After declining more than -500 points the prior week the Dow rebounded +659 points despite some profit taking ahead of the weekend. This was the best weekly gain since December 2011 and pushed the Dow into positive territory for the year.

Market Statistics

I am surprised there was not a bigger decline on Friday with the Dow and S&P running into heavy resistance and the potential for destructive headlines over the weekend. With ISIS, Greece, Venezuela. Russia and Ukraine all fighting for headline space investors appeared unconcerned. A -60 point decline in the Dow was noise rather than a real market indicator.

The biggest headline for the day was of course the Nonfarm Payrolls. The headline number showed a gain of +257,000 jobs in January. This was well over the consensus estimates of +235,000. In addition the November and December numbers were revised higher by a total of +147,000 jobs. December rose from 252,000 to 329,000 and November rose from 353,000 to 423,000. It was the best 3-month job gain in 17 years. These are huge numbers suggesting the job market may be accelerating rapidly. It also means the chance of a Fed rate hike in June just became a lot stronger.

The BLS also published their revisions for all of 2014 but despite upward monthly revisions as high as +70,000 and downward revisions as large as -40,000 the total revision from January through October was a net of only +17,000 jobs. That is the smallest I can remember in recent years and basically a rounding error.

The unemployment rate for January rose slightly from 5.6% to 5.7% because a whopping 703,000 people rejoined the workforce and the separate Household Survey showed a gain of +435,000 jobs. These numbers are dramatic and completely trashed analyst comments about the potential for slowing job growth in January and the impact of the layoffs in the energy sector. Sources claim more than 30,000 layoffs in the energy sector in the last 90 days.

Lastly the average hourly earnings rocketed higher by +0.5% after the minimum wage hikes in more than a dozen states took effect January 1st. That is the biggest single month increase since November 2009. It was equaled in July 2011 but you have to go back to 2009 and the rebound out of the recession to see a higher number.

Analysts blamed mild January weather in most of the country for the strong increase in jobs relative to the harsh conditions in the prior January. However, the gains were broad based not just in outdoor jobs like construction. Retail posted a gain of +46,000 jobs and that is not specifically weather related. Mild weather may have brought more consumers into stores but retailers should have been laying off seasonal workers in mid January after the gift return cycle slowed. Apparently many of them retained some of those employees.

The education/healthcare sector saw job gains of +46,000 as a result of the implementation of the Affordable Care Act. Employment in the insurance sector also rose as a result of the ACA. You can expect growth in the finance/accounting field over the next several months as a result of the tax preparation changes required by the ACA.

The unemployment rate for teenagers rose to 18.8%. The other major categories were mostly unchanged with adult males 5.3%, adult women 5.1%, whites 4.9%, blacks 10.3%, Asians 4.0% and Hispanics 6.7%. The U6 rate of all unemployed and under employed rose from 11.2% to 11.3%. The number of workers forced to take part time jobs because full time was not available rose +20,000 to 6.81 million.


While January employment reports are very volatile because of the seasonal adjustments for holiday workers we should not lose sight of the fact that the average job gains over the last three months is now +336,300. That is a very large number and a dramatic change from earlier in the year. This raises the odds of a Fed rate hike in the near future.

Analysts who were pushing their expectations farther out into the future like Morgan Stanley projecting Q1-2016 are now faced with having to retract those estimates earlier into 2015. The consensus had been September-November but with the sudden appearance of the strong jobs and wage growth those were being pulled backwards to the June meeting once again.

The FOMC does not meet again until mid March but Janet Yellen will give her annual congressional testimony on February 24th. That may be the first indication we get of her new intentions.

Currently the word "patient" in the FOMC post meeting statement means the Fed will not hike rates for at least two meetings. Once that word is removed it will give the Fed the option but not the compulsion to raise rates at any time.

This sudden change in the outlook for employment was not lost on the bond market. The yield on the ten-year treasury jumped +6.8% on Friday alone to 1.94%. For the week the yield on the ten-year rose from a low of 1.65% to 1.94% or roughly +29 basis points in only five days. This represents an 18% spike in only one week. This is titanic and suggests the tide has turned and assuming the economy does not take a sudden downturn the low yields are now behind us.


The economic calendar for next week is lackluster with no reports that are likely to be market moving. The retail sales for January on Thursday would be the only one that could be a potential speed bump if it comes in significantly lower than expected. The -0.9% decline in December is expected to rebound to +0.3% in January.



Yelp (YELP) had a bad day on Friday despite beating earnings Thursday evening. The company reported better than expected earnings and raised guidance but only showed user growth of +13%. That was below expectations. The company was downgraded by Pacific Crest, Northland Securities and B. Riley & Co. BR analyst Sameet Sinha cut his rating from buy to sell and said the stock no longer deserves a premium multiple because growth prospects have changed. He cut his projected multiple from 7 times to 4 times. He said Google is stealing traffic and Yelp will have to pay more for page views in the future.

Pacific Crest said local advertising account growth, the clients that advertise on Yelp, declined to 54%, down from 84% in the year ago quarter. Yelp plans to boost its sales force by 40% to offset this decline in new accounts.

Shares declined -21% to $45.


DeVry Education (DV) better go back to school after reporting earnings of 75 cents that missed estimates for 78 cents. Revenue of $484.9 million was also below estimates of $487 million. They opened multiple locations in the USA and made two acquisitions in Brazil. The CEO said they were continuing to see growth in students but they were still facing challenges. One of them will be to rescue their stock price from a new 52-week low after earnings.


Buffalo Wild Wings (BWLD) reported earnings of $1.07 that missed estimates for $1.09. However, revenue of $4.08 million beat expectations for $4.05 million. The stock soared with a +7% gain after the company bragged on some new offerings and upbeat guidance. They are introducing a new lunch menu in April with "variety, value and speed," all the things lunch guests want. They will also add wraps or sandwiches that can be eaten on the go rather than take the time to dine in. All restaurants will have tablets at the table to allow ordering and payment to reduce wait time. Investors must have liked the plan to give BWLD shares a $13 boost.


Linkedin (LNKD) shares gained +11% after the company reported earnings Thursday evening. Earnings rose +56% to 61 cents and beating estimates of 53 cents. Revenue rose +44% to $643 million, also a beat. Membership rose +15 million to 347 million. Multiple analysts raised their price targets saying everything LNKD was doing was working. JP Morgan hiked the target from $253 to $300. RBC Capital from $245 to $300. Cowen & Co from $260 to $290. Canaccord Genuity from $240 to $285. Credit Suisse upped from $285 to $331. While LNKD gave cautious guidance analysts said ignore it. They always give cautious guidance.


Twitter (TWTR) shares rose +16% after reporting earnings on Thursday evening. This was amazing since the company reported mediocre subscriber growth of only 4 million users. They originally blamed it on a glitch in iOS 8 software in Apple phones that launched in the quarter. On Friday they retracted that excuse. In a tweet the company said it was not Apple's problem. It was a bug in Twitter's software.

The company guided for Q1 for a revenue midpoint of $445 million and consensus is for $450 million. They guided for earnings of $89-$94 million and also slightly below estimates. Twitter confirmed they had signed a deal with Google to integrate its tweets in real time into Google's search results. This is an effort to monetize the 200+ million logged off Twitter users that visit Twitter profiles each month. The new integration of video messaging is also expected to give the service a boost in 2015.


GoPro (GPRO) did a face plant after issuing weaker than expected guidance for Q1. The company is expecting 16 cents on revenue of $335 million compared to estimates for 17 cents and $325 million. That may not seem like a big miss but there were complicating issues. COO Nina Richardson unexpectedly resigned to "pursue other opportunities." Investors don't like unexpected departures. She had a block of 25,000 shares that were a signing bonus when she took the job in Feb 2013 and she had to remain employed for 24 months to vest. That could have had something to do with the timing of her resignation. She also had options on 450,000 shares that would vest 25% per year on Feb 2014, Feb 2015, etc so she gets half of those as well.

There are also 76.1 million shares that will become available for trading when the lockup expires on February 17th. There are only 127.77 million shares outstanding and 76.1 million will become available for trade on the 17th. Nearly 14% of the outstanding shares are currently held by institutions. The average daily volume is 7.4 million shares. The potential is very high for a major decline in the share price when those shares come out of lockup. Insiders holding those shares have seen them decline from $95 to $47 over the last four months. The odds are good they are going to want to cash "some" of them out before the price falls further.

GoPro reported earnings of 99 cents, up +200% from the year ago quarter, and well over the 70 cents analysts expected. Revenue of $634 million crushed estimates for $580 million. They shipped 2.4 million cameras compared to estimates for 1.95 million. That was roughly 1,000 units an hour for the entire quarter.

GoPro has a PE of 115 and competitors are showing up every month. They have a great product and a loyal customer base but their time as a high dollar stock may be over. If GPRO shares decline under the post IPO consolidation support at $38 we could see a wholesale dumping of the remaining shares as the PE compresses to something more reasonable.


The earnings calendar for next week is starting to slow. Nearly 70% of the S&P have reported earnings and the rest will be spread out over the next four weeks. So far 65% have beaten on earnings with 10% meeting estimates and 17% missing estimates. The earnings have not been the challenge but as always the guidance is the key. Unfortunately guidance has been ugly. However, we have reached the point where the "strong dollar" excuse is now a get out of jail free card because everybody with overseas sales has used it. Investors expect it and they are not holding the companies accountable for weak guidance because of the dollar.

The highlights for next week are Tesla, Cisco Systems, Whole Foods, Panera and FireEye on Wednesday. AIG, Cabellas and Kraft report on Thursday and Red Robin on Friday. It is not a very big list.


Markets

I am pretty sure that everyone will agree with me that a +624 point Dow gain for the week is excessive even though it declined -507 the prior week. Large market swings are symptoms of indecision and uncertainty. Shorts are squeezed on the unexpected rebounds and longs are crushed by the declines. This is what makes a market. It is our job to survive the volatility until the market picks a direction that lasts.

The S&P has spent all of 2015 wandering between about 1,985 and 2,064. It has made six trips across that range and Friday's high was the high for the year at 2,072 but it did not hold only to drop back to 2,055 at the close. Quite a few analysts believe we are due for another trip back to the 1,985 level. Fortunately the more that believe that theory the less likely it is to come to pass.


After Friday's payroll report we are facing a new problem. The stronger employment makes it more likely the Fed will hike rates in June. While that is still months away that cloud will linger over the market until it happens. Historically the first Fed rate hike causes a -5% dip in the market. Once that occurs the market tends to move higher from there because the Fed is hiking rates because the economy is doing better. Since the market is so tuned into the Fed communication today more than any point in the past this market hiccup could occur at any point from now until June.

The better than expected earnings are a positive for the market but the worse than expected guidance is a negative. If the market declines on the negative guidance then we are less likely to decline again in June if the Fed hikes rates. The key inflection point today is the Yellen testimony on Feb 24th. She will likely drop some clues as to what the Fed is planning when she testifies before Congress. Unfortunately the 24th is a long way off in market time. We could see the Dow move a couple thousand points before the 24th if it decides to go directional. That sounds like a lot but remember the Dow has moved over 500 points in each of the last two weeks.

Rather than concern ourselves about the distant future we only need to worry about the week ahead. The S&P has given us a clear range and a deviation from that range in either direction is a trading indicator. If the S&P moves over 2,064 it would be a buy signal with 2,073 and 2,093 the next resistance points. If it moves below 1,985 it would be a sell signal with 1,972 a potential support point. It we did break 1,985 on the next dip I fear there would be a bigger dip in our future.

The 150-day moving average is still in play at 1,999 but it was broken intraday last week.


The Dow volatility should calm down in the week ahead because the majority of the Dow components have already reported earnings. That means the sudden gaps higher or lower should give way to less dramatic movement. However, we do have Coke (KO) on Tuesday and Cisco Systems (CSCO) on Wednesday. Both are low dollar stocks and should not cause any serious post earnings volatility unless they really surprise on earnings. For instance if CSCO posted ugly results and dropped -10% (-$2.75) that would only equate to about -20 Dow points and hardly a material impact. A similar 10% move on KO ($4.10) would equate to about -28 Dow points. Neither of those stocks have a recent history of 10% or greater post earnings moves. Coke came close in October with a $2.70 move but Cisco rarely moves over $1 in a gap open.

If the Dow volatility calms then "investors" as opposed to "traders" will begin to reenter the market. Investors are waiting for the market to either begin moving higher at a measured pace or crash back to some level where they feel the risk of new positions is justified. During the January volatility they were simply waiting on the sidelines.

Resistance is now 17,915 with support, 17,500 and 17,375 at the 100-day.



The Nasdaq Composite outperformed the Nasdaq 100 last week with the big caps struggling to move past the resistance from early January. The composite index benefitted from small cap earnings that had no dollar exposure. The composite came very close to retesting the strong resistance at 4,800 with Friday's spike to 4,787.

The Nasdaq 100 barely exceeded the 4,250 resistance level from early January and fell back to 4,228 at Friday's close. The big caps are struggling but the composite index is the one the market watches. If it reaches and exceeds that 4,800 level next week it could drag the broader market higher.

Composite resistance 4,774, support 4,600.

Nasdaq 100 resistance 4,250 and downtrend resistance at 4,285. Support 4,100.




The small cap Russell 2000 is suddenly the most bullish chart. The Russell closed right at 1,209 on Thursday and only gave back -3 points on Friday. Because of their lack of dollar exposure the small caps could return as the market leader with a breakout over that 1,208 resistance and the historic high at 1,219. That would really fire up the market and create a directional market.

In the weekly chart below the Russell has been consolidating since early 2014. Louise Yamada coined the phrase "the longer the base the higher in space." If the Russell breaks out it could lead us higher, headlines permitting.


On the negative side the Dow Transports are not cooperating. We are on the verge of another lower high if the transports roll over next week. Support has been solid at 8,575 but with oil prices rising again and the government talking about doubling the tax on gasoline and diesel the transport rally may be over. Since the transports theoretically confirm Dow rallies and declines the weak transports suggest trouble ahead.


Oil is looking toppy after it's nearly $9 rebound from the prior Thursday's low of $43.58. That is a +20% gain in 7 days. While I expect oil to go higher long term I believe the rebound was overdone and we could see some backing and filling to something in the $47-$48 level before moving higher. Declining oil will mean declining energy stocks and the potential for a weak equity market.

However, there are still a lot of shorts in the oil market so any slow creep higher could trigger another round of short covering and energy stocks could lead the market higher. Oil inventories should continue to rise because we are moving into the maintenance season for refiners where oil consumption declines. Also slowing oil consumption is a strike by workers at multiple oil refineries. Late Saturday the union expanded the strike to add two BP refineries in the Midwest. This is the first nationwide strike since 1980. The addition of the two BP refineries brings the total refineries impacted to 11. Generally production is not materially impacted by strikes but the longer it lasts the more stoppages we will see.

Ironically the refinery utilization last week rose from 88.0% to 89.9% and a three week high. Oil inventories rose +6.3 million barrels to 413.1 million and 15.4% over year ago levels and the highest level since records were started in 1982. Having record levels of oil in storage is not conducive to prices moving higher. Global storage locations are nearly full and once consuming countries can no longer store more of today's cheap oil we could see prices implode once again. We will be headed into the high demand summer driving season in about three months and that will help reduce the glut somewhat.


If the dollar continues higher the price of oil will struggle to move higher. There is almost no scenario where the dollar weakens significantly in the coming months. Europe and Japan are racing each other to cheapen their currency and boost their economy. There are rumors that China will also enter the currency war in the coming weeks and that will force all those currencies even lower. With the Fed more likely to hike rates in June that will strengthen the dollar even further.


Active rigs declined -87 last week to 1,456 and bringing the total decline since September's high of 1,931 to -475 rigs. That is a -24.6% decline and analysts are expecting the drop to continue to the 1,000-1,100 level. Six months from now we will see a decline in production.


I would continue to be cautious about new longs until the S&P breaks through that resistance at 2,064 and the assault on the old highs begins. The earnings guidance could be a drag on the market despite the strong jobs report. Remember, the last dozen or so economic reports have been weaker than expected. Rising jobs suggests corporations have an optimistic outlook about the future but it is not yet showing up in the economic reports. Continue to be cautious about new plays until a confirmed trend appears.

Random Thoughts

Newly elected Greek officials are playing a game of chicken with the ECB and EU. On Wednesday the ECB said it would no longer accept Greek government debt as collateral for loans. On Friday the EU set a deadline of February 16th for Greece to apply for additional bailout funds. The current bailout agreement expires on February 28th. If Greece does not apply they will have no source of funds after the 28th. This deadline of the 16th means Greek officials will have to stop talking a belligerent game and either fall in line with the current rules or run out of cash in March.

The risk for the EU/ECB on pulling the bailout plug on Greece is that it may force Greece into a banking collapse and an exit from the Eurozone. They would be forced to establish their own currency. While that does not sound terribly bad it would set a precedent. The Eurozone is built on the idea of the common currency and that design is supposed to be irreversible. If Greece were to exit then it could open the door for Italy and Spain to exit and the Eurozone house of cards comes tumbling down.

Germany is demanding that Greece continue to undergo serious austerity and repay its debt in full, which is approaching 300 billion euros. There is no way this will ever happen simply because Greece has very little money. The interest on the debt is more than Greece can pay so demanding debt repayment on top of that is ridiculous. Greece only has 11 million citizens and the GDP is only 2% of the Eurozone. The ECB/EU/IMF got themselves into this predicament by giving bailout loans to Greece in an amount they can never repay. Now Greece is standing up to the Troika and demanding concessions that the EU/ECB are not likely to ever allow. The newly elected government of Greece was elected on a platform of ending austerity and cancelling the bailout agreements. The new government has to stand firm or there will be riots and violence in Greece. The ECB/EU has to stand firm or risk the entire Eurozone collapsing. One analyst said it was the equivalent of two trucks loaded with dynamite heading towards each other at full speed.

S&P downgraded Greece to B- saying it expected the worst case scenario with bank runs and capital controls followed by an "exclusion from the Economic and Monetary Union."

Russia announced it was increasing military spending +33% in 2015 and plans to increase its nuclear arsenal, which is already the largest in the world. How it plans to do that with oil prices down -50% is the $64 question. Deputy Defense Minister Tatlana Shevtsova said 50% of spending will be to modernize and refurbish the existing military. "Expenses on the defense industry will not be cut regardless of the current economic situation." State defense spending will grow by 20% in 2015 to a peak of 40% growth in 2017. In 2014 the number of weapons supplied to the military rose +65%.

Russia is a big exporter of military hardware but the sanctions have cut into that revenue stream. The drop in oil prices and the rise in the dollar further damaged the Russian economy. Putin could be the Greek savior. He has invited Mr Tsipras to Moscow in May. If Putin can pull Greece into the fold then being kicked out of the Eurozone would be less of a problem for Greece. For Putin Greece is an aircraft carrier in the middle of the Mediterranean. If he establishes a foothold in Greece that becomes a problem for everyone else in the area with Russian military planes and ships basing out of Greece.

The EU will impose more sanctions on Russia on Monday but they are still just pinpricks. Angela Merkel and Francois Hollande went to Moscow last week in an attempt to work on a resolution to the Ukraine problem. The meeting did not go well. Putin continues to claim Russia is not involved in the fighting. The U.S. administration said there was nothing they could do to prevent further fighting and the eventual acquisition of the Donetsk and Luhansk regions by Russia. All that is necessary for evil to flourish is for good men to do nothing.

China is preparing to cut down on global gambling by Chinese citizens. President Xi Jinping warned last week that citizens will be gambling much less in China, neighboring countries and the USA. The deputy chief in the Ministry of Public Security said, "Some foreign countries see our nation as an enormous market...A fair number of neighboring countries have casinos, and they have set up offices in China to attract and drum up interest from Chinese citizens to go abroad and gamble. This will also be an area that we will crack down on."

Xi has seen the outflow of cash as casino chains built billion dollar casinos dedicated to the Chinese gambler. Large sums of money flow out of China and much less returns to China. The government is cutting down on the number of advertisements promoting Macau. Visa restrictions are being tightened and money transferred by retail gamblers is being tracked. The anticorruption crackdown has already slowed the travel of mainlanders to the world's largest gambling center. High rollers don't want the government watching how much money they transfer to Macau. It alerts government watchers to investigate those individuals as part of the corruption crackdown. Gaming revenue in Macau declined -30% in December alone. MGM and LVS are in trouble if this trend continues.

The Baltic Dry Shipping Index hit a new 30-year low last week as the demand for dry commodity carriers falls to a cycle low as a result of the economic decline in Europe and China. This is the price to rent a dry bulk carrier by the day. It is hard to build any kind of bullish scenario for the coming year with commodity demand falling off a cliff.


Deflation in the U.S. rose to levels not seen since October 2008 according to the ISM report. The prices paid component of the ISM declined to 35 or a -3.5% fall compared to December. Only 11% of respondents reported paying higher prices while 41% reported paying lower prices. This is the third consecutive month of declines with the price component declining -18.5% over the last three months. In the ISM any number over 50 represents an increase and under 50 represents a contraction. Of the 18 manufacturing industries the only industry reporting an increase in prices paid was the Printing and Related Support Activities. That is hardly a benchmark industry. If the decline continues the USA will be struggling to fight deflation and our Fed interest rates are already at zero.

A Societe Generale's strategist, Albert Edwards, has warned that the deflation threat currently dogging the euro zone is greater in the U.S. and that equity markets will soon be "ripped to smithereens." Also, "The deflationary fault line on which the U.S. sits is every bit as precarious as that of the euro zone, but is being disguised," he said in a new research note on Thursday. "The scales will soon lift from the market's eyes." Edwards is seen as bearish by the rest of the analyst community. Link to his full statement.

Yields on Nestle's corporate debt went negative last week. That means investors are essentially paying a fee to buy Nestle's debt just so they can park their cash somewhere safe. Euro denominated debt of Shell and Novartis are also approaching negative yields. Euro denominated debt from Bank of America, General Electric and McDonalds are all trading at zero yields. Yields on government debt from Belgium, Denmark, France, Germany and Japan are all negative. Bank of America estimates that yields are now negative on of 1.2 trillion euros of European debt compared to 500 billion euros at the end of October.

Need condoms? Don't buy them in Venezuela. A 36-pack is now selling for $755 or 85% of the national monthly minimum wage. Inflation is so bad citizens can't afford to buy anything even if they could find it on store shelves. The military was guarding food stores until last week when they took them over to prevent price hikes. Citizens wait hours in line only to enter the stores and find nothing on the shelves. Starvation is everywhere and the situation is getting worse by the day for the 29 million citizens. Hospitals, clinics and surgical centers are shutting down because they have no supplies and no doctors. Everyone that could flee the country already has. It will not be long before disease is rampant and the government is overthrown.

Radio Shack finally pulled the plug on its recovery and filed bankruptcy last week. The company started in 1921 in Boston selling ham radios. Over the years the stores have progressed from selling the first computers, a TRS-80 with an operating system written by Bill Gates in 1977. In 1983 it sold the first laptop called the TRS-80 Model 100. In 1984 they started selling mobile phones and satellite TV in 1985. Today it has more than 4,000 stores and plans to sell 2,400 of them in the bankruptcy. Sprint and hedge fund Standard General will purchase the stores. Sprint will operate 1,750 of them as phone stores but they will still carry the Radio Shack brand. Radio Shack has $1.3 billion in debt and $1.2 billion in assets. The new symbol is RSHC, now trading at 13 cents. How far have computers come? Click here to see the 1981 computer catalog.

Enter passively and exit aggressively!

Jim Brown

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"Everyone is a disciplined, patient investor, entirely focused on the long term. And then an hour goes by."

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