Investors appear to be going through with withdrawal pains ahead of the FOMC announcement next Wednesday. This is premature and unwarranted since there is very little chance the Fed is going to make a material change before June and probably September. The Fed can't withdraw stimulus by raising rates with the dollar surging nearly 1% per day. That would send the dollar into hyper drive and S&P earnings into the cellar.

Market Statistics

The building angst over the soaring dollar is finally translating into the equity market. With 45% of the S&P getting 50% of their earnings from overseas the dollar strength is going to be a major drag on Q1/Q2 earnings. Investors ignored this for the last several months but the daily decline in earnings estimates and the daily rise in the dollar has finally hit critical mass. The idiot light on investor dashboards is blinking red and warning of an impending crisis.

Market volatility has returned with back to back days of alternating three digit moves on the Dow and the 100-day average on the S&P acting like last ditch support. With 2.5 days left before the FOMC statement there was very little short covering ahead of the weekend.

Oil prices collapsed under the pressure of the dollar, rising inventories and a new U.S. production record. Falling oil prices helped drag equities lower and the $40 level for Crude could be hit next week.

Economic news did not help. The Producer Price Index (PPI) fell -0.5% for February after a -0.8% drop in the prior month. This is the fourth consecutive monthly decline. Expectations were for a +0.5% increase. For once it was not energy prices dragging down the index. Energy prices were unchanged thanks to that rebound in oil prices in February. It was a -1.6% decline in food prices that pushed the index lower. This comes after a -1.1% decline in January. How did this happen? Food prices almost never decline. You can thank the rising dollar pushing the prices of all commodities lower and slowing exports.

Core PPI, excluding food and energy, fell -0.5%. The headline PPI is now -0.7% lower than year ago levels and when compared to the +1.0% YoY in December it shows how fast prices are falling.

Not only is inflation nonexistent the risks of deflation have increased in recent months. There is almost zero chance the Fed is going to hike rates in the near future given the strong dollar and deflation risks.

Consumer Sentiment for March declined -4 points from 95.4 to 91.2 and the second monthly decline from the 11-year high of 98.1 in January. This was the biggest miss of expectations since February 2006. The present conditions component declined from 106.9 to 103.0 and its lowest level since November and the expectations component declined from 88.0 to 83.7. More than 30% of respondents said their income had fallen in the past year. Those respondents that thought they were better off declined from 47% to 41%. Another 59% said business conditions were unfavorable. Some 47% said their incomes would probably not keep pace with rising prices. That is up from 40% in January when gasoline prices were rapidly declining. Average gasoline prices nationwide rose from a low of $2.06 in late January, early February to $2.44 last week. A +38 cent increase in gasoline prices is likely responsible for the majority of the decline in sentiment.


The calendar is relatively light for next week with the exception of the FOMC announcement on Wednesday afternoon. Second in importance would be the Philly Fed Manufacturing Survey on Thursday. This is seen as the most important manufacturing survey of the month and has a direct correlation to the monthly ISM report two weeks later.


Stock news was really light on Friday because we are in that slack period between the end of Q4 earnings and the beginning of Q1 earnings just over three weeks from now. Next week will begin the earnings warning cycle although Intel preannounced on Thursday. Others will follow.

Intel regained 13 cents of Thursday's $2 loss but there is probably more weakness ahead. Intel cut its expected Q1 revenue forecast by -$1 billion to $12.8 billion plus or minus $500 million. Analysts were expecting $13.7 billion. The chipmaker said small and medium sized businesses did not upgrade PCs to move from Windows XP to Windows 7/8 as everyone expected. Companies are taking the "if it is not broken, don't fix it" attitude.

Intel said PC component suppliers were cutting inventories below typical levels because of a serious slowdown in the upgrade cycle. BlueFin Research Partners said Q1 PC shipments could decline 8-9% to 75-76 million units.

IDC changed their forecast for PC shipments to decline -4.9% for all of 2015 instead of 3.3% in their last update. The company said PC sellers bought more computers in Q4 than anticipated in order to gain from the Microsoft subsidies that were cut back for 2015. The company said PC sales are not expected to increase until Microsoft releases Windows 10 later this year and only if consumers like the new software. Microsoft has had two bad launches of Windows 8 and 8.1 when consumers shied away because of the new interface.


Berkshire Hathaway (BRK.B) announced that HJ Heinz had cut 7,400 jobs over the last 20 months as Buffett and his partner at 3G Capital worked to return Heinz to profitability. Heinz had 31,900 employees on April 28th 2013 when Berkshire and 3G took the company private. Berkshire gets $720 million annually from its preferred stake in Heinz while 3G managers actually run the operation. The layoffs and plant closures have saved more than $330 million a year. Heinz posted a profit of $657 million in 2014 and only $18 million in 2013 so the restructuring is paying off.

On Thursday Berkshire announced it had closed the acquisition of the Van Tuyl Group, the largest privately held dealership group in the United States. The deal was announced in October. The company was renamed Berkshire Hathaway Automotive and is headquartered in Dallas. Under the Van Tuyl Group model local entrepreneurs manage the dealerships and have minority stakes in the business. Every managing partner has elected to stay with Berkshire and remain an equity partner. Given the unlimited resources of Berkshire it would be stupid to leave and strike out on their own again.


Despite Intel's problems other chip makers are doing well. NXP Semiconductors spiked to another new high on Friday after Needham initiated coverage with a strong buy rating. The Needham analyst put a $144.67 target on the stock and it closed with a +6.2% gain to $104.67. The analyst said the recently announced merger with Freescale (FSL) transforms the company into a "powerhouse in the semiconductor industry." NXP announced on March 1st they were going to acquire Freescale for $12 billion in cash and stock. The combined company will be the world's largest automotive semiconductor provider and the largest general purpose microcontroller supplier. NXP technology is used in keyless entry systems, car entertainment consoles, audio amplifiers, modems, smartphones, smart cards, lighting, and wireless infrastructure gear. Apple uses NXP chips in the iPhone 6 to power Apple Pay. NXPI was recommended in as an Option Investor play on February 12th at $84.


Repligen (RGEN) reported a Q4 loss of 1 cent on a 49% increase in revenue to $16.4 million and a 25 cent profit for the year. For the full year they guided to revenue in the range of $72-$75 million compared to a 27% increase in revenue to $63.5 million in 2014. The company develops consumable bioprocessing products for the use in production of monoclonial antibodies and other biologic drugs. Apparently investors liked the results with the stock spiking +17% on Friday.


Anacor Pharma (ANAC) rallied +15% after reporting a loss of 21 cents for Q4. Analysts had expected a loss of 59 cents so this was a huge earnings beat. Revenue was $9.6 million compared to full year revenue of $20.7 million. This represented a significant ramp in sales in Q4. Shares have rallied +50% in 2015 and doubled in the last 12 months.


A similar stock, Cempra (CEMP) has quadrupled since September. The company reported a 46 cent loss for Q4 and in line with estimates and revenue of $2.5 million that missed estimates of $3.5 million. No earnings, very little revenue and they just completed a secondary offering of 6 million shares. So why is the stock in rally mode? Apparently they have several promising drugs in the pipeline. They are creating new antibiotic drugs to treat multiple bacterial diseases like pneumonia and various types of infections. With the current inventory of antibiotics losing their potency and effectiveness against common diseases and the onslaught of hospital incubated superbugs we need some a new generation of antibiotics.


There was also good news outside the biotech sector. Software and services provider Ebix Inc (EBIX) rallied +15% on earnings of 45 cents that beat estimates for 39 cents. Revenue was $60.6 million. Shares of EBIX are up +50% year to date.


Oil prices declined to $44.75 intraday and closing in on the January low of $43.58. Inventories rose 4.5 million barrels to another 8- year high at 448.9 million. Cushing storage rose to 51.5 million and just under the record of 51.9 million barrels. Active rigs declined another -67 to 1,125 and -806 below the September high of 1,931. Oil rigs declined -56 to 866 and -46% below the 1,609 high on October 10th. Baker Hughes is targeting a 50% decline as normal in a bear market so another -60 rigs if they are right. At the pace they are dropping I expect to be well below 800 active oil rigs. Active gas rigs declined another -11 to 257 and a new 18 year low.

Offshore rigs declined -3 to 48 and a multi-month low.

The conversation level over shrinking storage is reaching a crescendo. However, numerous energy analysts have come out over the last week saying there is 25-35% storage still available. The additional capacity is in the Houston area and in some tanks around the U.S. shale fields. That is like a driver looking for a 5 gallon gas can in Denver and having the service station attendant saying, "On the computer we have a dozen in Dallas." If the storage is not where you need it then you still have a problem. With the futures delivery point at Cushing Oklahoma rapidly filling up the pipelines into Cushing will have to be turned off if/when capacity is reached. That means wells will have to shut down if the oil in the pipelines is not moving.

We could be 3-4 weeks away from a critical point for crude pricing. Refineries will come out of their maintenance cycle in early April and begin to produce summer blend gasoline ahead of the Memorial Day weekend that kicks off the summer driving season. Until then we should continue to see inventories build. However, imports did decline about 600,000 bpd last week to 6.79 mbpd. Refiners may also be feeling the storage crunch and will have to cut back on imports in the weeks ahead.

Analysts are expecting the January low of $43.58 to be tested and most believe we will see $40 before March is over. If Cushing does halt or curtail the inflow of oil we could see the prices decline in a hurry.



The rising dollar continues to pressure oil and other commodities. The dollar index closed at 100.18 on Friday. That represents a 26.6% gain since May. This is almost unprecedented.



Gold and silver prices are also being slammed by the dollar. Gold declined to $1,150 and a 3-month low. Silver has fallen back to January 2010 levels at $15.50 and the 2011 spike to $50 has been completely erased. The drop in silver has been due to the dollar but in silver's case it also represents a decline in the global economy. Like copper, silver is used in electronics manufacturing and demand has declined as fewer large devices are sold and more phones and tablets with less silver and copper. About 25% of the silver mined today is noneconomic. That means they are losing money on every ounce they sell but they have to keep the mines running at a minimum level to maintain operational capability.

Silver stockpiles are shrinking as the current mine production is less than demand. Eventually prices will rise in spite of the soaring dollar but until the global economy recovers I expect copper and silver to remain weak.




Markets

It was a volatile week in the markets but the damage was muted. Despite two days out of the last six with -300 point Dow declines the Dow only gave up -197 for the week or -0.6%. That was the best performance of any large cap index. The Russell 2000 actually gained +1.2% for the week and that is the bright spot this weekend. Obviously the large cap indexes are suffering from dollar pressures where the impact of the dollar on the small caps is minimal.

For instance Hewlett Packard said they could lose $1.5 billion in 2015 because of the dollar and it has only strengthened since that warning. They could be up to a $2 billion loss before the quarter is over. Most small caps don't even generate $2 billion in annual revenue. The difference in scale is the key. The earnings capacity of the small caps is not being harmed while the big caps are losing billions.

For instance IBM gets 55% of its revenue overseas. Pfizer 66%, Wynn Resorts 72%, Applied Materials 78% and Phillip Morris 99%. Even with active hedging programs a 26% increase in the dollar over the last 9 months is a dramatic difference. Companies earning money in euros, yuan or yen have seen their purchasing power drop considerably when products have to be purchased in dollars. In the case of companies like Hewlett Packard they can sell their products in foreign currencies after marking them up but then they have to convert those currencies back to dollars to bring the money home.

In theory we could just ignore the large cap stocks and concentrate only on small caps. Unfortunately the large caps control the major indexes and that is what represents the market. If someone asks you at dinner what the market did today you more than likely would not say the Russell 2000 gained 4 points. They would look at you like you said aliens visited the NYSE today. The market is represented to the public by the changes in the Dow, S&P and Nasdaq.

The S&P gave back -18 points for the week or -.86%. Given the big intraday swings I feel fortunate it was only -18 points. The index bounced off the 100-day average at 2044 for the last four days without a breakdown. So far that support is holding and the 150-day at 2019 is untested. If you only look at the chart of the S&P it would appear that test of 2019 could come next week. However, if you look at the rebound in the Russell it suggests the S&P could rally into the FOMC meeting on expectations for no change in the post meeting statement.

When the S&P rallied on Thursday it came to a dead stop at 2065 which was resistance in January. With the three-day dip to 2040 and solid stop at 2065 that gives us our breakout targets for next week. A move outside either of those levels should give us market direction. I would not be surprised to see the 150-day average at 2019 to be tested.

Support 2019, 2040, resistance 2065, 2080.


At the low on Friday the Dow was down -265 points at 11:30. That makes the -145 at the close appear relatively tame. The Dow inexplicably rebounded off the 100-day average at 17,655 for the last three days. The Dow rarely honors any moving average but apparently somebody was watching last week and decided that was a decent place to put buy orders. Since very few people actually buy a Dow ETF that means somebody was buying Dow stocks. If we delve into this a little closer the answer appears. It was the three financial stocks, GS, AXP and JPM, that held up the Dow and kept it from falling under the 100-day. It was not that they powered the index higher but they did react positively to the banking stress test capital expenditure news and that kept the Dow from declining. United Health, Du Pont, Disney, Travelers and Verizon also contributed. They offset the obvious losers of Exxon, Chevron, GE, Visa and IBM.

When the Dow rebounded on Thursday's short squeeze it came to an abrupt halt at 17,900 and resistance from January. This gives us our trading range for next week from 17,640 to 17,900. A move outside that range gives us market direction.



The Nasdaq lost -55 points or -1.1%. A funny thing happened on the Nasdaq. The decline came to a dead stop at old uptrend resistance at 4850. The index held up remarkably well and I think it could follow the Russell 2000 higher if the small caps continue their rebound next week. The Nasdaq chart is still in much better shape than the Dow and S&P and could be poised to return to the highs if the Fed makes no changes.

Apple quit going down and that was a major factor in the Nasdaq minimizing its losses. The other big caps were still bleeding points as you can see in the table below but Apple is the 800 pound gorilla and the post Apple Watch "sell the news" event knocked off $5 early in the week but remained flat the last three days.

Resistance 4900, 5000. Support 4850, 4730.



The Russell 2000 rebounded to close within 6 points of a new high on Thursday. Friday's early decline was almost erased with only a -4 point loss to end -10 points from a new high. This is very bullish given the Dow and S&P losses on Friday. Per my comments above the lack of dollar impact on the small caps could make them the favorite of the investing class over the coming weeks. That does not mean they will soar while the rest of the indexes collapse but all things being equal if the big cap indexes are at least neutral the Russell could break out again. That could trigger buying in the bigger indexes.

Watch the Russell 200 closely next week. If the Fed does nothing the Russell could be the leading index. However, they would be hurt significantly by a change in Fed policy because they have a lot of debt and higher rates will hurt. Obviously nothing will change in the near future but a change in Fed policy will make investors more cautious well ahead of any rate hike.

Resistance 1242, support 1220, 1205.


There are some high profile earnings next week that could poison investor sentiment if they miss too badly. Adobe and Oracle report on Tuesday. FedEx reports on Wednesday and Nike on Thursday. Closing out the week Darden, KB Homes and Tiffany report on Friday.

Morgan Stanley economist, Ellen Zentner, said the Fed will not raise rates until March 2016. She pointed out that for every 1% gain in the dollar it is the equivalent of a 14 basis point hike in rates because of the negative impact on the U.S. economy. The dollar is up +26.6% since May. That is the equivalent of a 3.72% hike in interest rates. While the Fed wants to raise rates the rapidly falling inflation and potential deflation risks simply point to the "data dependent" Fed being forced to wait on the sidelines. Zentner said even if the Fed does remove the word patient from the statement they are still not going to raise rates in 2015. They may remove the word just to create some volatility in the bond market and that will force real rates slightly higher without the Fed actually making a move. If they remove the word the equity market could have a tightening tantrum and the Fed has to consider that as well.

The Bloomberg ECO Surprise Index measures the number of economic data beats and misses in the USA economic forecasts. The index has fallen to its lowest level since 2009 when we were in the middle of the Great Recession. Forecasts have been missed by the largest majority in the last six years. The only major report to beat has been the payrolls. Everything else has been routinely missing the estimates and the market has been ignoring it. Citigroup has their own chart of economic misses by country. The U.S. is at the bottom of the list on that index as well.

Both charts from Bloomberg.



The Atlanta Fed's real time GDPNow forecast fell from +1.2% growth for Q1 to only +0.6% growth after the retail sales report on March 12th. How could the FOMC raise rates in these conditions?


We are less than 2 months away from the 3rd longest streak of gains without a 10% correction. The last correction was in 2011. If the S&P did crater again next week all the way down to 2,000 that would still be only a garden variety -5% dip like we have seen many times before in this bull market. It is not the end of the world. The S&P could easily retest that 2,000 level soon.


The rebound by the Russell gives me hope for next week but the market will remain headline driven ahead of the FOMC announcement on Wednesday. What happens after that event is entirely up to the Fed.

I expected a market decline after option expiration and the last two weeks may have been just a testing phase ahead of that event. With earnings declining, GDP revisions sinking, China weakening, oil prices potentially testing $40, retail sales and consumer confidence falling and Greece threatening to exit the EU again, it would not take much of a push by the Fed to crash the market. Hopefully they understand the box they are in.

Random Thoughts

On March 16th, 2004 the post Fed statement had the following sentences. (Hat tip to Art Cashin)

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters to be roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

In the May 4th, 2004 statement the Fed said:

The FOMC decided today to keep its target for the federal funds rate at 1%.

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

In the June 30th, 2004 statement the fed said:

The FOMC decided today to raise its target for the federal funds rate by 25 basis points to 1.25%.

Apparently the Fed reuses its prior language a lot and conditions could be shaping up for a repeat of that 2004 scenario. However, economic conditions are significantly worse than in 2004 and that should keep these statements from being repeated.


The Greek government announced it was going to use cash belonging to pension funds and other public entities for its own use. The amendment submitted in parliament said "Cash reserves of pension funds and other public entities kept in the Bank of Greece deposit accounts can be fully invested in Greek sovereign notes. Pension funds and public entities will be able to claim damages from Greek state in case of overdue repayment or partial repayment. The finance minister said pension funds are not required to transfer their reserves to the Bank of Greece. At least not yet.

The Greek Finance Minister Yanis Varoufakis said last week, "Greece is the most bankrupt country in the world and European leaders knew all along that Athens would never repay its debts." Greek Prime Minister Tsipras said, "Greece can't pretend its debt burden is sustainable." Apparently the house of cards is about to crumble.


Macau's economy declined -17.2% in Q4 after mainland China cracked down on travelers to Macau and gamblers quit spending money. President Xi Jinping's anti-graft campaign prompted high rollers to avoid the gambling city during the Lunar New Year holiday leading to the city's worst monthly decline in revenues in February. Tighter visa procedures and a ban on smoking also kept gamblers away. Most of China smokes.

Full year 2015 estimates now project an 8% decline in gross gaming revenue after a -2.6% decline in 2014. Fine dining restaurants, luxury retail malls and high end hotels are nearly vacant due to a lack of high rollers. Per capita spending by Chinese tourists declined -32.8% in Q4.

Do you think all those casino owners are rethinking spending billions of dollars to open monster casinos in a communist country?


The S&P celebrated its six-year anniversary of a bull market this month. It is up over 200% during that period. Unfortunately this is the third strongest six-year gain since 1907. The other two times were in 1929 and 1999 and neither ended well. Both resulted in major market crashes.

Business Insider Chart


Very Important

I have written about this several times in the past but it does not hurt to repeat it. The U.S. dollar is a global reserve currency. Nearly every commodity in the world is priced in dollars. If Ireland wants to buy oil from Kuwait they have to pay for it in dollars. This means they have to convert their local currency into dollars to make the purchase.

With the dollar soaring this causes significant economic pain around the world because they are forced to use dollars as their trading currency. This also forces countries to stockpile dollars for future use and this cheapens their currency. It is a vicious cycle that every country in the world would like to do away with. When that eventually happens it will be a death knell for the USA.

That came one step closer to fruition last week. The United Kingdom announced they would be applying to join the Chinese led Asian Infrastructure Investment Bank (AIIB) as a founding member. This is China's answer to getting rid of the dollar as a trading currency.

They will soon begin operation of the Chinese International Payment System (CHIPS) and will provide a way for banks to transfer funds to one another without using the U.S. banking system or the dollar.

China also was responsible for the formation of the BRICS development bank called the New Development Bank (NDB) as well as the AIIB. Once these banks begin full operation along with the CHIPS payment system it will end the dominance of the U.S. dollar as a trading currency and shortly thereafter as a reserve currency. Countries will need far less dollars on hand to transact business on a daily basis.

The founding NDB members include Brazil, Russia, India, China, and South Africa. The Founding AIIB members are China, India, Indonesia, Kazakhstan, Mongolia, New Zealand and Britain. The Middle Eastern oil producing countries are expected to join to remove dependence on dollars to pay for oil. Today getting dollars for crude is a win-win because that is the strongest currency. Once these other banks and payment systems are in full swing the dollar is going to crash and OPEC members will want payment in other currencies.

The U.S. has brought this on itself. Banking regulators are attacking banks around the globe and levying fines and penalties in the billions of dollars because those banks did business with countries the U.S. does not like. For instance the U.S. government fined BNP Paribas $9 billion for doing business with "evil" countries like Cuba. How can we impose such a big fine on foreign banks? Because everyone has to deal with the U.S. banking system to process payments in dollars. The government is currently working on new fines on six more banks of $1 billion or more each. Name one other government that has fined a bank in another country for doing business the government did not like.

Also, the U.S. debt is rocketing higher, currently at $18 trillion and headed for $25 trillion just after 2020. Add to that our unfunded liabilities between $45 and $75 trillion, nobody really knows for sure, and we are like Greece. There is no way the U.S. can ever repay our existing debt. Once interest rates normalize at 4% our annual debt service will go up from $300 billion to $1 trillion a year. That is only a couple years away.

The world governments see the writing on the wall and they want to have another banking system in place before the U.S. system crumbles and it will crumble. I am not exaggerating here. Do your own research.

It will not be long before the other "western" nations join up with the AIIB, NDB and CHIPS and the strong dollar will be history. I am not talking months but in the coming years and the eventual crisis will make the 2009 financial crisis look like a walk in the park.


The Debt Ceiling debate returns next week. The temporary reprieve on the $18 trillion debt ceiling expires and congress will have to deal with it in some form. Whenever this has happened in the recent past there has been numerous headlines and market volatility. With a new crop of republicans in office there is bound to be some grandstanding even if it is just temporary. President Obama is not likely to compromise since it is in his favor to have the republicans self destruct over the debt fight. There is not likely to be a Obama-GOP compromise and that means there will be some ugly headlines before the GOP caves in and extends the ceiling. This is just one more reason why other nations want to be freed from using the dollar for their trading. The uncertainty is a headache for them because they really don't understand American politics.


The longest refinery strike in 35 years may be over soon. Unions have worked out a four-year deal that still needs to be ratified and would put 30,000 members back to work. Local chapters may still need to work out minor details but the strike could be coming to an end over the next couple of weeks. This means more oil will be refined and gasoline prices will begin to decline again. Twelve refineries and 20% of U.S. refining capacity has been hit by the strike. Only one refinery was forced to shut down but the others suffered lower throughput as maintenance issues slowly reduced production. The major companies affected include Exxon, BP, Valero and Chevron.


This is a quadruple witching option expiration week. This happens four times a year and historically these produce bullish weeks for the Dow and S&P about 2 out of 3 times. Since 1983 the Nasdaq has posted 19 advances and 13 declines in the March week. However, the week after quadruple witching, especially in March, is typically negative.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

In the episode titled Amok Time Spock has to battle another for the girl that was pledged to be his wife. After winning the contest he gave the girl who had betrayed him to the other suitor named Stonn. "She is yours. After a time, you may find that having is not so pleasing a thing, after all, as wanting. It is not logical, but it is often true."



Leonard Nimoy