The markets shook off multiple future events and rallied on Friday. Are investors seasonally jolly?
The markets celebrated lawmakers kicking the government shutdown can two weeks farther down the road. Why worry, that is two weeks from now and an eternity in market time. They rejoiced because the House/Senate conference committee is trying to find some way to keep the SALT deductions and not cause a taxpayer revolt in the high tax states of CA, NY, CT, NJ and IL. That rejoicing may be premature because in order to keep the SALT deduction lawmakers have to find $800 billion in revenue from somewhere else. It is not likely to happen and if they did, everyone in the rest of the country would pay the price.
Regardless of the reasons for the bullish market on Friday, the tech sector is still sick. While the Dow and S&P closed at new highs, the Nasdaq Composite closed at its lows and well off the intraday highs. Investors are still taking profits in tech stocks. The chip sector was the hardest hit again with the $SOX closing down -6 points and the only index with a loss.
The big economic report for the day may have produced some of the bullish sentiment. The Nonfarm Payrolls for November showed a gain of 228,000 jobs compared to a revised 244,000 jump in October and estimates for a gain of 199,000. The big lift for the month came from an addition of 62,000 workers in goods producing industries led my manufacturing. The services sector created 166,000 jobs. Average hourly earnings rose +0.2% after a -0.1% decline in October. The average hourly wage rose 5 cents to $26.55. The unemployment rate was flat at 4.1% and a multi decade low. The labor force participation rate was unchanged at 62.7%.
Contractors added 24,000 jobs, more than likely as a result of hurricane repair, manufacturers added 31,000 and energy/mining added 7,000. Involuntary part time workers increased by 48,000. Those are people forced to take a part time job because they cannot find full time employment.
With the economy growing at a steadily increasing pace, new jobs should continue to grow. If the tax reform bill makes it into law, we could see the pace increase later in 2018.
The preliminary Consumer Sentiment for December declined from 98.5 to 96.8 compared to estimates for a rise to 99.0. The drop was led by a decline in the expectations component from 88.9 to 84.6. The present conditions component rose from 113.5 to 115.9 compared to the recent 116.5 high in October.
The decline in expectations was led by respondents who claimed to be democrats and worried about the potential hike in their taxes. Since the most democratic states are the five states with the highest taxes, the loss of the SALT deduction would be a blow to their finances.
Wholesale trade inventories declined -0.5% in October and the biggest decline since the -0.6% drop in February 2016. Durable goods inventories rose +0.1% but nondurables fell -1.3%. Sales of durable goods rose +1.3% and nondurables +0.2%. The decline in inventories is actually positive because it means a boost to manufacturing in 2018.
The combination of the weak wage growth and the drop in wholesale inventories pushed the Atlanta Fed real time GDPNow forecast for Q4 down from 3.2% to 2.9% growth. This is a volatile forecast and changes weekly.
The calendar for next week is headlined by the FOMC rate hike decision on Wednesday and the Yellen press conference immediately afterwards. The Fed funds futures are predicting a 100% chance of a quarter-point hike with a 9.8% chance of a 50 basis point hike. Nobody in their right mind would expect the Fed to upset the status quo with a 50-point hike just before Christmas and as Yellen is packing up her office to head into retirement. She would not want her last official act to be crashing the market. More than likely, she wants to slip out the door quietly so she does not get blamed if something goes wrong with the economy in 2018.
There are several important economic reports next week including the inflation indicators in the CPI and PPI reports. Retail sales should also be important since this is the report that covers Black Friday.
Unless there is a major miss in expectations for any of these reports, the market should ignore them. Investors are on cruise control while they wait for the outcome of the tax bill changes in the conference committee.
Believe it or not, the Q4 earnings cycle kicks off on Thursday. Adobe reports earnings for Q4, Costco and Jabil for Q1-2018 and Oracle for Q2-2018. These companies always get a jump on the crowd by several weeks.
Adobe has already guided higher and expectations are for earnings of $1.16. Costco has also guided higher with their blowout sales for November. Expectations are for earnings of $1.35. Oracle is the dead money sleeper of the group with expectations for 68 cents. Oracle shares rarely move vertically unless they miss or beat earnings.
Alexion Pharmaceuticals (ALXN) spiked $7 on Friday after activist investor Elliott Management was rumored to be pushing for changes. They want the company to issue guidance that is more aggressive or put itself up for sale. Elliott is considering a proxy fight to shake up the board. The firm gave Alexion until the end of December to add more biotech experts to the board. Alexion said it is always interested in "active and constructive dialog" with all shareholders. Depending on where Elliott acquired its stake, they could be really upset since shares have fallen from $145 to $110 over the last two months.
Sage Therapeutics (SAGE) spiked 70% on Thursday and another 11% on Friday. Moving the stock was phase II trial results on their SAGE-217 treatment for major depressive disorder or MDD. The results showed a "highly significant mean reduction in the Hamilton Rating Scale for Depression among patients taking the drug." The company is planning a late stage trial in 2018. Reportedly, this drug is for short-term use. You take it, you get well. If the symptoms come back later, you can take it again. Normally depression drugs are a lifetime treatment program. The CEO said he could see the drug being as big as Prozac saying there is nothing else available that produces results this significant. He said, "I have been doing this for 20 years, and I don't think I have ever seen data this dramatic in a mid-stage trial." Needham reiterated a buy and raised their price target from $100 to $193. Canaccord raised their target from $140 to $191. Chardan Capital raised their target from $140 to $225.
Deutsche Bank (DB) raised their rating on Trivago (TRVG) from hold to buy saying the company should benefit from a more stabilized bidding environment among its biggest customers. The analyst did not change the $10 price target with shares at $6.60 before the upgrade. Shares spiked to $7.58 then fell right back to $6.60. The stock has had a rough four months with a decline from $24 to a close at $6.46 on Monday. The company gave an investor presentation on Thursday and apparently, Deutsche Bank was the only one impressed. Nobody else changed their outlook or even reiterated their positions.
Reportedly, the summer was rough on these companies with the hurricanes causing chaos in the hotel/travel business in the south. Revenue growth fell from the prior average of 67% to only 17% in Q3. Guidance of 2% to 15% growth in Q4 was met with prolonged selling. Trivago will celebrate its one-year anniversary of being a public company next week. Happy birthday. Will Trivago still be around for number two?
Apple (AAPL) is reportedly in talks to acquire Shazam Entertainment Ltd for $400 million. The Shazam app lets a user identify songs or TV shows by pointing your smart phone at the audio source. The song app already works with Siri ("Hey Siri, what is that song?") but the TV show portion has not yet been integrated. Shazam is privately held and has raised $183 million in venture capital over its 18-year lifespan. Pitchbook recently valued the company at $1 billion. Apple is trying to beef up its 27 million subscriber music service to compete with Spotifiy's 60 million subscribers.
Apple said Chief Design Officer Jony Ive is returning to day-to-day management of the company's design teams after a two-year stint focusing on other projects. Ive was behind many of Apple's iconic designs including the early Macs and iPhones. His recent job was designing the new spaceship campus.
Rumors continue to flow over the three iPhones to be announced in 2018 according to AppleInsider. Yes, the iPhone X is only a little over a month old and there are new phones in the pipeline. The largest one will have a monster 6.5-inch OLED screen. There will also be a 5.8 inch and 6.1 inch model with an LCD screen. All three will have larger batteries, which suggest longer battery life, except they have to power those larger screens. The biggest phone is rumored to have a 3,300-3,400 mAh battery, much larger than the current 2,716 mAh in the iPhone X. AppleInsider said Apple is planning an earlier ramp on these phones so there will be sufficient quantity available when they are announced in September.
The tax reform bill has not even been firmed up yet and companies are announcing monster stock buyback plans. Home Depot (HD) announced a $15 billion buyback and raised guidance for annual sales between $114.6-$119.8 billion by the end of 2020. The new repurchase program replaces the existing $15 billion program. The company expects to buy back $8 billion in shares total in 2017 with $2.1 billion in Q4. Since 2002, Home Depot has bought back 1.3 billion shares worth $73 billion.
At an investor presentation on Wednesday the company said they expect revenue to grow 6.3% for the current year with same store sales rising 6.5%. Earnings are expected to rise 14% to $7.36. Full year 2017 sales are expected to be $100.6 billion.
Honeywell (HON) announced on Friday an $8 billion stock repurchase program. This included $1.5 billion currently unspent in the prior $5 billion program. At the current price, this would be about 7% of the outstanding shares.
The company also said it was buying 25% of Chinese software provider Flux Information Technology. They will also form a joint venture with Flux to serve customers outside of China and Honeywell will own 75% of the venture. Flux makes warehouse management systems and software and currently manages more than 129 million square feet of warehouse space in China.
Bank of America (BAC) announced last week it was buying back another $5 billion in shares on top of their previously announced $12 billion buyback from July 1st through June 30th, 2018. BAC has recently moved out of a 10-month consolidation pattern under $25.
Mastercard (MA) boosted its dividend to 25 cents, payable Feb 9th to holders on Jan 9th. They also boosted their existing share buyback from $1.5 billion to $5.5 billion. No date was given for the repurchase program.
Nvidia (NVDA) announced a new Titan V graphics processing unit (GPU) for PCs. The Titan V is built on the company's new Volta architecture. The video card is targeted at machine learning and artificial intelligence (AI). The 12gb HBM2 video memory card has 21.1 billion transistors, can deliver 110 teraflops of performance and is NINE TIMES more powerful than its predecessor the Titan Xp, which was just announced in April.
Think about that. Nvidia already had the fastest GPU on the planet that was less than 9 months old and they have already produced a new one that is nine times faster. This is why AMD and Intel do not have a chance. While they are trying to figure out how to copy Nvidia's prior architecture, Nvidia is already light years ahead of them with the next version.
Gartner (IT) said PC shipments rose 3.6% in Q3 but the high-end PC market that includes gamers and GPU enabled PCs grew much better than expected. Allied Market Research said the GPU market is expected to reach $157 billion by 2020 with an annual average growth rate of 35.6% from 2016 through 2022. Jon Peddie Research said graphics board shipments rose 29.1% in Q3 over Q2 and 21.5% YoY. Nvidia continues to be the leader with 72.8% market share.
Nvidia shares fell $30 from $217 to $187 in the chipwreck over the last two weeks. Everything I wrote about above plus the dozens of other areas they dominate, suggests this is yet another buying opportunity.
I normally do an informal survey of shippers during the holidays. With about 25 people/kids in my immediate family, we have multiple deliveries nearly every day in the weeks surrounding Black Friday. My daughter has all her online purchases delivered to my house so her kids will not discover what she bought. My wife adds to the load buying for the kids and grandkids.
Last year the Postal Service was the main carrier with daily stops and I wrote that UPS must not have bid low enough to capture Amazon's business. This year I have seen the entire range of carriers. I have had the postal service make more than one delivery a day more than once along with UPS, which actually made 3 deliveries in one day.
Bear with me I am getting to the point. I always look to see what packages are in the trucks. Who is doing the most business? This year, according to my UPS drivers, 85% of their packages are from Amazon. About 5% are Target, higher volume than in the past, and maybe 5-7 a day are from Walmart. Harry & David packages have more volume than Walmart. UPS started something new this year. They have drivers using their personal cars to deliver the overflow. That is how I got 3 deliveries in one day. Two were personal cars with different drivers and one was the truck.
FedEx said only about 5% of the packages were Amazon and normally the large or heavy packages. They said Target (TGT), Wayfair (W) were the next most common. FedEx has far less volume than UPS. Twice last week the truck came around 2:PM and had only about a dozen boxes left while the UPS truck can show up well after dark and have multiple dozens of packages left. The FedEx driver said he did not know why volume was lighter this year.
The Postal Service has been delivering the small lightweight stuff from Amazon and others. Nothing over about 3 pounds. Amazon made up about 25% of their loads and almost no Target or Walmart.
The investing outlook from this survey is that UPS is likely to surprise to the upside with significantly higher volume than Q4-2016. I only had 3-4 deliveries total in Q4-2016 from UPS with most from the Postal Service. I have had at least a dozen deliveries from UPS this year. UPS added a surcharge of between 27-97 cents for shipments between Nov-19th and Dec-2nd and again between Dec-17th and Dec 23rd.
I would expect FedEx to underwhelm on Q4 earnings. I think Target will surprise higher and Walmart may underperform. Amazon will likely post blowout numbers. The UPS driver said he has been with them for 10 years and has never seen this much volume from Amazon.
The bitcoin phenomenon is continuing. Coins hit a temporary high of $19,000 on one exchange last week but only one. There are more than a dozen exchanges and each one has a different price depending on the buy/sell volume on that exchange. The graphic below is a real time snapshot of prices as of midnight Friday ET. The lowest price quoted was $14,648 and the highest price was $16,611. The exchanges with the highest volume typically have the average price with the extremes on the low volume exchanges.
The CBOE will launch the first bitcoin futures contract on Monday with the symbol XBT starting at 6:PM ET Sunday night. The contract will represent one bitcoin and the margin will be 40% of the bitcoin price. When the CME launches its futures product representing 5 bitcoins the margin will be 35%. I am sure margin rates will escalate rapidly if the volatility continues. Both exchanges said they stand ready to adjust margin as required. With the price at $15,000 on Friday night, that would require $6,600 in margin with the CBOE on Monday. Reportedly, many hedge funds are prepared to go long in hopes of capturing the rally without the headache and added expense of actually buying bitcoins. Also, there are quite a few large funds that are prepared to short the futures because they believe this bubble is going to pop soon.
There will be a price limit of 10% above or below the prior day's close. Trading will be halted for 2 minutes. When trade resumes and the contract moves 20% above or below the prior day's close, trade will be halted for 5 minutes.
I think it is a safe bet that all the major traders are going to tiptoe into the market. Initial bets will be small until they get a feel for the movement and then positions will increase. Last week bitcoin moved 40% higher in about 40 hours and when you are talking about a $15,000 price tag that becomes either a major gain or a major loss very quickly.
For mere mortals there is a trust security (GBTC) that represents one bitcoin at one-tenth of the price of a coin. This is dangerous since it does not trade 24 hours a day. Gaps higher or lower could be a killer. There are no options.
Crude prices are no longer rising despite the decline of -5.6 million barrels in the EIA inventory report last week. The US produced another record high at 9.707 million bpd and the fifth consecutive weekly record. The OPEC meeting is behind us, the good news is priced in and we are heading into a weak demand cycle. Analysts are targeting a move back below $55 in the weeks ahead.
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The S&P rebounded back to resistance at 2,650 with a decent 14-point gain on a Friday. News that the conference committee was trying to find a compromise on SALT deductions was credited for some of the gains. The feeling that some kind of tax reform would eventually be passed is also lifting sentiment. The drag from last week on worries about the negative points in the bill has apparently faded.
Investor sentiment was mostly unchanged as of Wednesday's close but with rallies on Thr/Fri we could see a different ratio next week. Just over 64% still believe the market is not going higher. That means there are a lot of investors that could be converted if the markets continue making new highs.
The S&P closed at a new high at 2651.52 on Friday. The prior high was 2,647.58. At this level, every point counts. The forecasts for 2018 are piling up with Morgan Stanley at 2,750, Bank of America 2,800, Goldman 2,850, UBS 2,900, BMO Capital 2,950 and Oppenheimer at 3,000. Nearly everyone expects a material decline in 2018 with a rebound to those forecast levels.
I believe we have to get out of 2017 first. The coming week could be lackluster because of the tax unknowns. However, this is December and tis the season to be merry and invest those end of year bonuses.
The Dow also closed at a new high at 24,329 after several days of declines. The Dow remains very unsupported but the industrial stocks are still being bought. The blue chips are bringing in the green for the holidays. The key here is that the corporate tax cut will be good for these companies and the 12-14% repatriation tax will allow them to bring their cash hoard back from overseas. That means higher dividends, more buybacks and probably more acquisitions.
Dow support is 24,150.
The Nasdaq opened higher but faded to close near the lows. The big cap tech stocks have not regained their traction despite some minimal gains for two-thirds of the group. The 6,900 level remains resistance with the closing high at 6,912. Earnings expectations for ORCL, COST and ADBE could lift the Nasdaq late in the week.
The small cap Russell 2000 only posted a minor gain on Friday and remains in the clutches of resistance at 1,520. The small caps are supposed to be strong in December and the tax reform should give them an added boost. They do not seem to have gotten the message yet. We need to see the Russell move higher for the overall market to have a chance of continued gains.
Despite the record close on the Dow and S&P we are not out of the woods yet. The market is normally up on the day before a Fed announcement so that is positive for sentiment. Even if the Fed hikes as expected, the market is likely to ignore it unless Yellen develops a case of foot in mouth disease at the press conference.
The main storm cloud remains the provisions in the tax bill when it comes out of the conference committee. That will drive the market when it happens. Secondly, lawmakers kicked the can down the road on the government funding but not far enough to get us into 2018. The commentary from both sides of the isle suggests there could really be a government shutdown before Christmas unless they kick the can again into 2018. The battle lines have been drawn and neither side seems interested in compromise.
With the tax bill and funding bill both due out before Christmas and both with the potential to be major market movers, I would be careful about putting a lot of new money to work. The Dow could easily be 1,000 points higher or lower by Christmas. The historical trend is for gains in December but prior years did not have those two potholes in the road ahead. Be patient, there is no rush to trade. There is always another day if you have money in your account.
Enter passively and exit aggressively!
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"When asked how he would spend his championship money a Philadelphia Phillies relief pitcher reportedly said, "90% I will spend on good times, women and Irish Whiskey. The other 10% I will probably waste."
Tug McGraw 1944-2004
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