Boeing continued its role as the biggest gainer on the Dow by adding another 54 points or half of the day's gains.

Market Statistics

Boeing has contributed 151 Dow points in just the last three days. The 54-point gain today came after the company said it delivered 763 commercial planes in 2017, up from 748 in 2016 and beating the 2016 record by 1 plane. Two-thirds of the deliveries were 737s. For the year, Boeing booked orders for 912 commercial planes with a list price of $134.8 billion. That lifts their order backlog to a record 5,864 planes.

The strong assist to the Dow helped produce buying in other Dow components and lifted the index to a new high while the S&P and Nasdaq were struggling to remain in positive territory.

The NFIB Small Business Survey for December declined slightly from 107.5 to 104.9. Some analysts attributed the weakness to the tax fight that appeared doomed for most of December. It was passed just before the holidays so the January survey will be more important. Even with the minor decline, the survey is still tracking at a 4% GDP growth rate for Q4. The November number was a high for this survey.

The internal components were mostly flat with few material changes. Plans to increase inventories fell from 7 to -1 but that is typical after the holidays have passed. Employment decreased slightly from 24 to 20 but still healthy. Surprisingly, those respondents expecting the economy to improve declined from 48 to 37.

The Job Openings and Labor Turnover Survey (JOLTS) for November showed a 3.8% job openings rate. This was down only slightly from the 3.9% in October. This was impacted by the pre holiday hiring that occurred in late October and early November. The number of job openings declined from 5.925 to 5.879 million. Hires declined slightly from 5.592 to 5.488 million. Separations fell from 5.251 to 5.202 million. Quits fell from 3.187 to 3.174 million. Layoffs declined from 1.693 to 1.686 million. Job openings remained near their historical highs. Layoffs remain very low because economic conditions are strong. The quit rate at 2.2% is also at a cyclical high because jobs are easy to find and workers are moving upward. The report was ignored.

The calendar for the rest of the week is highlighted by the Philly Fed Manufacturing Survey on Thursday but investors are going to be more interested in the coming government shutdown deadline and the Q4 earnings that start on Friday.

The bank earnings on Friday kick off the Q4 cycle. Societe-Generale (SOC-GEN) downgraded BAC, JPM, MS and CS this morning saying their results could be disappointing. Apparently, some investors disagreed because more than 103,000 contracts of the January $29 calls on the XLF were bought this morning with the ETF at $28.50.

Target (TGT) set the retail sector on fire before the open this morning but it was short lived. Target raised Q4 earnings guidance from $1.05-$1.25 to $1.30-$1.40. Same store sales are expected to rise 3.4% and well above analyst expectations for 1.25%. They guided for 2018 earnings of $5.15-$5.45 and well above estimates for $4.36. Target shares spiked to $70 on the news but faded at the close. The retail ETF declined despite the strong guidance. Apparently, investors believe all the good holiday shopping news is priced into the market.

Bernstein upgraded Target on Monday with a $75 price target.

Shares of retailer Under Armour (UA) declined sharply after Susquehanna Financial cut their rating from hold to sell with an $11 price target, a -31% decline. The analyst said the company's brand position continued to weaken because they were discounting too heavily and selling items too cheaply in stores like Kohl's, DSW and Famous Footwear. He said discount sales at these stores were causing companies like Dicks Sporting Goods and Hibbett Sports to reduce their retail exposure by cutting shelf space and styles on hand. The analyst said UA would have to eliminate all the selling at discount stores or the brand would suffer significant damage.

Piper Jaffray reiterated an overweight rating on Amazon (AMZN) with a price target raise from $1,200 to $1,400. The analyst said a survey of 1,000 internet users found that a significant portion did not spend much on Amazon for the holidays. The analyst said this proves that Amazon is still in the early innings of its sales growth even in its most developed market. The survey showed that 50% of people spent less than 10% of their holiday budget on Amazon. That equates to about 4% share of the US market. Amazon is expected to grow revenue 28% in 2018.

Amazon continues to break into new markets. Harman Kardon will include Alexa in its speakers in 2018. Toyota and Lexus are adding Alexa to their top of the line models in 2018. Alexa will be able to start cars remotely, set the cabin temperature, lock car doors, play music, answer questions, map trips, give weather and news reports, etc.

UBS reiterated a buy on Apple (AAPL) saying the company could repurchase $120 billion of its stock over the next two years thanks to the lower tax on repatriation of overseas cash. The company only has a $190 price target, which is lower than targets from other major analysts. UBS warned that supply chain noise and mixed demand data points create near term uncertainty but the potential stock buybacks would limit any downside on the stock. Barclay's is targeting $190 billion in buybacks over three years.

RBC Capital believes Apple will report robust Q4 sales. They base this on results from some Apple suppliers. Broadcom and Jabil have reported solid earnings and raised guidance. Consensus estimates are for $86.2 billion in revenue, which is at the high end of the $84-$87 forecast by Apple. Earnings estimates range from $3.57-$3.78 with RBC at $3.74. The analyst does not expect Apple to disclose its plans for the overseas cash in the Q4 conference call. They are likely to defer until they have developed a range of plans. Normally Apple updates its dividend and buyback plans in April and RBC expects that to continue. Apple has $97 billion in long-term debt that it used to pay for its buybacks and the new campus. Paying down that debt with repatriated cash would be a smart move.

Urban Outfitters (URBN) reported same store sales for the Nov/Dec period rose 2% with overall sales up 3.6%. The company said it saw weak sales in Crosley cameras and film and while they knew they would be weak, they were worse than expected. The CFO said the tech and media category tends to double over the holidays and then is halved the rest of the year. Same store sales were up 2% at Anthropologie, 5% at Free People and 1% at Urban Outfitters. With URBN shares up 47% over the last several months, the weak results were disappointing.

Berkshire Hathaway (BRK.B) is going to be a major winner from the tax reform. Barclay's said Berkshire's windfall could be as much as $37 billion. The windfall will come from the lower tax liability on appreciated investments. Future earnings should increase by 12% on an ongoing basis. Morgan Stanley estimates are slightly higher at 14%. Berkshire currently has $109 billion in cash and equivalents and that hoard should continue to rise at a faster pace thanks to the reduction in taxes.

Seagate (STX) shares cooled slightly after Monday's revelation they were hoarding a massive amount of Ripple crypto currency. The company raised guidance on Monday for revenue of $2.9 billion beating the $2.74 billion consensus. Seagate said it participated in the Series A $28 million and B $55 million rounds of funding for Ripple. The company Ripple owns 61% of the outstanding XRB currency. If Seagate held just 1% of Ripple, that would be worth $1.5 billion. While Seagate did not disclose its percentages, analysts believe their Ripple holdings could be worth as much as $7 billion. Seagate's market cap is only $13 billion and only rose $1.4 billion on Monday when the news broke. That suggests Seagate shares could be significantly undervalued.

Seagate said it shipped 40 million disk units in Q4 with more than 88 exabytes of storage. The company said they had signed a long-term agreement to obtain NAND flash memory from Toshiba and will provide continuity for its current and future SSD product portfolio. This is negative for WDC because they had the guaranteed pipeline before Seagate joined the consortium that bought the memory unit from Toshiba. Earnings are Jan 29th.

After the bell, WD-40 (WDFC) reported earnings of 90 cents that beat estimates for 83 cents. Revenue of $97.6 million rose 9% but missed estimates for $93 million. They raised guidance for 2018 for sales growth of 4% to 6%, revenue of $396-$403 million and earnings of $3.91-$3.98. Analysts were expecting $3.85 and $398 million. Shares rallied $5 in afterhours.

Crude oil prices shot up nearly $2 to $63.44 and the highest level since December 2014 after the API inventory report showed a monster decline of -11.2 million barrels. That was the biggest decline for this time of year since 1999. That was about three times the analyst estimates. Brent crude rose to $69 on the news and that is a huge challenge to global producers. At those prices, US producers can raise their exports of our light crude and take market share from OPEC. US producers have been ramping up exports since the ban was removed 2 years ago.

I would caution readers that December 31st was property tax day in the US and refiners typically move as much oil out of inventory as possible to reduce their tax bill. Beginning next week, we should see US inventories begin to rise again.



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The markets have been moving higher on mediocre volume and the indexes are starting to show increased signs of volatility. After such a large gain over the last week, it is not surprising and we should watch for some temporary signs of instability. It is highly unusual for the markets to simply sprint up 4% in a week's time.

The outlook is still positive but we need a temporary pause to relieve some of the overbought conditions. The Dow was the only bullish index today and half of its gains came from Boeing. The S&P posted a minor 3-point gain and the Nasdaq only gained 6 points with the Russell 2000 negative. That is not the kind of gains you would expect with the Dow up +156 points at its high.

The S&P stalled when it hit 2,750 today. That was the optimistic upside target for 2017 and whether that had anything to do with it today is unknown. The S&P is well outside the uptrend regression channel and is clearly overextended. Support should be back at 2,700 but I strongly doubt we will see that level again without a government shutdown. After Q4 earnings, we could revisit that level.

The Dow A/D line was almost evenly split with one more advancer than decliner. The Dow traded well over 25,400 intraday but pulled back at the close. There was more than $1 billion in market on close orders on the NYSE. This was the first time in a week that MOC orders were not strongly positive.

I doubt anyone can look at the Boeing chart and not expect a retracement soon. The same could be said with CAT, HD and others. These are the stocks that will benefit significantly from the tax reform and they could still move higher before they correct. When that correction comes, it could be ugly.

The Nasdaq Composite posted a minimal 6-point gain and the A/D line was negative with 1,282 advancers compared to 1,527 decliners. Up volume was the weakest since December 20th, if you discount Christmas week and the low overall volume. Only four of the top 15 big cap stocks were positive.

The Nasdaq has rallied the strongest at +4.0% since the low on Friday before New Year's weekend. Many of the big cap stocks were making new highs after major gains. That may have run its course. Tech stocks are not big taxpayers. Their average effective tax rate was already in the low 20% range and therefore they will not be big beneficiaries of the reform. There may be a retracement ahead. Like the big cap industrials, I would not expect it for another 3-4 weeks but that does not mean it could not happen at any time. I would keep my stop losses tight.

The Russell rebounded from a 12-point decline on Monday to close with a 2-point gain. The index rebounded from a 4-point decline to 1,559 at Tuesday's open to rise to 1,565 intraday. That rebound failed and the index closed with a 2-point loss. The Russell is struggling just to remain positive despite the 5-day streak of minimal gains. This could be the canary in the coalmine and a warning the 2018 rally is fading.

Supporting the Nasdaq and the Russell on Tuesday was a 3.3% gain in the biotech sector. This came from the streaming news from the JP Morgan Health Care Conference and the potential for M&A in the space. The tax reform will help drug and biotech companies and this is lifting the sector. The Biotech Index closed only 6 points from a new high.

S&P futures opened negative but have recovered off their lows to be down only 1 point. There is still a lot of darkness before the dawn and anything can happen by morning. I would be cautious about buying these market highs but I would continue to hold long positions. Just monitor your stop losses and expect increased volatility over the next four weeks.

There was a 7.8 magnitude earthquake in the Caribbean this evening and tsunami warnings have been issued for all the islands. We will not know until morning the extent of the damage and that could have a bearing on the market. Natural disasters do not normally move the market but there have been instances where moves appeared.

Enter passively, exit aggressively!

Jim Brown

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