided for same store sales between 3% and 5% for the full year.
Shares fell -5% after the CEO warned that September same store sales had risen at a "low single-digit percentage rate." That suggests the uptick in sales in July/Aug has faded.
Friday's decline was expected. Apple and Facebook only made it worse along with the drop in oil prices. The post Fed reaction lifted the markets back to resistance and buyers ran out of conviction ahead of the weekend and Monday's debate.
Last week was the fifth week of the sixth most volatile weeks of the year. Next week is the sixth and final week. That does not mean week 7 will suddenly explode higher but typically the last two weeks of October are bullish. The problem with next week is the debate and that is a once every four year event so it is hard to quantify other than the historical details I posted earlier. The worst part about it is that the other two debates are five days apart the following week. We are going to be drinking political news from a fire hose and that is likely to be market negative unless one candidate surges ahead after the Monday debate.
I would like to think portfolio managers are so starved for returns they will jump in anyway after Monday's debate but we have to see the results first.
The S&P closed at 2,177 on Thursday, which was right in the middle of the congestive resistance from the six weeks of consolidation. Friday's decline moved it closer to the bottom but still well above prior support at 2,150.
Gaining the 30 points needed to make a new high could be a tough challenge but not insurmountable if the right events appear.
Three weeks from now, we will begin the Q3 earnings cycle. Earnings are expected to decline -2.3% compared to the forecast for a +0.3% increase as of June 30th at the start of the quarter. This will be the sixth quarter or earnings declines. So far, 70 S&P companies (69% of those issuing guidance) have issued negative guidance and only 35 have given positive guidance. On the positive side, revenue is expected to rise +2.6% and the first quarter of revenue growth since Q4-2014.
The weak earnings for Q3 are already factored into the market but the positive expectations for Q4 are not. The guidance with the earnings will be very important and should they confirm the analyst expectations for Q4 we could see a lasting rally appear.
Unfortunately, there are two weeks of political hurdles in out path and Monday's event should give us a clue of what to expect in the rest. You may remember Romney had a good first debate and the market rallied. His second two debates were failures and the market had to adjust for the Obama recovery.
This debate has the potential to be more like a UFC cage match than a civilized debate. That makes the outcome even more volatile.
That means predicting the path of the S&P next week is next to impossible.
The Dow was down -137 at its low on Friday. That took it right back to the 18,250 level, which was prior resistance and is now support. The biggest stocks in the Dow were also the biggest losers and that could continue next week.
The Dow spiked over initial resistance at 18,350 on Thursday and looked like it had a good chance of holding that level. The breakdown in Apple helped drag the other stocks lower in sympathy.
Support is now 18,250, 18,100 and 18,000. Falling back under 18,200 could poison sentiment and cause a larger decline.
The Nasdaq was the hero for the week with two consecutive closes at new highs. The -33 point decline on Friday is still in new high territory so the relative strength is still there. The index would have to fall back to 5,225 for sentiment to weaken.
The Nasdaq will be penalized by the debate if Clinton is seen to be the winner. The biotech sector will crash and that is a large component of the tech index. Secondly, the news on Friday that Apple chip suppliers are seeing another 20% cut in orders for Q1, suggests the semiconductor sector could also be weak. Losing both chips and biotechs would make it nearly impossible for the Nasdaq to post any material gains.
Support is now 5,200.
The small cap S&P 600 came very close to a new high at 764.64 on Thursday with the prior high at 765.47. The -5 point decline on Friday was not material. The SP600 failed to break below support at 730 on the early September decline and maintained its relative strength. As long as that support does not fail, the broader market should remain in a positive trend.
We are entering the sixth week of the six most volatile weeks of the year and this could be a wild ride. The Fed may be out of the picture on rates but with 11 Fed speeches and two Yellen speeches next week, they will be front and center with their opposing sound bites. In the prior 30 years, there has only been two times where three voting members have dissented on the policy action taken. Last Wednesday was the third time and you can bet those dissenters will be trying to make their case to the market in the weeks ahead. With the December meeting so far away, investors may ignore any screaming hawks and focus on the soothing cooing from the doves.
We are approaching a point where the market "should" rally once all the political headlines are digested. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. You may get that chance.
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I am shocked the bullish sentiment declined again last week. The survey ends on Wednesday and investors should have been breathing a sigh of relief when the Fed pushed the rate hike into December. Bullish sentiment still declined and bearish sentiment rose. There may be more unrest in the investor population than is visible on the surface.
The largest cyber hack of all time was actually a hack of 420,000 sites of all sizes. A Russian gang amassed more than 1.2 billion unique sets of data by purchasing a small set of credentials and using those credentials to hack progressively larger sites where they stole new credentials that allowed them into even larger sites. They wrote programs that scanned the web using the credentials they already had to see what other websites had users with those same credentials.
The third largest hack was 360 million MySpace accounts. Next was 167 million Linkedin accounts followed by 145 million Ebay accounts. Lastly, 130 million MasterCard and Visa accounts were stolen from Heartland payment systems. Heartland paid $140 million in fines for allowing access to the information.
This item was sent to me by a reader.
Some people believe the stock market can predict the presidential election, based on its performance in the 3 months leading up to the election. When the stock market is down so is the incumbent party but when the stock market is up there is a greater likelihood the people will keep the incumbent party in power. It is another example of how the stock market is an excellent barometer of social mood. Of the past 22 elections, since 1928, the stock market's performance has accurately predicted the election results 19 times (86%). In the game of odds, those are darn good. The S&P closed at 2,180 on August 8th. With Friday's close at 2,164 that would suggest an incumbent loss.
The chart below is courtesy InvesTech Research.
So far, in this election campaign the Secret Service has paid Trump's campaign $1.6 million to cover the costs of flying agents charged with protecting him on his personal plane. That is less than the $2.6 million the service has paid Clinton's campaign. The Clinton amount is larger because she has been chartering private planes and the cost is much higher. The Federal Election Commission (FEC) requires the service to pay its own way or reimburse the candidates.
Clinton's campaign disclosed it paid $36,602.99 to the government for her travel on Air Force One from Washington to Charlotte NC with President Obama on July 5th. Air Force One costs $206,337 per hour to operate. There were some other travel reimbursements in that $36K number but the campaign would not break them out. Analysts say the $30K number is about right for the flight. I am sure it was worth it to Clinton just to get that picture of her and Obama waving from the cabin door at the top of the stairs.
UPS delivered its first package by drone on Thursday. The 2 pound package was a medical inhaler and was flown unattended without a pilot to an island 3 miles offshore Beverly, Massachusetts and landed on a patch of grass at the destination. Flying without a pilot was a simulated urgent medical delivery.
UPS has a partnership with CyPhy Works, a drone maker in which UPS has a stake. It was the first test delivery as UPS experiments in using drones for difficult locations or emergency deliveries.
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