The Dow posted its fifth consecutive weekly loss and the worst run since 2011.
Obviously, you can do a lot of things with statistics. While the Dow has had its longest string of consecutive weekly losses since 2011, it is only down 4% from the recent highs. In the December crash it was down -18.8% in only three weeks. I know which one I would rather see happen.
The Russell 2000 had an almost identical rebound to the 50% level but immediately crashed back to a four-month low. Unfortunately, the small caps lead, and they are leading down. If the index breaks and closes below the 1,500 level it would trigger a lot of technical selling and the overall market could begin a new leg lower.
There was only one economic report on Friday, and it was ugly. Durable goods orders for April declined -2.1% after a 1.7% rise in March. The March number was revised lower from 2.8%. A sharp drop in aircraft orders was blamed for the decline. With Boeing having problems with the 737 Max, the overall sales for aircraft declined. Boeing posted almost zero orders in April, down from 44 in March. They did report 4 bookkeeping adjustments that technically kept them above zero. Nondefense capital goods orders fell -5.0% but ex-aircraft that improved to -0.9%.
Defense capital orders rose sharply with a 4.8% gain. On a year over year basis they are up 28.9%. Tariffs on steel and aluminum weighed on the orders as buyers held off hoping for a resolution. This is the second time in 2019 that durable goods orders declined with a -2.6% decline in February.
This was not a good week for economics. The Chicago Fed National Activity Index fell from -0.15 to -0.45. Existing home sales fell from 5.21 million to 5.19 million and missed estimates for 5.36 million. New home sales declined from 692,000 to 673,000. The Kansas Fed Manufacturing Survey declined from 5 to 4 and its second consecutive decline from 10 in March.
On the positive side weekly jobless claims declined to 211,000 and mortgage applications rose 2.4%. E-Commerce sales for Q1 rose from $132.8 billion to $137.7 billion.
The weakness prompted multiple stories about an impending recession. JP Morgan cut their GDP estimates from 2.25% to 1.0% growth. That may be slightly premature because the Atlanta Fed real time GDPNow forecast is 1.3% for Q2 even after the negative economics. JPM said "Net, net, business investment is sputtering at the start of the second quarter as uncertainty and geopolitical risks are a heavy anchor that appears to be a big drag on company's willingness to order up new equipment." "Business confidence is clearly lacking in the manufacturing sector."
What the low numbers did was reset the expectations for a rate cut before January. According to the CME Fed funds futures, there is only a 16.2% chance of rates remaining level through January. That means there is an 83.8% chance of a rate cut. There is a 47% chance of two cuts. While that is highly unlikely, that is what the futures are saying.
The economic calendar is lackluster until Friday. The manufacturing surveys rarely move the market and the GDP release is a revision and not expected to move materially. The personal income and spending numbers on Friday are important for the Fed with the PCE Deflator a critical data point. However, schools are out, and summer has begun and economics will be ignored due to a lack of market interest by retail investors.
There are some decent earnings this week with Palo Alto Networks, Costco, Dell and Uber heading the list. Palo Alto will have news on 5G and guidance will be important given the Huawei sanctions. Costco and Dell are not far from recent highs and guidance will be important. The retail sales trends have been choppy, but Costco is expected to show continued gains. Dell should be profiting from the decline in chip prices, but surveys claim PC sales declined in Q1.
Uber reports its first ever earnings as a public company and everyone expects another big loss. This will be a critical report since shares are barely holding their ground after their IPO. There will be a giant dose of volatility regardless of what they report. There will be a big move.
For the current cycle 483 S&P companies have reported earnings with 75.2% beating estimates and the current forecast is for a 1.5% growth rate. Revenue growth is now forecast to be 5.6% for Q1. Only 57.1% have beaten revenue estimates. There have been 60 earnings warnings for Q2 and 20 earnings upgrades. Nine S&P companies report this week.
Foot Locker (FL) shares were crushed after reporting earnings of $1.53 that missed estimates for $1.61. Revenue of $2.08 billion also missed estimates for $2.11 billion. Same store sales rose 4.6% but missed estimates for 5.6%. The company also cut guidance from double digit earnings growth to high single digits. They warned that "the proposed tariff of 25% on footwear would be catastrophic for consumers, companies and the American economy as a whole." The Footwear Distributors and Retailers of America (FDRA), a trade association, said the tariff would add $7 billion in additional costs for footwear customers every year.
The CEO said Q2 would not be very exciting because of changes to merchandise and the normal course of inventory turnover. Shares fell to a 52-week low and 16% decline.
Hibbett Sports (HIBB) shares were going in the other direction after reporting earnings of $1.61 that blew past estimates for $1.32. Revenue of $343.3 million also beat estimates for $327.0 million. Same store sales rose a whopping 5.1% compared to estimates for a 0.7% decline. They raised guidance from $1.80-$2.00 to $2.00-$2.15. Analysts were expecting $1.90. They raised same store sales estimates from a -1% to +1% range to +0.5%-2.0% range. They said improved web traffic and their buy online pick up in stores program was improving store traffic. Shares rallied 21% on the news.
Autodesk (ADSK) shares were slammed after reporting adjusted earnings of 45 cents that rose 700% from 6 cents but missed estimates for 47 cents. Revenue of $735 million rose 31% but missed estimates for $741 million. Billings rose 40% to $798 million. They guided for Q2 for revenue of $787 million at the midpoint and analysts were expecting $791 million. They also guided for 61 cents in earnings and analysts were expecting 63 cents.
They generated free cash flow of $207 million, $550 million over the last 12 months and they are on target to generate $1.35 billion through fiscal 2020. Shares were hammered for a 5% loss.
The Hewlett Packard twins (HPE and HPQ) both reported earnings on Thursday after the close. HPQ reported a 2.9% rise in earnings to 53 cents that beat estimates for 51 cents. Revenue of $14 billion was in line with estimates. HPE reported earnings that rose 14.4% to 42 cents and beat estimates for 37 cents. Revenue of $7.2 billion missed estimates for $7.4 billion. Both companies had positive and negatives in their metrics. HPQ was seen as the better results and shares rose 4%. HPE gave back early gains to trade flat.
Reuters reported late Thursday that "three sources" claimed Boeing would be allowed to fly the 737 MAX planes on domestic routes as soon as late June. The comments were made in a meeting between the FAA and the International Civil Aviation Organization (ICAO) in Montreal. Reuters said there was no precise timetable but the FAA was leaning towards a removal of the restrictions after the software upgrade.
Unfortunately, on Friday the Wall Street Journal reported the FAA could be expanding their safety review to include older models of the 737. The WSJ claimed this extended review and a new pilot training program could add months to the grounding.
Boeing has completed the software modifications, but they have not yet submitted it to the FAA for certification. Reportedly, Boeing is being forced to come up with new procedures for human pilots when the automatic pilot software goes haywire. The FAA administrator said once Boeing submits their software update for certification is should take the FAA 3-4 weeks to complete certification. After certification, Boeing would install the new software and pilots would have to complete a new training course on how to use it and how to recover from a software error. That suggests late August as a potential date for ungrounding the planes.
American Airlines (AAL), Southwest Airlines (LUV) and United Airlines (UAL) have all cancelled additional flight schedules well into August. The FAA administrator said reporters should not try to apply comments and project dates. "It takes as long as it takes" to get it right.
I would not get too excited about buying the dip because Boeing has a lot of costs ahead. Passenger compensation is expected to exceed $1.4 billion. Airlines with grounded planes are going to demand compensation for lost revenue and that could be billions more. However, Boeing is cash rich and they could write a check for $5 billion and barely feel the impact. It is the negative headlines that will produce the most pain.
Tesla is having a very bad month. Cars are crashing, shares are plunging, competition is rising and price targets are falling. Shares have fallen to two-year lows after Elon Musk said earlier in the week that Tesla was running out of money and need to cut costs dramatically. Shares tried to rally at the open on Friday after Musk sent another email to employees promising record-braking sales. He said Tesla has received 50,000 net new orders in this quarter. He said Tesla could break a prior delivery record if everyone would work together to hit production targets.
"Based on current trends, we have a good chance of exceeding the record 90,700 deliveries from Q4 last year and making this the highest delivery/sales quarter in Tesla history." The company missed production estimates in Q1 and Q4 despite Q4 deliveries setting a record.
Analysts pointed out that the EV tax credit for Tesla cars will decline another 50% to $1,875 at the end of June. Other newer competitors still qualify for the $7,500 tax credit. With 18 EV models set to be released by the end of 2020 and 40 by the end of 2022, prices are going to get cheaper and competition will be fierce.
Multiple analysts posted bearish targets from $10 to $50 and Citigroup reiterated a sell rating. Bank of America, CFRA and Evercore also have sell ratings. The $200 level was a downside target for multiple brokers and with shares now at $190 they are reevaluating their analysis.
The National Transportation Safety Board said a Tesla that crashed on March 1st was operating on Autopilot at the time of the crash. This is the third fatal crash of cars on Autopilot. This trend will continue because Autopilot is not expected to be fully capable until 2021 but drivers are lulled into a false sense of security by the current system.
Shares are on autopilot towards lower levels as negative headlines outpace positive headlines.
Rumors are starting to reappear about Apple buying Tesla. They once offered $230 a share for the company but Musk turned them down. Since Musk has found out how hard it is to run a car company and a dozen other businesses at the same time, he may be more interested the next time he is approached with a lifeline offer.
I seriously doubt Apple will be making an offer for Tesla since they are also in trouble. Shares have lost more than $100 billion in market cap since May 1st. With Chinese manufacturers offering phones in China for $200-$300 and the government trying to talk citizens out of buying anything from an American company, the outlook for Apple is rough. They receive 17% of their revenue from China and sales in China have been declining even before this latest hit from nationalism. The tariffs are also a factor and are reducing profits per phone by an average of $160. This is going to be a rough quarter for smartphone sales.
Morgan Stanley downgraded Constellation Brands (STZ) after a 36% rebound from the January 9th low. The analyst also warned that beer sales are slowing and Constellation will have some tough comps from 2018. They still like the company but worry that the weak forecast for beer sales in general will drag shares lower. They are not factoring in the impact from the Canopy Growth investment because nobody knows what sales of THC infused beverages will bring. They are expected to be available for sale in Q4. Constellation is also preparing CBD infused beverages. I personally believe shares will be a lot higher by the end of 2021 as all these products become hot sellers.
Qualcomm (QCOM) shares were punished again when US District Court Judge Lucy Koh ruled erroneously that Qualcomm was monopolistic and unfair in their patent strategies. Shares collapsed. It was the end of the world for Qualcomm, except that it wasn't. Only those who did not have an understanding of the problem were predicting gloom and doom.
First, the ruling was very shallow and no evidence was presented that any consumers were harmed. There was no weighing of potential harm against potential benefits, like having a phone at all since Qualcomm's patents make the phones possible. There was no economic analysis at all. Lawyers claim those two points make the ruling very likely to be voided on appeal.
Lastly, this only involved the Standard Essential Patents (SEPs) and does not apply to the non-standard essential patents or NSEPs. These are the vast majority of Qualcomm's patents. The SEPs only account for about $7.50-$13.00 on a smart phone. Even if the verdict stood the financial impact to Qualcomm would be minimal since they will still be able to collect a reduced price on the SEPs after renegotiation.
Last month Apple testified that this technology was needed, Qualcomm had the best technology in these areas and that the SEP licensing was mutually beneficial and the licensing model was entirely legal.
Qualcomm is going to request a stay to halt the process from moving forward while they request an expedited appeal, which they will most likely win. Under the most favorable circumstances the appeal is not likely to be decided within 18 months. Since Qualcomm's 5G technology is going to be even more in demand with the ousting of Huawei, we could even see the White House get involved to limit any negative consequences for Qualcomm.
This dip should be buyable since there is no financial impact for at least two years, and it could all be erased. Wait for a base to form and then begin building a position.
Piper Jaffray said based on "conservative growth and valuation assumptions" Amazon (AMZN) could be worth $3,000 a share in 24-36 months. This would be a $1.5 trillion market cap. The analyst said their confidence in the projection was 65% or higher. Using a sum of the parts analysis and factoring in decelerating growth from every major category of Amazon's business we have a "high degree of confidence that shares can reach this level without any major acquisition or significant changes to the business model. They said a potential spinoff of AWS would highlight the undervaluation of all other Amazon businesses. They also pointed out that AWS and advertising revenues were growing well above the rates for the sector in general. Their 12-month price target is $2,225.
Novartis (NVS) received FDA approval for Zolgensma, a one-time gene therapy treatment for spinal muscular atrophy. This is the leading genetic cause of infant mortality and affects 1 in every 11,000 births.
Here is the catch. The drug costs $2.1 million for the one-time dosing. Don't have $2.1 million or your insurance is balking on payment, no problem. Novartis will let you make payments at $425,000 a year for five years. The company rationalized this price by saying this is only 50% of the 10-year cost of the current chronic management of this disease. This makes this the most expensive drug ever.
Biogen has a similar treatment for the same disease that costs $750,000 for the first year and $375,000 annually thereafter. Be very thankful your children did not have this disease.
Shares rose $3 on the news they were in talks with 15 insurance companies on payment options.
Gasoline prices rose 67 cents between New Year's day and the peak on May 4th. This was the second biggest seasonal rise on record. Typically the peak occurs around Memorial Day but the recent volatility in crude prices allowed gasoline prices to decline about 20 cents from the peak. The average is still about $2.80 with California drivers paying more than $4. Despite the rise in prices more than 43 million Americans are expected to travel this weekend. Nearly 75% of Americans are planning a road trip this summer according to GasBuddy.com.
Oil prices did not rise that high this year and the spike in gasoline prices came from an unusually large number of refinery outages. Now that those refiners are coming back online, the price of fuel is falling.
Crude prices crashed for the week on the increasing fears that the trade war will weaken demand. China was also threatening to buy less oil and LNG from the US and that impacted prices.
There is currently 3.3 million bpd of production outages around the world, but Saudi Arabia has promised to keep the market well supplied. Even with the Iranian military threat and the bombing of four tankers in the Persian Gulf, prices declined on the Saudi promise and demand concerns.
Active rigs declined by -4 as oil prices weakened. The energy sector as evidenced by the Energy Select SPDR (XLE) is in a bear market with a 22% decline from its October highs. There is too much oil sloshing around in the global system despite the current outages. If demand does decline, we could see some surprisingly low prices for crude. The summer driving season begins this weekend, but oil prices are not reacting.
Crude inventories are actually rising in the US and this is unheard of for this time of year.
The Dow posted its fifth consecutive week of losses and the longest streak since 2011. That is the headline on the financial news this weekend and it is not likely to stimulate investors to come back into the market. The five weeks of declines as we entered the "sell in May and go away" period more than likely convinced investors this was a good year to follow the trend and move to cash ahead of summer vacations. The second half of that saying is "come back again after Labor Day." Very few investors want to be at risk in the market while they are on a cruise or at the beach with their family. It is much safer to park your cash in a fund or long-term stock positions where you can withstand a little volatility. Trading comes to a screeching halt over the summer months. Volume on Friday was barely over 5 billion shares.
The market is beginning to understand that this is no longer just a trade war with China. It is a new cold war. China's stated goal is to dominate the world in technology, trade and military might over the next two decades. President Trump understands this threat and is trying to slow them down under the guise of a trade war. If it was just trade, he could have easily convinced China to buy billions more in energy and agricultural products and this fight would have been over months ago. Along with that goal, Trump also wanted to end theft of intellectual property and forced technology transfers. Instead of stealing technology from the US and others, they would have to create it themselves.
This is not new. When the Space Shuttle was flying China stole the blueprints and began to construct their own shuttle. The US discovered the plan to copy the US shuttle and they created fake blueprints and allowed them to also be hacked. Those fake plans had subtle design flaws that would prevent the shuttle from working. China did not discover the flaws until they had constructed their first prototype after ten years of work. When it was discovered they were too far down the path and the US was already abandoning the shuttle program so China killed their program as well.
China has working prototypes of the F-22 Raptor and the F-35 fighter developed from blueprints stolen in cyber attacks against American contractors. Do we have the plans for their new hypersonic carrier killer missiles? I doubt it. Those same US defense contractors report thousands of attempted hacks every day from the massive teams of Chinese hackers. It has been reported that China employs more than 20,000 hackers in buildings where there are thousands employed around the clock seven days per week. If we continue to let China steal our intellectual property by any means it will only fuel their rise to be the dominant global power.
When China realized Trump was not going to back down no matter what, they stiffened their resolve because their way of life was at stake. This is not a trade war. This is a new cold war and it is likely to become significantly worse before it gets better. You will not hear it in the mainstream press, but other countries are expressing support for the president's efforts because China is stealing from them as well.
China plays the long game. They do not fret over what happens over a couple months or even a couple years. They have thousands of years of history and are approaching 100 years of communist rule. They do not have to worry about political opinions and with severe controls on social media and search engines, their people do not know there is a better life. President Xi can continue to stonewall the trade war until a new president replaces Trump even if it is six years from now and Xi can start the process all over in hopes of a better outcome. Timing is relative only to the US.
As investors slowly become aware of the deepening crisis, they will lose even more interest in the market. The S&P has already produced an almost perfect rebound from the initial dip and then a failure of that rebound. If the support at the 2,800 level is broken it would likely trigger an entirely new leg lower with 2,632 as the potential target. I know that is a scary thought, but the market does not care what we believe. A break below 2,800 would produce strong technical selling. Another break below the 200-day at 2,776 could enter free fall until 2,632. I would caution being overly long until the S&P moves back over 2,900 and erases the initial rebound failure.
The Dow is holding over the 100-day average but only barely. This could be just coincidence since the Dow rarely pays attention to averages given its thin 30 stock composition and price weighted swings. The 200-day at 25,433 is also in play but it is almost never respected. The Dow has tested the 25,200-support level multiple times and a breakdown there could target 24,000. Boeing was a big contributor on Friday, but it could just as easily erase 30 points on any given day. Friday was a short squeeze day ahead of a holiday weekend. Shares gapped up at the open and moved sideways the rest of the day on low volume. Friday's action should be ignored.
Both Nasdaq indexes closed right on critical support and right on the edge of a material decline. This pattern is bearish where a 50% rebound failed and the index quickly returns to support. Typically, support fails under those conditions. The Nasdaq Composite posted a minor 8-point gain but the big cap Nasdaq 100 Index posted a 7-point loss. The Nasdaq A/D line was 2:1 positive but the big cap stocks were mostly negative. Apple and Google have been major drags on the Nasdaq. Tesla has also been a negative drag along with the chip sector.
The small cap Russell 2000 is also at critical support and that was after a 12-point gain on Friday. This could be the calm before the storm. Small caps normally lead the market and they are right on the edge of a cliff. Would you buy this chart?
I would love to tell you that good times are just ahead. Unfortunately, I have nothing to justify a statement like that. There is a far better chance that the market will continue to move lower. I am not predicting a crash but just a continuation of the current trend. We are always just one tweet away from a monster rally or a major decline. With all the negativity coming out of China, it is highly unlikely there will be a quick resolution. The president may try to tweet his way to a solution in order to prop up the market, but I don't see the US making any major concessions to bring China back to the bargaining table. That coupled with the new Iranian tensions and rapidly slowing economics, suggests a further market decline.
Enter passively and exit aggressively!
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