News that Broadcom may bid for Qualcomm caused a major rally in semiconductors that added to the Apple generated gains.
The market was positive but moving sideways until 1:30 when headlines broke that Broadcom (AVGO) with a market cap of $112 billion could be preparing a bid for Qualcomm (QCOM) with a market cap of $91 billion. The rumored bid was in the $70 range, which would have been a 27% premium to the $55 price in QCOM shares before the headline broke. If by chance this deal actually happened, it would be the largest tech acquisition ever.
There are a lot of hurdles to cross before a deal this big can be completed. Both are international companies, which means approvals by multiple countries. Secondly, Broadcom would have to complete its move to the US as its home country. There is no chance of getting it approved with Broadcom a Singapore company. The CEO announced the move in the Oval Office with President Trump on Thursday.
Broadcom has been a serial acquirer. The company was a $30 stock in early 2013 and it is $275 now. The last major acquisition was the Avago acquisition of Broadcom in 2015 for $37 billion in the largest tech acquisition ever at that time. They took the Broadcom name but retained the Avago symbol.
The key here is that the old Broadcom was a wireless chipmaker. Qualcomm is a wireless chipmaker. Together they would be a near monopoly in some types of wireless chips. Analysts believe this could be a deal too complicated for Broadcom to A) come up with a price that Qualcomm is likely to accept and it would have to be well over $70. B) The breakup fee would have to be huge because of the regulatory complexity. C) There would more than likely be competitive bidders.
I speculated a couple weeks ago that Apple should buy Qualcomm to get their chip technology and eliminate the complicated licensing program that costs Apple billions in licensing fees every year. Qualcomm will earn $7 billion for 2017 on revenue of more than $25 billion. What is having a wireless chipmaker in Apple's portfolio worth? They have $269 billion in cash so money is not the problem.
Don't forget that Qualcomm is in the middle of acquiring NXP Semiconductor (NXPI) for $110 per share or $37 billion. That deal is currently on hold by the EU and the approval process will restart on Dec 6th. Activist shareholder Elliott Management is pressing for a higher price and shares were at $118 before the Broadcom rumors.
The surge in the chip sector powered the Nasdaq to a new record high. The index gained 13 points in the 30 min after the headlines broke. The $SOX closed at a new high after spiking 20 points after the 1:30 news. Since the chip sector leads the Nasdaq there was nowhere to go but up.
Apple (AAPL) was also a contributor to the rally with a spike to record high of $174.26 at the open, Shares faded back to close at $172.48 but they still contributed 30 points to the Dow and 19 points to the Nasdaq 100. Qualcomm contributed 9 to the $NDX, second largest contributor behind Apple with Broadcom adding 5 index points in 4th position. Amazon was the third largest contributor at 7.3 points.
Apple gained on their blowout earnings but analysts said the guidance was the key. They guided for the sale of 85.5 million iPhones in Q4 and that was slightly above the midrange of their prior guidance. That means there are no material production issues. That was a major relief to analysts and investors.
However, the odds are very slim Apple shares will hold those gains without some retracement. Ideally, that would be a pullback to $160-$165 but we rarely get what we want in these situations. The August earnings spiked to $160 and then pulled back to $150 on those manufacturing rumors. The May earnings spike to $156 pulled back to $142.50. There is precedent for Apple shares to drop about $10 in the weeks after an earnings spike.
However, there are no headwinds for Apple today. With the manufacturing rumors dispelled, Apple's business is booming. One company that handles remarketing of Apple phones said 15% of the phones traded in on the iPhone X are model 8s. That means demand for the X truly is off the charts. There were lines at the major Apple stores Friday morning that were hundreds of people long and they remained long most of the day.
Apple temporarily exceeded $900 billion in market cap on Friday. Apple is well on its way to being the first trillion dollar company. Microsoft is next at $649 billion. Amazon is well behind at $536 billion, Alibaba is $469 billion, Facebook at $424 billion, Google at $313 billion and Wal-Mart at $268 billion.
In earnings news, Bloomin Brands (BLMN) reported earnings of 12 cents that missed estimates for 15 cents. Revenue of $948.9 million narrowly beat estimates for $948.0 million. Same store sales fell -1% but that was better than the -2% consensus. The company said the hurricanes reduced revenue by 1% and earnings by 4 cents. They guided for the full year for earnings of $1.31-$1.36 compared to prior guidance of $1.40 to $1.47. Somebody needs to check my math but that guidance drop was a lot more than 4 cents so there are problems they cannot blame on the hurricanes. Analysts were expecting $1.40. It appears investors bought the hurricane excuse because shares closed flat rather than suffering a big loss.
Dentsply International (XRAY) reported earnings of 70 cents that beat estimates for 66 cents. Revenue of $1.01 billion beat estimates for $978.4 million. The company guided for the full year for earnings of $2.65-$2.70 per share, slightly tighter than the prior guidance of $2.65-$2.75. Shares rallied 6% on the news.
ImmunoGen (IMGN) reported a loss of 37 cents, which missed estimates for a loss of 28 cents. Revenue of $8.5 million missed estimates for $29.2 million. They guided for full year revenue of $115-$120 million. They posted a big miss on earnings and revenue so you would expect a big drop in the shares. Instead, they rallied 6%. On the call, they said they raised $235 million in capital through transactions with Sanofi and Jazz and that gives them a two-year run rate on cash burn. That will allow them to complete some existing trials and move forward on marketing collaborations.
Starbucks (SBUX) reported earnings after the bell on Thursday, missed on revenue, and lowered guidance. They cut EPS growth estimates to 12% in 2018 compared to prior guidance of 15-20%. They guided for same store sales growth of 3% to 5% and revenue growth of 6% to 9%. They warned they would take a revenue hit as they closed all 379 Teavana locations by spring of 2018 and close its ecommerce platform. The company is also selling its Tazo tea brand to Unilever for $384 million. Starbucks bought the brand in 1999 for $8.1 billion. Shares fell as much as 6% in afterhours on Thursday. They rebounded to actually gain 2% after the CEO said on Friday the company could exceed those new growth targets. I may be wrong but I think Starbucks shares are dead money until they can prove the growth is back on track. With a Starbuck on nearly every major street corner in the US the revenue average per store is going to continue dropping. Overall sales may rise but only because they are putting 2-3 per corner in China.
Another Thursday night reporter was Activision (ATVI). They reported earnings of 47 cents that missed estimates for 50 cents. Record revenue of $1.62 billion missed estimates for $1.74 billion. They guided for the full year for $2.08 on revenue of $6.68 billion. Analysts were expecting $2.14 and $6.79 billion.
However, Activision had guided in August for earnings of 34 cents and revenue of $1.385 billion. Based on their guidance they had a blowout quarter. Activision Blizzard had 384 monthly active users (MAU) with a record 49 million online players. Subsidiary King Digital had 293 million MAU. Numerous engagement metrics were at record highs. For Q4 they guided for 36 cents and $1.7 billion in revenues.
The annual BlizCon event at the Anaheim Convention Center this weekend saw 30,000 tickets sold out in a matter of seconds. Millions more will watch it through online live streaming.
Shares plunged $2 after setting a new intraday high.
Pandora (P) reported a loss of 6 cents that beat estimates for 7 cents. Revenue of $378.6 million missed estimates for $381 million. The company guided for Q4 revenue of $365-$380 million and analysts were expecting $413 million. The CEO said advertisers were complaining Pandora's advertising interface was lacking critical features and it is starting to have an impact on our revenue. Advertising accounts for 73% of Pandora's revenue. Investors were not pleased with the earnings, guidance and CEO comments and the stock fell 25%.
The outlook for Q3 earnings has improved considerably with current expectations at 7.9% growth, up from 4.3% several weeks ago. Of the 407 S&P companies that have already reported 72.2% have beaten earnings estimates and 66.7% have beaten on revenue. There have been 41 guidance warnings for Q4 and 23 companies have raised guidance. The current forward PE is 18.1. In the coming week 49 S&P companies will report along with 1 Dow component.
The notable companies reporting next week include Priceline, Monster Beverage, AstraZenaca, Nvidia and Dow component Disney.
The economic reports on Friday were mostly positive. The Nonfarm Payrolls for October were 261,000 and slightly under estimates for 315,000. This was another Goldilocks number that was not too hot to cause the Fed to accelerate their rate hike schedule. The September payrolls that came in with a decline of -33,000 because of the hurricanes were revised higher to a gain of 18,000 to stretch the continuous string of monthly gains to 85 months. August was revised upward from 169,000 to 208,000.
The unemployment rate fell from 4.2% to 4.1%, a decade low, and the labor force participation rate declined from 63.1 to 62.7. There was a whopping decline of -765,000 from the labor force. The broader U6 unemployment rate fell to 7.9%.
The leisure/hospitality sector rebounded with a gain of 106,000 jobs after a loss of -102,000 jobs in September due to the hurricanes. Many service businesses were closed for several weeks after the Houston and Florida storms.
The trade deficit for September was $43.5 billion, just over $1 billion more than in August. Exports and imports both increased. The deficit has been just over $43 billion a month for the last four months.
Factory Orders for September rose 1.4% and the largest gain since October. Durable goods orders to 2.0% and non-durables +0.8%. Nondefense capital gods rose 1.7%. There was no material impact from the hurricanes.
The ISM Nonmanufacturing Index rose slightly from 59.8 to 60.1 for October. That is the highest level since July 2015 at 60.3 and almost back to the levels seen before the financial crisis. The services sector accounts for 88% of GDP. New orders were flat at 62.8 and backlogs declined slightly from 56.0 to 53.5. The employment component ticked up slightly from 56.8 to 57.5. There was no material impact from the hurricanes.
The economic calendar for next week is very light without any important events. There is only one Fed speaker when there are normally around 10. This looks like a holiday week only there is no holiday.
Crude prices shocked traders with another $2 gain to $55.70 and a two-year high. Other than the constant propaganda from Saudi Arabia and OPEC about doing whatever it takes to stabilize prices and potentially extending the voluntary cuts through the end of 2018, there was only one relevant piece of news.
Nigeria returned to the headlines after the Niger Delta Avengers said the cease-fire declared in August 2016 was officially over. The rebels warned of a "brutish, brutal and bloody campaign against oil companies." The group has been responsible for cutting Nigerian production from 1.65 mmbpd to 1.0 mmbpd earlier this year. That production had been recovered according to the IEA as pipelines and facilities were repaired. The rebels want the oil wealth redistributed to the Niger Delta region where the oil is produced. They promised to cut every pipeline that moves crude away from the region until their demands are met. They are also targeting an offshore production facility in 1,700 meters of water and 130 km offshore. The facility is operated by Total SA.
The active rig count fell another 11 rigs. We have lost 60 rigs in the last 14 weeks to 898 and the lowest level since May 12th. Oil rigs declined -8 and gas rigs -3.
The Volatility Index ($VIX) closed at a historic low of 9.14 on Friday. The prior historic low was 9.19 on Oct 5th. I know this is going to sound like a broken record but this is a long-term warning. The VIX cannot remain this low forever. When volatility does return a lot of investors are going to be hurt badly because they have forgotten that bad things can happen in the market with no warning.
Despite the weekly headlines by some barely known analyst predicting the end of the current bull market, there is nothing on the horizon that would suggest an end. Earnings are actually improving and tax reform although only in the discussion stages is in the headlines every day. Larger and larger stock buybacks are being announced, dividends are rising, the global economy/markets are improving, US economics are improving and the Fed is on a very slow path towards normalization. There are no obvious roadblocks in the near future.
Just be aware that record lows in volatility and record highs in the market will eventually reverse. I have always found that the greater the percentage of my assets I have in the market the more likely it is to crash.
As the semiconductors lead the Nasdaq, the small caps "normally" lead the market. They were early to rebound in September and the S&P followed. Now the small caps are fading while the S&P is making new highs. Is this time different? Will the Russell 2000 turn higher or will the S&P follow the Russell lower?
The S&P is moving ever closer to 2,600 despite the moves over the last week being muted. The index is moving farther away from the uptrend support and farther away from the averages. Currently, the S&P is 65 points above the 50-day average. Back in March, the index closed 101 points above the 50-day average. In December, it reached 104 points over the average. Those are the two widest ranges since before the financial crisis. That would suggest we still have room to run but the average high spread seems to be about 75 points.
The 2,600 level is going to be strong psychological resistance because only 7 Wall Street analysts have targets over that level. Either we are going to see a major flurry of updated targets or there could be a lot of analysts taking heat for their predictions. Investors do listen to forecasts. Some even act on them.
The Dow gained 22 points despite Apple, UNH and HD adding more than 50 points. The Dow A/D line was almost flat with only 3 more advancers than decliners. The index has had a flat A/D line despite the recent gains.
Disney is the only Dow component reporting earnings this week and that is after the bell on Thursday so it will not provide any lift during the week. Apple is likely to fade from the record high because of the $15 gain over the last week. While Apple may deserve the gains, that is a lot in one week and earnings are now behind us.
The Dow remains the most overbought index and the one most likely to pause for a rest. You could say the flat consolidation pattern over the prior 7 days was that rest. Markets do not have to decline in order to recharge and that could be what has happened to the Dow. We just will not know until next weekend.
The Nasdaq big caps have launched to another level. The Nasdaq 100 closed at a new high on 5 of the last 6 days. Four of the last five months saw a very choppy trend for the big caps until the late September rally. The NDX took profits in mid October and that reenergized the index for a higher run.
Only two of these big cap stocks are NOT at a new high. Those are Priceline and Tesla.
The Nasdaq Composite closed at a new high on Friday thanks to Apple's 19-point contribution. Broadcom and Qualcomm added another 14 points. That means 33 of the 49 points gained were added by only 3 companies. The index has had six decent declines since May that averaged 186 points each. The last two have barely broken 100 points or roughly a 1.5% decline each. As long as the tech stocks remain hot, this performance can continue but the post earnings depression phase will eventually appear. I would not be surprised to see a dip back to 6,550 or roughly 3%.
The Russell 2000 is struggling to hold its gains but so far, it has been mostly successful. Friday's close was only 17 points below the record high close at 1,512. This pattern has actually morphed into a continuation pattern that normally breaks to the upside.
There was a major shift in investor sentiment last week. The bullish camp gained 5.4% to 45.1% and the highest level since January 4th at 46.2%. Bearish sentiment collapsed to 28.6% after a 5% spike the prior week. The new Nasdaq highs have a powerful impact on sentiment.
The fundamental factors suggest the market will continue moving higher. Maybe not in a straight line but the trend should remain bullish. Dips should be bought but probably not on the first day. It has been 489 days since we have seen a 5% decline and we normally average twice a year. Retain some cash in your account and consider any dip a buying opportunity.
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