The markets had their best week in months as a result of several E-vents.
I have to thank David Darst for giving me the idea for the title this week. His list of positives for the market caused me to consider what really moved the market other than the normal oversold reasons.
Over the last week the market was moved by Ebola. While the news headlines had faded going into Thursday a new case in New York caused the bullish rally on Thursday afternoon to crater right at the close and the futures to go seriously negative Thursday night. The idea of an infected person walking around New York, visiting restaurants, riding cabs and subways and even going bowling put a sudden fear into New Yorkers and the market. Fast forward to Friday and the string of press conferences assuring there was no risk allowed the headlines to fade again and everyone go back to their personal lives.
Nina Pham, the first Dallas nurse to be hospitalized with Ebola, has now been discharged from the hospital and is Ebola free. This news was all over the headlines on Friday and that helped to reduce the worry over the New York case.
The ECB is going to release this weekend the results of the enhanced stress tests on European banks. A report leaked on Friday said 25 of them will fail with 105 passing the enhanced test. However, 15 of the banks that failed have already raised additional capital and the other 10 are in the process according to the leaked report. This "there were problems but they have been corrected" implication in the leaked report was somewhat positive for the market. It removed some of the worry that the European banking sector was worsening.
European economic data did not worsen last week. You know analysts are grasping at straws when a positive headline is that economic conditions did not worsen. The European manufacturing PMI rose unexpectedly to a two-month high of 50.7 for October. HSBC analysts had expected a drop below 50 into contraction territory. German PMI also moved unexpectedly back over 50 to a three month high of 51.8, up from 49.9 in September. Spanish unemployment fell to the lowest level since 2011 to 23.7% in Q3, down from 24.5% in Q2. France was the laggard in the group with a drop in their manufacturing PMI from 48.8 to 47.3 in October and a two month low. Still European economics improved slightly from the market crushing worry from the prior week.
Energy prices in the U.S. continued to fall and this is very positive for consumers and holiday shopping. With oil prices at $80 this represents a $1.1 trillion annual tax cut for consumers according to Citigroup. While it is not likely to last a year we can safely say that the amount spent on gasoline will decline about $100 billion a month and that money goes straight into consumer's pockets and right back out again in consumer spending elsewhere. Of course if oil prices were do decline under $80 it would set off a round of cutbacks in exploration in the energy sector and that means significant layoffs until prices pick up again. Cutbacks would not happen until 2015 so the Q4 quarter should benefit from continued employment and lower gasoline prices. The average price in the U.S. this weekend is $2.99 and dropping about a penny a day.
Natural gas prices collapsed to an 11-month low on Friday as oil moved closer to $80. The fall weather has been mild and gas demand for home heating has not yet arrived. Weekly injections into storage are running just under 100 Bcf with only one more week before the traditional start of the heating season on Nov 1st. Gas inventories in storage are still about 400 Bcf below year ago levels and we almost ran out of gas last year. Consumers are getting a break on their gas bills in October but once the injections turn into withdrawals we can expect prices to rocket higher.
Continuing the "E" themed reasons, the market rallied because the U.S. Economy continues to muddle along. Existing home sales rose unexpectedly from 5.05 million to 5.17 million. The Consumer Price Index for September came in at only +0.1% and well below the level that would worry the Fed. The trailing 12 month inflation rate is only +1.7%. Several analysts, including myself, thought it would be flat or negative after the -0.2% decline in August. The collapse in energy prices was evident but higher prices for food kept it barely positive.
Lastly Earnings have been mostly positive despite quite a few high profile disappointments. We sometimes forget that the market is made up of roughly 4,500 stocks and we focus on the 100 or so mega-caps as our reading on the market. While stocks like IBM, KO, MCD, AMZN and NFLX led a flock of earnings misses there are dozens of S&P stocks that were beating estimates. So far more than 300 S&P companies have reported and 64.9% have beaten estimates with an earnings growth rate of roughly +5.1% compared to early estimates of +4.1%. Only 49.3% have beaten on revenue.
I believe guidance is more important than earnings and I have been capturing guidance news for October. Currently there have been 73 companies with positive guidance, 111 with negative guidance and 180 that provided guidance in line with prior forecasts. Since negative guidance normally runs 2:1 over positive guidance this has been a slightly positive month at 3:2 negative over positive. Unfortunately we are seeing a higher number of companies post in line guidance, which does not say much about the current quarter. Companies typically lowball their guidance to some extent. If they can't improve on it now that we are in Q4 it suggests they are struggling just to maintain the status quo. Next weekend will be my last update on the guidance front because October has the most earnings and there is nothing to be gained by dragging it out until the last company reports.
I touched on Ebola, Energy, ECB, Europe, Earnings and the Economy. It was definitely an "E" week and there is no reason to think that these same six Es will not impact us in the week ahead. With the exception of Ebola it is the same Es that we have been dealing with for quite a while. I could have added Extremists with the Canadian shooting and New York hatchet attack but I think those perpetrators were more likely mentally incompetent than extremists. The real extremists have yet to appear and once we get to Black Friday I am going to be breathing a sigh of relief for every day that passes without a mall attack.
The economic report for Friday was New Home Sales, which rose slightly from the revised August number of 466,000 to 467,000 in September. However, the preliminary August number was 504,000 so it was a big decline from the initially reported levels. We can take comfort in the knowledge that September sales were still up +17% from year ago levels at 399,000. Sales in the Midwest surged +12%, South +2%, Northeast was flat at zero and the West declined -8%. The average sales price fell from $286,900 to $256,600. That is the lowest average sale price since August 2013. You have to wonder if builders were discounting homes to get them sold before winter. No builder wants to have homes sitting vacant over the winter where pipes can freeze and heaters have to be kept running.
The calendar for next week is dominated by the FOMC announcement on Wednesday and the GDP for Q3 on Thursday. The speculation about the FOMC and the assumed end of QE has gotten a lot of press over the last two weeks. When Bullard suggested the Fed could hold off on ending QE last Thursday he generated a firestorm of conflicting views.
Personally I don't believe the fed will change their plans. They have been moving towards ending QE at the October meeting for over a year and the Fed does not make spur of the moment changes in policy. They are like a huge oil tanker that takes miles to turnaround. Once they get moving in one direction they rarely change that direction without a lot of hand wringing and the appropriate number of trial balloons to gauge the wind direction and political impact of the potential change.
The real question for next week is whether they keep the "considerable period" language that supposedly implies the Fed will not raise rates for six-months after the end of QE. That implication has been debated for most of 2014 but once QE is over it will take on a new significance. If they take it out it would imply a potential rate change in less than six months. Since the current projection by independent analysts is moving closer to September 2015 than June 2015 I would expect them to leave the language in the announcement. However, the Fed is trying to come up with new language that enforces their "data dependent" stance and that change, if it happens at this meeting, would negate the considerable period terminology.
This is a pivotal meeting for the Fed and therefore for the markets. The Fed has appeared to be slightly more dovish in recent weeks since they disclosed their fear about a European meltdown. Whatever action they decide to take would probably be of a more dovish nature than hawkish.
Interesting article from Mohamed El-Erian on What Will the Fed Do?
The Q3 GDP is expected to decline from the snapback of 4.59% in Q2 to +3.1% growth. I think most investors would be happy with that number because it represents continued growth. If you take the -2.11% decline in Q1 and the +4.59% rebound in Q2 and combine them you get +2.48% growth for the first half. Getting +3.1% for Q3 would be slightly higher and put us back closer to the +4% average rate of Q3/Q4 of 2013.
A new split was announced by Jarden (JAH) I also added some reverse splits on ETFs.
Stock news was pretty quiet on Friday with the Amazon crash the biggest news. Amazon (AMZN) dropped -$26 (-8.3%) on Friday after reporting disappointing earnings Thursday night. Amazon lost -$417 million for the quarter while sales rose +20% to $20.6 billion. At the same time they invested $21.1 billion into operations and capital expenditures a +23% rise. Amazon is building out a series of warehouses and shipping centers that will enable it to ship products to customers from the closest warehouse and cut down on the $5 billion a year they spend on shipping. The company said it was hiring 80,000 holiday workers to handle the expected increase in volume. They hired 70,000 last year and they have 149,500 normal workers. For the full year Amazon said it was on track to lose $40 million on what is expected to be more than $80 billion in revenue.
Amazon admitted the Fire phone was an initial failure in a crowded market and wrote down their remaining inventory. They took a $170 million charge for inventory write downs. They slashed the price of the remaining phones from $199 to 99 cents. They are not discontinuing the phone and they just started shipping current models in Europe. Amazon also played down estimates for Q4 saying the rising dollar was causing sales slowdowns in Europe.
The Ebola fears may actually help Q4 sales as fewer shoppers will want to brave the malls looking for bargains. The National Retail Federation survey found that 41% of shoppers said they will spend more online this year than last.
Shares of Amazon declined to close at $287 and right on critical support. Various analysts were calling for a decline to $200 and at least one thought it could trade down to $100. Investors need to realize that Amazon is trading at 15 times EBITDA, which is very cheap for Amazon. Also, once Bezos gets the infrastructure built out he can turn on the profits almost instantly. All he has to do is quit spending at $20+ billion a quarter. I would not write off Amazon but I also would not buy it until we see what the next week brings in terms of the stock price.
Bad news for Amazon is good news for Alibaba if you believe the stock price is telling us a story. The two biggest online retailers are the opposite in results. Alibaba makes a profit. Shares of BABA are reaching a breakout point at $98 after falling to $68 post IPO. BABA reports earnings on Nov 4th.
Another stock falling to critical support was GoPro (GPRO). Oppenheimer initiated coverage on GpPro with a sell rating and a $45 price target. The analyst said the early adopters have already purchased a camera and sales in 2015-2016 will be tougher to produce. He said there would also be new competitors in the coming months that would eat into GoPro's market share. He warned that cell phone video was also a challenge as the camera quality and resolution improves. There are four ratings I could find on GoPro. Barclays at neutral, Robert W. Baird at neutral, Stifel at hold and Oppenheimer at sell. That is not a very encouraging list but that may not be everyone.
Shares retreated to support at $70 with a -9% drop. This is a critical level with $65 the last material support before $40.
Procter & Gamble (PG) said it planned to spin off its Duracell battery brand and use the money to buy back shares. The company is considering offering existing shareholders a share-swap for shares of the new company. This would give those that want a stake in Duracell the opportunity and also reduce the outstanding share count of PG shares. They are also considering a straight sale, spin off and other options. The split would happen in the second half of 2015. Duracell sales are between $2.0-$2.5 billion. PG did $83 billion in sales last year but they don't breakout the sales by brand.
PG also reported adjusted earnings of $1.07 that missed estimates by a penny. They lost 7 cents due to currency conversion issues during the quarter. More than 60% of PG sales come from overseas. Revenue was $20.79 billion.
UPS (UPS) reported earnings of $1.32 that beat estimates of $1.28. Revenue rose +6% to $14.29 billion. The company affirmed its full year guidance of $4.90-$5.00 compared to analyst estimates of $4.95. The company has spent $500 million in capex and will spend $175 million more for operations to get ready for this holiday season. They are hiring between 90,000-95,000 holiday employees. They expect shipment volume to rise +11% over last year's record volume. They are raising rates by +4.9% for 2015. UPS said they were experiencing currency conversion issues but lower fuel prices were offsetting some of that drag.
Pfizer (PFE) surprised everyone when they announced a Viagra sized stock buyback of $11 billion on Thursday. This is in addition to the $1.3 billion remaining on its current authorization. Shares rallied slightly but the announcement was quickly seen as the end of Pfizer's bid to acquire AstraZeneca (AZN). Pfizer, with a market cap of $180 billion tried to buy AZN with a bid of $118 billion earlier this year. Under British rules they could make another bid in late November. If they are going to spend $11 billion on buying back shares it would seem to suck up a lot of cash they could use in another acquisition attempt and therefore suggest there will not be another attempt.
Shares of Pfizer have been declining since March so it would be a little harder to use their shares as currency for the entire transaction. I view Pfizer shares as dead money. If Pfizer has that much cash on hand they should be using it to make acquisitions or develop new drugs to improve the share price rather than simply buying back shares. The only good thing is that they announced the buyback near their 52-week lows rather than at the top. It is always better to buy when shares are cheap regardless of who you are.
The S&P has rebounded +144 points in eight days without any material pauses for profit taking. To say it was now overbought would be an understatement. The beauty of the markets is that it can remain overbought, or oversold, for far longer than investors expect.
Most traders believe the Oct 15th panic dip was capitulation and this rebound is the start of the end of year rally that will power us to new highs. Let's hope "most traders" are right. However, there are critical resistance levels ahead. I pointed out on Tuesday that the 50-day average at 1,966 could be trouble that that was almost exactly where the S&P stalled on Friday.
If it gets through that level the next hurdle is 1,970 and the strong resistance from the first week of October. The good news would be a push through those levels because the next stop would be 1,985 and then the resistance highs from 2,000-2,012.
For an index that has rebounded +144 pints in 8 days only another +50 points would have it closing at a new high. How many traders thought that would happen when it was bouncing off 1,820 just over a week ago? I am pretty sure the bulls were scarce on October 15th.
The small dip on Wednesday afternoon created minor support at 1,930 so that is the target we don't want to test again. With good news breaking out all over the stage may be set for a continued rally next week.
The week before a midterm election has been up 75% of the time since 1982. While history is a guide and not a guarantee it does provide some level of assurance to those who want to be bullish anyway.
Watch 1,966-1,970 for a breakthrough early next week.
The Dow is still well under the 50/100 day averages with the 50 day the most troublesome at 16,895. The Dow overcame some serious dead weight in the form of IBM, KO, MCD, BA, T and others earlier in the week. The post earnings gains by MSFT, MMM, PG, CAT, etc helped pull the index out of the slump to gain nearly 1,000 points in 8 days. If IBM was not in the index it would be +160 points higher today. The $20 drop in IBM is worth about 160 Dow points.
Fortunately the majority of the Dow components have reported so there should not be any more negative surprises.
If the Dow can push through the 50-day at 16,895 the next test is 17,000. Without any positive earnings surprises we could have a lack of catalysts to produce the momentum needed to break through those levels. This will be a pivotal week for the markets and the Fed is going to be either the pothole in the rally road or the fuel for the boost higher.
Wharton School professor Jeremy Siegel made news earlier this year when he predicted Dow 18,000 by the end of the year. When interviewed on Friday he said the chances were only 50:50 today with the Dow -7% from that level. With the Dow closing at 16,800 that is only 1,200 points from his 18,000 target. The Dow has rallied almost that much in the last 8 days and the best two months of the year are still in front of us.
Thud! That sound you heard on Friday afternoon was the Nasdaq slamming into resistance at 4,485. A breakthrough here targets 4,545 and then 4,600 and the 14-year highs. The Nasdaq gained +31 points on Friday despite the -23 point loss by Amazon.
Here is the most interesting statistic. Since the low at 4,116 on the 15th the Nasdaq has rallied +367 points or a whopping +8.9%. That is a huge move in a short period of time and it is showing no signs of fading. All the big tech names have already reported earnings so there should not be any monumental disasters like Amazon or Netflix in the near future.
The Nasdaq needs to rest. It would not hurt to have a couple days of minor profit taking before the Fed announcement on Wednesday. This is a marathon, not a sprint and we need to develop a sustainable pace rather than spike to resistance and then collapse.
Initial support should be around 4,445 with resistance right at the closing level of 4,485.
The Russell 2000 rested on Friday. It was down fractionally all day only to squeeze out a minor gain at the close. The Russell ran into minor resistance at 1,120 and it paused to refresh. It still posted a +3.7% gain for the week. The Russell is critical to the overall market and we definitely do not want to see it start falling behind and lagging the big cap indexes. We need the Russell to continue surging ahead to give buyers confidence the bottom is behind us.
The Dow Transports surged over resistance at 8,500 and appears headed for a retest of the closing high at 8,676. The transports are positive confirmation for the Dow and a new high would trigger additional buying in the industrials. In theory the transports move the goods the industrials produce and better earnings expectations for the transports suggests a better economy. In reality the transports are surging more on the lower fuel costs than a surge in the economy. However, a 3% GDP is not bad and we heard from the railroads and the airlines that demand is strong. Cheap fuel and strong demand should mean higher profits and a new high soon.
Monday and Tuesday could be consolidation days. Everyone thinks they know what the Fed will say on Wednesday but nobody knows for sure. This could cause some profit taking and positioning for a negative news event but I don't know what they could say that is not already priced into the market.
The real wildcards are another Ebola case or another terrorist attack by sane individuals. We know it is coming. It is only a matter of time. However, for the last 13 years we have expected it and nothing appeared. We can't live our lives in constant fear of attack or the terrorists will have won. We should invest and follow the trend but keep our stops tight just in case the unexpected happens.
A +4% rally in the S&P and +5% in the Nasdaq caused the Volatility Index (VIX) to decline more than -10% per day for three consecutive days. That is the first time that has ever happened. There are 50 puts for every 100 calls on the VIX. That is the highest percentage of bearish bets in 10 months. The open interest in VIX puts surged to a record 3.54 million contracts last week. The VIX closed at 16 and half of its value on the 15th.
Beware the end of QE3. Just take a moment to reflect on QE3 now that it is ending. When it started 27 months ago at $85 billion a month it was injecting roughly $1 trillion into the markets on an annual basis. With the taper nearly a year old the QE3 program has injected $1.7 trillion into the markets but buying up the majority of marketable securities in the market for several durations. The fed has never successfully unwound a stimulus program without creating a market crash. This, along with QE1 and QE2 and their subsets has pushed the Fed's balance sheet to more than $4.48 trillion. Why would anyone actually believe that the Fed can unwind a balance sheet that size without rocking the market even if they take a long time to do it? Yellen said it could take until the end of the decade to reduce the balance sheet. Since recessions normally come on a 5-7 year cycle and we are already 5 years into this cycle the odds of another recession in the next couple of years is very strong.
When stocks rise on stimulus it is only rational that they will decline as stimulus is removed. Since the Fed is probably not going to make any changes to their balance sheet until late in 2015 you would think the market would be safe until then. Unfortunately by NOT supplying additional stimulus they are actually tightening monetary policy even though they are taking no action. All of this is going to come to a head probably in Q1. The end of year rally will be over and investors will be planning for the inevitable rate hikes later in the year. Investors have had several years of above average returns. We should be planning for a year of change as the market resets its expectations.
The Conference Board published a new report last week suggesting the Chinese economy is about to fall off a cliff. They are projecting a drop in GDP growth to around 4% compared to the 7.3% today and 10% average from 1993-2011. They cite numerous factors including a sharp rise in private sector debt. Since 2009 when private sector debt was 117% of GDP it has risen to almost 200% today and it growing at 15% per year. This is a level that has typically caused serious crashes in other economies. This is an interesting report and worth a quick read. Is China Falling Off a Cliff?
Chinese home prices fell for a fifth straight month wiping out gains for the year and could force the government to add more stimulus to slow the decline. Prices fall in 69 of 70 cities
There was a new revelation last week that workers at the Census Bureau falsify data. Wow! That is like saying, news flash -- the Pope is catholic. This has been almost common knowledge in the investment community for years. This latest revelation came from yet another whistleblower in the Los Angeles region claiming workers have been manipulating data for years. "Everybody knows falsification is going on" according to the whistleblower. His data has been turned over to congressional investigators who are also looking into falsification in other parts of the country. Workers in Denver and Philadelphia have recently blown the whistle on coworkers and turned their evidence over to investigators. So far workers in 4 of the 6 regions have now turned over data to investigators. Only the New York and Atlanta regions have failed to produce any whistleblowers but the investigation is still young.
There were multiple claims of the unemployment rate being manipulated for two months before the 2012 elections. Of course the Census Bureau denied it but when investigators started breathing down their back more than 120 personal computers with 11 belonging to supervisors suddenly went missing never to be found. It is amazing to me how many emails, hard drives and even computers suddenly disappear once investigators begin to focus on the wrongdoing in government.
If the government can't disappear the documents they can always claim they are protected by executive privilege. President Obama initially claimed he did not know about the Fast and Furious gun running scheme being handled by the Eric Holder and the Justice Department. This is where guns were sold to questionable buyers in Arizona and New Mexico and allowed to be smuggled into Mexico. In theory they were going to track the serial numbers and figure out how they got from the U.S. into Mexico. Unfortunately people started dying after these guns got into the wrong hands. The president was outraged and promised to get to the bottom of it. Eric Holder refused to supply records requested by Congress investigators. They finally held him in contempt of Congress but still no records.
The watchdog group Judicial Watch sued and a federal judge demanded the Justice Dept turn over all relevant documents. On Friday the Justice Dept released a list of 15,662 documents related to Fast and Furious that President Obama refused to release because he claimed "executive privilege." Twenty-eight of those were emails from Holder to his wife, Sharon Malone and 11 were from Holder to his mother. If you are like me you are probably wondering why President Obama could claim executive privilege on emails to Holders wife and mother. This just shows how corrupt Holder and the Justice Dept really are. They will do anything to prevent being held accountable for wrongdoings.
The Eurozone is moving ever closer to its third recession since the financial crisis and eventually deflation. The inflation rate in the zone has declined to +0.3% and could go into decline in 2015 if the price slide continues at the present rate. This region makes up almost a fifth of the world's output and it is sinking fast. The Eurozone is heading for a Japanese style deflation and the U.S. is not going to escape contamination once it begins. Populist politicians will seize control after years of imposed austerity and the eurozone is likely to self destruct. Globally 46 countries have central banks that target inflation and 30 are currently fighting a losing battle with inflation below the target rate and slipping. The Pendulum Swings to the Pit also Barron's Stock Market blemishes
In the last five years the percentage of household financial assets invested in the stock market has increased by 25% to a total of 35%. That means 35% of individual investors net wealth is at risk. This is now higher than the 34% in 2007 just before the financial crisis. The two prior peaks were 43% in Q1-2000 and 31% in 1968. Bear markets occurred from 1966 to 1982, 2000-2002 and 2007-2009. Amazing how that peak in invested assets corresponds to the beginning of bear markets. Welcome back to the Market
$70 oil? Jeffery Gundlach is predicting oil prices will plunge further to $70 and that will seriously impact the amount of drilling and fracking and dramatically slow future production. If the oil bloom withers it will take the economy with it along with rising unemployment and a falling stock market. Oil Will Tumble to $70
Venezuela defaults on deal with China to supply 330,000 bpd of oil in repayment for billions in prior loans. China loaned Hugo Chavez billions to bail out his socialist state and the repayment for those loans was 330,000 bpd in crude oil. Last week Venezuela's national gazette made it official that Caracas no longer needed to export that oil to China. Instead it can send as much or as little oil to China as it wants. Furthermore the terms of the loans have been extended beyond the initial three year term, perhaps indefinitely. China's Ministry of Commerce confirmed the changes "at Venezuela's request."
The problem is one of cash flow. Venezuela has none. They spent the Chinese billions years ago and now they get nothing for the 330,000 bpd of exported oil. By defaulting on the agreement with China they can now sell that 330,000 bpd of oil to someone else for real money. China loses, Venezuela wins. Unfortunately they just burned an economic friend. I doubt they will be going back to the bank of China for future loans but the new cash flow from oil sales will probably keep them afloat for a couple more years.
In the "you can't make this up" department Vladimir Putin is blaming the U.S. for the war in the Ukraine and for many of the current global problems. He said the U.S. is causing growing chaos for sovereign states and support for neo-Nazis and Islamic extremists. Putin Blames U.S. for Islamic Terrorism
Need a house? A mystery bidder offered $3.2 million for 6,000 of Detroit's worst homes. These homes could be unhabitable, inhabited, have mold, have recently burned and have been condemned. The treasurer of Wayne County said someone tendered a $3.2 million bid for all the foreclosed properties up for auction. Some come with the demand that they be demolished within 6 months at an estimated cost of $24 million. Only about 1,000 of the homes are thought to have any value. New Slum Lord Born?
Warren Buffett had a bad week. Between IBM and Coca Cola the investor lost $2.3 billion for the week. Both companies missed earnings and dropped hard. Berkshire Hathaway has been a long time investor in Coke and a fairly recent investor in IBM. On tops of those problems were GM, down -24% in recent months and Chicago Bridge & Iron (CBI) down -38%. Sometimes stuff happens and you have to deal with the disaster, pick up the pieces and move forward.
Only 60 shopping days until Christmas.
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