The week after March quadruple expiration is normally negative and it appears the weakness arrived on schedule. There is no specific headline driving the decline this week but the economic news did provide some negative bias. Volume was light but it did pickup as the day progressed.

Market Statistics

There was no urgency in the selling and it appeared to be continued settlements from option expiration. However, this is the period in March where fund managers take profits from Q1 and restructure their portfolios and cash reserves for the summer doldrums ahead.

The morning economics started off good with the Consumer Price Index actually rising for a change. The headline number for February rose +0.2% compared to a -0.7% decline in January. This was the first increase since October. The core CPI also rose +0.2% after a +0.2% gain in the prior month. The Fed should have been thrilled with these numbers but one month does not make a trend.

The rebound in energy prices in February was responsible for most of the gains. The energy CPI declined -9.7% in January and rebounded +1.0% in February. I am sure everyone remembers the brief flirtation with $2 gasoline in January that quickly rebounded to nearly $2.50 in February. Gasoline prices never go down as fast as they go up. Fuel oil prices rose +1.9% in February after a -9.9% decline in January. Be glad heating season is about over.

The core CPI rose +0.2% mostly because of a rise in rents, which rose +0.3%. Prices for cars and trucks also rose by +1.0% ahead of the spring selling season.


New home sales for February rose +7.8% to an annualized rate of 539,000 from 481,000 in January. This is the third consecutive monthly gain despite the severe winter weather. Since February 2014 new home sales have increased +24.8%. Sales in the Northeast rose from 17,000 to 43,000 and the South rose from 287,000 to 316,000. However, sales in the Midwest declined from 62,000 to 54,000 and in the West from 134,000 to 126,000. That was a -12.9% decline in the Midwest but a +153% rise in the Northeast. Apparently everyone in the Northeast that was snowed in for January got cabin fever and went house shopping in February. The supply of homes on the market fell from 5.1 months to 4.7 months and the lowest inventory since June 2013.


The bad news for the day came from the Richmond Fed Manufacturing Survey for March. The headline number fell from zero to -8 and well below the cycle high at 20 in October. This is the lowest level of activity since July 2013 when the headline number fell to -11.

All the major components declined except for employment. The inventory to order gap is plunging especially hard to -38. Both the order components are deeply into negative territory. The sharp decline in new orders and the rapid processing of the order backlogs suggests the April numbers are going to be even worse.

The strong dollar is making it very tough for U.S. companies to export overseas and the lack of new orders bear out this fact.

The headline number on the corresponding services survey declined from 18 to 12.

Manufacturing Components


The economic calendar for Wednesday has nothing that should move the markets. The Durable Goods report is normally ignored by traders. The early morning speech by Chicago Fed President Charles Evans could have the most influence. Evans is one of the doves on the FOMC and wants to see unemployment below 5% before raising rates. He will probably try to counter the hawkish comments by James Bullard and Richard Fisher.


Early Tuesday St Louis Fed President James Bullard warned that investors are at risk for an interest rate surprise unless market expectations are revised to correspond with the outlook of policy makers. He said market expectations were currently different than the Fed's stated rate path. He said if expectations are not corrected and the Fed follows through with its rate hike plans the market could react violently. Bullard said the "taper tantrum" came from a misalignment of market expectations and the market was setting up for another tantrum when the Fed announces its first rate hike, which could come as early as June. Bullard's comments could have been a cloud over the market in the morning.

Another cloud hovering over the market was the Chinese Purchasing Managers Index, which came in at 49.2. This is an eleven month low and well below the consensus estimates of 50.5. China's stated growth goal is a 7% GDP in 2015 but even high ranking officials claim it will be tough to hit that number. The real time forecasts are now showing a number in the range of 6.5% growth and a 14 year low. The PMI is just one more data point in those declining GDP estimates. With China's economy sliding it means the government is likely to devalue the currency again with a new stimulus program and that will make it harder for U.S. companies to export their goods to China.

George Soros made headlines claiming that Greece is in a lose-lose position with only a 50:50 chance of staying in the eurozone. He also warned that Greece could "go down the drain" because of current fiscal problems with no obvious way out.

News from the U.K. was also weighing on European markets as Prime Minister David Cameron said he would not accept a third term. Cameron is well liked and by saying he would not accept a third term before he has even won a second term caused consternation in the U.K. on how the May elections might turn out. He basically said, don't vote for me, vote for my team. Unfortunately a team without a leader is not a winning proposition.

In stock news Sonus Networks (SONS) declined -34% after the company slashed guidance and said it was looking for ways to cut costs amid shrinking revenue. For the current quarter the company is now projecting a loss of 29-34 cents and well below its prior guidance for a profit of 3 cents. Analyst consensus estimates were also for 3 cents. The company guided for revenue of $47-$50 million compared to the prior forecast of $74 million and analyst estimates for $71 million. Revenue growth has declined in the last four quarters.

Sonus said it no longer expects to receive certain orders this quarter that had previously been expected. Sonus is finding it tough to compete with Cisco (CSCO), Juniper (JNPR) and Brocade Communications (BRCD) in packet-based networking. Sonus had a reverse 1:5 split back in January to inflate its stock price. Unfortunately it may need another one soon.


The largest producer in the Bakken, Whiting Petroleum (WLL) put itself up for sale a couple weeks ago after ballooning its debt to more than $6 billion with the acquisition of Kodiak Oil & Gas in 2014. With oil prices cut in half those debt payments are choking Whiting. After news broke they were for sale the shareholders rose up in anger because the share price had declined from more than $90 to less than $30 over the last year. Why sell at the bottom when the potential for a premium is very small?

Whiting then revised its statements saying it was going to sell some non-core assets like pipelines, gathering systems and processing plants. The bids were supposed to close by last Friday. There was no news and investors began to get nervous.

Monday afternoon the news broke that Whiting was going to sell up to 40 million shares in a public offering in order to pay down the debt. They were also going to sell $1.75 billion in new convertible senior debt due in 2020 and 2023. Shares were crushed at the open today. Maybe I am dense but if you are going to sell shares to pay down debt then why are they selling another $1.75 billion in new debt. It seems counter intuitive. I am sure they are paying off short term debt and selling long term to postpone the pain until oil prices rebound. The total of the two offerings could generate up to $3 billion and Whiting has more than $6 billion in existing debt.


Things are getting tougher in the oil patch. American Eagle Energy, located in Colorado, missed the first payment this month on $175 million in bonds it sold in August 2014. The company has now asked creditors to enter into confidential debt-restructuring talks. The company struck fear into debt holders by mentioning a potential bankruptcy as an option in the restructuring. When the company missed the $9.8 million interest payment it immediately hired restructuring advisers.


Quicksilver Resources (KWKAQ) gave up the fight and filed for Chapter 11 bankruptcy on March 17th after intentionally skipping a $13.6 million interest payment on February 17th. Quicksilver shares have declined -98% over the last year. They are cutting 10% of their workforce while they plan for asset sales. Plans before bankruptcy failed to produce any buyers and the company said it hopes the bankruptcy will allow the company greater flexibility in future asset sales and restructuring. Quicksilver has more than $1 billion in debt. Pipeline owners with tens of millions in unpaid fees for transporting Quicksilver production said they were planning on being "active participants" in the bankruptcy. Quicksilver has more than one million acres under lease and more than 4,000 wells producing 242 million cubic feet of gas per day.


BPZ Resources (BPZRQ) also filed bankruptcy after failing to pay $62 million in interest and principal in early March on $229 million in debt. BPZ has 1.9 million acres under lease both on and offshore Peru.


In February Cal Dive International (CDVIQ), an offshore well services company, also filed bankruptcy after the oil crash terminated a lot of offshore activity. Contract delays by Pemex and cancellations by other companies forced the company to seek protection. The company is now up for sale either in parts or as a going concern.


These problems in the oil patch are going to continue as long as oil remains under $50. Many E&P companies leveraged themselves up as they raced to increase production. As long as oil was selling for $100 they could make a $20-$30 profit and life was good. Once oil fell to $50 there was no profit and that made paying those interest payments very difficult. There will be more companies in the headlines over the next several months as they either seek court protection or are acquired by those with cash on hand. By some calculations there is more than $800 billion in high yield debt in the oil patch and we have just scratched the surface with these bankruptcies.

Since Facebook (FB) announced the person to person payments last week it has been a series of new highs every day. Shares have rallied nearly 10% in the last six days. The renewed interest in Facebook has brought all the analysts out of hiding to praise the company and its future prospects. The company is getting ready to host its two-day developer conference, which starts tomorrow. This is how Facebook dispenses news to developers about new features and we will get the information second hand.

JMP Securities raised their price target to $97. Piper Jaffray upped their target to $92 from $84. Brean Securities reiterated their buy rating for multiple reasons including advertising growth, continued user expansion and the successful monetization of Instagram and WhatsApp. Facebook is reportedly in talks with publishers about posting content directly on the network. Reportedly the company is in talks with the New York Times, BuzzFeed, Huffington Post, National Geographic and others about posting their content directly into the Facebook network. Chief Product Officer, Chris Cox, said, "Reading news on a smartphone is still a very bad experience most of the time. We want to try and make that a better experience for publishers."


Twitter (TWTR) shares rallied +6% after the company struck a deal with Foursquare to allow users to include their location in tweets. Instead of saying "Dallas" the tweet would say something like "Diamond Shamrock Building, Dallas." Foursquare collects billions of user-generated check-ins and can therefore narrow down the GPS coordinates very precisely. The company has more than 65 million places catalogued and more than 85,000 developers using Foursquare data. With Twitter working with Foursquare there is always the potential for an acquisition although I think Foursquare would fit better in the Facebook portfolio. The company is valued at less than $1 billion so pocket change for Facebook.


Sonic Corp (SONC) reported adjusted earnings of 13 cents compared to estimates for 12 cents. Revenue of $126.2 million also beat estimates for $124.3 million. While that earnings beat may seem lackluster the earnings more than doubled the GAAP earnings from the year ago quarter. Even on an adjusted basis that was an 86% increase in earnings. Same store sales rose +11.5% and margins rose by +110 points. They repurchased $75 million in stock and $93 million year to date. That is 5% of their outstanding shares. They have repurchased 23% of their outstanding shares since 2012. They plan to add another 34-44 stores in 2015 and 900 stores are converting to a higher royalty rate this year. They guided for mid single digit same store sales gains for the rest of 2015 but they always guide low.


Markets

It started out as a really boring day until the selling started to pick up speed just after lunch. The Dow, S&P and Nasdaq all opened in the green but it only lasted about two hours before the buyers disappeared. It was not that there was an over abundance of sellers but there just were not enough buyers.

The only indexes ending in the green were the S&P Small Cap 600 ($SML) and the Russell Microcap Index ($RUMIC). The Russell 2000 small caps only lost -1 point so there was no material selling in any of the small cap indexes.

The Dollar Index rose only slightly after an early morning dip and the recent downtrend appears to be slowing. It was extremely overbought and the dovish Fed comments have worked to weaken it against the other global currencies.


The decline in the dollar has strengthened commodities like gold and oil but this should be only temporary. QE from the ECB will eventually further weaken the euro and lift the dollar again.



The S&P gave back -13 points to close at 2091 after coming to a dead stop at 2114 on Monday. The Dow and S&P both found solid resistance on Monday and could not crack it. The failure to even dent it caused a sudden drop as the close on Monday and that continued today.

Initial support on the S&P should be in the 2086 range and the low from the 19th. That would be followed by 2065 and 2040.

Historically the S&P gives back about -1.6% in the week after March expiration. If we count that from the 2114 resistance halt on Monday that -1.6% decline would take us back to 2080. Obviously that -1.6% is an average of the drops over the last 17 times it has occurred. Some were more, some were less. The most logical place for this decline to end is around 2065. That is just enough to satisfy the dip buyers that stocks are a bargain again. With the 100-day average at 2055 that would be a backstop to that 2065 level.

The two day drop did create a lower high compared to the February highs. That now becomes stronger resistance at 2114.


For the Dow the two day decline brings back into focus the support of the 100-day average at 17,750. If we get another day of decent selling that should become the unofficial target.

The Dow barely closed down triple digits at -104 compared to the recent flurry of 250-300 point days. If today was just the calm before the storm then we could have another big decline in our future. The trading has been too calm the last two days and that suggests there is another shoe about to drop.

Another interesting tidbit is that most energy stocks were down today when oil prices were up slightly. Is that telling us that investors expect the oil rebound to fail? I suspect the answer is yes. Chevron was the biggest loser on the Dow and Exxon faired only slightly better.

Monday's resistance on the Dow was 18,200 and it was rock solid. Support is now 17,950 followed by 17,750 and 17,650.



The Nasdaq Composite gave back -16 points to close back below 5000 once again. The Nasdaq 100 ($NDX) looks suspiciously like a double top formation with the 4480 level the top. The high in February was 4483.

Support at 4420 then 4350.


The Nasdaq Composite is still well ahead of the other big cap indexes with several support levels before it would break the current uptrend. The key level to watch here is 4850 and the low from earlier in March.



The Dow Transports fell especially hard over the last two days and that is negative for market sentiment. The index has now made its third lower high since November and with oil prices off their lows the implied support of low fuel prices may be fading. If the transports break below the 8600 level it would be very negative for the broader market.


The S&P Small Cap 600 only gained 15 cents but it was another new high for the small caps. As long as the S&P-600 and Russell-2000 can hold their gains the big cap indexes should not decline too far. If the small caps start slipping then the broader market losses could accelerate.


I am neutral on the market for Wednesday. However, the sharp decline at the close on both days this week suggests fund managers are in fact closing positions. This was expected and this week has a historical bias for losing ground.

I just don't see any big negatives for the market but then the market does not need an excuse to correct. When all the internals line up the bottom falls out and there does not have to be an excuse or a headline to trigger the decline.

I would keep your stops tight for the rest of the week and don't be too eager to buy the dips.

Enter passively, exit aggressively!

Jim Brown

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