If it is Friday it must mean major Russian headlines. Last Friday it was the "We are ending our military exercises and withdrawing our troops from the border." Watch what Putin does, not what he says.
Last Friday saw a major short squeeze as the world took the Russian comments seriously that the military exercise was over and troops and equipment would be moving away from the border with Ukraine. Early this week Putin said Russia was sending 275 trucks filled with humanitarian supplies to the battle worn areas of the Ukraine. Those Russian army trucks were quickly painted an innocent white to appear nonthreatening and the convoy headed for a slow motion trek to the border. With frequent stops at military bases out of the prying eyes of reporters the convoy was supposed to arrive on Friday. Surprise, surprise. Thursday night a convoy of 30 armored personnel carriers (APC), also freshly painted white to appear as part of the aid shipment, crossed the border into the Ukraine where they were immediately fired upon by the Ukrainian military. The Ukrainian president "Petro Poroshenko said the military destroyed a "significant number" of the APCs. Russian spokesmen said "Proshenko's comments were fantasies and should not be the subject of serious discussion." The statements amount to "provocation" and are part of an "information war." "The government in Kiev is trying to drag Russian into a war."
Russia immediately denied the claim and warned the Ukraine about attacking the convoy with the humanitarian aid. Apparently the highly publicized white truck aid convoy was a misdirection play in hopes of sneaking in the armored column disguised with the white paint as part of the humanitarian convoy.
Here is where it gets crazy. The Russian military convoy did not begin crossing the border until the reporters imbedded with the aid convoy were within range and could easily see the border crossing. Two western reporters immediately tweeted out that they saw the Russian military convoy crossing into the Ukraine. In other words it appeared that Putin wanted to see how the international community would react if he actually invaded Ukraine. This may have been a "test invasion." There were several other crossing points held by the separatists that would have been out of view of the international reporters. Instead they used the one where the reporters were watching. This was no accident.
Of course Russia denied having or sending any military equipment into the Ukraine so the international bluff for the common person is still working. Anyone with any access to the facts understands that Russia has been sending in equipment for months and they have been firing rockets across the border for weeks. The invasion is proceeding step by deniable step.
NATO Secretary General Anders Fogh Rasmussen told reporters that Russia made an "incursion" into Ukraine and that NATO sees a continuous flow of Russian weapons into Ukraine. Late Friday multiple stories on Bloomberg reported another large column of armored vehicles 40km from the border and headed for Ukraine. Meanwhile the 275 white trucks are parked in a field a short distance from the border. Russian Defense Minister Sergei Shoigu told Chuck Hagel "there were no Russian military personnel involved in the humanitarian convoy, nor was the convoy to be used as a pretext to further intervene in Ukraine." We still don't know if there are weapons hidden in those trucks.
The volley of conflicting headlines early in the day managed to knock the markets back into negative territory at 10:45 with the Dow coming off a +60 point gain to decline to a -137 point loss before noon. The Dow never made it back to positive territory but the Nasdaq managed to gain +12 points and the S&P closed only fractionally lower.
I think once the market realized it was a "test" invasion the dip buyers appeared. Those that bailed on the initial headlines probably were protecting profits from the week's gains.
There were plenty of economic reports but none of them really moved the market. The NY Empire Manufacturing Survey was a serious disappointment but it was ignored. The headline number declined from 25.6 in July to 14.7 in August. July was the highest reading in four years so a normalization decline was to be expected but this was huge. While the majority of the components declined the six-month general business conditions index soared from 28.5 to 46.8. That is the highest level since January 2012. There was no indication why businesses were so optimistic in the face of declining conditions. The new orders component declined from 18.8 to 14.1 and the backorders component fell even further into contraction from -6.8 to -8.0. Employment fell from 17.1 to 13.6 and inventories fell from -3.4 to -14.8. Manufacturing in New York is thought to be expanding but there are some companies closing up shop and moving to less expensive locations.
The Producer Price Index (PPI) for July rose +0.1% compared to +0.4% in June. The core rate, excluding food and energy, rose +0.2% compared to +0.1% in June. There was nothing in this report to move the market. Energy prices declined for the fifth time in six months and should continue falling. Food prices rose +0.4% after declining the prior two months. There was nothing in this report to worry the Fed. The consumer version will be released next week and that has more relevance to the Fed.
Industrial Production for July rose +0.4% compared to +0.2% in June. Manufacturing rose +1.0% and the most since February. Motor vehicles and parts jumped +10.1% to power the gain. Motor vehicle assemblies rose to 13.2 million and the most since 2002. That was a spike of 1.5 million over the June levels. Business equipment rose +1.3%.
Consumer Sentiment for August fell from 81.18 to 79.2 and the lowest level since November. Economic expectations for 2015 fell from 71.8 to 66.2 and the lowest level since October when the partial government shutdown was in the headlines. The present conditions component rose from 97.4 to 99.6. Consumers must be drinking the same kool-aid as the purchasing managers in the New York report above. To have the two main components diverge so significantly is probably worry over the coming election cycle. However, the backlash over Obamacare is growing as more and more people realize how little coverage they got, how much they have to pay up front before getting coverage and how much that coverage is costing them. The "disapproval" rating is rising about 1% per week and it is coming from both democrat and republican consumers. This is not going to go away anytime soon.
Also weighing on consumers is the geopolitical headlines from Ukraine, Israel, Liberia and Nigeria. People are worried we are going to get drawn into some overseas conflict and they are worried the Ebola epidemic will spread to America.
E-Commerce Sales for Q2 rose from $71.2 billion to $75 billion for a gain of +4.9%. As companies ramp up their websites to compete with Amazon the online totals are going to continue to rise. Sales are up +15.7% from Q2-2013. Internet retailers now account for 6.4% of all retail sales. There is plenty of room to grow. Amazon could double its sales and only increase that number to 8.1%. There is roughly $1.171 trillion in U.S. retail sales per year.
U.S. International Capital Flows were negative at -$18.7 billion in June. Foreigners were net sellers of Treasuries and Notes with a record -$40.8 billion in outflows that were only offset by foreign central banks that bought $20 billion in treasuries. Net foreign purchases of U.S. equities was only $2.6 billion compared to $11 billion in the prior month. The total net outflows of long and short term investments was -$153.6 billion and a record. China sold $2.5 billion in Treasuries to lower their balance to $1.27 trillion. Japanese holdings declined -$600 million to $1.22 trillion.
Despite all that selling in treasuries the yield on the ten-year declined to 2.3% intraday on the Ukraine news before rebounding to close at 2.345% and a new 13 month low. It amazes me that investors keep buying treasuries at this level when they know the Fed is on track to start raising rates in Q1. Once the final QE announcement appears in October we should see investors get the message and selling should begin. However, with the worst range of geopolitical headlines in years there is no better place to park your money for the next couple of months. Just don't expect to get much in yield return.
Next week is the housing week with three major housing reports. The sector is in a swoon despite the low interest rates because the number of cheap homes as a result of foreclosures has declined and the wholesale buying of hundreds of homes by hedge funds has also slowed. The bargains have disappeared and it is very difficult to get a loan. I don't expect any big surge in sales despite July being a good month in normal cycles.
The FOMC minutes will be the stumbling block for the week. The hawks and doves are trading jabs in their speeches and there was probably a heated discussion over policy and the coming end of QE when they met in July. Analysts will be waiting with baited breath for the minutes and the rest of us will simply be watch the impact on the market from the various sound bites.
We have reached that point in the earnings cycle where there is barely enough companies reporting to keep the talking heads active for an entire day. They will have to find some new topics soon. Hewlett Packard (HPQ) is the big dog on the block next week with Home Depot (HD) and Lowe's (LOW) the next in line. Sears Holding (SHLD) will be interesting on Thursday if only to see what they have decided to spin off to raise money this time. Target (TGT) on Wednesday could also be interesting because of the ongoing charges for their credit card breach.
Gilead Sciences (GILD) was in the news on Friday after it won a patent arbitration on its blockbuster Hep C drug Sovaldi. Roche Holdings AG had a 2004 collaboration agreement with Pharmassist Inc. Gilead bought Pharmassist in 2012. Roche claimed it had exclusive rights to Sovaldi under that partnership. The arbitration panel ruled that Roche failed to establish ANY of its claims and was not entitled to any damages or other relief. That is a heck of a smack down for a drug that sells for $84,000 for 12 weeks of treatment. Sovaldi had sales of $3.5 billion in the second quarter alone and they have only scratched the surface of the infected population. Shares of Gilead rallied strongly for the third day. Without that patent litigation hanging over their head and projected sales of $12 billion a year on that drug alone I think there are many gains ahead. The chart is nearly vertical but a major roadblock has been removed. If you see a dip in the near future I would jump on it.
Monster Beverage (MNST) had a monster gain on Friday after Coke (KO) announced it was taking a 16.7% stake in the company and they were swapping brands. Coke will give Monster $2.15 billion in cash and transfer all its energy drink brands like NOS, Full Throttle and Burn to Monster. In exchange Monster will give Coke its non-energy brands like Hansen's Natural Sodas and Hubert's Lemonade to Coke. Monster will also give Coke two seats on its board.
This is a win-win for Monster. They are no longer competing with Coke in the energy drink market and Coke will use their international distribution channel to market Monster beverages. This was a major boost for Monster and catapults them years ahead of what they could have done on their own.
News of the deal leaked out and option volume rocketed higher starting last Monday. Option volume was more than 10 times normal and all on the call side. Somebody is going to get some unwelcome news from the SEC. The sheer volume of the calls bought all week will probably mean only the initial purchasers will be confronted. The rest can easily claim they were just following the volume.
It was a decent week in the markets so any volatility just before the weekend only accentuated the profit taking. The major indexes all posted gains with the Nasdaq Composite leading the pack with a +2.1% gain and the Nasdaq 100 a +2.56% gain. The NDX is now up +11% for the year and the Transports +11.7% and Semiconductors +16.7%. The Russell 2000 remains down -1.9% for the year.
The S&P flirted with resistance all week. The initial resistance at 1945 held on Wednesday but was broken on Thursday with a sprint to 1955. The open on Friday saw another spike to 1965 before declining on the Ukrainian news to close at 1955.
In theory the S&P is in rebound mode and headed back to new highs. However, there is significant resistance at 1955 and again at 1985. We may get there but I doubt it will be in a straight line. If there was going to be a failure at resistance the 1960-1965 level would be it. This is uptrend resistance from December.
I have two thoughts here. El-Arian warned that geopolitical news was "cumulative" and eventually there would be one headline too many that would crash the market. That is one view. My view is that the market rallied on really bad news from multiple countries. The more likely a Putin invasion of Ukraine the more traders will price that into the market and when it arrives it may be much ado about nothing. How many times do journalists have to warn about an impending invasion before investors glaze over and no longer care?
Watch the market, not the headlines.
The Dow has honored support and resistance like somebody was pulling the strings behind the scenes. The decline to 16,368 was almost to the point and the rebound and stall at 16,728 was also picture perfect. For a narrow index with only 30 stocks it is rarely this precise. The slow volume was one reason for the textbook moves. Without an abundance of volume the buyers and sellers tend to all have similar ideas about what to buy and sell and when. This "orderly" market reduces volatility and sets investors up for a surprise when it ends.
Despite the headlines Visa was the only Dow component to post a loss higher than $1 with most of the moves less than 50 cents. Other than the sharp index declines the day was really pretty boring.
Resistance 16,728 and support 16,368.
The index that could cause trouble next week is the Nasdaq. The index closed about 18 points off its opening high (4482) and only about 20 points below is 14 year high at 4485. If the Nasdaq breaks out to a new high next week we could have a stampede on our hands. The tech stocks should be vulnerable after the earnings misses and lowered guidance but investors keep piling into the tech sector.
Even more important the Nasdaq 100 ($NDX) closed only -3 points below its recent high. This is very bullish and a breakout here could trigger significant short covering.
The Russell 2000 remained the weak link with a very lackluster rebound and a +.9% rebound for the week. That is less than half the Nasdaq gain. In theory the small caps are telling us not to trust the bog cap gains. Typically fund managers invest in big caps when they scared of the market and small caps when they are confident of the market.
Normally I would recommend watching the small caps for market direction. This week I am recommending you watch the Nasdaq. A breakout will drive the market higher and maybe pull the small caps along for the rise.
I have mixed emotions about next week. The geopolitical headlines are being mostly ignored. Earnings showed 10.1% growth and the highest since 2011. The tech stocks are about to break out to new highs or potentially fail at those new high levels. I recommend watching the Nasdaq for a break out. If that occurs I would add to long positions in the expectation of the Russell 2000 accelerating to catch up. If the Nasdaq fails at resistance it may be only temporary. With two weeks left in summer the volume is going to be very light and the bulls appear to have the ball.
Chinese power consumption in Shanghai and Jiangsu fell by more than 10% in July compared to double digit growth in July 2013. Other provinces including Zhejiang, Anhui, Hubei, Hunan and Guizhou reported consumption declines of up to -22%. This suggests China's real GDP before the government adjusts it to what they want to show the world is going to be much, much less than the 7.5% target for 2014. You can't have a booming economy without power consumption.
China's National Energy Administration said power consumption rose +3.0% in July, down from June's +5.9% rise. This highly manipulated number was still the slowest growth in 16 months. You know it is really bad when even the fictitious numbers have been lowered to 16 month lows.
If investors are expecting a rebound in the Chinese economy to float the global economic boat they are sadly out of luck.
Add in multiple countries in the EU already in recession or even worse in a depression that will be made worse by the Russian sanctions and the global economic outlook for the next two years is pretty dim. The U.S. may be the cleanest shirt in the dirty close hamper but it can't resurrect the global economy by itself.
U.S. industrial production has been rising at crawl speed for the last several years but compared to Europe we are in a manufacturing boom.
Europe posted economic growth of zero in Q2 but declining. Unemployment is 12% or roughly 19,130,000 people out of work. The Eurozone has been in a depression since the financial crisis and has not yet risen to its pre crisis economic levels. Many analysts believe Europe is turning into Japan with its lost decade. The ECB is on the verge of massive QE after a couple years of promising to do "whatever it takes" and never following through. Time has expired and analysts believe this time is different. Mario Draghi is going to be forced to follow through with his promise. When coupled with an imminent stimulus flood from China the overseas economies are going to be floating on an ocean of stimulus.
The Russian sanctions are only going to compound the economic problems for Europe and force the ECB to apply even more stimulus. It is a downward spiral that may not reverse for several years.
Japan's economy sank -6.8% in Q2 and the worst contraction since 2011 as consumer spending slowed dramatically after the government raised the consumption tax to 8% in April. Spending declined -18.7% on an annualized rate. The government has the option to raise it to 10% by 2015 if needed to raise money. Housing investment declined -35.5% and the largest drop in five years. Japanese debt topped one-quadrillion yen. That is 1,008,628,100,000,000 yen or 230% of GDP. However, in U.S. dollars that is only $10.5 trillion and about half what the U.S. debt will be in three years.
Mohamed El-Arian, Allianz chief economic advisor and formerly with Pimco, said on Friday that stocks are still reflecting sentiment on easy monetary policies. "It is impressive. And it is a bet on the fed, and it is a bet on central banks in the rest of the world." He said this week's data has been "shockingly poor, both out of the U.S. and out of Europe." This suggests that central banks will be dovish for longer. "That means that investors will still believe the central banks are the markets best friend." He said valuation matters and the stock and bond markets are trying to tell us something. They are telling us different things about the destination. He said "I am getting more and more nervous about this bet on bad-news-is-good-news. There is a limit on how high valuations go." He said rising equities climbing on the back of monetary policy is a "suckers bet."
He warned the geopolitical troubles were beginning to appear "cumulative." Also, "Central banks cannot fight geopolitical headwinds for a long time." Eventually there will be one headline too many and the market will react negatively.
On August 14th, 1935 President Franklin Roosevelt signed the Social security Act, which guaranteed income for the unemployed and retired. At the time the poverty rate for senior citizens was over 50%. In 1937 53,236 people received a total of $1.28 million. In 2013 more than 53 million received more than $730 billion. The average life expectancy in 1035 was 62. Today it is 78.7.
On August 14th, 1945 President Harry Truman announced the surrender of Japan and ending World War II. Despite the bombing of Hiroshima and Nagasaki some Japanese wanted to keep on fighting. Emperor Hirohito intervened in a radio address called the "Jewel Voice Broadcast" where he announced Japan would surrender.
August 15th, 1971 Richard Nixon took the U.S. off the gold standard and ended the convertibility of dollars into gold. He also froze ages, prices and rents for 90 days because of rapidly rising inflation. This was later called the "Nixon Shock" because it was such of a blow to the nation.
Remarks from Defense Secretary Hagel last week. The world is exploding all over. And so is the United States going to continue to have the resources, the capabilities, the leadership, the bandwidth to continue with the rebalance toward the Asia Pacific? And the answer is yes. Hagel went on say that, despite the rebalancing towards the Pacific, the US will not be "retreating" from any threats elsewhere in the world. Now, that said, as I've said, with that rebalance, which will continue, and we are committed to do that, we're not retreating from any other part of the world. Great powers can't pick and choose which challenges and threats they're going to deal with. There is no power on Earth like the United States of America.
No country is great enough, powerful enough to deal with all these threats and challenges alone in the world today. They're too big, too complex. The world is too complicated. Whether they're cyber threats, which are relatively new, but are just as real and deadly and lethal as anything we've ever dealt with, obviously, what's going on in North Korea, China's behavior in the South China Sea, East China Sea, you mentioned Russia's actions in Ukraine, North Africa, the Middle East today, every part of that world is troubled under great stress. Sounds like Hagel and Obama are reading out of different play books.
The first nine days of August are typically volatile with the market rallying into expiration Friday. Over the last 9 years if the first nine days were positive the rest of August was positive 7 of those 9 years. However the bulk of the month's gains came in those first nine days. The last two weeks of August are typically rocky according to the Stock Trader's almanac.
The current bull market is now the second longest in the last 85 years. The current bull market is 283 weeks old and the average length is 165 weeks. What is going to keep it moving higher?
Beware Ebola. The World health Organization (WHO) claims the outbreak of Ebola has been "vastly underestimated" and will require "extraordinary measures, on a massive scale" if it is to be contained. The Medecins Sans Frontieres (MSF) said the disease was spreading "faster than we can respond to" and accused WHO of being too slow to react. "Staff at the outbreak sites see evidence that the number of reported deaths vastly underestimate the magnitude of the outbreak." MSF said, "It is like wartime. The wakeup call was too late." It may take "six months to get the upper hand on this outbreak."
Plan International's head of disaster preparedness said "Time is running out and millions of lives are at stake." One of the major problems is the poor people it is affecting. They don't have medical care. When they get sick they stay home and family members take care of them. This assures that the family members also get sick and by the time there is a request for help dozens of friends and relatives may have been infected. Since a lot of sick people stay home there is no way of telling exactly how many people have been exposed or already have the illness. "By the time we find out about a sick family it is too late."
More than 80 healthcare workers have already died but we don't hear about them. We only hear about the two Americans that were flown back to the USA. Healthcare workers are fleeing the stricken areas. In Liberia the population of 4 million had about 200 clinical care doctors before the outbreak. Now there are only about 50 after the others fled or died. Non Ebola care has disappeared. Women are dying from unassisted labor and delivery. Auto accident patients are dying for lack of trama care doctors. Ken Isaacs VP of Samaritan's Purse told Congress "this Ebola outbreak is uncontained and out of control in West Africa." Officials warn that once the disease makes it to a high traffic country like Lagos (22 million) or Johannesburg it will quickly spread internationally.
Enter passively and exit aggressively!
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