Friday's volume of 2.7 billion shares was extremely low but selling volume was even lower.
Volume was even lower than the 3.0 billion shares for Thanksgiving Friday in 2016. Declining volume was only 1.1 billion shares compared to advancing volume of 1.57 billion. Even more telling was the 628 new 52-week highs compared to only 96 new lows. The sellers must have either been at the mall shopping or at home sleeping off the turkey overdose. The bulls were enjoying another day of gains while the bears were left out.
There were no economic reports or earnings on Friday. The only headlines talked about Black Friday sales and shopper volume. For anyone staying home it was a good day just to rest or catch up on those do list items you had been putting off.
The calendar for next week is full of reports and events. There are ten speeches from Fed heads including one from Janet Yellen on Wednesday. The confirmation hearing for Jerome Powell is on Tuesday and that will be televised. The most important reports for the week will be the Richmond Manufacturing Survey and the ISM Manufacturing Index. The ISM is a national report and carried the most weight. All the economic reports are expected to be positive and show continued growth.
The GDP on Wednesday is expected to show a slight upward revision to 3.2% growth.
The volume of earnings continues to decline and should no longer provide support for the market. Jack in the Box, VMWare and Ulta Beauty are the highlights for the week.
After 489 S&P companies have reported earnings, the expected growth for Q3 is 8.3% with revenue growth up 5.4%. 72.2% of companies have beaten the street's earnings estimates and 67.8% have beaten revenue estimates. There have been 63 earnings warnings for Q4 and 37 guidance upgrades. Only six S&P companies report this week.
Broadcom (AVGO) is reportedly considering raising the offer for Qualcomm (QCOM) from $70 to $77 but there may be a poison pill in the offer. Qualcomm would have to cancel its bid for NXP Semiconductor (NXPI). Qualcomm has offered $110 for NXPI and the stock is trading over $114 on expectations for a higher offer from Qualcomm. The company believes it must own NXPI if it is going to remain independent in order to compete in the sector in the future. Some analysts believe QCOM was willing to bump their offer to as much as $120.
This actually gives Qualcomm and escape route from the unwanted clutches of Broadcom. If QCOM raises their bid for NXPI to $120-$125, Broadcom would likely lose interest in Qualcomm. However, this would ratchet up the leverage for Qualcomm and set them up as a target for activist investors.
The downside is that a failure to acquire NXPI for whatever reason makes QCOM an even bigger target for Broadcom. The acquirer could make the case that QCOM was incapable of competing in a sector that is rapidly increasing in complexity and competition.
Broadcom (AVGO) shares are rising after they announced a 7 nanometer (NM) application specific integrated circuit (ASIC) for deep learning and networking. The core is built on the Taiwan Semiconductor Manufacturing (TSM) 7nm process technology. This technology on this small of a chip was technically unheard of just a couple years ago. This IP technology makes it perfect for advancing the 5G communications standards for systems on a chip (SoC) in the years ahead. Broadcom is a leader and major competitor in wireless solutions.
Teva (TEVA) shares posted a gain on news they were going to cut their workforce by about 4,000 workers. Reportedly, they will lay off 20% to 25% of their workforce in Israel and 10% in the USA. A financial website in Israel (Calcalist) reported the news. Teva is facing significant generic competition and falling prices for generic drugs. They missed on Q3 earnings and cut full year guidance from $4.30-$4.50 to $3.77-$3.87. Operating cash flow guidance fell from $4.4-$4.5 billion to $3.15-$3.30 billion. Shares spiked at the open but fell back to close with only a fractional gain. The company never confirmed the story.
When President Trump visited Saudi Arabia in May, he came home with $110 billion in defense orders. Part of that deal was $7 billion in precision munitions that would be provided by Boeing (BA) and Raytheon (RTN). There are concerns now that the munitions orders could be held up by congressional concerns about the number of civilians being killed in Yemen by the Saudi bombing. Reportedly, between 5,000 and 10,000 civilians have been killed and 40,000 injured. The Houthi rebels are experts at locating their command and control and weapons storage in heavily populated areas thinking Saudi Arabia will not bomb them there.
The order contains more than 8,000 laser guided bombs, 10,000 general purpose bombs and more than 5,000 GPS guidance kits for dumb bombs. The $110 billion in orders for 2018 is just part of what could be $350 billion over the next ten years. With Saudi Arabia becoming more overtly hostile towards Iran, it would be better to sell them the weapons and let them keep Iran in check rather than risk US lives and assets in policing Iran.
Lockheed Martin (LMT) said Saudi Arabia was negotiating to buy $28 billion in "integrated air and missile defense, combat ships, tactical aircraft and rotary wing technologies and programs." Boeing has other orders from the president's trip that include Chinook Helicopters and P-8 reconnaissance planes.
Defense stocks seem to be a bulletproof sector for the coming years.
Jeff Bezos net worth hit $100 billion on Friday as Amazon (AMZN) shares surged $30 to close at $1,186 and a new high. He is now the richest person in the world and the first person in modern times to hit $100 billion. He owns 78.9 million shares of Amazon. His Amazon shares are worth about $93.6 billion, up $2.4 billion on Friday. He has a $3 billion stake in Blue Origin, the rocket company competing with Elon Musk and Space X. He also owns the Washington post.
David Rockefeller was worth several hundred billion in today's dollars but nowhere near $100 billion when he was alive. Russia's Vladimir Putin is believed to be worth more than $100 billion but all his wealth comes from secret side deals with companies that he allows to do business in Russia so there is no way to know his actual wealth.
Amazon is going to host the 6th annual re:Invent cloud conference next week from Monday through Friday. There could be numerous announcements of new products and partnerships that will lift the stock.
Tesla (TSLA) announced the prices on its new trucks. The starting price for a Tesla Semi with a 300-mile range will be $150,000 and the 500-mile range vehicle will cost $180,000. The order demand has been strong and Tesla bumped the deposit from $5,000 each to $20,000 each. Other than the dog and pony show held by Elon Musk last week there has not been a list of features in the standard package and what options are available at extra cost. Tesla has said the trucks will be able to deliver an 80,000-pound payload but nobody knows how much the actual truck will weigh. That would add to the total weight and is relative for highway use tolls based on weight.
Morgan Stanley (MS) predicted the stock could rise to $400 in 2018 and then drop back to $200 because of a failure to ramp up production and increasing competition. GM has more than 20 electric vehicle models that will be in production in the coming years. Several other carmakers including BMW and Mercedes are rushing electric cars into production. Every mass-market car that hits the streets will weigh on Tesla prices in the future.
Barclays upgraded GM shares from neutral to buy saying the company was going to reinvent itself with electrification and autonomy. One analyst said the new GM could include a spinoff of their electric car division that could easily grow to $60 billion in market cap by 2025. That would be double GM's market cap today. They raised the price target from $41 to $55. Shares closed at $44.
Apple shares have shaken off the post earnings depression phase after a minor $8 drop and just short of the typical $10 decline. Shares have rebounded $6 from the $168 low the prior Wednesday when the major indexes closed at multi week lows. You can chalk it up to holiday shopping frenzy and the Thanksgiving week trend for investors to buy big cap tech stocks.
China's Economic Daily News said the company is preparing to launch a new lower-priced iPhone SE 2 that will cost about $450 and be aimed at emerging markets where consumers cannot afford the $1,000 premium phones. The current SE has a 4 inch screen and starts at $349. Analysts expect the phone to have a faster processor in order to run iOS 11.
The Wall Street Journal said stock buybacks are occurring at the slowest pace in five years. Year to date, S&P 500 companies have bought back about $125 billion in stock per quarter or targeting roughly $500 billion through December if the pace holds. The quarterly average between 2014-2016 was $142 billion a quarter. Authorizations increased by 20% in Q3 suggesting there are more buybacks ahead but there is a problem with that theory. With the broader market up 19% YTD and the indexes making new highs, stocks are expensive. Companies, like smart investors, are going to wait for a pullback so they can buy their stock cheaper and get more bang for their bucks. Goldman Sachs is forecasting a 3% increase in buybacks in 2018 to $515 billion.
Secondly, many companies have been paying off debt incurred after the financial crisis and with stock prices so high, they are prioritizing debt payments to increase future profitability. Many companies were borrowing money to finance buybacks and that practice has declined for the third consecutive quarter according to Bank of America. The pace of mergers and acquisitions is rapidly accelerating. The bank said M&A just had its busiest quarter of the year.
If tax reform passes with a 20% corporate rate and a minimal repatriation tax, we could see a surge in buybacks and dividends once the new rules become effective. There are estimates between $1 and $3 trillion in cash overseas that could be transferred to the US with a favorable tax treatment.
For investors this means future market declines should be short and shallow. Companies buying back their own stock on the dips will provide a floor under those securities. Obviously, not all companies buy back stock and the companies with billions in authorizations are the larger blue chip companies.
Consumers went shopping for bitcoin on Thursday as well. The largest bitcoin exchange in the US, Coinbase, added about 100,000 accounts from Wednesday to Friday to bring their account total to 13.1 million. One year ago, the exchange had only 4.9 million users. Bitcoin was worth $735 each last November. The CME is going to start offering bitcoin futures the second week of December. The move by the CME has given a sort of legitimacy to the cryptocurrency and consumers and investors are racing to get a piece of the pie. Analysts now expect bitcoin to be worth more than $10,000 by the end of the year. As of Saturday, the current price was $8,731.
Adobe Systems (ADBE) said Black Friday sales were surging. Online spending rose by 18.4% while mobile purchases rose by 46.2%. Online spending on Thanksgiving was up 18.3%. Shoppers surveyed indicated that 64% still planned on doing some holiday shopping in stores while 36% planned to do all their shopping online. More than 70 million consumers plan on using Cyber Monday sales to pick up some bargains. Overall consumers are expected to spend about $680 billion in November and December this year. That accounts for 17% of annual consumer spending.
Crude prices spiked again to close just under $59. Reportedly, there were comments from OPEC officials that Russia was going to agree to extend the production cuts. Others said Russia was going to agree only with certain conditions. The country is aggravated that the high prices are fueling US shale producers and the new flood of exports is cutting into Russia's export market share.
The growing hostility between Saudi Arabia and Iran was also credited with some of the price support. Personally, I doubt Saudi Arabia will enter into direct conflict with Iran for several years because of their billions of dollars in orders for military equipment. I believe they would want to have all those supplies and equipment on hand before starting a war.
Lastly, the Keystone pipeline is still offline while they repair the leak. That means inventories are going to decline next week and that supports prices.
The November OPEC production meeting is on Thursday. There will undoubtedly be a lot of propaganda from the participants as they flock to microphones like moths to a flame.
The active rig count rose by 8 with 9 oil rigs added and 1 gas rig removed. Producers have now reactivated 25 rigs over the last three weeks. Higher oil prices are providing the stimulation.
With only 2.7 billion shares traded and more than 60% of that likely done by computers, the market activity was about as exciting as watching a recent Denver Bronco football game. The Dow and S&P gapped open and then rose slightly intraday to peak around 11:AM and then faded into the close. The Nasdaq rose all day as investors bought the big cap tech stocks.
The market appears sluggish but nobody should have expected any material gains on Friday. This was more a lack of sellers than a surge of buying.
The balance of investor sentiment swung back slightly in favor of the bulls but given the new market highs last week you would have thought it would have been a bigger swing. With 64.5% still not convinced the market is moving higher, there is room for a lot more capitulation to the bullish camp.
The 2,600 resistance level on the S&P could still exert its influence next week. The 2-point gain over that level is not enough to escape its pull. Thanksgiving week is typically bullish and the gains were right on par with what was expected historically.
I went back on the charts to try and decide if there were any post Thanksgiving trends that we should watch. In recent years there was a sell off but not routine enough to be predictive for 2017.
S&P gains/losses in the week after Thanksgiving:
2016 -26 points
2014 -25 points
2013 -29 points
2011 +105 points
Obviously, those moves were related to events and market action leading up to Thanksgiving but that is more analysis than I am prepared to do here and past results are no guarantee of future performance. This simple exercise was to try and project a pattern.
The only one of significance is that there was only one gain in the last 7 years. If I was going to focus on one thing that would be it.
The Dow had one good day last week and then failed at resistance the last three days. The index is still struggling because of post earnings depression in many of its components. It is not serious but it is weighing on the index.
Round number resistance at 23,600 has held for three days. The Dow remains the most at risk index because of the big air pocket down to 22,275.
The Nasdaq 100 gained 23 points and AMZN, FB and AVGO supplied 20 of those points. This was a narrow rally at first but broadened out to 3:2 advancers to decliners on Friday.
The Nasdaq Composite is approaching 6,900 and the 7,000 level is being mentioned as a target and potential top in December. Reaching that level would represent a monster 30% gain for the year. Trees do not grow to the sky and markets do not rally forever.
The Russell succeeded in punching through the new high resistance from October and stalled at 1,520. That is where it has closed for the last three days. The monster four day rebound erased six weeks of declines. Can it continue? It would appear the Russell is due for a rest but anything is possible.
I believe investors should be cautious next week. With lawmakers going back to work, the tax reform package will take center stage and currently there are six GOP senators on the fence and considering voting no. With the extreme pressure that will be brought to bear over the next two weeks, I would expect some positive conversions but at least four have to switch to yes votes and this is just to get the bill into the conference committee. Once out of committee it will be even more difficult to get it passed again by both the House and the Senate. Time is growing short to get this done by Christmas as the administration has promised. That means there will be some deals cut that could appease some and displease others. A failure in the senate could mean a significant market decline.
Enter passively and exit aggressively!
Send Jim an email
"If you can count your money, you do not have a billion dollars."
J. Paul Getty
If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.