While traders were taking cover from the Juno blizzard the market was floundering under a storm of high profile earnings reports blaming the strong dollar for missing estimates. Add in a huge decline in durable goods orders and the Dow dropped -394 at the open to retest the 17,300 support level.

Market Statistics

The Nasdaq lost -112 or -2.3% at the open and the S&P declined -37 or -1.8%. While winter storm Juno failed to blanket the Northeast with the 2-3 feet of snow that was predicted the impact of the strong dollar on earnings has been worse than most analysts expected.

The biggest blow to the market was actually the Durable Goods report for December. Orders declined -3.4% for the fourth decline in the last five months. Over the last five months durable goods orders have declined an average of -4.84% per month. That is also caused by the strong dollar reducing demand for American products.

However, the December report was impacted significantly by a 55.5% decline in nondefense aircraft orders. New orders excluding aircraft still fell -0.8% while nondefense orders fell -3.2%. Orders for defense aircraft and parts fell -19.9%. Unfilled orders declined -0.8% and the first drop in seven months. New orders declined across all segments so the weakness was not just in aircraft.

Consensus estimates for the headline number were for a +0.5% gain so this decline was a big surprise. This will negatively impact the Q4 GDP and likely reduce it into the high 2% growth range, down from 4.97% in Q3.

The Richmond Fed Manufacturing Survey headline number declined from 7 to 6 for January. This is down from 20 in October. The decline was driven by the employment component that declined from 13 to 5, an 8 point drop. Backorders declined for the third month falling from -5 to -9. The new orders component was flat at 4 and relatively anemic. Prices paid declined from an annualized rate of +1.26% in December to only +0.7% in January. Prices received declined from +0.83% to +0.53%. There is no inflation in the manufacturing sector.

The separate services survey rose sharply from 3.0 to 14.0 on the headline number. This was the first gain in three months. The retail revenues component rose from 10 to 25 with services revenues rebounding from 2 to 12. The six-month demand expectations rose from 13 to 17 suggesting companies are optimistic about the future.


The Texas Services Sector Outlook Survey went the opposite direction. The headline number fell from 12.7 to -2.8 for January. That is the fifth consecutive month of declines from the high of 27.7 in September. This was the lowest reading in 11 months and the first negative reading in the last three years. All the components declined with employment falling from 14.3 to 5.8, revenue from 22.2 to 12.1, hours worked from 7.2 to 1.3, wages and benefits from 17.0 to 13.5, selling prices from 6.9 to 2.8 and input prices from 19.9 to 11.4. Since Texas has been a leader in the U.S. economic growth the sharp decline over the last several months suggests the U.S. economy is weakening.

The only positive report for today was Consumer Confidence, which soared from 92.6 to 102.9 and the highest level since August 2007. Obviously the falling gasoline prices are the prime driver of confidence. The present conditions component exploded higher from 99.9 to 112.6 and the expectations component rose from 88.5 to 96.4.

For some reason the burst in confidence did not carry over into consumer buying plans. The percentage of respondents planning on buying a car rose from 12.2% to 13.0% while those planning on buying an appliance/TV shrank from 51.9% to 43.6%. Prospective home buyers declined slightly from 4.9% to 4.8%.


The calendar for Wednesday is highlighted by the FOMC statement and the Fed's take on the recent economic events, strong dollar and worries from overseas. Morgan Stanley pushed their expected date for the first rate hike out to March 2016 and others are now targeting Q4 2015. The consensus is now July but moving farther away at a steady pace.

The GDP estimate for Friday's report has not changed officially but the number of analysts expecting a sub 3% growth number is growing. This could be market negative if the number comes in much lower.

Next week we have the ISM Manufacturing report and estimates are falling. We also have the payroll numbers that could reflect the sharp decline in workers in the energy sector plus the final layoffs from the temporary holiday workers.


The market was crushed this morning by multiple earnings misses and lowered guidance from blue chip companies. Dow component Caterpillar (CAT) fell more than $6 (about 45 Dow points) after reporting earnings of $1.23 compared to estimates for $1.55. The company also guided a lot lower for 2015 because of the impact of the crash in oil prices, mined commodities and the impact of the strong dollar. Caterpillar now expects to earn $4.60-$4.75 in 2015 compared to analyst estimates for $6.67. That is a monster guidance warning. Revenues are expected to be -9% below 2014 levels.

I warned several weeks ago to expect some ugly earnings from CAT and everyone else that depends on the energy sector and overseas sales for their revenue. Although CAT shares declined to multi-year support I would not be a buyer today.


Dow component Pfizer (PFE) went against the flow at the open with decent spike despite some lackluster earnings and warnings about the strong dollar. Earnings of 54 cents beat the street by a penny but warnings about falling revenue on patent expirations and currency issues overseas blunted the good news. Prescription drug sales declined -3%. Helping to lift shares was an announcement they would return $13 billion to shareholders in 2015 through $6 billion in share buybacks and $7 billion in dividends. This compares to $11 billion in 2014. The company is sitting on $33 billion in cash and said it is in search of an acquisition.


Dow component Procter & Gamble (PG) saw its shares decline -3.5% after it reported a -4% decline in revenue and -8% decline in earnings as a result of the strong dollar impacting overseas sales. The company said it had experienced "unprecedented currency devaluations where virtually every currency in the world devalued versus the dollar." P&G warned that 2015 revenues would be down -5% and net earnings -12% or at least $1.4 billion after taxes because of the dollar.


Dow component Microsoft (MSFT) dropped -9.2% after reporting disappointing earnings and guidance on Monday night. This decline was responsible for about -30 Dow points. The company said PC sales were expected to decline because of the strong dollar and software sales overseas were being affected. They projected an 8% decline in 2015 earnings.

On Tuesday no less than six analysts downgraded Microsoft for multiple reasons and that pushed the stock down even more than the -$2 it lost in afterhours on Monday.


Dow component Dupont (DD) fell more than $2 at the open after reporting earnings of 71 cents that were in line with estimates. However, revenue declined -4.8% to $7.38 billion because of the strong dollar. The company issued weak guidance for 2015 so the same reason. Earnings are now expected to be $4.00-$4.20 and analysts were expecting $4.47.


Polaris Industries (PII) posted earnings of $1.98 compared to estimates of $1.95. Revenue of $1.27 billion also beat estimates. The company guided lower for 2015 with earnings of $7.22-$7.42 and well under analyst estimates for $7.81. The company blamed the strong dollar for falling small vehicle sales in Europe. Polaris shares spiked +5% on the news.


Other companies that are very dependent on overseas sales and will see further weakness because of the dollar include Avon Products (AVP), which only gets 15% of its sales from the USA. Coach (COH) gets 20% of its sales from Japan. PepsiCo's (PEP) second largest market after the USA is Russia and the ruble declined -6.6% to a new record low on Monday alone. Competitor Coke (KO) only gets half its sales from the USA. Tiffany (TIF) gets 40% of its sales from overseas.

After the bell Apple (AAPL) blew the doors off earnings estimates by selling 74.5 million iPhones. The average estimate was 64.9 million units. Earnings were $3.06 per share, easily beating estimates of $2.60 per share. Net earnings were $13.072 billion and just shy of the record of $13.078 billion set in Q1-2013. Revenue of $74.6 billion easily beat estimates of $67.5 billion. CEO Tim Cook said demand for Apple products soared to "an all time high."

Apple guided for revenue of $52-$55 billion for Q2, up from $46.5 billion in the year ago quarter. Analysts were expecting $53.7 billion so that was in line with estimates. Gross margins should rise slightly to about 39%.

Apple said the impact of the dollar was reduced by a comprehensive hedging program.

iPad sales declined for the fourth quarter with an -18% drop to 21.4 million units. Mac sales rose +14% to 5.5 million units. The company said the Apple Watch will ship in April. Apple is now holding $178 billion in cash. That is enough to buy Google.

Apple shares declined -$4 in regular trading to close at $109. After the earnings shares rallied to resistance at $115 in afterhours.


Yahoo (YHOO) reported earnings of 30 cents which beat estimates of 29 cents. Revenue of $1.18 billion matched street estimates. However, Yahoo earnings were not the big news. Yahoo announced a tax free spinoff of Yahoo's 384 million Alibaba shares into a separate entity. This will avoid billions in taxes and was cheered by investors after the close with Yahoo shares rising +7% to $52 after the close. The new entity will be called SpinCo. The split is expected to occur in Q4 after the 12 month lockup of Alibaba shares expires. It will require approval by the IRS and SEC. The Alibaba stake is worth $39 billion today. Yahoo will retain its 36% in Yahoo Japan, currently worth $7 billion.


Companies on tap for earnings on Wednesday include Dow component Boeing, Facebook, Qualcomm. Expect more of the same with warnings about the strong dollar.


Crude oil rallied +2% today despite the down market and energy stocks bucked the market decline. However, the 2% gain on WTI intraday barely registered on the chart. The rally was short lived with WTI declining -75 cents after the close to $45.51. No bottom yet but that $45 level is getting a lot of traffic.


There is a huge argument in progress in the analyst community about the impact of the oil crash on the economy. Everyone agrees that lower gasoline prices will be very stimulative for consumer spending. However, the sharp decline in spending by energy companies and the large number of job losses is going to weigh on the economy. The argument in the analyst community is based on how much this will impact the economy. Some believe it will be negligible and others are thinking as much as -1% on GDP because of the relationship factors from other sectors dependent on energy spending.

We won't know the real impact for another 3-6 months because current projects/drilling has been budgeted and contracted for months. Until those existing commitments expire we won't see the real impact of the oil decline. If oil prices do find a bottom here in the $45 level and begin to climb into the high demand summer driving season then budgets may not be trimmed as much as expected and the economic impact muted.

Gasoline prices rose today to end the record streak of consecutive declines at 120 days. That is the longest streak since records were started 15 years ago. Gasoline prices rose to $2.038 per gallon, up from $2.033 on Monday. That is still 40% less than the same week in 2014.

Markets

The gains in Apple and Yahoo spiked the futures after the close and they are holding at +4 points at 7:30 ET. After a big market decline like we had today we could expect some dip buyers to appear but they may be traumatized by the nearly -400 point Dow decline at the open. The intraday rebound failed and if the market had been open another 30 minutes we could have closed back on the lows.

The S&P failed at the 2,064 level I highlighted in the weekend commentary and dipped all the way back to 2,020 intraday today before rebounding to close at 2,029. The rebound was lackluster and the selling into the close suggests we could see further declines ahead. The 150-day average has been support since the December decline and it now at 1,995. That is the level we should key on for any future decline. The 2,000 level is psychological and we saw earlier in the month the selling overshot that level somewhat. If we test that again and 1,995 fails we could be looking at another decline like we saw in October.

There is zero chance that we will not see additional earnings misses and lowered guidance because of the strong dollar. However, that excuse will eventually be ignored. I just don't expect it this week.

The analyst estimates for S&P earnings are dropping like a rock and I would not be surprised to see estimates under $120 soon and earnings growth for Q4 to turn negative. That will be a serious drag on the markets and we need to prepare for that event.


Much of the market decline today was Dow related. The number of Dow stocks losing large amounts simply overpowered the index. The declines in the S&P were not as severe and the declines in the Russell 2000 and Russell Microcaps were minimal at roughly .5% and .3%. It was a big cap decline. The small caps have very little exposure to currency issues since sales are mostly in the USA.

The Dow declined to uptrend support at 17,300 and just above the earlier January declines. The number to watch here is 17,275, which allows for a small overshoot to the downside. Resistance is 17,800.



The Nasdaq was weak in part because of Apple earnings fears. Apple shares declined -$4 in regular trading and Apple is 12% of the Nasdaq 100. That suggests the Nasdaq should open higher with the Nasdaq futures up +26 late Tuesday. Qualcomm will weigh on the Nasdaq at the close tomorrow because 90% of their revenue comes from overseas. They are likely to report serious currency issues if they have not adequately hedged against the soaring dollar.

The challenge for the Nasdaq will be Apple. The big event is over and once the shorts cover there may not be enough buyers left to push it higher.

Support on the Nasdaq is 4,650 and resistance well above at 4,770.



The Russell 2000 declined -6 points and remains very close to resistance at 1,200. This was a strong showing given the big decline in the Dow. The Russell Microcap ($RUMIC) only lost -1.5 points. This is critical since the micro caps are inherently risky and fund managers are careful about loading up on these small companies. I view this as a bullish signal. That does not mean the Russell indexes are going to charge higher but it does suggest the broader market is not as negative as it appears on the surface.



Despite the big gains by Apple and Yahoo I continue to have a neutral bias for the market. Until the negative reaction fades to the dollar impact on earnings we are going to have a lot more stocks moving lower after they report. The FOMC announcement on Wednesday should be market positive because the prospect for rate hikes should slide farther into the future. The GDP on Friday could be a problem if it shows a larger than expected decline. The combination of all these events plus the increase in violence in the Ukraine and headlines from Greece could weigh on investor sentiment.

Enter passively, exit aggressively!

Jim Brown

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