Friday's volume was light but the market internals were strong.

Weekly Statistics

Friday Statistics

Friday's gains were broad based with volume of only 5.3 billion shares but advancers of 4,876 easily beat decliners of 2,242. New highs of 610 beat 93 decliners.

The Dow and S&P surged to new highs while the Nasdaq posted decent gains to pull to within only 9 points of a new high. Even the Russell 2000 managed to squeeze out a new high by two points.

As expected, there was a sell the news event on the bank earnings BUT it only impacted the banks. That was the only sector that lost ground for the day. Banks had rallied into their earnings cycle and traders took profits on those gains.

The Dow dipped at the open thanks to the declines in JP Morgan (JPM) and Goldman Sachs (GS). The index rebounded back into record territory and held at barely positive until 12:30 when a sudden spurt of buying triggered some short covering ahead of the weekend and the Dow and S&P surged to new highs.

Some of the market rally was due to weak economic data. Yes, you read that right. The weak data is putting the data dependent Fed on hold and there is a growing consensus that they will not hike rates again in 2017. There is a 97% chance of no hike at the July meeting. There is now a 91.6% chance of no hike at the September meeting. That shrinks slightly to 87.9% for the November meeting. The December meeting has risen to a 51.6% chance for no hike. January is now a 50% chance. Previously, September had a decent chance for a rate hike and December was almost guaranteed. The weak data is causing the Fed plenty of consternation.

The first item of weakness on Friday was the Consumer Price Index for June. The headline number was zero with the core rate rising only +0.1%. On a trailing 12-month rate, the headline inflation is up only 1.6% compared to the 2.8% reading back in February. This sharp decline is why the Fed is starting to get worried. The core rate over the last 12 months is 1.7%, down from 2.3% in January. Analysts and the Fed are blaming the decline in inflation on "transitory" factors. Yellen said this would fade over the next couple of years. Yes, years. So why has the Fed been in such a hurry to hike rates? Because they are afraid this 8-year expansion is eventually going to fade and the Fed will only have a couple of bullets in their rate cut arsenal to deal with it.

Energy has been a major contributor to the decline in inflation. The energy CPI fell -1.6% in June after a -2.7% drop in May. Gasoline declined -2.8% in June after a -6.4% drop in May.

Food prices have been flat. Even healthcare prices have been declining thanks to the tidal wave of generic drugs hitting the market.

Retail sales for June declined -0.2% after a -0.1% drop in May. The May number was revised higher from the previously reported -0.3% number. Retail sales were again driven lower by falling energy prices. Sales at gasoline stations declined -1.3% for the biggest component loss. However, even if you take out energy, sales still declined -0.1%.

Food and beverages fell -0.4%, sporting goods and hobbies -0.6%, food service and bars -0.6% and clothing -0.1%. Building materials rose +0.5%, general merchandisers +0.4% and nonstore retailers +0.4%.

Retailers have no pricing power. Amazon and other online retailers are squeezing brick and mortar retailers and 19 chains are closing large numbers of stores in 2017. They are fighting for their lives and cannot raise prices and hope to maintain market share. Consumers are the big winners in this battle. Wages are growing very slowly so declining prices are a benefit.

Industrial production for June rose 0.4% compared to the +0.1% rise in May. This was the fifth consecutive monthly rise. However, the majority of the gain came from mining and energy production, which increased 1.6% compared to manufacturing production rising +0.2%.

Business inventories rose 0.27% after a -0.20% decline in April. The June gains reversed a five month decline since the +0.85% rise in November. Retail inventories rose 0.51%, wholesale inventories +0.38% and manufacturing inventories declined -0.5%. This report was ignored.

Consumer sentiment for July declined 2 points from 95.1 to 93.1 and the lowest level since the election. October was a multi-year low at 87.2 and that spiked to 98.2 in December. Cleary, there was a huge post election surge but that has been fading and the decline is now accelerating. The new administration needs to start accomplishing some legislative goals or sentiment is going to continue declining at a rapid pace.

The present conditions component rose from 112.5 to 113.2 but the expectations component declined from 83.9 to 80.2.

The key reports for next week are the Housing Market Index on Tuesday, Housing starts on Wednesday and the Philly Fed Manufacturing Survey on Thursday. As we get closer to the end of the week, the Fed meeting on the 26th will begin to weigh on the market. This is a fairly light week for economics and all eyes will be on the earnings calendar.

This is a busy first week of earnings with nine Dow components starting on Tuesday. We also have Netflix on Monday after the close, Qualcomm on Wednesday and Ebay on Thursday. This is the first week of the four-week cycle and activity will increase in the following two weeks. These earnings are the incentive for traders to remain invested as we head toward the two worst months of the year in August and September. Once the first two weeks of the cycle are over the market risk increases because the earnings outcome will be known and the anticipation will begin to fade.

With 6% of the S&P already reported, 80% have beaten earnings estimates and 83% have beaten revenue estimates. The five-year average is 68% and 53% respectively. Current Q2 earnings growth is 6.8% but the early estimates are normally low by more than 3%. Revenue growth is expected to be up 5.5%. One company has warned on future results and five companies have raised guidance. That 17% negative guidance rate is far below the average of 75%.

Earnings estimates for Q3 are currently 7.1% growth with 5.0% revenue growth. For Q4, earnings are estimated to grow 12.2% and 5.0% revenue growth.

The strong earnings growth compared to recent years is powering the market rally. The weak economics are expected to remain weak the rest of the year with an average of 2.0% GDP growth. That and the low inflation should keep the Fed from forcing the economy into a recession with another series of rate hikes. However, Morgan Stanley said on Friday they still expect one more hike in 2017 and four hikes in 2018. They are far outside the current mainstream consensus.

The major banks reported earnings on Friday. Rather than write an update on each I am going to summarize.

JPM $1.82 vs est $1.57, revenue $26.4B vs est $24.8B.
Citi $1.28 vs est $1.21, revenue $17.9B vs est $17.3B.
WFC $1.07 vs est $1.01, revenue $22.2B vs est $22.5B.
PNC $2.10 vs est $2.01, revenue $4.06B vs est $4.0B

JPM provision for credit losses declined 13%. Core loans up 8%, investment banking fees up 14%. Returned $4.5 billion to shareholders. Over the last 4 quarters they have generated over $25 billion in profits.

Citi's net income was $3.9 billion, down -3%. Cost of credit rose 22% to $1.7 billion. Trading revenue declined -7% but less than guidance of -12%. Loan growth rose 2%. Returned $2.2 billion to shareholders.

WFC net income was $5.8 billion, up 5%. Loans declined from $982B to $957.4B. Auto loan originations of $4.5 billion fell -17% from Q1 and -45% from year ago quarter. Deposits flat at $1.3 trillion.

PNC net income $1.1 billion, up 10.9%. Net charge offs $110 million, down -18%. Commercial loans $145.8 billion, up 6%.

All four stocks declined on Friday in a sell the news event even though Wells Fargo was the only one with a minor miss. JPM attracted additional attention after CEO Jamie Dimon went off on politicians and the press saying as he travels around the world it was embarrassing to be an American because of the dysfunction in Washington. He said in spite of all the regulation and roadblocks to business, the economy continued to grow at 2% and the banks were doing really well. If the government would quit doing "stupid sh**" everything would grow a lot faster. Needless to say that caught the attention of quite a few reporters.

The retail sector is no longer hated if you believe all the upgrades on Friday. Telsey Advisory Group upgraded Ross Stores (ROST) to outperform and a $70 price target. Shares spiked $1.65 at the open to reverse a bearish trend but then gave back most of the gains by the close.

Wal-Mart (WMT) shares gained $1.29 after Goldman Sachs put them on their conviction buy list with a price target of $84. The analyst said Wal-Mart was better positioned than any other retailer to cope with the demand of e-commerce and technology spending to compete with Amazon. He said Wal-Mart alone has the scale to compete aggressively. Wal-Mart is starting to offer grocery delivery in addition their in-store pickup options. The $84 price target is only a 12% gain from here. Resistance at $80 could be a challenge until after Amazon completes the Whole Foods acquisition. There is legislative opposition growing on that transaction so it is not a done deal.

The Gap (GPS) gained 2% after JP Morgan put them on their "Americas Focus List" with a price target of $27. Shares closed at $23.28. Since The Gap has seen 11 earnings estimate downgrades over the last two months, a positive comment was unusual. Gap has 13% of its shares sold short so any good news could lead to a short squeeze. The lackluster rebound on Friday suggests very few shorts were concerned. Some may have already been squeezed out after the Target guidance on Thursday caused a big rebound in Gap shares.

Ulta Beauty (ULTA) shares rose slightly after Goldman Sachs went bottom fishing and upgraded the stock from neutral to buy with a price target of $310, which was lower than their prior target at $321. Confused? The analyst was catching heck in various headlines for the conflicting signals. He said same store sales are positive and "sector leading" and the company will not be impacted by Amazon. The company has "convenient locations, a product assortment that mixes mass market and prestige items and service rather than price." "We do not believe that price competition will derail Ulta's core value proposition, or that Amazon yet offers a compelling alternative to the consumer."

Sprint (S) shares spiked on Friday after news broke they had approached Warren Buffett and John Malone's Liberty Media soliciting an investment between $10 and $20 billion in the wireless carrier. Masayoshi Son, the CEO of Softbank, which controls Sprint, met with Buffett and Malone separately at a conference in Sun Valley. Sprint CEO Marcelo Claure was also at the meetings. Berkshire Hathaway is reportedly considering an investment of $20 billion while the amount under consideration by Liberty Media is unknown. Sprint has been in play for some time and most assume they will eventually merge with T-Mobile despite regulatory issues. This is a new twist and it will be interesting to see if either of those big fish actually take the bait. Sprint only has a $34 billion market cap so that would be an enormous investment.

Casino stocks including WYNN, MGM and LVS plunged on Friday after a top prosecutor in Macau was found guilty of corruption. The man was sentenced to 21 years for illegally awarding nearly 2,000 public contracts that benefitted his family. The casinos in Macau are being audited over issues in the junket industry and potential money laundering issues. The junket industry is responsible for 53% of revenue for the casinos. Where ever there are large sums of cash changing hands in China there are concerns on money laundering as consumers try to move their assets out of China. With all the new casinos there are worries there will be blowback on the casino operators from the illegal construction and services contracts. WYNN shares were the hardest hit with a $4.50 drop.

F5 Networks (FFIV) was downgraded by Piper Jaffray from buy to neutral with a price target reduction from $144 to $136. The analyst said the product refresh cycle is not going as expected, meaning product growth "could remain challenged." The analyst said survey data showed a decline in quarter-over-quarter demand. He also said the guidance warning by A10 Networks (ATEN) was also a negative sign. F5 shares lost $4.50.

The two bouts of ransomware over the last month did not help CyberArk Software (CYBR). The company warned that revenue would be in the range of $57-$57.5 million compared to prior guidance of $61-$62 million. They slashed their adjusted income to a range of $8.5-$8.9 million, down from $10.9-$11.7 million. They said several anticipated transactions did not close before the end of the quarter and performance in Africa and the Middle East was lacking. Shares were crushed for a 16% loss.

Crude prices rebounded sharply from the drop the prior week and the gains lifted the energy sector and the market in general. There is a relationship between oil and equities and sometimes you can almost follow it from minute to minute across the markets.

Inventories declined sharply on Wednesday and OPEC said it was considering production limits on Libya and Nigeria. I personally think the biggest factor in the rebound was simply the extremely bearish sentiment. With Goldman predicting oil under $40, the longs had evaporated. The short trade was crowded and the inventory decline triggered the beginning of a short squeeze.

On Friday the Baker Hughes rig report showed no gain for the week. Actually, there was a gain of two oil rigs but a loss of two gas rigs so the combined number was zero. That encouraged investors that maybe the surge in active rigs was over since this was the second week in the last three that active rigs did not rise. I think it is wishful thinking.


The Dow, S&P, Russell 1,000, 2000, 3000 and Dow Transports all closed at new highs. The Nasdaq is only slightly below a new high. The four weeks of sideways volatility have resolved into a new push higher. We should all be celebrating and sending Janet Yellen thank you cards.

The Dow may be at a new high but every Dow stock has not participated. Since trends tend to reverse, I thought I would show you the seven Dow stocks that have lost ground over the first six months of 2017. If they are going to reverse over the last six months of the year, they need to get started. Intel and Goldman are the only two stocks that appear to be trying to rebound from their lows. The other five are still stuck at the bottom.

When fund managers restructure their portfolios as they tend to do in the summer, they try to find overlooked "values" that are oversold. I would not be a buyer but others might. If funds begin to nibble at these stocks, it would go a long way towards sending the Dow higher. Right now, they are all anchors that are holding back any rally attempt.

The Dow gained 84 points on Friday but it was not due to a significant outperformance by any one stock. Boeing was the leader with a $2 gain but it was the broad based rally that helped the most.

The index surged in the afternoon on what appeared to be a buy program at 12:30 that triggered some pre-weekend short covering. The uptrend resistance was broken intraday but the last minute selling kept the Dow from an outstanding breakout over that level. Support is now well back at 21,525 and the Dow could be poised to make a new run higher.

The S&P rallied most of the day but surged on the 12:30 buying burst. The intraday high at 2,463 almost reached the uptrend resistance at 2,465 but fell just short. The S&P has added 30 points in three consecutive days of gains. It has added 50 points since the prior Thursday close at 2,409. Adding 50 points in a week is a cause for celebration but also a caution signal. We should see some profit taking soon. It is possible the earnings expectations could keep the rally going so hopefully the earnings reports will be good.

The big cap tech stocks are back in the groove with Nvidia leading the pack with a $25 gain over the last 8 trading days. Netflix will be the first big tech to report earnings on Monday but they will come in rapid-fire succession over the next two weeks.

The Nasdaq has rebounded from the July 6th low of 6,081 to add +231 points over the last 8 days. The Friday close was just barely over resistance at 6,308 but headed in the right direction. The prior high close was 6,321.76. With the big cap techs ramping up into earnings, we "should" breakout to a new high next week. There are no guarantees.

The decline in the bank stocks was a drag on the Russell 2000 since 17% of its components are financial. However, it did close at a new high by 2 points. If the banks can shake off their sell the news event, the Russell could move higher and that would be a strong sentiment boost for the broader market.

Next week should be positive but it seems like every time we end the week with a good setup for the next week, the market reverses on some new headline. Earnings are rising, warnings are very few, economics are weak but steady, the Fed is likely on hold and the coming earnings cycle should be positive. What could go wrong?

Next Friday more than $550 billion in S&P-500 options are going to expire. JP Morgan said there were sizeable call positions in the 2450-2480 strikes that could lead to dealer hedging to dampen market volatility should the S&P trade in this range. Similarly, there are large put positions in the 2370-2400 strikes that could boost volatility if there was a sell off. In English, if the market moves up slightly it should remain calm. If it declines to 2,400 it could be very chaotic. The maximum pain point is 2,430 where the most options expire worthless. Typically, the market gravitates toward that level.

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Random Thoughts

Despite the new market highs, we continue to see very little movement in the sentiment survey over the last week. Just over 71% of investors still do not believe the market is going higher. Investors seem to be confident in their view of market direction and they are not changing from week to week.

A huge sunspot 75,000 miles wide (AR2665) that was nine times larger than the earth, caused a coronal mass ejection (CME) on July 14th that is expected to hit the earth on July 16th. Source. Eventually one of these will be big enough and pointed in the right direction to knock down our power grid for months or worse. In the Carrington Event in 1859 the CME melted the copper telegraph lines off the poles, burned telegraph buildings and produced daylight conditions overnight in the U.S. where people got up early and went to work thinking it was morning. If that happened today, it would be the equivalent of a nuclear EMP and destroy anything electric. There was a similar sized event on July 23rd, 2012 that narrowly missed the earth and 99.99999% of the population never even knew how close we came to a mega disaster because NASA did not make the information public until April 2014. Lloyds of London researchers estimated the cost of a Carrington Event today at up to $2.6 trillion in the U.S. alone. AR2665 was an M class flare and should only cause brief problems with communications. In May 2013, there was an X class flare that was 280 times larger but fortunately, it was pointed away from the earth.

Elon Musk has said some dystopian things in the past and he continues to make unexpected comments in his speeches. On Saturday, he said the shift to sustainable energy was inevitable "but it does matter whether it happens sooner or later." Musk said, "The sun is a giant fusion reactor in the sky. It is really reliable. It comes up every day. If it doesn't we have other problems."

Then he tanked his stock again. Since the speech was on Saturday it has not fallen yet but Monday could be a bad day. He has a habit of calling Tesla stock overpriced much to the chagrin of his shareholders. He said, the stock price "is higher than we have any right to deserve especially based on current and past performance." "The stock price obviously reflects a lot of optimism on where we will be in the future. Those expectations sometimes get out of control. I hate disappointing people. I am trying really hard to meet those expectations."

He also said he would not be selling any stock except to pay taxes. "I am going down with the ship. I will be the last to sell."

He then attacked regulations. "It is important to get the rules right. Regulations are immortal. They never die unless somebody actually goes and kills them. A lot of times regulations can be put in place for all the right reasons but nobody goes back and kills them when they no longer make sense."

He said 20 years from now actually driving a car would be like having a horse. There will be people that will have non-autonomous cars, like people have horses today. It would just be unusual to use that as a mode of transport.

Where he went off the rails was in a plea for the government to regulate artificial intelligence (AI) before things advance too far. "Until we see robots going down the street killing people, they do not know how to react because it seems so ethereal. AI is a rare case where I think we need to be proactive in regulation instead of reactive, because I think by the time we are reactive to AI regulation, it is too late. Normally the way regulations are set up is when a bunch of bad things happen there is a public outcry and after many years a regulatory agency is set up to regulate that industry. It takes forever. That is bad but in the past it was not a fundamental risk to civilization. AI is a fundamental risk to the existence of human civilization."

John Mauldin is as concerned about our future as Elon Musk. Only he sees a different danger in the very near future. He believes there will be another financial crisis in 2018 and he is warning to prepare now. Prepare for Turbulence

Here is an excerpt from that article.

"Get out of Dodge" was a phrase made popular by Marshall Matt Dillon on the TV show Gunsmoke in the 1960s. The phrase slipped into the youth culture and endures as a shorthand way of saying that you'd better leave town before the stuff hits the fan.

"I believe the Fed is aware that they should have been raising rates earlier. They also understand the present risks. While I believe it is appropriate to raise rates slowly, I simply cannot understand why they would want to reduce their balance sheet at this late date, at the same time that they jack up rates. They could have been letting the balance sheet roll off for four years, but to do so now in conjunction with raising rates simply increases the risk of a policy error. But I don't think they will see that as their problem.

Chair Yellen and I both believe the majority of the current governors will be gone by the second quarter of next year. It would not surprise me at all if Vice-Chair Fischer offers to resign before his term is up in June 2018. This Fed is going to raise rates a few more times, start reducing the balance sheet, and then get the hell out of Dodge.

Federal Reserve governors basically have a 14-year term, which reduces the ability of any one president to appoint a majority of the FOMC within a four-year term. Of course, resignations affect the balance.

Trump is going to have the unusual opportunity to appoint at least six, and more likely seven, governors by the middle of next year, if not sooner. Whether he wants it to be or not, this will be the Trump Fed. Without major reforms in place, the Trump Fed will face a recession, serious global economic issues, and a resulting major equity bear market. Think they will continue to raise rates? How long before they start to talk about supplying a little more QE to appease the markets?

The current FOMC simply hopes that everything holds together until they can slip out the back way from Dodge. Who do you think will get the blame for the next crisis? It should be this FOMC, but that's not the way the real world works.

The Trump Fed will be politicized and stigmatized by its Democratic opponents no matter what they do. Howls for outside controls and oversight will rise in the night."

"Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don't believe it will be. Janet Yellen

"I disagree with almost every word in those two sentences, but my belief is less important than Chair Yellen's. If she really believes this, then she is oblivious to major instabilities that still riddle the financial system. That's not good. "

Read the rest of the article for the full explanation of the problem. Prepare for Turbulence

The Citigroup Economic Surprise Index closed at a two-year low on Friday and not that far above a six-year low. With earnings expected to end the cycle around 10% growth, Citi warned "we may be approaching a cyclical peak." The biggest concern is that "hard" economic data has been anything but good.


Enter passively and exit aggressively!

Jim Brown

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"There are men running governments that should not be allowed to play with matches."

Will Rogers