Goldman Sachs added another $3 to their post election gains to add roughly 23 points to the Dow and power it to a new high.
Goldman has gained $57 since the election and added about 441 points to the Dow or roughly one third of the Dow's 1,363 point rally since November 8th. Thank you Goldman Sachs. However, we know this Goldman spike will eventually end badly and the Dow will suffer as a result. When? Nobody knows.
The markets did break a new trend today. That trend was opening high and closing at the lows. That was broken today when buyers flooded into the intraday dip and pushed the indexes to close at the highs. That is a very positive sign and suggests the market weakness is easing.
Portfolio managers cannot afford to fade this rally with only 17 trading days left in 2016. They have ride the wave and try to stimulate it whenever possible in order to keep up with or exceed all of their peers. There should be ample window dressing over the next three weeks. Unfortunately, that is setting up for a sudden surprise in January when everyone is free to take profits from all these monster gains.
The U.S. economics just keep getting better. Factory Orders for October rose +2.7% compared to +0.3% in September. That was the largest monthly increase in about 18 months. Durable goods saw the biggest gain at +4.6% with nondurables at +0.9%. However, shipments, the component that feeds into the GDP, only rose +0.4%. They are running at the slowest pace since 2011. Backorders rose +0.7% and the first gain since April.
The International Trade deficit for October rose from $36.4 billion to $42.6 billion. That was over the forecast for $41.7 billion. It was the largest deficit since June. Exports declined -$3.4 billion to $186.4 billion and imports increased $3.1 billion to $229.0 billion. The larger deficit was largely responsible for the pull forward of the soybean exports into Aug/Sep. Exports of soybeans in October declined -30.6% after being up 45% in the prior two months.
The Core Logic Home Price Index rose 6.7% for October compared to a 6.3% rise in September. Those are annualized rates. The actual rate of change for October was +1.1% and the 22nd consecutive monthly increase. Home prices are still -4.7% below their 2007 peak.
The market ignored all those reports.
The calendar for the rest of the week is just as boring with nothing that should move the market. The next highlight will be the Fed rate announcement next Wednesday. William Dudley said yesterday he expects four rate hikes in 2017. That is exactly what I have been saying, one at the end of each quarter. However, I do not expect the Fed to be that clear in their guidance. They would like to maintain all their options and that means repeating the stance of "rate hikes will be data dependent" even though they have ignored the data for the last two years. Yellen's press conference could be telling since she will maintain her dovish posture but try to walk a thin party line.
At the close today the chance of a December rate hike was at 92.7%.
Apple was in the news for multiple reasons on Tuesday. The Supreme Court threw out the $399 million judgment against Samsung in the patent dispute over the iPhone design. The court said Samsung did not copy the entire phone but only some icon placements and Apple was not due the $399 million. The court ruled 8-0 against Apple and sent the case back to a lower court to decide how much the copied items were worth compared to the entire phone.
CEO Tim Cook came out on the attack against an IDC article on Monday that said Apple watch sales had declined -72% in Q3. IDC said Apple watch sales were 1.1 million units in Q3, down from 3.9 million in the year ago quarter. Tim Cook responded to a question about the report from Reuters saying, "Sales growth is off the charts. In fact, during the first week of holiday shopping, our sell-through of Apple Watch was greater than any week in the product's history. And, as we expected, we are on track for the best quarter ever for the Apple Watch."
The problem is the lack of context. Since Apple has never reported unit sales for the watch, analysts have nothing to compare "off the charts" to in order to make a rational decision. Also, Cook reported on "sell through" rather than IDC's reports on "sell in." It is one thing to sell retailers a lot of watches, but the key is the sell through to consumers. If you sell retailers one million watches but only 100,000 actually get sold to consumers then your sell through could be high on a relative basis to the past but lousy compared to the amount of inventory on hand.
The entire thing is a tempest in a teapot. Josh Brown said "If Apple decided to write off the entire watch unit, no one would even blink." Because they have not reported unit numbers or revenue, nobody knows if they are making money on them or not.
Autozone (AZO) reported earnings of $9.36 and that beat estimates for $9.31. Revenue of $2.47 billion rose +3.47% but missed estimates for $2.5 billion. During the quarter, they opened 16 new stores and bought back $363 million in stock. Cash on hand rose $30 million to $195.54 million.
Microsoft (MSFT) received the final approval for its acquisition of LinkedIn (LNKD). The European Commission was the last regulatory agency to sign off on the acquisition after the announcement six months ago. Microsoft will pay $26 billion for the company. Microsoft will have to make some changes to Windows to insure they are not forcing LinkedIn on new PC buyers. The company will have to continue allowing other developers to interface with the Office Add-in program that allows developers to integrate with Outlook and Office. Other developers will be able to continue marketing their products in the Office Store. Microsoft has to allow PC builders to "opt-out" of including LinkedIn software in the version of Windows they sell with their PCs. Any future Windows users must be able to seamlessly uninstall any LinkedIn software and not be repeatedly asked if they want to reinstall it.
Toll Brothers (TOL) reported earnings of 67 cents that missed estimates by a penny. Revenue of $1.86 billion beat estimates for $1.79 billion. For the full year, they reported earnings of $2.18 and revenue of $5.17 billion. Toll said the weak earnings were due to a $121.2 million warranty charge for some older stucco homes. The company said they expected to deliver 1,000-1,250 homes in the current quarter with an average price of $750,000-$780,000. For the full year for 2017, they expect 6,500 to 7,500 homes with a selling price of $775,000-$825,000 with gross margins around 25%. Shares spiked 5% on the guidance.
Netflix (NFLX) shares soared after Evercore ISI upgraded the stock saying the competition it feared never appeared. "Netflix seems to be in a good position now." The analyst said many of the announced over-the-top (OTT) competitors had either been delayed or were finding it hard to scale in the current environment. The deluge of original Netflix content in 2017 was going to be insurmountable. Netflix is producing more than 1,000 hours of original content in both movies and TV shows. That is up from 600 hours in 2016. Their content budget for 2017 is $6 billion. They are creating an athletic competition show called "Ultimate Beastmaster" that will have separate versions in six countries with local languages.
There are continuous rumors that Disney, Amazon or Apple will eventually buy Netflix if for no other reason than to prevent them from being a competitor in the decades ahead. Amazon and Disney are in the content generation business and they could eliminate their biggest opposition by making the acquisition.
Pandora (P) saw another lift today after Oppenheimer upgraded them to outperform with a price target of $21. The analyst says a buyout by SiriusXM is a legitimate possibility. This was speculated last week as well and shares rallied 15% on the call. Today's gain added another 3%. The SiriusXM CEO admitted he has made a new contact with Pandora about the potential.
Shares of Nike (NKE) were downgraded by Cowen & Company saying they were losing market share to Adidas and Under Armour. The preference for Nike shoes has declined from 55% to 44% in the latest survey. Cowen also said promotional discounts for Nike branded products appear "elevated" with 25% discounts at Dicks Sporting Goods and Kohls. The analyst warned of a high probability for a guidance cut for 2017. Shares fell slightly on the news.
After the bell Western Digital (WDC) raised guidance saying it now expected current quarter revenue to be $4.75 billion, up from prior guidance of $4.7 billion. The company announced it was shipping its new 12TB and 14TB hard drives along with 256GB MicroSD cards. They said acceptance of their new products was very strong and a new cross license agreement with Samsung would also increase revenue. Shares spiked 3% in afterhours to $67. WDC is a current long position in this newsletter.
Chipotle Mexican Grill (CMG) saw its shares fall 7% today after the co-CEO said they were nervous about hitting the guidance they gave in October. He said the company was not satisfied about their rate of recovery and the quality of the restaurant experience. Analysts were quick to slash forecasts. Instinet cut their Q4 forecast from $1.30 to 95 cents and the full year from $1.91 to $1.46. CMG management also said about half of their 2,000 stores would be graded C, D or F on customer service.
Boeing (BA) recovered from an early decline after Trump said the contract to produce the two new Air Force One planes was overpriced and should be cancelled. The reported price for two 747-8 custom built planes is around $4 billion. However, these are not just normal 747 aircraft. They have complete electronic shielding to protect them from EMP and nuclear blasts. They have the equivalent of armor plating around sensitive systems to make them more survivable from external threats. They have antimissile components and nearly as much communications gear as Cheyenne Mountain to enable the president to talk to anyone on earth at any time. The electrical and fuel systems are fully redundant. There is a complete operating room in the lower level in case someone is injured in an attack. There is a communications cabin, kitchen, crew quarters including his protection detail and more than 4,000 sq ft of living/meeting space. Each of the two planes is custom built to Air Force specifications and is not expected to be delivered until 2023 or later.
The Air Force said the 2016 commitment is $170 million for analysis and design. The budget for 2017 is $2.9 billion once the design is accepted and construction is expected to start in 2019. The current Air Force One plane and backup went into service in 1990 and are approaching the end of their service life after thousands of flights and many millions of miles. They need to be replaced and I am sure Boeing will continue with the contract. The comments from Trump are the first salvo in a long contract negotiation process.
Crude prices are holding over $50 but just barely after a 2% decline today. The OPEC news is fading but we could get some more headlines on Friday when they meet with the non-OPEC producers to firm up any proposed cuts. This meeting may not end well.
The S&P closed within 0.12 points of a new closing high. The index closed at the high for the day and that was a change in the recent trend. It would appear the market has shaken off the recent weakness but we are still facing some significantly overbought levels. The markets my go higher from here but they will not likely go in a straight line. The next 17 trading days are likely to be choppy with an upside bias.
For tomorrow, the prior high at 2,213.35 is the target and hopefully it does not produce a sell the news event. Support is well back at 2,190 and it held on two days last week.
The Dow hit resistance at 19,250 and came to a dead stop. The 35-point gain was driven by a 23-point lift from Goldman Sachs. If traders decide to start taking profits in Goldman the Dow is going to find it tough to move higher. Goldman's weighting in the Dow will be a major drag, just like it has been a huge lift on the way up.
Support from last week is in the 19,135 range and resistance if 19,250.
The Nasdaq Composite squeezed over the 5,325 resistance level but only by 8 points. That is still within range and can provide some downward pull in a weak market. Overhead resistance remains the 5,400 level and the historic highs. The big cap techs were in the wrong column today but the individual losses were minimal.
The small cap Russell 2000 rebounded back to a new high in only two days after a four-day decline. The small caps were the strongest sector today and that is very positive. As long as they continue to make new highs, the broader market will not crash.
Twenty years ago today Alan Greenspan uttered the words "irrational exuberance" saying external factors were driving the market to unreasonable gains. It would appear we are back in the irrational exuberance camp again with all manner of investors and analysts almost giddy with excitement over the potential for corporate tax cuts and the removal of a decade of regulatory burdens. Greenspan said today he would like nothing better than to see Dodd-Frank disappear. That bill was originally 2,300 pages with 293 new regulations. However, the bill is being modified by regulators almost daily and the page count is reportedly up to 80,000 pages and the overhead to banks and institutions is massive.
We are at the point where everyone is starting to project their hopes and dreams on the Trump administration but we are a long way from the reality of what will appear. I believe the market will finish the year higher, but I also believe January could be ugly.
Enjoy the rally while it lasts and then get ready for a buying opportunity in 2017.
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