Traders expecting the worst ahead of the tax vote were painfully surprised.
The markets opened positive on the text of Jerome Powell's speech for the confirmation hearing even though there was a critical tax vote expected later in the day. After the confirmation hearing the market rallied again on the softball questions, good answers and no apparent roadblock to his confirmation. The market declined after news of a North Korean missile launch into the Sea of Japan and ahead of the committee vote on the tax reform bill in the senate.
After the bill was voted out of committee, a major step for the bill, the market exploded even higher to post a 255 point gain on the Dow. It was not a good day to be short.
Voting the tax bill out of the finance committee was a crucial step ahead of the full vote in the senate. This morning Goldman Sachs had said there was only slightly better than a 50:50 chance of getting a tax bill passed in 2017 and that rose to 80% in 2018. Cowen & Company said the passage of a tax bill was very unlikely in 2017 because of the various divisions in the republican senate. Morgan Stanley was also negative on the outlook. Two of the major holdouts Corker and Johnson voted to pass the bill out of committee after changes were promised before the vote by the entire senate. The six senators on the fence have now declined to 4 and with Corker and Johnson capitulating, we are likely to see some similar capitulation by others. While this was a crucial step, there are numerous future steps to be completed before it becomes law. We are not out of the woods yet despite the market reaction.
The North Korean missile problem rose in intensity because this launch went significantly higher suggesting they have the capability to hit the USA. The missile traveled 2,800 miles into space compared to the International Space Station, which orbits 250 miles into space. The missile returned to earth to land in the Sea of Japan only 625 miles from where it was launched. The UN called an emergency meeting of the Security Council but that will not accomplish anything.
President Trump was adamant when questioned during a briefing and said emphatically, "We will take care of this." His tone and manner was that of somebody that had been pushed past the breaking point and action could be imminent. What that could be is anybody's guess.
Something needs to be done soon because Kim Jong Un said this in his last public statement. "North Korea has harnessed a multi-functional thermonuclear nuke with great destructive power which can be detonated at high altitudes for super-powerful EMP (electromagnetic pulse) attack according to strategic goals." An EMP over the USA has the power to knock out all electronic power for months to years. It is estimated 80% of Americans would die if this were to occur. For him to brag he has "super EMP capability" should be the last straw for the USA. Of course, the American press has conveniently overlooked or ignored this critical piece of information as being too wild to even consider. Unfortunately, the United States is not preparing. On Sept. 30, the Congressional Commission to Assess the Threat of Electromagnetic Pulse to the United States of America shut down after a failure to secure funding from Congress.
The economic reports helped to power the market's gains. The Richmond Fed Manufacturing Survey for November rose from 12 to 30 and a record high. The major internal components posted strong gains. Shipments rose from 9 to 33 and the largest gain since 2001. Capacity utilization rose from 7 to 19. This was a very positive report.
Consumer confidence for November soared to 129.5 and the highest level since December 2000. That is up from 126.2 in October. The present conditions component rose from 152.0 to 153.9 and the highest level since 2001 and the expectations component rose from 109.0 to 113.3. The percentage of respondents planning on buying a vehicle declined from 14.0% to 12.6%. Prospective homebuyers rose slightly from 6.4% to 6.9% and appliance/TV buyers rose from 48.8 to 52.0. The booming economy and the potential for a tax cut seem to have lit a fire under consumers as well as the market.
Case Shiller existing home prices rose from 5.9% to 6.2% in September. Despite the constant rise in prices there seems to be no letup in demand.
The trade deficit for October increased from -$64.1 billion to -$68.3 billion. Exports of autos fell -2.1% and consumer goods declined -1.7%.
The API crude inventories after the bell showed a decline of -1.821 million barrels compared to estimates for a -3.15 million barrel drop. Gasoline declined -1.529 million barrels and just over estimates. Distillates rose 2.696 million barrels and well over the forecast for a 230,000 build. Crude prices only declined about 30 cents after the report.
Expectations for the OPEC meeting on Thursday are keeping prices high. Everyone expects them to announce an extension of the production cuts until the end of 2018.
The Q3-GDP revision is tomorrow and expectations are for 3.3% growth. Expectations for Q4 GDP are currently +3.4% growth. If the economy can maintain this pace before the tax cuts become effective, we could actually hit 4% at some point in the next year. Q1 is normally the spoiler so it remains to be seen if it will continue to be a laggard with another 1.2% gain like the one we saw this year.
Janet Yellen will speak at 10:00 and after today's confirmation hearing on Powell, her speech is likely to be ignored unless she goes off the beaten track and says something analysts are not expecting.
Emerson Electric (EMR) said it was dropping its $29 billion acquisition offer for Rockwell Automation (ROK). The company said it would focus on rebuilding the company in smaller steps using internal investment, partnerships and acquisitions to broaden the companies experience in automation. Currently Emerson focuses on the process side of business with software and equipment. Rockwell is the leading supplier of controls for assembly lines. Emerson shares rallied 3.7% on the news with investors breathing a sigh of relief. Emerson's market cap at $40 billion is only slightly larger than Rockwell's at $29 billion. Rockwell shares also surged over 3% on the cancelled bid.
Arby's just bought a massive amount of chicken wings. The roast beef sandwich company signed a deal to acquire Buffalo Wild Wings (BWLD) for $157 per share. Arby's is privately owned by Roark Capital Group, which owns a dozen or more fast food companies including Jimmy Johns, Auntie Annes, Cinnabon, McAlisters, Carl's Junior, Corner Bakery, Seattle's Best, Schlotzsky's and Hardees. They had originally bid $150 but Marcato Capital, an activist investor, had built up a stake in the mid $140s and had three seats on the board. Arby's had to sweeten the deal in order to induce Marcato to take the cash and go home. There were rumors last week that the price could go as high as $170 if Marcato decided to hold out on negotiating. Buffalo Wild Wings will continue to operate as an independent brand.
Thor Industries (THO) reported earnings of $2.43 compared to estimates for $1.80. Revenue of $2.23 billion beat estimates for $1.95 billion. This is an example of real blowout earnings. The CEO attributed his monster earnings to millennials buying RVs. Who knew? He said the demographic had changed from older couples taking vacations and visiting the grandkids to younger families that can do short camping trips on the weekends or even just drive it to kids soccer games and have all the comfort of home with air conditioning, refrigerators and a restroom. Shares spiked 13% on the news.
Autodesk (ADSK) reported a loss of 12 cents after the close. That was slightly better than the 13-cent loss analysts expected. Revenue of $515.3 million beat estimates for $514.1 million. The company guided for the current quarter for a loss of 10-14 cents on revenue of $537-$547 million. Analysts were expecting $544.8 million. Full year losses are expected to range from 49-53 cents with revenue of $2.04-$2.05 billion. Autodesk is shifting to a subscription model and that typically produces paper losses for up to 2 years but then a much stronger revenue stream in the future. Shares fell below $110 in afterhours but rebounded to $116 at the close.
Marvel Technology Group (MRVL) reported earnings of 34 cents that beat estimates of 33 cents. Revenue of $616.3 million beat estimates for $613.1 million. They guided for the current quarter for earnings of 29-33 cents on revenue of $595-$625 million. Analysts were expecting 27 cents and $590 million. Marvel announced last week it was buying Cavium for about $6 billion.
Nuance Communications (NUAN) reported earnings of 20 cents that beat estimates for 15 cents. Revenue of $474.7 million beat estimates for $455.7 million. Shares spiked about 5% in afterhours.
The earnings highlight for Wednesday is Jack in the Box followed by Ulta Beauty and VMWare on Thursday.
AMD and Nvidia (NVDA) were weak after Mizuho warned that mining for crypto-currencies would decline in 2018. Nvidia only gets about $80 million a year in revenue from GPU mining but AMD sees about $500 million. The analyst said Ethereum could move in early 2018 from "proof of work," which requires GPU mining to "Proof of Stake" protocol, which no longer uses GPU mining. The decline in AMD and NVDA continued to weigh on the chip sector, which has been down the last two days.
Bitcoin set a new record high Tuesday afternoon at just over $10,065. With exchange Coinbase adding 100,000 accounts a day and a technical limit of only 21 million bitcoins, the price is going to continue to rise. One analyst today said we could see $40,000 by the end of 2018. Former hedge fund manager at Fortress, Michael Novogratz, said bitcoin could quadruple in the next 12 months and Ethereum could triple. He said there was a big wave of institutional money coming and he was going to launch a $500 million digital assets fund. He correctly called the $10,000 level back on October 10th when bitcoin was $4,874. He said he bought just under $20 million in bitcoin when the price crashed to $6,000 in mid November.
I get hate mail all the time when I say a particular market move is a short squeeze. I am sorry, but that is what drives quite a few market gains. Investors did not suddenly decide today, after four days of stagnation, that they wanted to buy stocks $3-$4 higher than they could have bought them on Monday.
We had several days of low volume and declining internals with the indexes at new highs. The Dow had failed at 23,600 several times. With Goldman Sachs, Cowen and Morgan Stanley saying they doubted the tax bill would be passed in 2017, it was the perfect setup for the shorts. They expected negative headlines and a post Thanksgiving decline. Instead, they were hit with positive headlines and a monster short squeeze. These events are a fact of life in the market and happen routinely. We should thank the shorts for donating their money to the bullish cause.
If you look at the S&P chart below for the last four months there are no other candles like the one we got today. Shorting new highs is a favorite bearish pastime and this one bit them badly.
The S&P is again in blue-sky territory and without some unfortunate event, bullish sentiment could be locked in for the rest of the year.
Likewise, on the Dow there are no other candles over the prior four months like the candle we got today. This was a major breakout and there was a lot of price chasing, making it even more painful for the shorts. The Dow has gone from fighting resistance at 23,600 to well over 23,800 and the next target for December is round number resistance at 24,000. Let me be the first to say it. If we get a favorable tax deal signed into law, we could see 25,000 by the end of December. That is only about 4% over our current level.
The Nasdaq did not participate in the Dow rally. There were more big cap decliners than advancers and even Apple was lower for the day. The tech stocks powered the rally last week and while the indexes were positive today they were muted compared to the 1% gains on the Dow and S&P. This is actually good news. As long as there is consolidation on the way up, it allows for continued gains longer term.
The Nasdaq Composite closed over 6,900 and could easily reach 7,000 in the days ahead. There are no tech earnings to power the move but December normally provides a steady melt-up for the tech stocks.
The Russell 2000 was the leader for the day with a 1.5% gain of 23 points. After stalling at 1,520 for 4 days, the breakout was huge. However, it did not become huge until after the tax vote at 2:30. The index was under resistance at 1,520 at 2:00 and rallied 17 points into the close after the vote.
You can call today's move anything you want to call it. There may even have been some month end portfolio adjustments involved in the closing sprint. Big gains like these seldom continue back to back. We "should" see some consolidation but market sentiment has taken a giant leap higher and that could continue to lift the markets as long as the tax headlines continue to be positive. What goes up could come down just as fast if the news turns negative.
Enter passively, exit aggressively!
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