An Inexplicable Force

Podcast: Play in new window | Play in new window (Duration: 13:16 — 6.1MB)

DOW – 13 = 17,217
SPX – 2 = 2030
NAS – 24 = 4880
10 YR YLD + .04 = 2.07%
OIL – .34 =45.56
GOLD + 5.20 = 1176.80
SILV + .07 = 16.00

Housing starts rose in September as builders ramped up construction of apartments. Construction of new homes increased 6.5% to a seasonally adjusted annual pace of 1.21 million units in September. After two months of declines, the gain in September brings starts back to just below June’s level, which was an eight-year high. In September, starts for single-family homes, which accounts for the largest share of the market, rose 0.3% to a 740,000 unit pace.

Earnings reports will likely be a big driver for stocks this week. IBM shares dropped 5.5% after announcing revenues that missed even the most pessimistic expectations and issuing weaker-than-expected guidance for the year.

Verizon (VZ) posted better than expected earnings and revenue, in large part due to the release of the new Apple (AAPL) iPhone 6S and 6S Plus in September. The company net added 1.3 million wireless retail postpaid subscribers in the quarter compared with 1.1 million in the second quarter. Net income rose to just over $4 billion, or 99 cents per share on revenue of just over $33 billion.

United Technologies (UTX) reported a drop in third-quarter profit that still beat analyst expectations, and its chief executive said the industrial manufacturer would announce a significant restructuring before the end of the year; including plans to buy back $12 billion of its stock. That seems to be a common M.O.; when profits drop buy back your own stock.

Lockheed topped third quarter profit estimates on increased sales of F-35 jets. Lockheed (LMT) is developing and building F-35 jets for the U.S. military and nine other countries. With estimated development and procurement costs of $391 billion for the United States alone, the F-35 is the world’s most expensive weapons program.

After the closing bell, Yahoo reported an 8% drop in adjusted quarterly revenue. Net third quarter profit was $76 million, or 8 cents per share, compared with a profit of $6.7 billion, or $6.70 per share, a year earlier; a year ago Yahoo (YHOO) sold part of Alibaba (BABA) for $6.3 billion.

Also, after the bell, Chipotle (CMG) reported earnings of $144 million, or $4.59 a share, up from $130 million, or $4.15 a share, a year earlier. Revenue grew by 12%, but same store sales grew by just 2.6%; not the meteoric 19.8% of a year ago.

Sandwich chain Subway will start serving antibiotic-free chicken and turkey at its U.S. restaurants next year, and within the next nine years will stop selling any meat from animals given antibiotics. That sounds like a long time to wait, but Subway says the supply of beef raised without antibiotics in the U.S. is extremely limited and cattle take significantly longer to raise.

On Wednesday, eBay (EBAY) will announce results for the first time since it spun-off PayPal (PYPL), and Thursday will see Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOG) release Q3 reports.

Back in August, the markets tanked and many traders made bets the market would fall even more – they shorted stocks. And even though the markets have bounced back, and the S&P 500 is enjoying a three week rally, the shorts are still short. JPMorgan Chase analysts compared the amount of stock that traders have borrowed – the first step in a short sale – with the total available at institutions to lend.

The level is almost 7%, near a three-year high. Separate data compiled by Markit tells the same story: short interest is about 3% of all shares outstanding, roughly the same as at the bottom of the August selloff. That tells us that the recent rally has not been fueled by short covering. To bring short interest back to levels before August, short-sellers would have to buy back about $90 billion of shares.

The European Central Bank’s governing council is scheduled to convene its regular monetary policy meeting in Malta later this week, but analysts are already discussing the chances of more economic stimulus. Grounds for extending QE would include inflation worries, slowing growth in China and stock market instability. On the flip slide, oil prices remain low, which is a boost for energy-importing Eurozone countries, and confidence indicators remain surprisingly solid. The ECB’s current €1-trillion-euro bond-buying program is slated to end in one year.

Continuing his recent world tour, China’s President Xi Jinping touched down in London last night, marking the leader’s first ever state visit to the U.K. Ministers expect more than $50 billion of trade and investment deals to be struck during Xi’s four-day stay, including a new nuclear pact between the two nations. The trip has been hailed by officials from both countries as the start of a “golden era” of relations.

Yum! Brands (YUM), the owner of KFC, Pizza Hut and Taco Bell, is preparing to separate its Chinese and U.S. businesses in a major restructuring of the $31B fast-food group. The move follows calls from activist investor Keith Meister, who has suggested Yum could boost its worth by $16/share by exiting China (an increase of about $7 billion in market value). Plans to break up the company are advanced and could be announced before the end of the month.

Winning over 40% of the popular vote, Justin Trudeau’s Liberal party sealed a victory in Canada’s general election on Monday, ousting Conservative Prime Minister Stephen Harper after almost a decade in power. This was an interesting election. While his opponents pledged balanced budgets, Trudeau promised three years of deficits to more than double infrastructure spending. He also vowed to raise taxes on Canada’s “wealthiest one per cent so that taxes for middle class families could be lowered.

Trudeau’s party also vowed to end Canada’s combat mission in Iraq and Syria, but the Liberals also pledged to accept more Syrian refugees. Another change is the call to legalize, regulate and tax marijuana. Ultimately, the tipping point in the election was likely a pledge of free Tim Horton’s for everyone.

The White House announced that 81 firms had committed to the American Business Act on Climate Pledge. The effort is part of the buildup to the United Nations climate negotiations at the end of this year, when world leaders hope to reach an international agreement on curbing planet-warming emissions. Negotiators are meeting in Germany this week to finalize a draft of the agreement ahead of the big meeting in Paris.

Richard Branson, founder of Virgin Group, has posted a leaked document on his blog; a policy document advocating for the decriminalization of drugs around the world, drafted by the United Nations Office on Drugs and Crime. The BBC then posted the document. The document calls to decriminalize drug use and possession for personal use. It lists drug-related deaths, discrimination, social exclusion, violence, and incarceration as some of the negative effects of treating personal drug use as a criminal offense. The UN said the briefing paper cannot be considered final or formalized, and is still under review.

Speaking at a technology conference, Apple CEO Tim Cook finally gave some statistics surrounding the company’s streaming music service, stating it had 15 million users, including 6.5 million paying subscribers. If you tried the free-teaser version of Apple music and then decided to pay for a subscription, you are probably old, or at least not real young, or at least over age 35; younger people aren’t paying.

Other announcements: Apple plans to have 40 stores in China by the middle of 2016 and expects to start shipping the new Apple TV next week. No word on an Apple car. Cook said that the automotive industry is at the precipice of “massive change”, though he stopped short of saying whether the world’s most valuable company would play a role in that transformation.

We do have word on Tesla (TSLA). When Consumer Reports reviewed the Tesla Model S, they gave it very high marks, a perfect score of 100. Now, they have gone back and surveyed Tesla owners about how the car is holding up; the results are not so good. The main problem areas involved the drivetrain, power equipment, charging equipment, giant iPad-like center console, and body and sunroof squeaks, rattles, and leaks; all items covered under warranty, but still.

U.S. regulators could expand their investigation into Takata air bag inflators beyond 11 automakers, as questions arise whether vehicle design played a role in the defective devices. On Thursday, the NHTSA also expects to make a case that it should coordinate the Takata recall to ensure that an estimated 23 million inflators installed in 19 million U.S. vehicles are properly replaced.

In a special stockholders meeting held yesterday, more than 99% of Humana (HUM) shareholders voted in favor of a $37 billion merger with Aetna (AET), and both companies still expect the acquisition to close in the second half of 2016. The deal is part of an industry-wide consolidation.

“Star Wars” fans were given the longest look yet at the upcoming “The Force Awakens” film. The two-and-a-half minute trailer, which debuted during halftime of ESPN’s National Football League game, quickly attracted more than 17,000 tweets per minute. It was viewed on YouTube more than 220,000 times within the first 20 minutes. Tickets for the film’s U.S. release on Dec. 18 went on pre-sale at the same time as the trailer, with U.S. ticket seller Fandango crashing temporarily.