Investors need to make up their minds. Earnings either matter or they don't. Which is it?

Market Statistics

This has been a rocky earnings cycle for investors. Companies beating estimates are getting crushed and some missing estimates are in rally mode. Earnings have come in much better than expected with 240 S&P companies already reported. Early in the cycle the earnings growth estimates had slid to -1.1% with only 55% of companies beating estimates.

As of Friday 68% of S&P companies have now beaten earnings estimates. A small 11% met estimates and 21% have missed estimates. Earnings growth estimates have rebounded to +0.7% and while miniscule at least it is growth. So far only 55% have beaten on revenue estimates.

The challenge for the market is the quality of those earnings. Nearly everyone had warned the polar vortex had impacted sales and currency fluctuations were creating havoc for international companies. The events in Venezuela, Argentina, Russia, Europe, China, etc were causing significant swings in currency values and impacting the outlook for Q2 as well. Companies are beating estimates BUT these were dramatically lowered estimates.

A second challenge was earnings misses by high profile companies prominent in the major indexes. Dow component Visa (V) missed on earnings and warned on Q2 and the stock dropped -$10.50 and accounted for roughly -85 Dow points on Friday. Amazon hit their numbers but warned of a potential loss for Q2 and the stock dropped -$33 and accounted for a substantial amount of the Nasdaq's Friday loss of -73 points.

It is not that the overall earnings are so bad and there were a couple of valid excuses. The impact to the market came mostly from those high profile companies.

On Friday half of the market decline was fear of Russia. Events were heating up in the Ukraine and it appears Putin will eventually invade despite the agreement signed just a week ago. Putin, President Obama and the G7 were firing headlines at each other with the G7 promising to pass even more stringent sanctions if Russia continues to ratchet up the tensions in Ukraine.

Ukraine is not a big deal economically. It is a big deal psychologically. If the G7 can't force Putin to back down after weeks of warnings then there is nothing to stop Putin from repeating this scenario of inserting undercover operatives, agitating for change, causing the host country to respond with violence and then Russia invades to protect Russian speaking citizens. Any border country with Russia will be at risk. Putin has shown he has no fear of reprisals by his actions in Georgia, Crimea and now Ukraine.

The U.S. can't stop him. We only do $40 billion a year in trade with Russia. The EU does $400 billion and they are against any serious sanctions. Their economies are too weak and they can't afford to bite the hand that feeds them. Putin is now threatening sanctions in retaliation against the U.S. and EU if they level more sanctions against Russia.

So far the U.S. and EU have placed sanctions on banking and travel against 55 prominent Russians. On Friday the G7 nations said they were preparing to add another 15 Russians to the list. I am sure Putin is laughing at this limited response to his military adventures.

So far Putin has not complained about the hashtag attack launched by Jen Psaki, a State Dept speaker shown below, who lobbied this week for the hashtag #UnitedForUkraine. I am sure support is building all over Europe for this new weapon of war. Ukrainians are probably rushing to arms to fight under their new hashtag banner. The Russian Ministry of Foreign Affairs has actually been posting some messages to that hastag stream to push their own talking points. Oops! I guess President Obama is following the policy of "Speak softly and carrying a big hashtag."


One thing the U.S. and EU could do is remove Russia from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network. SWIFT links 9,000 financial institutions in 209 countries and territories exchanging 15 million messages a day regarding financial transactions. While SWIFT does not facilitate funds transfers it does send payment orders, which must be settled between financial institutions. Removing Russia from SWIFT would cause a significant hardship for Russian financial institutions and slow money transfers to a crawl. SWIFT is a "cooperative society" under Belgian law and it is owned by the financial institution members. When IRAN was removed from the SWIFT network it had to resort to bartering to get around the financial imposition.

If the G7 nations were to block Russia from the global financial network it would cause significant immediate pain. Unfortunately the U.S. and EU don't have the backbone to do it. Europe is afraid Russia will cut off their oil and gas supplies and strangle their economy by doing so. The U.S. won't impose meaningful sanctions without the support of Europe. The G7 nations don't like what is happening but without a backbone they are powerless to stop it. The Russian invasion of the Ukraine is almost guaranteed and much of the market decline on Friday was a reaction to the increase in the headlines.

Once the Ukraine invasion if over, much like Crimea, the headlines will fade and everyone will go back to business as usual until Putin moves his troops to the border of some other country. Until the invasion is over the market will continue to react to the headlines as though there was a major impact to the U.S. economy. There is virtually no economic impact to the U.S. from the Ukraine returning to Russian rule. A Russian invasion of Ukraine probably has less impact to the U.S. economy than a tornado in Kansas. Most American investors don't understand the potential impact and they were fleeing the headline risk over the weekend.

There was only one economic report on Friday and it was ignored. The final revision of the April Consumer Sentiment rose from the initial reading of 82.6 to 84.1 and the highest level since July. This was a material change from the 80.0 reading in March. The present conditions component rose from 95.7 to 98.7 and the expectations component rose from 70.0 to 74.7.

The jump in sentiment is bullish for the economic outlook since bullish consumers spend more money. This suggests hiring is improving and retail sales will rise into summer. Fluctuations in the equity markets appear to have had limited impact on the outlook of consumers.


The calendar for next week is littered with economic potholes. This is the week for the payroll reports starting with the ADP Employment on Wednesday and ending with the Nonfarm Payrolls on Friday. The ADP estimate is for about the same as last month with only a small increase from 191,000 to 200,000. The Nonfarm Payroll forecast jumped from the 192,000 jobs in March to an estimate of 210,000 for April.

Also of importance is the first look at the Q1-GDP with the consensus at +1.3% growth, up from +2.63% in Q4. However, on Friday UBS lowered their forecast to only +0.5% growth. This number could really upset the market even though the polar vortex will get all the blame.

The FOMC meeting on Tue/Wed will culminate in the announcement at 2:PM on Wednesday. There is no press conference this month. The Fed is expected to continue on its present course and announce another $10 billion cut in QE with a likely end to QE announced at the October meeting. Janet Yellen has made it perfectly clear the Fed is on a steady course on QE and there will not be any rate increases for a very long time. This removes a lot of the drama from the meeting announcements but they always seem to create volatility in the markets.

The ISM manufacturing on Thursday is a national number and will show the health of the manufacturing sector for April. Analysts are looking for a 0.5 point gain to 54.2. With the volatility in the regional reports that may be wishful thinking but then the weather has abated and the sector should be improving.


Amazon (AMZN) continued spending like it was 1999 in the effort to be all things to all people and make every person in the world a customer. For the last 17 years since Amazon has been a public company the plan has been the same. The heck with earnings we are going to grow this thing to the point where all the competition disappears. Amazon is on track to sell half a trillion dollars a year by 2020. They are growing revenue by about 20% a year and investing all their profits. Over the past decade they have only reported profits of about $5 billion because all excess cash is invested in making Amazon bigger and more efficient. Once they get to that $500 billion level they can add 2-3 cents to everything they sell and the profits will come rolling in. At least that is what Amazon investors are expecting.

In the first quarter Amazon reported revenue of nearly $20 billion (+23%) while profits fell -19% to $146 million. However, they recently announced the Fire TV set top box (got mine) as they proceed to destroy Netflix. Earlier in the week they announced a deal with HBO to stream HBO content to the Fire TV and much of it was exclusive, which means it will disappear from their competitor's offerings. Numerous analysts have discussed the potential for Amazon to acquire Netflix once they force the stock price much lower through expanded competition.

Rumors claim Amazon will also announce an Android phone later this year. Multiple people claim they have been shown the models and it will be announced in late Q3. If it follows the Amazon model the phone will be free or nearly free and put the squeeze on the rest of the sector.

Pushing Amazon stock lower on Friday was the profit warning for Q2. Amazon said it could lose up to $450 million in the quarter as a result of continued expansion costs and new product development. Should investors be worried? I think there are no worries long term but short term we could see further declines. Amazon shares fell -10% on Friday to $303. That is down from its high of $408 in January. However, it was not the biggest decline of the year. Amazon fell -11% after the Q4 earnings for the same reason. Minor profits, big jump in revenue, more investment into infrastructure and new product development. Once it declines to the $250-$260 level the buyers should appear. I think Amazon front loaded their expenses into Q1 and the metrics will look better later in the year. Jeff Bezos can't afford for his stock to fall too far. He will need it for future acquisitions.


Dow component Visa (V) reported adjusted earnings of $2.20 that beat street estimates for $2.18. However, the stock declined -4%, the biggest drop since July, after they warned revenue growth was going to slow to 10-11%, down from 10-13% as a result of the sanctions on Russia. The CFO said the sanctions would trim earnings by several pennies per share. The sanctions on some Russian banks caused Visa to stop processing charges for several Russian banks owned by investors that had been sanctioned. Putin said Russia would create its own payment system or change the laws and MC/V would lose market share permanently. On Friday the Russian parliament voted to change the nation's laws and create its own payments system.

MasterCard also issued cautious comments on Friday after parliament voted. MasterCard reports earnings next week.


Starbucks (SBUX) reported earnings of 56 cents that met estimates but revenue fell short of estimates at $3.87 billion vs $3.95 billion. They raised their full year guidance a penny to $2.68 compared to street estimates at $2.66. However, CEO Howard Schultz was very bullish. They are moving ahead with serving alcohol in a broader number or stores and they are expanding their food line. Schultz said the alcohol "test was over" and it was so successful they were expanding it nationwide.

Same store sales rose +6% overall and +5% in the USA. Given the disruptions caused by the polar vortex those are good numbers and would have been higher without the storms keeping people off the streets.

By adding different types of food items and adding alcohol they are stretching the hours for store traffic. They are moving from primarily a morning traffic pattern to capture the lunch crowd and the after work crowd for a beer or glass of wine with a happy hour snack. More than 10 million customers have downloaded their mobile application and the technology is so robust other companies and national retailers have asked to license it. They are currently processing over 5 million transactions a week through the app. The app combines a loyalty card into a mobile wallet allowing customers to pay with their phones and earn rewards.

Even though coffee prices have surged to a 26 month high with additional double digit increases possible Starbucks has already bought all their coffee for 2014 in early 2015. More than 40% of 2015 requirements have already been purchased. Starbucks remains hedged against further increases. Milk is actually a bigger risk because Starbucks can't hedge for more than 3-6 months into the future and milk prices are at an all time high already as a result of droughts. I thought it was a good report and shares did not decline in a bad market.


Next week is the last major week for earnings. The number and quality of companies reporting after this week will decline dramatically. The number of major companies fell off sharply this week with all the big headliners like INTC, AAPL, FB, GOOG and others already reported. This is the week for the major oil companies and a few of the smaller builders. What we have left is a smattering of various sectors and a lot of symbols most readers have never heard of before.


Please put us in the Dow! That is the implied plea by Apple's board after they declared the 7:1 stock split. Currently they are too expensive to be a Dow stock because the big movements in Apple shares would cause extreme volatility in the price weighted Dow. By cutting their share price post split to $80 it is a plea to join the Dow 30.

Apple is grasping at straws to boost its share price after topping out at $700 back in 2012. Apple is being penalized by only releasing a couple upgrades to existing devices a year. New products rumors continue to evaporate and the company is losing market share to Android. iPad sales are slowing and missed estimates with Android rapidly gaining in the tablet space. The Samsung phones are also gaining share and showing no signs of slowing.

Apple has to do something or they are going to end up like BlackBerry where only the Apple faithful are buying their products. Since most people don't upgrade their phone every year Apple can only count on repeat sales every 2-3 years and they are suffering because of it.

If Apple can get into the Dow it will open up a new level of index buyers. Funds that track the Dow will have to own Apple and not trade it. There are not many of those funds compared to the S&P and Russell but they do exist plus the various ETFs. Will the Dow committee see through the Apple gambit or will they care?

Once the stock split occurs it will attract an entirely new set of investors that could not afford it before. Of course the volatility will diminish significantly going from 892 million shares outstanding to 6.25 billion. Think Microsoft type volatility with 8.3 billion shares or Intel with 5.0 billion. Moving to that many shares has a volatility price. The Apple move reeks of desperation to me.


Turn out the lights the party is over. That is the way I feel this weekend as I look at the charts in the context of the seasonality for this time of year and what normally happens over a midterm election summer. We can't always count on the seasonality and April is a prime example. April is one of the strongest months of the year for the stock market with a 2%-3% gain. However, the S&P is now down -9 points for the month with 1,872.53 as the breakeven point. The Dow is down -98 points with 16,458 the starting point. The Nasdaq started the month at 4,198 so it is down -123 points and not likely to finish the month with a gain.

The April decline, although not significant at the current levels, proves seasonality is fallible. The sell in May cycle was expected to be brutal this year for multiple reasons and it appears some investors got a head start in April.

The summer of a midterm election year is almost always negative with the lows set in September and October. Past performance is no guarantee of future results but I don't want to bet against this trend today.

The S&P came to a dead stop on resistance at 1,885 on Tuesday and again on Thursday before rolling over on fear of the weekend on Friday. While the resistance failure last week may have only been temporary it did produce a very negative chart pattern. ANY further decline is going to attract more sellers faster than flies to a picnic. The market is leaning bearish going into the sell in May period and it won't take much incentive to make that a self fulfilling prophecy.

Resistance is 1,885 and initial support is 1,850.


The Dow punched through 16,450 on Tuesday to hit 16,565 and the high for the week. It only lasted a few minutes and the rest of the week was a struggle. The Dow came within 15 points of the 16,580 resistance making it close enough for a triple top pattern. The Dow fell back into congestion at 16,350 and closed only 30 points above the low for the week. On the positive side the Dow only lost -47 points for the week and Friday was the worst day that erased all the gains. You could apply the Ukrainian tensions as the excuse for Friday but I think that excuse is getting about as old as the polar vortex excuse for earnings.

I am very worried the Dow is not going to recover although it may take another run at the highs before giving up the race. The 16,330 low from Friday will be starting support on Monday and ANY close below that level suggests we are headed back to 16,000 and probably lower.


The Nasdaq looks worse today than it did last weekend. The early week rebound rally began failing on Wednesday and by Friday it closed only 7 points above the lows for the week. The Nasdaq 100 ETF (QQQ) is showing a head and shoulders pattern and a solid downtrend line from the March highs. This is not a positive chart.


Using the same chart style for the Nasdaq Composite does not show the H&S as clearly but it does point out the same bearishness. The Nasdaq looks destined to retest 4,000 and a break there could easily decline to 3,575-3,700.

The magnitude of the losses on the top 25 graphic is very telling. Nearly all of the high dollar stocks are represented and with big declines. Apple is the only major big cap missing.



The Semiconductor Index ($SOX) appears to be peaking as well. A decline back below 560 would be bearish for the sector and for the Nasdaq. The index declined -3.3% on Friday but many individual chip stocks were off much more than that. KLAC -7%, TER -5% and ADI, BRCM, TXN all down more than -4%.


The Russell 2000 seems destined to retest the 1,096 level and more than likely head lower if that support is tested. The Russell posted another lower high and the fourth one since the high in early March. This is a bearish chart but we have seen sudden reversals in the past. Moving higher is possible although not probable.


On the bullish side the NYSE Composite chart is actually a ray of hope for the bulls. The index came to a dead stop at 10,600 last week but declined only slightly since Wednesday. Since the NYSE Index contains 2400+ companies it is not impacted by the movements of a select few. If the NYSE were to rebound only about 115 points it would be a new closing high. The bears have not found the NYSE honey pot yet so let's not waken them.

Support is 10,270 and resistance 10,600.


Based on the Dow, Nasdaq and Russell 2000 charts I am bearish for next week. There may be a month end bounce but I doubt it will stick. I hope I am wrong but look at the charts above and make your own decisions, it is your money.

Random Thoughts

You know the market has topped when retail investors go all in. TD Ameritrade (AMTD) and E*Trade Financial (ETFC) both reported large spikes in trading volume. TD Ameritrade said the number of trades jumped +30% to a record 492,000 trades per day. E*Trade said volume rose +33% to 198,000 and Charles Schwab (SCHW) saw a 13% increase to 337,300 per day. It appears retail traders are doing a little high frequency trading of their own.

Ameritrade said client cash as a percentage of total client assets fell to 14.8% and the LOWEST level since September 2007 just before the market crashed. Margin debt has reached new highs in Q2.

A Russian invasion into the Ukraine seems almost assured. Putin's "Doomsday Plane" a TU-214SR has been following Putin around as he moves around Russia. The Doomsday plane is a long range aircraft similar to the U.S. E-4B command and control aircraft and it is packed with cutting edge sensor and communications capability. If hostilities broke out Putin would want to be in or near this plane to direct his forces and have constant awareness of any potential attacks against him, Russia or Russian forces. With this plane he can monitor the Russian air force moves and attacks on those Russian planes. The plane was seen flying a racetrack pattern just outside the Baltics as NATO sent more forces to that region to prevent Putin from making another land grab. However, the number of Russian helicopters just across the Latvian border jumped from 30 to more than 100 in the space of a couple days. Putin warned that any military buildup in any border nation would be met with an equal buildup of Russian forces.

A Russian presidential adviser Sergei Glazyev proposed a plan of 15 measures to protect the country's economy if further sanctions were applied. Glazyev basically proposed a scorched earth program to retaliate against those countries enacting sanctions. A few are listed here:

  • Russia should withdraw all assets, accounts in dollars, euros from NATO countries to neutral ones.
  • Russia should start selling NATO member sovereign bonds before Russia’s foreign-currency accounts are frozen
  • Central bank should reduce dollar assets, sell sovereign bonds of countries that support sanctions.
  • Russia should limit commercial banks’ FX assets to prevent speculation on ruble, capital outflows.
  • Central bank should increase money supply so that state cos., banks may refinance foreign loans.
  • Russia should use national currencies in trade with customs Union members, other non-dollar, non-euro partners.

    Russia had to cancel a bond sale for the 7th time due to lack of buyers. At least $64 billion in foreign funds have fled the country since the Ukraine situation first began. The Russian central bank has spent more than $50 billion supporting the ruble. There is a cost to war and it is far from over. Some analysts are now predicting the Russian economy will fall into a deep economic depression that could last until 2020. They believe Putin needs a war to keep people focused on external enemies or they will come after him when they realize the economy is crashing.

    NATO countries have scrambled fighters multiple times last week to counter Russian flights converging on their airspace. Britain scrambled Typhoon fighter jets to force Russian Tupolev-95 Bear bombers away from Scotland's airspace. There were several other intrusions in other countries. NATO sent up fighters to push surveillance aircraft away from Dutch airspace on Thursday. Defense experts say Russia uses such flights to remind the world of its military might and to probe other countries defensive systems. Ukraine said they were seeing almost hourly violations of their airspace by Russian planes. Analysts believe Russia is trying to plot all the air defense radar locations so they can be neutralized in the early hours of a Russian invasion.

    Bear Bomber Picture Taken by Typhoon Fighters

    The Ukraine Prime Minister, Arseny Yatseniuk, said Russia wants to start World War III by occupying Ukraine "militarily and politically." "The world has not forgotten WW II but Russia already wants to start WW III. Attempts at military conflict in Ukraine will lead to a military conflict in Europe."

    Two Russian spy ships are operating just outside U.S. territorial waters on the East Coast, outside the Gulf of Mexico and near Cuba. The Viktor Leonov and Nikolay Chiker are currently in international waters according to the Pentagon and they have been cruising up and down the coast for a month. The Leonov is an intelligence gathering ship outfitted with high tech electronic spying gear. The Chiker is an ocean-going naval tug that has been accompanying the Leonov. It is not unusual for Russia to outfit seemingly routine ships like the tug with secret spy gear to spy unobtrusively. The Chiker is also equipped to support Russian submarines so there is likely a Russian submarine lurking offshore as well.

    The Pentagon said the ships had been spying on the U.S. nuclear missile submarine base at Kings Bay GA and other U.S. military bases. An official said the Russian ship may be watching the movements of U.S. nuclear missile subs to keep Russia notified on which are in port and which are leaving for duty stations.

    Sell in May? Historically the period from May 1st to November 1st sees the market decline about -4%. However, May 2013 was a very bullish month. Past performance, etc.

    If we only factor in the performance for midterm election years it goes from mildly negative to definitely bearish. The second chart from FBN Securities CMT JC O'Hara shows the historical performance for the summer in a midterm election year.

    Average Monthly Market Gains (Chart Zerohedge.com)

    JC O'Hara Historical Midterm Market Chart

    The Stock Trader's Almanac "Best Six Months" strategy created in 1986 proves there is validity to the sell in May cycle. Since 1950 a $10,000 investment in the Dow from November 1st to April 30th would now be worth $765,055. The same investment made from May 1st to October 31st would have resulted in a $593 loss. The same investment in the S&P compounded into $565,846 for November-April and only $6,981 for the May-October period. May has been positive only six times in the past 16 years but 3 of those up years had gains of more than 4%.

    QE is still declining and the markets are going to decline with it. Bianco Research did a study since the start of QE and found that the S&P has risen +117% during periods when QE was in effect and declined -27% when it ended. Most analysts believe QE will end at the October FOMC meeting. Expect a market decline into that meeting.

    Economic conditions are fading. Home sales have fallen off a cliff, declining -14.5% in March, as a result of higher mortgage rates, higher home prices, a shrinking number of distressed properties, tighter credit and the severe winter weather.

    Corporate earnings are shrinking despite the large number of stock buybacks. Revenue is expected to rise only +3% for Q1 and bottom line earnings are now back into positive territory for Q1 but just barely. Analysts are expecting a miraculous recovery for Q2 with earnings rising about +8%. That was roughly the level they were expecting for Q1 only five months ago.

    GDP is now expected to show growth of only 0.5% to 1.0% for Q1. Everyone is blaming it on the weather so the really critical number is going to be the one for Q2 where weather is not a factor.

    The bond market thinks the economy is going to get worse. The yield on the 30-year treasury fell to 3.439% last week and a ten-month low. While that is good for the mortgage market it suggests equities are going to continue to be weak. However, one of the factors pushing treasuries higher is the tension from Russia. This is a flight to quality trade and it can be reversed almost immediately if the situation were to improve.


    Comstock Funds commentary Key Market Movers Turning Negative

    Enter passively and exit aggressively!

    Jim Brown

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    "I never try to predict or anticipate. I only try to react to what the market is telling me by its behavior."
    Jesse Livermore