The equity market is slowly climbing the wall of worry towards the prior highs.
The progress is "inch worm" slow with a steady rise, pause, repeat rhythm. Fortunately, the pauses have been minimal. The S&P actually managed to string together seven consecutive days of gains and the longest streak in 18 months. The index closed only about 37 points from its record high.
The Dow lagged the broader market on Friday but still managed to post a minor gain. The index is only about 192 points below the record high set in January 2018 before the market sank for the next seven months. This 26,616 level could be the left shoulder of a head and shoulders pattern if the index suddenly rolled over. While I am not expecting that, it remains a possibility.
The market waited patiently all week on worries over the Nonfarm Payrolls on Friday. Would they be a repeat of the 20,000 jobs in February or return to normal around 200,000? Fortunately, they returned to normal and proved the February number was a fluke.
The report showed a gain of 196,000 jobs in March and February was revised up slightly to 33,000. We still do not know what caused the abnormal reading, but it should not matter now. There will be another revision next month, but I doubt it will move much. The second revision is normally small. The first quarter average was 180,000 thanks to the +312,000 reading in January.
The unemployment rate was flat at 3.8% and participation rate declined slightly from 63.2% to 63.0%. The labor force declined by -224,000 and the third monthly decline after four months of huge gains. Average hourly earnings rose 4 cents to $27.70 increasing the year over year wage growth to 3.2%.
Education and health services added 70,000 jobs, professional and business services 37,000 and leisure and hospitality 33,200. Construction added 16,000, government 14,000, financial 11,000, information technology 10,000 and transportation 7,300. Manufacturing lost 6,000 jobs.
The weekly unemployment claims on Thursday fell to 202,000 and a 49-year low. This is another indication that employment is still strong with fewer people filing for unemployment.
The markets breathed a sigh of relief and opened sharply higher. For the Dow that was the high for the day.
Consumer credit for February was the only other report of note. The headline number of $15.2 billion was slightly less than the $17.0 billion consensus. January was revised higher to $17.7 billion. Credit typically declines into May and then increases over the summer months.
Revolving credit rose $3 billion and slightly higher than the $2.6 billion increase in January. Nonrevolving balanced rose $12.2 billion but less than the $15.1 billion increase in January. Nonrevolving balances have not declined since April 2011. Due to rising defaults on auto and credit card loans, banks have been tightening credit standards since early Q4. The growth of balances will slow as the availability of easy money dries up.
The economic calendar for next week has the inflation indexes with CPI and PPI. Neither are expected to show any material increase. Any increases are likely to be driven by the rising price of oil and gasoline. Oil prices have risen $20 or 47% since the late December low at $43. That will impact the price indexes.
The FOMC minutes on Wednesday will command attention especially with the Fed's flip flop on rate policy. Chairman Powell will speak on the economy at the House of Representatives Democratic Caucus retreat in Virginia. The times have not been released but the speeches will be of high interest.
Last but definitely not least is the Brexit on Friday. If there are no changes to the timeline this week, the UK will crash out of the EU on Friday in what is called a hard Brexit. Prime Minister May and multiple party heads are trying to come up with a compromise from adding a couple weeks or targeting a June 1st exit or even an exit a year from now. This is not just a moving target but a radically gyrating target, so anything is possible.
Friday starts the Q1 earnings cycle with JP Morgan and Wells Fargo leading the list of the big banks. The rest will report the following week with Goldman Sachs and Citigroup reporting on Monday the 15th.
The current Q1 forecast for earnings growth has fallen to a -2.2% decline. Some 23 companies have already reported and 82.6% have beaten estimates. Revenue is expected to rise 5.0% and 43.5% of those 23 companies have beaten estimates. The current forward PE is 16.6. Six S&P companies report earnings this coming week.
There was only one material earnings report on Friday. Greenbrier (GBX) reported a sharp drop in earnings from $1.02 to 22 cents and missed estimates for 24 cents. Net income fell from $61.64 million to $2.77 million. They guided for Q2 revenue of $658.67 million that beat estimates for $628.73 million. For the full year they guided for earnings of $3.60-$3.80 on revenue of $3.0 billion. Analysts were expecting $3.61 and $3.09 billion. The higher earnings guidance spiked the stock at the open, but the gains were short lived.
On Thursday, Constellation Brands (STZ) reported earnings of $1.84 that beat estimates for $1.72. Revenue of $1.797 billion beat estimates for $1.732 billion. They guided for the full year for earnings of $8.50-$8.80 excluding any impact from their holdings in Canopy Growth (CGC). Analysts were expecting $9.36 but that included Canopy earnings. Beer sales rose 11.6% to $5.202 billion. Wine and spirit sales declined -0.2% to $2.914 billion.
The company said it was going to sell about 30 wine brands to Gallo for $1.7 billion. The average selling price for a bottle of the brands being sold was $11. Shares were up sharply on expectations for the Canopy business. The company has 35 patents and 195 patent applications. They plan to launch cannabis beverages in Canada this year. Constellation expects continued losses in its Canopy investment in 2019 but a run rate of $1 billion next year and significant profits in 2020. Shares spiked sharply from $178 to $193.
Deutsche Bank cut them to a hold on Friday. Goldman sees Constellation Brands as well-positioned in high-end beer and expects new flavored malt beverages such as Corona Refresca to contribute to growth.
McDonalds (MCD) was reiterated with an outperform rating at Telsey Advisory Group and the price target was raised from $195 to $210. At the same time McDonalds said it was launching a "simplified" late-night menu starting April 30th that will have only the favorite menu items. The stores have been fighting slow delivery times at night because of the complexity of the menus. The new menu will apply after midnight. The fake food will still be there. The "contains some chicken" nuggets will be on the list. I saw a documentary piece on those a couple weeks ago and I would never let one of my grandkids eat them. Go for the chicken strips instead. Shares closed at a new high.
Intel (INTC) was downgraded from outperform to market perform (buy to hold) by Wells Fargo. The analyst said, "weak semi demand data points in 2019 leave us to consider some downside risk for Intel shares." Intel does have some risk. AMD is making a new 7 nanometer processor that is well positioned compared to Intel's 10 nanometer processors. Intel has still not produced those, but AMD has passed that technical level and is already making the faster 7 nanometer versions. The long-time king of processor chips has been dethroned by a surging AMD.
Goldman Sachs cut Boston Beer (SAM) to a sell saying competition is intensifying in 2019 and the company is unlikely to repeat its innovation success. In 2018 the company had strong sales of its new flavored malt beverages and cider innovations. Competition has a way of copying anything that is successful and without a flurry of new flavors or products, their rise could be short lived. Goldman pointed out that Constellation Brands was launching a new line of flavored malt beverages. They highlighted the Corona Refresca as an example. Shares of SAM fell $16 on the downgrade.
While in this sector, Bank of America raised Anheuser Busch (BUD) from underperform to neutral because of a better debt outlook but said its "mainstream beer" sales are still going flat. The analyst raised the target from $68 to $91. He said the 1.8% organic growth is anemic but steady and dividends are "safe for now." He warned that beer volumes have been weak with increases mostly from M&A activities. The analyst also cited competition from Heineken overseas. Overall global beer volumes have stopped growing over the last five years. BUD controls 82% of volume in the mainstream beer category. Shares rose $1 on the upgrade.
Morgan Stanley upgraded Bed Bath and Beyond from underweight to equal-weight (sell to hold) on Friday with a $20 target. This followed an Citigroup upgrade on Monday from sell to neutral. Citi raised the price target from $11 to $18. The reason for the upgrades is the emergence of activist investors, Legion Partners. The firm has built a 3.4% stake in the company since March 25th and produced a 30% rise in the stock. This has not gone unnoticed with seven analysts upgrading the company over that period. Despite the upgrades only 2 of the 20 analysts covering the stock have it rated a buy. Bears are the largest shareholders with 35% of the stock sold short. This produces a great opportunity for a short squeeze. Legion is trying to replace the entire board and nominated 16 directors. Both co-founders are 80 years old and it is time for some new blood. The lead director is 88.
Align Technology (ALGN) continues to surge after Piper Jaffray reiterated an overweight rating and raised the price target from $250 to $200. Goldman Sachs said in a note that revenue is expected to rise 23% in 2019. Invisible braces are not going away and Align has a lock on this space. Piper Jaffray believes Align is "one of the med-tech world's most compelling growth stories." Earnings are on April 24th and consensus is 83 cents on $529.5 million in revenue.
Facebook (FB) is cursed. The new data breach exposed personal details of more than 540 million members. Everyone including Zuckerberg knows there will be more fines and regulation in the future. Zuckerberg
even wrote an article last week calling for more regulation of the social sites on the internet. Despite the continued privacy issues, Facebook usage is not slowing. Guggenheim upgraded the stock from neutral to buy and raised the price target from $175 to $200. The analyst said Instagram has billions in untapped potential and could add $10 billion in revenue for Facebook by 2021. Of those with a rating 33 of 29 analysts have buy ratings. Shares rose to a new 6-month high on the upgrade.
Amazon (AMZN) rallied to a 5-month high after Jeff and MacKenzie Bezos agreed to an amicable divorce. MacKenzie will keep roughly 4% of Amazon's shares worth $35 billion and that will make her the fourth richest woman in the world. Jeff will keep a 12% stake in Amazon and MacKenzie gave him voting control over her shares, which leaves him firmly in charge of the company. She also gave up her stake in Blue Origin and the Washington Post. With $35 billion in stock, she clearly did not need to battle for the other assets.
The couple met in 1992 while both worked for a hedge fund. Jeff wrote the business plan for Amazon in the car while they were moving to Seattle. MacKenzie was driving. Investors were bracing for a nasty divorce given the tabloid news about his new girlfriend, but it worked out for the best and shares rose.
This shows just how rich Jeff is because after giving $35 billion to his wife he is still the richest person in the world.
Amazon also announced a major wave of price cuts approaching 20% at Whole Foods. Prices on hundreds of items have been slashed. Amazon is trying to create a Costco like following out of the 100 million Prime subscribers by giving them additional discounts. Costco has a 90.7% renewal rate and Prime subscribers are close to 100%. More than 16 analysts have price targets at $2,000 or above with Stifel the highest at $2,500.
Apple (AAPL) shares posted their 8th consecutive gain after news broke that Apple Music now has more subscribers at 28 million than Spotify (SPOT) at 26 million. The eight-day streak is the longest since the record 9-day streak ending Sept-4th 2018.
Apple's new PowerBeats wireless earbuds are said to be even better than the AirPods. Not only is the sound significantly better but they are 23% smaller and 17% lighter than the original version and provide 9 hours of listening on a single charge compared to 5 hours on the AirPods. They are more expensive at $250 compared to AirPods at $159 but Apple users tend to have a higher pain threshold for prices. With revenue from wearables up 50% quarter to quarter and 34% year over year, they are rapidly gaining market share. The prior version of PowerBeats were the top selling fitness headphones in the world. This current model will be even better and help power Apple's non-iPhone revenue.
Let's hope their Q1 earnings does not sour this uptrend.
Boeing shares declined again after the company said it was cutting production of the 737 Max from 52 to 42 planes per month. The prior plan had been to increase production to 57 planes later this year. The 42 planes will be the same level as they produced in 2016 with a rise to 47 planes in 2017 and 52 in 2018. The production cut suggests they do not expect the planes to be recertified in the near future. Originally they were expected to be grounded for two months but now it appears it could be a lot longer. The longer they are grounded the more orders could be cancelled.
In the latest data dump from the black boxes in Ethopia, the crew fought the MCAS anti-stall software, which was trying to push the plane's nose lower. They turned it off and that was the correct procedure but for some unexplained reason they turned it back on and it flew the plane into the ground. The software was being triggered by a defective sensor. It was not the software that was bad but the outside sensor. On the Lion Air plane that crashed, the same thing happened the day before the crash and an experienced pilot riding along in the cockpit told the plane's pilots how to fix the problem and the plane continued on its journey. The next day the same thing happened because of the defective sensor but there was nobody in the cockpit to save the day. In both cases, pilot training in dealing with the nose down issue was at fault.
Oil prices continue to rise as production in Venezuela and Libya was in doubt. Venezuela's production in March fell to 740,000 bpd, a 16-year low due to the country wide blackout and workers walking off the job. Vice President Pence announced a new round of sanctions against 34 PDVSA vessels and two firms that transport oil to nearby Cuba. He alluded that there were more sanctions coming against the financial sector. April 28th is the deadline for non-US entities to wind down their transactions with PDVSA or suffer sanctions by the USA. The 10-day blackout caused many oil facilities to shut down and analysts believe most will not reopen due to lack of workers and money.
OPEC cut 570,000 bpd from its production in March. Compliance to the 1.2 million bpd production cut announced in January rose from 79% in February to 124% in March due mostly to Saudi Arabia's excess cuts.
Libya had the biggest production increase in OPEC as the Sharara field restarted. However, that is likely to be temporary as the country begins a new round of military conflict. The militant Libyan National Army, led by Khakifa Haftar, is marching towards the capital to evict the government leaders and take control.
The turmoil in Venezuela and Libya combined to lift oil prices to $63.34 on Friday. Surprisingly, there was a huge surge in active rigs with 19 rigs going back to work after declining by 41 rigs over the prior five weeks. Was it the sudden breakout of oil prices over $57 that put rigs back to work? There is also the possibility of some event in the fields that kept rigs from moving to new locations after completing a well. There are a dozen potential reasons for the temporary decline in active wells.
Crude prices tend to peak around Memorial Day and then wander in a range until after July 4th when prices start to fade ahead of the end of summer. This suggests we will see prices over $65 soon.
The S&P is only 37 points away from a new high. There is no material resistance between Friday's close and that 2,930 level. The final 2,872 level has been decisively broken and should now act as support.
The positive comments on the China trade talks plus the rebound in jobs on Friday, have eliminated the last two barriers to further gains. However, it is the unknown events that appear out of the blue that cause the most trouble.
While the new 4-6-week target date for a completed trade deal is far longer than the earlier targets, it managed to move the carrot a little farther into the future and that could keep investors involved that much longer. As long as the commentary remains positive the market could remain positive.
However, once the old high is touched, we could see some volatility appear. With earnings expected to be weak, we could see some investors decide to take profits and move to the sidelines ahead of the summer doldrums.
Friday was relatively calm with only six Dow components moving more than $1 for the day. Boeing was the only loser of more than a buck and erased 18 Dow points but that was minimal. News after the bell that Boeing was going to cut production of the 737 caused the shares to decline another $9 in afterhours. That means Monday's open will have a 63 point drag on the Dow and possibly more since this has been big news over the weekend.
Like the S&P the Dow has moved over the final major resistance before reaching the record high at 26,828. There is some congestion between Friday's close and the high but nothing material. That prior high should be a tractor beam for the index in the days ahead. The January 2018 high of 26,616 could be a temporary problem.
Amazon was by far the leader of the tech sector although Tesla bounced back after the judge gave Elon Musk two more weeks to reach another settlement with the SEC. The tech sector is also nearing a new high with only 71 points separating the index from the record high at 8,109. The FANG stocks have been hit or miss but Apple has been doing the heavy lifting with 8 consecutive gains.
The 8,000 level could be round number resistance but that close to 8,109 it would be hard to tell which number was controlling the move. It would take a material event to keep the Nasdaq from touching that high. With tech earnings still two weeks away, there "should" be nothing in the way unless somebody big drops an earnings warning.
The Russell surged through resistance at 1,566 and the 200-day at 1,574. There is one hurdle left and it is a big one at 1,600. If the small caps can punch through that level the entire market would get a boost.
I am positive on the market given all the broken resistance and the nearness to the historic highs. Those highs tend to pull the indexes up and investors catch the new high fever. I know this is boring, but I have to remind you that sometimes reaching those new high levels can be the equivalent of a dog catching a car. It can be dangerous for the dog. Even if the dog is not crushed, the goal has been achieved and there are no other near-term targets, so he peels away to wander back to his yard. Investors are the same way. Once a big target is reached, they don't know what to do. If there is no obvious target ahead, they lose interest and start to take profits. Nobody can tell you in advance if that will be the case this time, but you should be aware and watch for the sudden appearance of volatility.
Enter passively and exit aggressively!
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