JNJ Bids $8.9 Billion to Avoid Lawsuits

Tuesday started off flat in all three major indices.  However, by 10 am, the bears had stepped in to sell off the whole market until 12:15 pm.  At that point, we saw a sideways grind in a tight range near the lows in the SPY, DIA, and QQQ.  This grind lasted the rest of the day.  This action is giving us a Bearish Engulfing signal in the SPY (with a lower wick), a Bearish Harami in the DIA (again with a lower wick), and a black candle that qualifies as both a Bearish Dark Cloud Cover and an Indecisive Spinning Top in the QQQ.  One additional piece of info is that the small-cap IWM printed a big, ugly Evening Star candle that crossed below its T-line (8ema).   This all happened on far less-than-average volume in all three major indices, but the IWM had slightly greater-than-average volume.

On the day, seven of the 10 sectors were in the red with Industrials (-2.18%) leading the way lower while Communications Service (+0.37%) and Utilities (+0.33%) held up better than the other sectors.  At the same time, the SPY lost 0.55%, DIA lost 0.58%, and QQQ lost 0.34%.  VXX gained 1.73% to 44.67 and T2122 fell out of overbought territory to 64.79.  10-year bond yields fell again to 3.342% while Oil (WTI) was flat at $80.53 per barrel.  So, Tuesday there was a little bit for both camps.  We came into the day overextended to the upside. That means bulls would be perfectly justified if they characterized the day as a pause or consolidation of an uptrend.  On the other hand, bears could also legitimately say it looks like the uptrend has lost steam and we could be at the start of a bearish reversal. 

In economic news Tuesday, February Factory Orders came in below expectations at -0.7% (compared to the -0.5% forecasted but still much better than the -2.1% reading in January).  Meanwhile, February JOLTs Job Openings came in better than expected at 9.931 million, which was the lowest level in two years, (versus the 10.400 million forecast and the January value of 10.563 million openings).  Both of those will be seen as good news by the Fed as factory activity is slowing and there are notably fewer open jobs (so, less wage inflation pressure).  Then, after the close, the API Weekly Crude Stocks Report showed a much bigger drawdown than expected at -4.346 million barrels (as compared to a forecast of -1.800 million barrels but still not as much as the prior week’s surprise drawdown of 6.076 million barrels).

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In stock news, F reported a 10.7% increase in sales in Q1, selling 456,972 vehicles compared to 432,132 in Q1 of 2022.  Of note is the fact that 95% of those Q1-2023 sales came from trucks and SUVs.  Electric vehicle sales increased 41% year-over-year to 10,866 in the quarter.  The company also announced adding a shift at their Kansas City plant and increasing production across the country to support strong demand.  Meanwhile, F rival GM announced that about 5,000 salaried workers have taken buyouts which the company says puts them “well on their way” toward meeting a goal of cutting $2 billion in costs by the end of 2024.  (The company CFO said the buyouts will contribute approximately $1 billion in savings.  He also said GM will take a $1 billion charge in Q1 related to these contract buyouts.)  Elsewhere, the US Army has awarded LMT a multi-year production contract for JAGM and Hellfire missiles that could run up to $4.5 billion (initial value $439 million in year one).  At the same time, WMT announced that 65% of its stores will be serviced by automation by the end of fiscal 2026. (Meaning the distribution centers will be automated, eliminating warehouse workers.)  The announcement also disclosed that the WMT will lay off more than 2,000 people at online order fulfillment centers related to this automation.  Finally, after the close, TTE announced it has gotten a new (sweeter) deal from Iraq related to its $27 billion project to create 4 natural gas, oil, and renewables projects in the country.  In the new deal, Iraq will take only a 30% ownership stake in the projects, compared to the original deal that gave Iraq 40% ownership in the projects.

In stock legal and regulatory news, the NHTSA announced a recall of 143,000 VLKPY (Volkswagen) 2018-2021 vehicles related to front passenger seat airbag systems.  At the same time, a US Appeals Court has rejected a bid from AAPL, which was seeking to override its rejection for a trademark on “Apple Music.”  (A jazz musician had been using the “Apple Music” term to brand his music in advertising since 1985.)  Later in the day Tuesday, TPG agreed to buy a majority stake in the “Elite” software business of TRI for $500 million.  Elsewhere, Reuters reported JNJ has refiled for bankruptcy of its talc subsidiary (created solely to limit JNJ liability from 40,000 lawsuits claiming the company’s tac powder contained cancer-causing agents).  While JNJ had initially filed for bankruptcy and offered $2 billion to settle all lawsuits, the new filing is offering $8.9 billion (paid over 25 years) to resolve all current and future claims (there are more than 60,000 current claimants).  Meanwhile, ABUS filed a patent infringement lawsuit against PFE and NNTX related to the latter pair’s COVID-19 mRNA vaccine.  Later, a Reuters report says that a 3-judge panel of the 7th Circuit of the US Court of Appeals appears very skeptical of MMM’s attempt to do the same thing JNJ did above (move liability to a new subsidiary and then file bankruptcy for the subsidiary to avoid liability from lawsuits by the parent corporation.  A bankruptcy judge had ordered lawsuits to continue against MMM even though the subsidiary (Aearo Technologies) is bankrupt.  The suits are related to alleged defective military-issue earplugs that caused deafness.

In mortgage news, rates fell last week but demand for home loans dropped anyway.  Analysts say a lack of home listings are outweighing lower rates as home buyers are not satisfied with the offering available.  The average 30-year fixed-rate, conforming (20% down) loan rate was 6.40% (down from 6.45%) with origination points also falling from 0.62 to 0.59.  Nonetheless, home purchase mortgage applications fell 4% week-on-week while refinance applications fell 5% on the week.  The National Realtors Assn. says the main issue facing that market is a 20% drop in new listings and total “for sale” inventory (houses) less than half of what was on the market at this time in 2019.  So, it appears Americans are staying put longer and not refinancing to do renovations.

Overnight, Asian markets were mixed but leaned (at least in broadness) to the upside.  Japan (-1.68%), Thailand (-1.44%), and Hong Kong (-0.66%) paced the losses.  At the same time, India (+0.91%), South Korea (+0.59%), and Shanghai (+0.49%) led the gainers.  In Europe, we see the opposite picture taking shape at midday.  The more plentiful red side of the market is led by CAC (-0.13%) and DAX (-0.20%), with eight smaller exchanges moving (some moving more) to the downside.  Meanwhile, the FTSE (+0.44%) leads the gainers, with four smaller exchanges moving up less at least in early afternoon trade.  In the US, as of 7:30 am, Futures are pointing toward a start to the day just on the red side of flat.  The DIA implies a -0.08% open, the SPY is implying a -0.12% open, and the QQQ implies a -0.13% open at this hour.  10-year bond yields are up a touch to 3.357% and Oil (WTI) is down four-tenths of a percent to $80.35/barrel in early trading.

The major economic news events scheduled for Wednesday include the ADP March Nonfarm Employment Change (8:15 am), Feb. Imports/Exports and Feb. Trade Balance (both at 8:30 am), March Service PMI and S&P March Global Composite PMI (both at 9:45 am), March ISM Non-Mfg. PMI (10 am), and EIA Weekly Crude Oil Inventories (10:30 am).  The major earnings reports scheduled for the day include CAG and SCHN before the opening bell.  There are no earnings reports scheduled after the close.

In economic news later this week, Thursday, we get Weekly Initial Jobless Claims and Bank Reserve Balances with Federal Reserve Bank.  Finally, on Friday, US markets are closed but March Avg. Hourly Earnings, March Nonfarm Payrolls, March Participation Rate, March Private Nonfarm Payrolls, and the March Unemployment Rate are reported.

In terms of earnings, on Thursday, LW, STZ, RPM, and LEVI report.  There are no reports scheduled for Friday..

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So far this morning, CAG has reported a beat on both the revenue and earnings lines.  The earnings beat was almost a 20% upside surprise versus the average analyst forecast.  CAG also raised its forward guidance.  (SCHN reports at 8 am.)

With that background, at least in the premarket, it looks like the consolidation continues. It could be that with March Payrolls data coming when the market is closed Friday that traders don’t want to get too far in front of their skis. Today’s ADP Payrolls number may give some of them the courage to change that stance. All-in-all, the bulls could not have hoped for a much better start (consolidation) to April after the surge the three-day surge that ended March. Overextension is not an issue now, either in terms of T-line (8ema) or the T2122 indicator. Stay cautious, but the trend is clearly bullish in all three major indices.

As always, be deliberate and disciplined…but don’t be stubborn. If you have a loss, admit you were wrong and take that loss before it gets out of hand. And when the price does move in your direction, always move your stops in your favor and take a little profit off the table. You have to keep the “Legend of the man in the green bathrobe” in mind. In a winning situation, it is NOT HOUSE MONEY you’re betting, it’s YOUR MONEY! There is absolutely no reason to keep raising your bet (risk) size just because you’ve had a win. Finally, remember that trading is not a hobby. It’s a job. The money is real and so is the risk. So, treat it that way. Do the work and follow the process. Stick to your trading rules, trade with the trend, and take those profits when you have them. Do the work!

See you in the trading room.


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