The major indexes posted gains for the week but they were minimal.
The S&P only gained 1.5 points since the 2,552 close six days ago on October 5th. The Dow set three record highs but gained only 98 points for the week. The Nasdaq managed to close at a record high on Friday but gained only 15 points for the week. The Russell 2000, Biotech Index, Dow Transports and the S&P-600 all lost ground for the week.
The prior week sported a strong gain on the indexes ahead of the big bank earnings. Early this week everyone was nervously awaiting the reports and there was a little sell the news decline on everyone but Bank of America. The banks had rallied for four weeks into the numbers so it was only logical for traders to take profits on disappointing results. This held the markets to minimal gains for the week.
The economic reports were mixed and that added another layer of confusion for investors. Retail sales for September exploded higher by 1.6% and the largest gain since March 2015. Pushing the headline number up was a monster 5.8% rise in sales at gasoline stations as gas prices shot up in the aftermath of Hurricane Harvey. Vehicle sales surged 2.1% as people replaced cars destroyed by the storm. Building supply store sales rose 2.1% as consumers rushed in to buy items to repair their homes.
The only sectors declining were sporting goods -0.2%, electronics and appliances -1.1% and furniture -0.4%.
To show how much the gasoline sales impacted the headline number, if you exclude service stations and cars, sales only rose 0.5%.
Obviously, this sales surge will fade since it is storm related but it will take months for conditions to return to normal.
The spike in sales caused the Atlanta Fed's real time GDPNow forecast for Q3 to rise slightly to 2.7% growth.
The Consumer Price Index (CPI) rose +0.5% for September but this was also impacted by storms. The energy component rose 6.1% with gasoline up 13.1%. The core rate, excluding food and energy, rose only +0.1% and remains below the rate the Fed is hoping to see in order to hike rates again in December. Inflation year over year is 1.7% and it has been flat at that level since May. The tame inflation numbers actually reduced the chance of a December hike to 81.7%.
Consumer Sentiment for October surged to 101.1 from 95.1 and the highest level since January 2004. This was only the second time over 100 since Y2K. The present conditions component rose from 111.7 to 116.4 and the highest reading since the year 2000. The six-month expectations component rose from 84.4 to 91.3 and the highest level since 2004. The percentage of people expecting the economy to improve over the next 12 months rose 8% to 55%. With the stock market at record highs, daily headlines about tax cuts and a strong job market, the average consumer is happy today.
The economic calendar for this week will key on home sales and manufacturing. The Fed Beige Book on Wednesday will summarize the economic conditions in each of the Fed districts. It is normally neutral for the market. The Fed has been going to a lot of trouble to figure out how to use the word "moderate" in describing the activity in the various districts. The market will ignore the report unless something has changed dramatically and we have not seen any indications in the normal weekly reports.
On Wednesday, China launched its 19th National Congress of the Communist Party, which is held every five years. The China event is not noteworthy for the US except that Kim Jong-Un is reportedly preparing to launch a barrage of short and long-range missiles on that day. He does it to remind China they do not control him. On Friday, Kim again threatened to launch missiles against Guam so trouble may be brewing.
President Trump has one carrier battle group on station off South Korea and he has dispatched a second Nimitz class carrier, the Theodore Roosevelt, complete with a 7,500 man Marine detachment, which should arrive there soon. The pressure on North Korea is building. Wednesday could be the trigger point.
Any shooting between North Korea and the US would be very market negative because of the potential ramifications.
The earnings calendar went from about 10 companies last week to about 125 this week. The big dog on Monday will be Netflix (NFLX). There are nine Dow components reporting this week (pink) and they will move the market. Goldman Sachs and IBM on Tuesday could be the early trouble spots.
Netflix is the first big tech stock to report and analysts are tripping over each other to hike their target prices. Over just the last week there were nine hikes to the target and the prior week Wells Fargo beat the pack with an upgrade to $235.
New Price Targets
$225 Morgan Stanley
$235 Wells Fargo
$235 Goldman Sachs
The catalyst for all these target hikes is the recent hike in subscription prices. The bump in rates is expected to earn Netflix roughly $200 million a month in additional revenue with no increase in expenses. One analyst calculated the subscription increase was worth about $15 billion in market cap and NFLX has only gained about $8 billion since the announcement.
Netflix is expected to have added about 800,000 subscribers in Q3 compared to their guidance for 750,000. I would be surprised if the actual number was not over one million new subs.
Netflix traded over $200 intraday but that was a sell trigger for a few traders ahead of Monday's earnings. This will be an interesting report and an even more interesting stock reaction. Shares are up $20 over the last week on the hike in subscription prices. Assuming Netflix just has a good quarter rather than a blowout quarter, I would expect to see a significant decline on the news. Any decline from this point would be a buying opportunity.
The big earnings news on Friday was the continuation of the big bank reporting. Wells Fargo (WFC) posted earnings of $1.04 that narrowly beat estimates for $1.02. Revenue of $21.9 billion missed estimates for $22.4 billion. The bank had to take a charge of $1 billion for a litigation reserve given their many ongoing legal problems. The bank said credit quality was better than ever. Loan originations for auto loans fell 47% to $4.3 billion as they try to reduce their lending to non-prime credit customers. Mortgage loan originations fell -16% to $59 billion because the rising price of homes and rising interest rates were limiting the number of customers that can qualify for loans. Shares fell -2.75% on the news.
Bank of America (BAC) reported earnings of 48 cents that beat estimates for 46 cents. Revenue of $22.83 billion beat estimates for $22.02 billion. Like the other big banks, the low market volatility has hurt their trading desks with a 13% decline in trading revenue. Deposits rose $45 billion or +4% while business loan balances increased $46 billion or +6%. The bank repurchased $7.9 billion in stock and paid $2.8 billion in dividends. Shares rose slightly on the news.
PNC Financial (PNC) reported earnings of $2.16 that beat estimates for $2.13. Revenue of $4.58 billion beat estimates for $4.13 billion. Loans rose $3.1 billion to $221.1 billion. Deposits rose $1.6 billion to $260.7 billion. Credit quality remained stable. They repurchased 4.2 million shares and paid dividends of $400 million. The quarterly dividend rose 20 cents to 75 cents. Shares declined $1.50 on the news.
JB Hunt Transportation (JBHT) reported earnings of 91 cents that missed estimates for 96 cents. Revenue of $1.84 billion narrowly beat estimates for $1.83 billion. The company has missed on earnings in three of the last four quarters. The company blamed "increases in driver wages and recruiting costs, increased rail purchase transportation rates, higher insurance and claims costs, increased legal and consulting costs, higher equipment maintenance costs and acquisition and integration costs." They also said the intermodal segment experienced $1.8 million in additional costs because of Harvey, Irma and Maria. The Dedicated Contract Services division saw a $1 million hit from the storms that resulted in an 18% hit to earnings. Network disruption "limited our ability to handle 5,500 loads" in the intermodal segment. Shares fell $4.34 on the report.
The Q3 earnings cycle is still young but 32 S&P companies have reported with 84.4% beating estimates and 81.3% beating revenue estimates. Revenue and earnings are expected to rise 4.4% for the quarter but over the last four years the October earnings have risen 4% above the initial estimates, which would mean 8.4% growth if that trend continues.
Nvidia (NVDA) closed at another new high after Goldman raised their price target to $217, RBC Capital to $220 and Needham from $200 to $250. That ties the Evercore ISI target at $250. Needham said Nvidia is not a one trick pony. They have "huge opportunities" in data centers, self-driving cars, artificial intelligence, video game consoles, gaming PCs and crypto currency mining. The analyst said the total addressable market for data center processors could be $21-$35 billion over the next five years. "We believe our data center estimates for $1.7 billion in 2018, $2.1 billion in 2019 and $2.8 billion in 2020 could prove conservative when addressing a $30 billion market."
Goldman reiterated a conviction buy rating with the analyst saying he was even more convicted after attending the GTC Europe 2017 conference.
The sheer power and capability of the new Nvidia Drive PX Pegasus system is causing a lot of upgrades. With the power to process 320 trillion operations per second and combine all the cars sensors into one interface, it is years ahead of the competition.
PG&E Corp (PCG) had a bad week after regulators began investigating to see if the California wildfires were caused by power lines downed by strong winds. The company confirmed California fire officials were investigating. PG&E equipment has caused fires in the past when power lines were blown down. PG&E has $800 million in insurance but that would be a mere pittance compared to their liability exposure if their equipment was to blame. With 31 people confirmed dead, 400 reported missing and billions in property damage, the liability could be huge. In 2015, a power line problem caused the Butte fire that destroyed 70,000 acres, burned hundreds of homes and businesses and killed 2 people. In 2013, a power line problem caused a 670-acre fire near Hollister CA.
Facebook (FB) said it had launched an online food ordering and delivery service. The initial companies on the service include Chipotle Mexican Grill, Jack in the Box, Five Guys and Papa John's. The service has also signed on food ordering services including EatStreet, Deliver.com, DoorDash and OLO. The ordering process is under the "Explore" menu on the left side of your Facebook page. Shares of GrubHub declined on the news.
Facebook shares closed at a two-month high but still below resistance at $175. Earnings are not until November 1st. The shares have overcome all the election advertising hoopla so far and earnings are almost a guaranteed beat. Mizuho has the highest price target on the street at $230 but it is only a matter of time before somebody puts a $250 number out for the stock.
Hewlett Packard (HPQ) raised guidance saying earnings are likely to come in at the high end of prior guidance. They guided for earnings of $1.74-$1.84 for FY 2018 and analysts were expecting $1.68-$1.86. The company expects to produce at least $3 billion in free cash flow and return up to 75% of that to shareholders. HP said growth opportunities could accelerate in sectors like 3D printing in plastics and metals. Gartner (IT) said HP is now the leading supplier of PCs again. The outlook for the stock is good since its current PE is only 15. Shares rose 6.5% on the guidance update.
President Trump said he was going to halt payments to insurers that a court found to be unconstitutional several months ago. The payments had been authorized by an executive order from President Obama when he knew he could not get them approved by Congress. The CSR payments amounted to billions of dollars for "cost sharing reduction." This puts the problem back on Congress if they want these subsidies to the insurance companies to continue. Many of the large companies had already planned for the payments to be discontinued after they were found to be unconstitutional.
The insurance companies will still be required to offer the subsidies to low income consumers who sign up for Obamacare but the government is no longer going to refund those subsidies. Nearly 85% of those insured under Obamacare receive a subsidy against their payments. The insurers in the Obamacare system were hit hard on Friday. Those who had already exited the system or never entered were still declining because investors were throwing everyone out rather than take the time to figure out who had exposure.
Dow component, UnitedHealth (UNH) fell sharply on the announcement to $186 but recovered to close flat at $192 because they had already reduced their exposure to the system in anticipation of the payments being cancelled.
Hospitals also declined on worries that more patients would not be able to pay their bills if they were forced out of Obamacare because of higher premiums.
Bitcoin surged again to $5,741 and almost back to the high set on Oct 12th. I am kicking myself again for not using my computer background and building a Bitcoin mining operation in my garage back in January 2015 when Bitcoin was only $200. Back then I thought, "It is only $200. If I only mined a couple a month it would not be worth it." Boy was I wrong. A couple a month over the last 34 months would be 68 today and worth almost $400,000 for a $10,000 investment in the mining computers.
The key with Bitcoin is that supply is limited to 21 million by the algorithm used to produce them. Currently there are 16 million in circulation and only five million left undiscovered. The amount of power needed to mine Bitcoins today is exponentially higher than 3 years ago because computers have to wade through trillions of unprofitable computations before finding the one that results in a coin. Some analysts believe Bitcoin could rise to $25,000 or even $50,000 over the next decade as demand increases but supply is fixed. The value of all Bitcoins in circulation was $92.8 billion as of Friday.
Saudi Arabia may be rethinking the IPO of Saudi Aramco. Originally, they considered floating 5% in the IPO with expectations of raising $100 billion. With oil prices struggling to hold at $50 and no guarantee they will rise before a late 2018 launch date, the kingdom may be having second thoughts. Low oil prices would mean significantly less money from the IPO process. Last week we learned that a Chinese investor may be trying to take a large stake in the enterprise. How large was not disclosed but reportedly very large. Why that would impact an IPO is unknown. There are also rumors that Saudi Arabia is considering selling large stakes to other sovereign wealth funds.
There is also talk about a two stage IPO where it lists on Riyadh's Tadawful exchange in 2019 and then expands to an international listing in 2020. Another factor could be the outlook on prices. With production rising in OPEC and non-OPEC countries and oil demand growth slowing because of the surge in electric cars and cars that require less fuel, they may be projecting lower oil prices in the 2020s and less benefit for Saudi Aramco. However, that would be a reason to IPO sooner rather than later since future profits would be declining. Who knows what they are really thinking but oil prices are not likely to rise significantly until mid 2018. Longview Economics chief market strategist predicted $10 oil in 2023-2025 because of the rapid adoption of electric vehicles. I would not hold my breath.
On Friday, the weak Consumer Price Index report caused the dollar to decline sharply in the morning and commodity prices to rise. The Iran decertification event also provided price support even though any impact would be a long way off. Congress has to get off its collective butt and actually do something about changing the JCPOA and/or adding additional sanctions. Even after that point, any Iranian oil export limitations would be well into the future and subject to a complete lack of compliance by other nations. Iran exports 2.3 million bpd with 10% going to Turkey, 13% to Europe, 46% to China/India, 14% to Japan/Korea and 17% going to other places. Unless Iran tested a nuclear weapon, I do not see any of those countries voluntarily halting Iranian imports.
US oil production declined 81,000 bpd last week because all of the Gulf production platforms have not yet been restarted after Hurricane Nate blew through last weekend. I am surprised the decline was not larger.
For the week ended on Friday the active rig count declined by 8 rigs to 928 and the lowest level since June 9th. Five oil rigs were deactivated and two gas rigs. Offshore rigs declined -2 but that could have been the result of the hurricane.
The major indexes managed to creep higher last week despite the worry over bank earnings, political headlines, economics and the concerns over Iraq and Iran. Next week the earnings really accelerate and those headlines will overshadow the rest of the topics in that last sentence. The only wild card would be an outright provocation by North Korea.
The bears are beginning to capitulate. Fundstrat's Tom Lee raised his year-end price target on the S&P from 2,275 to 2,475 saying he was wrong to be so bearish over the last several months. However, his new target is still 79 points below Friday's close. The confirmed bears are struggling to accept the reality of a market making new highs.
The sentiment survey for last week saw a sharp decline in the number of bearish investors. Bullish sentiment is back above the historical average for only the sixth time this year. Since the markets have been making new highs since early January it is surprising that sentiment has only been above the historical average six times. Bearish sentiment hit a five-week low as more investors begin to capitulate and join the bullish crowd.
The S&P gained only 2 points on Friday and finished one third of a point below its prior closing high. It was close but the crashing insurance companies stole the intraday gains. The resistance level at 2,550 has broken and new resistance is 2,555. Initial support is 2,544 followed by 2,525 and 2,495.
The Dow suffered from lackluster performance by its components on Friday. There were no big winners or losers and only four components moved more than $1 and they offset each other. American Express was the surprise gainer since the majority of the banks were lower on their earnings. Apple posted another surprising gain despite constant headlines about delivery problems, iPhone 8 mechanical problems and Qualcomm's suit to halt sales of the iPhone in China.
The Dow missed closing at a new high by one point but it was still a decent day given all the cross currents in the market. The Dow is relatively unsupported after ten days of mostly gains. The advance has been slow but steady. Initial support is around 22,735 and resistance is going to be 23,000 as a large round number that is sure to attract sellers unless a monster rally breaks out to power us through that level. The 20-30 points a day, the index has been adding is likely to come to a halt at that level.
The Nasdaq eased through the 6,600 level to close at a new high on Friday. The majority of the big caps were positive and the index shook off losses in the biotechs to post a minor 14-point gain. The Nasdaq has not had a 200 point dip since mid August and it is definitely due. With earnings approaching, I would expect some volatility but no material change in direction for the next couple weeks. We could easily see some consolidation of the last three weeks of gains. Initial support is 6,565 with resistance around 6,700.
The Russell 2000 is slowly bleeding points but has only given back 12 of the 162 points it gained since August. This remains bullish as long as the support at 1,500 holds. A breakdown there could trigger some cascade selling as investors rush to lock in gains.
The outlook for the market remains bullish but the major indexes have lost their momentum. There are various reasons for the slowdown and hopefully the barrage of earnings headlines next week can push those other concerns aside. The North Korea situation remains the wild card and hopefully the next event will be just a simple missile launch and the market can ignore it.
I continue to recommend holding some cash in your account just in case a buying opportunity does appear. The market does not need a reason to decline. We sometimes attach too much importance to the daily headline stream as a market propulsion device. Markets have a mind of their own and they can be very unpredictable at times.
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