A nearly 100-point spike in the last three minutes of trading stretched the Dow's winning streak to seven weeks.
The Dow gained 93 points in the last three minutes to reduce the loss for the day to only 63 points and give the index a 42-point gain for the week. The Dow's streak stretched to 7 weeks but only by a whisker. A similar 8-point spike on the S&P kept it barely positive with a 1+ point gain for the week.
We know what happened last Monday evening when there was a similar closing spike. The market gapped 185 points higher on Tuesday. While there is no guarantee we will see a continued spike on Monday, I would say the odds are good unless we are hit with a headline storm over the weekend. Last minute buy programs like we see below catch the shorts and technical traders off guard and they are forced to catch up at the next open.
Summarizing Friday's economic reports will be very easy this week. There were none.
One event of note was the surge in the dollar. The Dollar Index rose 1.48 since the January 31st lows. That is a major move and slowed the rise in commodities like gold. With the global economy slowing the US is the place to be and that leads to a strong dollar. It will also reduce S&P earnings in Q1 because 50% of S&P earnings come from overseas and the strong dollar will cause problems bringing those profits back home. It will also weaken sales overseas because local currencies are declining relative to the dollar. This makes goods more expensive.
For next week the NFIB small business sentiment survey will be on Tuesday. There was a sharp decline in Nov/Dec from the peak of 108.8 in August. Small business sentiment is impacted by the shutdown more than the tariffs. This is for January and the 35-day shutdown was in full swing so sentiment could have declined even further.
The consumer price index on Wednesday is the biggest report for the week because of the inflation component. Analysts are not expecting any rise so an unexpected rebound would be market negative if it appeared to be strong enough to wake the Fed and put them back in hike mode.
So far in this earnings cycle, 333 S&P companies have reported. Analysts are predicting 16.8% earnings growth for Q4 and 6.0% revenue growth. Some 71.5% of companies have beaten on earnings and 66.2% have beaten on revenue. There have been 42 negative preannouncements and only 15 positive guidance upgrades. The forward PE is 16.0 and 62 S&P companies will report this week.
Q1 earnings estimates have fallen to -0.1% earnings growth and 5.4% revenue growth. Seeing earnings decline on higher revenue means costs are rising.
Seeing the earnings forecast turn negative has not yet impacted the market materially. It was a factor in the Thr/Fri weakness but at only -0.1% it is not enough to force investors back to the sidelines. When we start seeing 2-3% decline forecasts, market sentiment will change.
We have two Dow components reporting this week with Cisco and Coke. There are multiple chip stocks reporting with Applied Materials and Nvidia leading the list. Nvidia has recovered nearly all the losses from the January 28th guidance warning but I would continue to avoid the stock until it moves back over $160.
Activision Blizzard needs to pull a rabbit out of their hat after announcing the breakup with Bunge. Shares are trading at a two year low after a four-year rally.
Arconic (ARNC) reported earnings of 33 cents that beat estimates for 30 cents. Revenue rose 6% to $3.5 billion to beat estimates for $3.4 billion. They guided for the full year for earnings of $1.55-$1.65 on revenue of $14.3-$14.6 billion. Analysts were expecting $1.59 on $14.4 billion.
Investors were not interested in the earnings. The company announced another restructuring plan to cut $200 million in annual expenses. They are considering the sale of other non-core businesses. However, most companies figured out a long time ago the more you cut the smaller you get and the less room for error. Arconic has been struggling since their creation. They did authorize a $500 million buyback program to be completed by the end of 2020 in addition to completing their prior $500 million program in the first half of 2019. Unfortunately, they cut their dividend from 6 cents to 2 cents. Shares fell 3% on the continued confusion.
Goodyear (GT) lost traction and skidded off the road on Friday. The company reported a drop in earnings from 99 cents to 51 cents that missed estimates for 60 cents. Revenue declined 5% to $3.88 billion and missed estimates for $3.94 billion. Tire volumes declined 3% to 40.7 million units. Tires for new cars declined 10% due to weakness in Brazil, India and China as annual car production slowed. Europe saw a minor gain. Tire replacement sales were nearly flat. Competition over the last 20 years has become fierce. Companies like Big-O and Discount Tire have taken over the tire replacement business and they have their own store brands at significant discounts. Shares fell 9% on Friday but that was just punctuation on a long line of declines.
Ventas (VTR) reported funds from operations (FFO) of 96 cents that beat estimates for 95 cents. This was down from $1.05 in the year ago quarter. Revenues of $923.26 million beat estimates by 1%. Investors were underwhelmed and shares fell 18 cents.
Coty Inc (COTY) reported earnings of 24 cents that beat estimates for 22 cents. Revenue of $2.51 billion declined $130 million but still beat reduced estimates for $2.47 billion. Coty has been so beaten up over the past year that expectations were very low. This is another restructuring story and the chart tells us nobody cared. They did talk up the outlook for the immediate future and that prompted some short covering. Shares spiked 32% on short covering.
ATM operator and money transfer firm Euronet Worldwide (EEFT) reported earnings of $1.37 that beat estimates for $1.27. Revenue rose 7% to $649.4 million but missed estimates for $664 million. However, the company said there was a $35 million charge for a change in accounting rules which means they actually posted a big beat. Transactions rose 15% to 1.08 billion. EFT processing revenue rose 10% to $161.3 million due to a 9% increase in the number of active ATMs. Money transfer revenue rose 15% to $274.1 million. Shares rose 10% on the news.
I see these numbers and can't stop thinking about the potential for Paypal to spoil their party. With the Venmo app consumers can send money to anyone. Venmo is up to about $20 billion a quarter in payments. Currently they can only process for US residents but they will eventually find a way to move overseas. US regulators worry about money laundering when dealing with cross border payments. That does not seem to stop consumers in Europe.
Hasbro (HAS) was hammered at the open after the company missed both earnings and revenue for the first holiday quarter without Toys-R-Us. Adjusted earnings of $1.33 missed estimates for $1.67. Revenue fell 13% to $1.39 billion also missing estimates for $1.52 billion. The company said they were not able to recapture the majority of the Toys-R-Us business during the holidays. Adding to the problem was the liquidation of the Toys-R-Us inventory that diluted the market and forced prices lower. Despite the bad news the company raised its dividend from 63 to 68 cents. I applaud them for that measure in the face of diversity.
Shares recovered by the end of the day on positive comments about new toys coming for "Star Wars: Episode IX," "Captain Marvel," "Avengers: Endgame" and "Frozen 2." They are also introducing a new line of Power Rangers toys this year.
Skechers (SKX) reported earnings of 31 cents that beat the year ago quarter loss of 43 cents and analyst estimates for 23 cents. Revenue of $1.08 billion rose 11.4% and narrowly missed estimates for $1.1 billion. Shares spiked significantly after they guided for Q1 earnings of 70-75 cents and analysts were only expecting 63 cents. Susquehanna raised their price target from $24 to $32.
"Hell hath no fury like a woman scorned." That quotation is from "The Mourning Bride" a play by William Congreve. I think we could change it today to "scorned and embarrassed." I am thinking about Mackenzie Bezos. Her husband was running around behind her back like a sex crazed 17yr old texting nude pictures to his new girlfriend. Now that the entire episode has blown up in Jeff's face and severely embarrassed Mackenzie, what could have been a calm private divorce between two ultra-rich professionals may turn into the biggest divorce disaster in US corporate history.
How does Mackenzie go to her next social party, charity fund raiser, etc without everyone talking behind her back or worse. Even though she did not have any part in the sexcapade she will now be tarnished forever. However, Jeff's lawyers now claim his phones were not hacked so maybe it was Mackenzie that texted those pictures to the National Enquirer. I seriously doubt it because of the embarrassment it would bring to her reputation.
The couple has not yet filed for divorce even though they have said they were divorcing. I would not be surprised if the quiet split of 16% of Amazon's stock is going to turn into a public war as her way of getting back at Jeff.
Normally a CEO divorce does not materially impact the stock price. However, in this case given the high-profile nature and Jeff's position as the undisputed leader of Amazon and Blue Origins, a bitter fight could distract him from company business. Amazon is not a normal business. They have hundreds of projects in the works worth tens of billions of dollars and multiple divisions that could be Fortune 500 companies if they were spun off on their own. There are a lot of management decisions required to run Amazon and fighting with your hostile wife on how to divide your $112 billion fortune could be a significant distraction.
You know the National Enquirer is not going to let this story pass. It will be on the front page in some form for months to come. Add in People, Us and the dozen other supermarket tabloids which are going to be milking this story for all it is worth. Before it is over Jeff will be signing up for one of the SpaceX trips to Mars just to escape the story.
Amazon shares closed at a five-week low on Friday as the story became front page on real newspapers and TV news channels. Obviously, the Amazon business is not going to crash because some nude pictures of Jeff made it out of captivity so any material dip is going to be a buying opportunity. Ideally a dip to $1,350 would be great but without some new headlines on this scandal, I doubt we will see that level.
Crude prices fell unexpectedly as legislation in the House took aim at preventing OPEC from controlling prices. This NOPEC legislation is nothing new. It has been discussed for decades but with Trump in office there is actually a chance it could be passed in 2019.
The current bill would prevent the 14-nation cartel from colluding to manage oil prices. Since that is the only reason the cartel exists, this would be a blow for OPEC. The bill in the House is called the No Oil Producing and Exporting Cartels Act or NOPEC. The bill would make it illegal for foreign nations to work together to limit oil supplies and set prices. The bill would authorize the Justice Department to sue oil producers for antitrust violations by stripping foreign actors of their sovereign immunity protections.
Presidents Bush and Obama both threatened to veto any NOPEC bill that made it to their desks. President Trump has constantly complained that oil prices should be a lot lower and OPEC was "ripping off the USA."
Recently OPEC has warned its members against mentioning oil prices when discussing production policy. The WSJ said OPEC was planning some ads to try and influence US perception of OPEC.
Barclays warned that passage of NOPEC legislation could see the oil market return to a period of instability as production surged and prices collapsed.
The challenge is that US producers need a minimum of $50 oil to remain profitable and maintain capex spending and employment of hundreds of thousands of workers. If OPEC production was allowed to run rampant, prices could fall back to $40 or even lower and a lot of smaller companies would go out of business. We actually need OPEC to manage production and keep prices in the $60 range.
US production is on the verge of 12.0 million bpd and could exceed 12.5 or even 13.0 mmbpd by the end of 2019 thanks to a handful of new pipelines coming online this year that will free up constrained production in the Permian.
Inventories should begin to rise more in the coming weeks as refiners shutdown processes for maintenance and to convert over to summer blend fuels. That should depress prices temporarily, but they always rise sharply ahead of Memorial Day through July as summer driving season shifts into high gear.
The Polar Vortex two weeks ago caused a major 237 Bcf decline in natural gas supplies and after last week's frigid return to the Midwest we should see a similar decline in the numbers reported this coming Thursday. Despite the major decline in supplies to a 52-week low, prices have fallen to a ten-month low. The problem for gas traders is that we have 8 weeks of supply at last week's demand levels but only five more weeks of winter of which several are guaranteed to be mild. If the vortex returned for another couple of weeks, gas supplies managers would begin to sweat.
Even though the major indexes finished with a weekly gain it was miniscule and no reason to get excited. If anything, having the Dow stretch its winning streak to 7-weeks is just one more reason for investors to be cautious because you know there is a real bout of profit taking at some point in our future. It would have been more bullish to give back 200-300 points for the week and have investors believe it was a great buying opportunity.
For weeks I warned that investors were pinning all their hopes on a trade deal with China and once Trump said there was no planned meeting with Xi and Kudlow said there was a long way to go to reach any agreement the wheels came off the rally. In the afternoon the White House reporters indicated the March 1st date for tariffs to increase from 10% to 25% could be extended, the market recovered but was still cautious. This sanctions threat will still exist next week.
In addition, the president is said to be signing an order to forbid any Chinese equipment in the 5G networks in the USA. That is a direct attack on ZTE and Huawei and against Chinese trade. Signing this order as US negotiators head to China this week for additional trade talks could be another carrot and stick tactic. If you agree to these trade rules everything will be ok. If you don't agree we are going to put your two largest networking companies out of business. You must give Trump credit. He is not afraid to ruffle feathers or go where no US president has gone before in negotiations with other countries. He is not your average milk toast president. He is not afraid to use Roosevelt's "big stick."
The S&P traded below 2,700 on both of the last two days but recovered to close over that level. The index is stuck below the confluence of multiple resistance levels with the 200-day at 2,742 the biggest threat. Assuming a lack of bad news over the weekend we could see that level retested next week.
The Dow broke through the cluster of moving averages and was on its way to 25,800 when the weakness began. Now the index is using that prior resistance as support. This is about the right level to rest after trading below 25,000 intraday on Friday. The close was 123 points above the intraday lows and back above resistance. This would be a good spot to launch a new move higher.
The A/D line was dead even on Friday with Goldman the biggest drag.
The Nasdaq fell back into correction territory intraday and closed exactly on that 7,298 level. Amazon was the big drag on the index with a couple biotech companies leading the winners list. The tech sector rebounded with the chip stocks, but that rally has given up ground the last two days. With the majority of the big tech stocks already reported we are headed into the post earnings depression period.
The Russell posted a minor 4-point gain for the week, but it was a fight. The index traded on both sides of the 100-day average multiple times but lost the battle on Friday. This week and next is small cap earnings and there are rarely any market movers. This is a herd mentality. If they majority do well the index will rise.
My emotion wants to say buy the dip, but my brain is telling me to be careful. We are heading into the February expiration cycle and many times this is a turning point for the market. Earnings are fading and investors are thinking about taking money out of the market to pay taxes. February is a weak month and normally it is the second half of the month that produces the losses.
With the potential fading for an end of February trade deal, the global economy slowing, Q1 earnings turning negative and a 10% rally since Christmas, there are plenty of reasons to be cautious in the weeks ahead.
Enter passively and exit aggressively!
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"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."
Alexis de Tocqueville 1835.
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