Apple shares declined nearly $5 and severely damaged market sentiment for the tech sector.

Market Statistics

Apple shares fell off a cliff in the premarket after a report from Taiwan Economic Daily claimed iPhone X demand could come in well below expectations in Q1. They claimed Apple would slash guidance from 50 million units to 30 million units. Since Apple has not given any iPhone X guidance, the report is somewhat dubious. However, some analysts have been cutting estimates significantly. JL Warren Capital is predicting sales of only 25 million units saying consumers are balking at the high price point with so many other phones available at cheaper prices.

Loop Capital remains bullish saying they are expecting 40-45 million units in Q1, up from 30-35 million in Q4. Jefferies is predicting 40 million. Reuters said research has shown that combined iPhone sales in Q4 have not been as strong as the debut of iPhone 6 in the same period in 2014. Rosenblatt securities reiterated a buy rating and $180 price target saying sales would be solid. The analyst said the sources behind the Taiwan report may have been confused since iPhone 8 production was cut several weeks ago. That news did not impact Apple shares because analysts thought it meant strong X sales. Rosenblatt said they are not seeing any order cuts from 3-D sensing and OLED display panel suppliers. He also said prior checks with Chinese suppliers showed X sales already above 8/8 Plus sales combined.

The damage was not just Apple shares. The chip suppliers for Apple also fell hard. That included QRVO, AVGO, SWKS and MU.

We have just over a month before we get the answer to these conflicting reports. Apple earnings are Feb 1st. Shares were down over $5 intraday to erase about 35 points off the Dow.

On the economic front, the Richmond Fed Manufacturing Survey for December declined sharply from 30 to 20. Backorders turned negative at -4. This was the first time in five months that components were negative. Any positive number shows expansion so the headline number is still strong. Even with the drop to 20, it is still the second strongest number since December 2010 and tied the October 2014 reading. The spike from 12 to 30 in November was unreasonable and the December drop was simply a snap back to reality.

The employment at 20 is a record high for that component. Wages increased slightly from 21 to 22.

The Texas Manufacturing Survey for December rose from 19.4 to 29.7 and the highest reading since 2006. Texas is benefitting from the resurgence in the oil sector, the rebuilding of the gulf coast after Hurricane Harvey and the tax reform will benefit small manufacturers that are making products for energy and construction.

The production component rose from 15.1 to 32.8 and a multiyear high. New orders rose from 20.0 to 30.1 but backorders slipped slightly from 11.4 to 9.2. Employment boomed from 6.3 to 20.4. Prices received rose from 15.1 to 17.9 and the high for the year.

The combination of the Richmond and Dallas reports suggests the national ISM could rise to 60 from the 58.2 reading for the prior month.

The S&P CoreLogic home prices for October rose 6.2% over October 2016 levels. This is old news since prices have been rising around these levels each month for the last year.

The calendar for Wednesday is headlined by the Pending Home Sales for November. That is the last material report for the week.

The API crude inventory report was pushed from Tuesday to Wednesday because of the holiday. However, oil prices exploded higher on news of a pipeline explosion in Libya. There is still fighting between different militias in Libya and the news reports said a band of heavily armed men attached explosives to the pipeline and blew it up. The pipeline carries 90,000 bpd to the main port in Libya. There is no estimate on the time to repair.

With the 450,000 bpd outage in the North Sea, 90,000 bpd in Libya, potential for similar sabotage in Nigeria plus a dozen other minor outages, the global inventories should be declining at a rapid rate. Crude prices spiked to almost $60 with a 2.2% gain. This excitement should begin to fade when US inventories begin to rebuild in mid January.

Seaport Energy said today there were more than 7,300 DUC wells in the US. (Drilled uncompleted) Those could all be turned on very quickly if prices shot up significantly. However, there would be a shortage of completion crews with most service companies operating full out already with no extra crews on standby. It would boil down to which producer would be willing to pay the highest price to get their wells fracked.

Stock news was very light today so this will be a short newsletter. Mallinckrodt (MNK) entered into an agreement to buy Sucampo Pharmaceuticals (SCMP) for $1.2 billion including debt. They are buying the company to get the flagship constipation drug Amitiza and the deal is expected to close in Q1. The CEO of Sucampo said Mallinckrodt was the natural partner to accelerate development of Sucampo's rare disease drug portfolio. The MNK CEO said the acquisition would add "at least" 30 cents to earnings in 2018. News broke in early December that SCMP had received an offer but the buyer was unnamed. Shares spiked from $11 to $17 over the last month and added another $1 to the $18 offer price on Tuesday. MNK shares were only fractionally higher.

Garmin (GRMN) introduced a new fitness tracker that only needs to be charged once a year. The screen is an always on, color display that is readable in sunlight. The Vivofit is designed to be worn 24/7 and safe in the shower. The device can be paired with a smartphone for additional features. The company said a tracker is only worthwhile if you are wearing it and by giving it a one-year battery, there is no reason to take it off. The display is programmable and comes with a watch face, countdown timer, stopwatch, multiple alarms and a weather widget. The device can even track your smartphone and help you find it when it is lost. Garmin Release Investors were not impressed and shares gained only 9 cents. I told you it was a slow news day.

Credit Suisse (CS) said it would take a $2.3 billion charge because of the tax reform. Banks tend to pay taxes in advance so they can get relief in future years. They are treated as a deferred tax asset. Money paid in when taxes were 35% is worth less with taxes at 21%. That means they have to write down those deferred assets. Bank of America is expected to take a $3 billion charge and UBS a CHF-3 billion charge. Shares of CS were only fractionally lower so investors are unconcerned.

Energous Corp (WATT) shares spiked nearly 100% after the bell after finally receiving their long awaited approval from the FCC on their wireless charging technology. Shares were heavily shorted with about 5 million shares or 30% of its float short. The company was ahead of the wireless charging curve but could not get its technology approved until today. This technology uses "RF power" or electricity transmitted through radio frequencies rather than the magnet technology (QI) adopted by Apple and others. The Energous technology will allow devices to be several feet away from the charging source. They have demonstrated charging from as far as 15 feet from the source. Shares spiked from day's low at $8.42 to the $17.25 high in afterhours. Shares settle at $15.30.

Retailers were up despite the weak market. MasterCard SpendingPulse reported a 4.9% rise in holiday sales. Online sales rose 18.1%. This was the best holiday sales since 2011. Super Saturday as it is called when Christmas falls on a Monday, was the second strongest day of the year behind Black Friday. Total holiday sales are expected to exceed $682 billion. Despite the strong year for retailers, there were the most store closings ever in 2017. Analysts do not expect 2018 to be much better. The move to online shopping is unstoppable. Some 70% of shoppers bought something online this year. Analysts believe online sales will be 50% of the total before 2030.

On the positive side for UPS and FDX, some 8% to 15% of online sales are expected to be returned or exchanged. Only about 8% of merchandise bought at a brick and mortar is returned. That is roughly $90 billion at the high end. January 5th is expected to be the biggest day for returns.

Brick and mortar retailers are getting into the act by offering to accept returns for stuff bought on Amazon. Retailers believe that is just another way of getting customers in their store. FedEx and UPS have setup customer drop off locations in 35,000 locations including Walgreens, Krogers and some Albertson's stores, dry cleaners, etc. UPS said 8.5 million packages were shipped back to retailers in the first week of January 2017.

Retailers traded higher as the normal sell Christmas cycle did not appear. In many years, investors buy retailers in October, with some selling on Black Friday and others waiting until Christmas to close the positions. It is still early, retail gains are at risk once the calendar turns to 2018. Costco was the one retailer where sellers have been active. They reported earnings on Dec 15th and shares have declined to post spike lows.

Amazon (AMZN) said it saw record levels of shoppers throughout November and December. In one week alone more than 4 million people became Prime subscribers. That is phenomenal. The company said it sold "tens of millions" of Alexa enabled devices and would have sold more but were out of stock on the Echo Dot, Echo Spot and Alexa Buttons. That claim also involves a tremendous number of Alexa enabled tablets. My wife got a 10 inch as a present and I won a 7 inch. I was not expecting much after having a bad experience several years ago with the early models. These are light years ahead in technology and ease of use. I would highly recommend them.

The company said shopping on the Amazon mobile app rose 70% this year as people were moving away from desktop shopping. More than 1,400 electronic products were ordered per second on mobile devices. Amazon said the hottest non-Amazon products were the Instant Pot, WowWee Fingerlings, the Fitbit Charge 2 fitness tracker, the 23andMe DNA test, the Coffee Lovers K-Cup 40-count variety pack, TCL Roku Smart LED TVs and Rumba robot vacuums. The Instant Pot fad is unbelievable. The Instant Pot Community Facebook group has almost one million members. I know people that have multiple pots because they love them so much. Amazon said their cargo planes can each carry more than 10,000 Instant Pots. The company said they sold enough Instant Pots to make more than 9 million bowls of chili at the same time.

Amazon never gives us the exact numbers of items sold but compares them to metrics they make up. For instance, they said they sold enough TVs to build 2,500 towers the size of the Space Needle. In the 5 days from Thanksgiving through Cyber Monday, they sold more than 140 million items from small businesses and entrepreneurs selling on Amazon. The most requested song on Alexa was Jingle Bells and the most requested recipe was chocolate chip cookies. Amazon packed and shipped more than 1 million packages a day.

The last Prime Now order in time for Christmas was delivered in 58 minutes at 11:58 p.m. on Christmas Eve in Baltimore, MD. The order included the Kid Galaxy Amphibious RC Car Morphibians Shark Remote Control Toy, the Crayola Oil Pastels Art Tools, 28 ct., and the VTech Click and Count Remote.

Here is the complete list put out by Amazon of their holiday shopping statistics. Amazon List


The markets traded sideways on very low volume of only 4.07 billion shares. That is the lowest full day volume since December 23rd, 2016. Wednesday is not expected to be much higher. Last year volume increased about 300 million shares per day between Christmas and New Years. After New Year's volume surged to the high 6 billion, low 7 billion range for the next two weeks.

This week is not expected to see any material market movement. According to the Stock Trader's Almanac, since 1950 the market has averaged a 1.5% gain between the two holidays. However, according to Kensho over the last five years the major indexes have averaged about a half percent decline. For this year, I would go with the Kensho numbers. The graphic below from CNBC shows the results of buying the indexes at the open the day after Christmas and selling them at the close on the last trading session of the year.

The markets were already trending lower coming into this week and the Apple drop in the premarket confirmed that negativity. The Tuesday declines were minimal with the Nasdaq losing the most ground thanks to Apple and the chip suppliers.

The S&P traded in a very narrow 5-point range and ended with a 3-point loss. There was never any direction other than sideways. Support remains 2,678 and resistance 2,695. The index is in range for another attempt at 2,700 but it would take a lot more excitement to get it moving higher. The low volume is going to be an anchor.

The Dow recovered slightly at the close but it was lackluster. The 8-point loss was better than the -30 point loss all afternoon but we are dealing with a 25,000 point index and these moves are just noise. The Dow traded in a 70-point range but that was due to the Apple inspired gap lower at the open and a rebound dip buy that faded quickly. The index traded in about a 30-point range for most of the afternoon. There was no excitement, no buyers and no sellers. If it were not for Apple shaking up the market, it would have been even more boring to watch.

The Nasdaq big caps continued their losing trend and this is not positive for the January outlook. With these stocks showing deteriorating trends, it suggests there could be some heavy selling once the tax calendar rolls over. There is no excitement and these stocks are the sentiment indicators for the Nasdaq.

The index has given back all its new high gains from last week and appears to be heading for a test of 6,900 as support.

The Russell is the only index with a gain and it was very minor. The Russell does look like there are some bargain hunters trying to pick up a few shares with that upslope trend over the last week. A break over 1,550 could energize the entire market.

We should not expect much from this week. I will be happy if we can just hold our recent gains. I would love to see the Dow make a run for 25,000 but at 254 points below that level, I just do not see any catalyst to overcome the low volume blahs.

I would recommend watching from the sidelines and maybe we will get a buying opportunity next week. There is no rush to invest. Be patient and wait for an entry point.

Enter passively, exit aggressively!

Jim Brown

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