The Dow's gains today were not broad based. Only 2 stocks added 100 points.
The Dow hit +166 at its high today to make a new intraday high at 24,552. While that looks like a bullish market, there was a lot of divergence. The Nasdaq, Russell 2000, transports, semiconductors and biotechs were all negative. On the NYSE there was $1 billion in sell on close orders. The Dow benefitted from its narrow 30 stock composition and price weighted construction.
Boeing and Goldman Sachs contributed 99 points to the Dow's gain leaving the other 14 gainers to contribute the other 18 points.
Boeing (BA) led the gains after they announced an $18 billion stock buyback and raised their dividend by 20% to $1.71 per share. The buyback replaces the previously announced $14 billion plan, which had $4.8 billion in remaining authorizations. They have repurchased $9.2 billion in stock in 2017. They expect this purchase plan to run 24-30 months to completion. The new quarterly dividend will be paid on March 2nd to holders on February 9th. Boeing has now increased its dividend by 250% over the last five years.
At its intraday highs, Boeing contributed more than 66 Dow points. Boeing is an incredible company that is printing money. Boeing signed orders for more than $90 billion in new planes in November. They have now sold more than 4,000 of the new 737 MAX planes to 92 customers for the fastest order ramp in history for a new plane. They have an order backlog of more than $500 billion on 5,700 planes. Unfortunately, their options are so expensive investors cannot afford to buy them.
Goldman Sachs (GS) has been a laggard in the banking sector but the expectations for getting the tax bill passed and repatriation of $2 trillion in cash has seen their shares rise on the potential for new M&A transactions among their clients. With the Fed expected to raise interest rates tomorrow and 3-4 times in 2018, they will be more profitable and bond trading will increase. Shares gained $7.55 and closed at a new high.
There were multiple headlines on the tax bill today. Senator Pat Toomey said he was working diligently to get the FIFO provision removed from the compromise bill. In addition, some 41 house members had sent a group letter to the conference committee trying to get the provision removed. However, more than 250 letters from various senate and house members had been sent to the committee asking for the addition and deletion of various items. This is going to be a tough task and there will be items in the final bill the market does not like.
After the bell news broke that the committee members had settled, for the time being, on a 21% corporate tax rate, 37% top individual rate and an increase in the mortgage interest deduction limit for loans up to $750,000. There was no mention of FIFO or the AMT. This could still change at any time. Some members of the conference committee will have lunch at the White House on Wednesday and the committee will hold its only public meeting on Thursday.
House republicans introduced six more bills to cut various Obamacare taxes and penalties. These bills could be added to the government funding bill that will be put forward by December 22nd. Senate leader Mitch McConnell said there was no way the government would be shutdown in December. He said he is confident they can reach an agreement to provide long-term government funding by the 22nd. Democrat Chuck Schumer immediately rushed to a microphone to say any bill with long term defense funding and shorter-term money for other programs would fail in the senate. He said "Democrats will oppose any budget deal that allows defense spending to increase without increasing spending on their domestic priorities."
Investors only heard the "no way the government will be shut down" and "house members and Pat Toomey are working diligently to remove FIFO." Even then, the markets other than the Dow were struggling to remain in positive territory.
Treasury yields and the dollar ticked up slightly after the Producer Price Index showed a rise of +0.4% in November. This was the third consecutive month with a +0.4% gain and that suggests inflation is finally gaining traction. Goods inflation rose 1.0% with core goods up +0.3% and services up +0.2%. At the producer level, the headline number is now up 3.0% over the last 12 months and the most since 2012, with goods up 4.2% and services +2.4%. However, more than two-thirds of the November gain was due to a 15.8% rise in gasoline prices.
PPI Chart from Moody's
The NFIB Small Business Survey for November rose from 103.8 to 107.5 and the highest level since the survey publication began in 1986. The index is averaging 105.7 for the quarter, which is consistent with 4.0% GDP growth. The number of firms expecting the economy to improve rose from 32% to 48%. Those expecting higher sales rose from 21% to 34% and those thinking this was a good time to expand rose from 23% to 27%. Those planning on hiring rose from 18% to 24%. Unemployment is at the lowest level since 2000 and the economy is growing at the fastest pace in nine years. There are good reasons for small business owners to be optimistic. The current economic expansion is likely to continue through 2018 and become the longest on record. The prior longest was 120 months from March 1991 to March 2001.
Tomorrow is the FOMC rate decision and Janet Yellen's last press conference. They are expected to hike by 25 basis points. Currently expectations are for 2-4 hikes in 2018. Three hikes is the most common expectation. If inflation as shown in the CPI on Wednesday, is moving up as fast as the PPI, we could easily see 4 hikes in 2018. That would not be traumatic. After Wednesday, rates should be at 1.25-1.50%. Adding another 1% with four hikes in 2018 would only bring rates up to 2.25-2.50% and still very low. The Fed will update their projections tomorrow.
According to the CME FedWatch Tool the odds of a January hike are 13.9%, Mar 62.4%, May 64.8%, June 80.3%, Aug 85.8%, Sep 90.0%, Nov 91.1%. Obviously all those numbers will change once the Fed updates their forecasts.
A potentially traumatic event for some consumers is the end of the AOL Instant Messenger (AIM) on December 15th. There is no conversion tool so users will have to hand copy every one of their contacts into some other messaging platform before that date. Any pictures you have on the service will have to be downloaded before the 15th or be lost forever. AOL said there are less than 10 million AIM users left.
AIM has been around forever in Internet terms or 20 years in human time. The messenger service started in 1997 and was the first chat application of its kind. When it shuts down all those clever screen names will go with it. ProblemChild99, MaryJaneForever, Flasher33, BigStick7, LoveGoddess11, etc. Teenagers and those not so young hid behind screen names while they flirted and chatted as they stared into their cathode ray tube video screens with dot matrix characters. We have come a long way in 20 years. Goodbye AIM.
There are no material earnings on Wednesday but Thursday after the bell we get Adobe, Costco and Oracle. They could impact the market at the open on Friday.
There was very little stock news today as most companies have completed their earnings cycle. Mattel (MAT) surprised everyone with an earnings warning only two weeks before Christmas. They said holiday sales are being hurt by weakness in some of their key brands. Some of Mattel's brands include Barbie, Hot Wheels and Fisher Price. They warned that full year sales would decline in the mid to high single digit percentages. Kids are turning to MP3 players, tablets, smartphones and other electronic devices like Nintendo, Xbox and Play Station rather than conventional toys. The bankruptcy of Toys-R-Us also hurt them. The company has halted dividend payments to aide cash flow.
Goldman Sachs upgraded Activision-Blizzard (ATVI) from neutral to buy and raised the price target to $73. The analyst said ATVI was trading at a discount to its peers ahead of a period of accelerating earnings growth. Shares rose 2% on the news but should continue rising to retest the highs.
Verizon (VZ) was upgraded from neutral to buy at Instinet on better visibility into subscriber growth, rising average revenue per user and better cost controls. The company announced a new streaming agreement with the NFL on Monday. Verizon is expected to launch a new over the top streaming service in the near future and several other service enhancements. Since Verizon has only a small TV base, they can price their streaming service competitively without worrying about cannibalizing their own subscriber base. The analyst raised his price target to $61. Shares closed at $53 and a 52-week high.
Tesla (TSLA) shares are surging after PepsiCo (PEP) said it has ordered 100 of the electric trucks. That is the largest known public order and Reuters claims more than 285 have already been ordered. The trucks require a $20,000 deposit and will sell for $250,000 or more. To put this in perspective Pepsi has more than 8,000 trucks in its fleet. More than 260,000 heavy-duty Class-8 trucks are produced in North America annually. If the trucks can actually be delivered and prove to be a hit, there is a huge market for Tesla. They claim a $100,000 per year benefit in the reduction of operating costs. That means they pay for themselves in less than three years and that would be a huge selling point for fleet managers. The challenge is the time it takes to recharge. That means they probably will not be favored for long haul routes but any regional service where they return to the yard every night is a prime candidate.
After the bell, API reported a decline of 7,382 million barrels of oil for the week ended on Friday. Analysts were only expecting about half that much. Gasoline inventories rose 2.334 million barrels and distillates rose 1.538 million. The strong decline in oil inventories is due to the sharp increase in refinery utilization to 93.8% as refiners race to deplete crude stocks so they can avoid property taxes on December 31st. This is an annual event where inventories decline in December and then rise in January. Crude prices rose only slightly to $57.50 in afterhours.
Gold prices continue to decline as bitcoin prices surge. Bitcoins and other crypto currencies have become the new hedge against the dollar and inflation. Gold and silver have crashed over the last week. Bitcoin has been trading in a range around $18,000 since the futures began trading on Sunday night.
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The S&P posted an anemic 4-point gain despite the Dow's surge to +166 intraday. The resistance at 2,650 has broken and traders are probably starting to focus on the 2,700 level for later this month. It would not take more than a couple good days to put us at that level.
The index has to cross very long-term uptrend resistance around 2,670 to get to 2,700.
The Dow closed over psychological resistance at 24,500 in its quest to reach 25,000 by the end of December. The index may need another catalyst to continue these strong gains. The successful completion of a tax reform vote without a lot of warts could be that catalyst.
The minor weakness from early last week has been forgotten and even if the Dow only made these gains on the back of two stocks, there are 28 others that could provide lift for the rest of the week. Investors are buying blue chips because of the multiple tax benefits including more buybacks, higher dividends, repatriation of cash and potential M&A. With the economy growing at a decent pace and earnings rising, there are no downside ahead other than political headlines and the end of the tax year.
The Nasdaq failed at downtrend resistance but did not sell off hard. The index was down -20 at its lows and recovered despite most of the big cap techs ending in the red. The Nasdaq was dragged lower by chips, biotechs and transports. Resistance is 6,875 and 6,900.
The small cap indexes declined again but the losses were minimal. The 1,520 level is proving to be tough resistance on the Russell but the index is holding over the 1,512 support followed by support at 1,500. As long as the index does not collapse, this consolidation could be paving the way for another run higher in the weeks ahead.
I would continue to be cautious about adding long positions until the outcome on the tax bill is known. There are already a couple of senators complaining they can no longer vote for it because of the deficit impact and the lack of a broader reduction for individuals. There is no guarantee the conference bill will pass and investors seem to be taking it for granted that it will. I could be completely wrong but the tax bill and funding bill are going to be very difficult to get through the senate and any failure would be market negative.
We will have plenty of time in 2018 to trade as long as we have money in our account. There is no race to be invested when the outlook is cloudy.
Enter passively, exit aggressively!
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