September is known as the most volatile month of the year.
September is certainly off to a good start if it is going to live up to its reputation. The North Korean H-bomb test tanked the markets for the second Tuesday in a row and this time there was no immediate rebound back to positive territory. This particular test is more troubling than the missile over Japan because it ratchets up the complexity level for possible responses. Add in the expected ICBM test for next Saturday and it is clear North Korea is not going to stop on its drive to be a nuclear power with long distance reach until somebody stops them. That is the biggest worry. If they are not stopped now before they have a fully capable delivery system and inventory of armed missiles, stopping them later will be a lot more dangerous for everyone.
Countries without a missile aimed at their cities are not as excited about the entire Korean threat scenario so support from the UN and other allies is weak. That means the U.S. may have to go it alone with only South Korea and Japan in their corner.
The market tanked on the potential for a future event rather than the H-bomb test on Sunday. That potential will only increase as the country continues to test bigger missiles and bigger bombs.
The Nasdaq and S&P rebounded from their lows but the Dow struggled to hold the 21,750 level all afternoon. There was no material rebound in the Dow. The Dow was down -281 at its lows and closed with a -234 point loss.
The economic reports did not provide any support for the market. The ISM-NY declined from 62.8 to 56.6 for August. The only good news in the report was a sharp jump in the employment component from 37.8 to 56.4 and the highest level in 18 months. The overall report still suggested NY economic activity was still growing although at a slower pace.
Factory Orders fell -3.3% for July after a 3.2% gain in June. That was the largest monthly drop in almost three years. Nondurable goods orders rose 0.4% but durable goods fell -6.8%. The biggest hit to orders came from the transportation sector where orders declined -19.2% from May. A decline in auto manufacturing continued with the banks restricting auto loans to everyone except the best credits. Despite the negativity in June, orders are still up 4% over June of 2016.
On Wednesday, the ISM Nonmanufacturing Index and the Fed Beige Book will be the top attention getters. The Fed will probably say activity in most Fed regions is "moderate" and their word of choice for the last year. That means the economy is trudging along without any particular growth spurts.
There is a lot of Fedspeak this week and Fed Governor Lael Brainard warned today that the Fed should be cautious about raising rates because inflation is "well short" of Fed targets. She said the Fed should wait until there is confirmation of the direction of inflation and solid expectations the targets will be achieved.
Currently inflation is 1.4% on a trailing 12-month basis and the Fed target is 2.0%. She said the Fed should be clear it is comfortable with inflation moving over 2% before they begin to hike rates again. She is a permanent voting member of the FOMC. She warned that Hurricane Harvey raises uncertainties for the economy this year and will likely have a "notable" impact on growth in Q3.
Given Brainard's comments on rates and the flight to safety from the H-bomb test, the yield on the 10-year closed at a 10-month low and is threatening to move under 2%.
In stock news, Rockwell Collins (COL) agreed to be acquired by United Technologies (UTX) for $140 a share or roughly $30 billion including debt. Collins shareholders will receive $93.33 in cash and the rest in UTX shares. Collins shares only gained 39 cents to close at $131 suggesting there is serious doubt the deal will be approved by regulators. That was even more apparent after Boeing said it would use the power granted by its contracts with those companies and its influence on regulators to "protect our interests." Airbus also raised an alarm over the potential deal. UTX may be forced to sell numerous non-core assets to get the deal approved and to raise cash to fund the acquisition. United will borrow $15 billion and will assume $7 billion in Collins debt. They are projecting a closing in Q3-2018.
UTX shares took a major hit since about one-third of the acquisition price is new UTX shares. Moody's and S&P both put UTX ratings on review for a downgrade. UTX said it would halt share buybacks for at least the next three years. They have $2 billion remaining on a prior authorization.
In the same sector, Boeing (BA) received a favorable ruling from the WTO that reversed a ruling from the EU that the company had received prohibited support for the 777X jet. The EU ruling had banned support from the state of Washington that allowed Boeing to build a $1 billion plant to design and build the world's largest carbon composite wings for the 777X. The EU ruled that the state reduced its business and occupation taxes for Boeing in return for the company building the plant in Washington. Boeing shares fell $3 with the market.
Disney (DIS) managed to close positive after Wells Fargo upgraded the company from market perform to outperform. The analyst said investors should focus attention on companies with streaming strategies and move away from those companies without a plan. Viacom was one company mentioned and downgraded from outperform to market perform.
I understand the upgrade but investors are not paying attention. They are too focused on the cord cutting aspects surrounding ESPN and future loss of revenue. Shares closed positive today but the mouse house is right on the verge of breaking through $100 to the downside. A weak summer movie season has hurt them as well as other companies.
After the close, Hewlett Packard Enterprise (HPE) reported earnings of 30 cents on revenue of $8.2 billion. Analysts were expecting 26 cents and $7.5 billion. The company guided for the current quarter for earnings of 26-30 cents but analysts were expecting 40 cents. For the full year they lowered earnings guidance from $1.46-$1.56 to $1.36-$1.40. The cut in forecast was due to the spinoff last week of its software business into a merger with Micro Focus International. HPE was not penalized for the guidance cut because of the spinoff. Shares rallied 5% in afterhours.
Shares of Dave and Busters (PLAY) declined 5% in afterhours after the company reported earnings of 59 cents compared to estimates for 55 cents. Revenue of $280.8 million rose 14.9% but missed estimates for $282 million. Same store sales rose 1.1% but they guided for a 1-2% rise for the full year, down from prior guidance of 2-3%. They lowered full year EBITDA guidance from $276-$282 million to $270-$276 million.
MGM Resorts (MGM) announced a $1 billion buyback and said it would sell the real estate belonging to the MGM National Harbor Casino to MGM Growth Properties for $1.19 billion. The casino will continue to be operated by MGM. Shares rallied about 1% in afterhours.
Retailer Duluth Holdings (DLTH) reported earnings of 13 cents that beat estimates for 10 cents. Revenue of $86.2 million beat estimates for $82.8 million. They guided for the full year for earnings of 66-71 cents with revenue from $455-$465 million. Shares rose sharply in afterhours.
Storm season is definitely upon us. September 10th is normally the peak in hurricane activity but they can still form until November 1st. Currently there are three storms on the map. Irma is a category 5 hurricane with 185 mph winds that will more than likely hit Puerto Rico, the Dominican Republic and Cuba a glancing blow before running down the west coast of Florida. This is going to be a major storm and our only hope is that it loses some strength in its brush with Cuba. Analysts believe it could decline to a category 4 but still dangerous.
Jose is following Irma with 45 mph winds and rising. It is still classed as a tropical storm but it is increasing in intensity. It is expected to turn north before it gets to Florida and could make landfall further up the east coast.
Tropical storm 13 is forming in the western Gulf and could move up the coast to Houston. Analysts are split on whether it will strengthen significantly since it is so close to land. If it moves further offshore, it could develop into a named storm and become additional trouble for the Houston area.
Category 5 Hurricane Irma
The markets are showing a little more weakness on this dip than the prior North Korean headline. Knowing there is another ICBM test likely on Saturday could be a hindrance. Is it possible a cruise missile could appear just before the launch to set back the missile program? I would not bet against it. Since this launch is so well telegraphed, the target is well known. Even if nothing appears to stop it, there is the possibility they could launch it in the general direction of Guam or even California just to further agitate the US. This is a wild card for the markets this week.
The S&P dropped 30 points intraday but rebounded to lose only 19. That is a critical point since the 2,450 support level was broken intraday but rescued by the close. At this point, there is no obvious direction and even in normal years, September is known for being the most volatile month of the year.
The political battles have begun over the debt ceiling, budget approval and the hurricane relief funding. It is going to be a rocky few weeks.
The Dow remains the weakest index and the 50-point rebound from the lows was definitely lackluster. Home Depot and Wal-Mart rescued the Dow from a deeper loss because they were expected to benefit from Hurricane Irma sales.
Goldman Sachs was hit with the falling interest rate problem and Brainard's warning the Fed should not be in a hurry to hike rates. Goldman knocked 55 points off the Dow. United erased 46 points on the Rockwell Collins acquisition news.
Support on the Dow is 21,600, 21,500 and 21,300.
The Nasdaq Composite did not sell off as much as expected given the recent gains. The index rebounded 41 points from its lows to end with a loss of 59 points. That rebound from -100 to -59 was material. The Nasdaq rebounded 207 points from last Tuesday's lows and was at risk to give half of that back. The recovery today was impressive even though it did not make it back to positive territory.
Netflix and Microsoft posted only fractional declines and Apple was expected to decline this week ahead of the product announcement. Apple's decline could have been worse. Google is facing the potential for a monster anti-competitive fine from the EU in multiple billions of dollars on Android search practices. This could be announced in the weeks ahead so Google shares are likely to remain weak.
If the Nasdaq remains the strongest index there is a chance for continued market gains but it is slim. The September volatility is going to be a challenge for the entire market.
The Russell 2000 had a streak of 7 consecutive gains at the close on Friday. That streak ended today with a 1% decline but it could have been worse. The index held on support at 1,400 and that is somewhat bullish.
I would be hesitant to add long positions this week. Now that we are in September and volatility is expected to increase in normal years, the North Korean problem, the probable Saturday missile launch, the political battles over the debt ceiling, annual budget and hurricane funding are likely to fuel that volatility in the weeks ahead. September normally provides a buying opportunity but normally late in the month.
Enter passively, exit aggressively!
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