The major indexes posted a minor gain to end a very volatile week. After a solid +263 point Dow gain on Monday as the result of a short squeeze, the index gave it all back by Wednesday's close. Thursday's lackluster rebound managed to turn the index positive for the week with a gain of only +50 points after moving more than 913 points in a zigzag pattern during the week. Volatility is definitely causing investor heartburn.

Market Statistics

Thursday was a lackluster market with the majority of traders already checked out for the long weekend. Volume was weak at 5.8 billion shares. It would have been weaker but traders were likely squaring away positions ahead of Friday's Nonfarm Payroll report. With the market closed on Friday a surprise number on the payroll report would setup a strong move at the open on Monday. Those traders not wanting to be caught on the wrong side of the trade were moving to the sidelines.

The earlier payroll reports both came in weaker than expected. The ADP Employment report on Wednesday came in at 189,000 compared to consensus estimates for 225,000. The Challenger Employment Report on Thursday declined from 50,579 to 36,584. However, the unemployment claims on Thursday came in at 268,000 and the lowest rate for this economic cycle. This suggested Friday's payroll report could be stronger than expected. The uncertainty in the various economic reports put investors on alert for a Friday surprise.

Friday was definitely a surprise. The Nonfarm number for March showed a gain of only +126,000 jobs, the smallest gain since December 2013 and well below the consensus estimate of 248,000. Estimates from 98 economists ranged from 179,000 to 300,000 so nobody came even close to reality. This ended the string of positive monthly gains of more than 200,000 jobs at 12 months. In addition to that surprise the prior numbers were revised down by -69,000. February was revised down -31,000 to 264,000 and January was revised down -38,000 to 201,000. The separate Household Survey reported a gain of only 34,000 jobs. The labor force participation rate declined again to 62.7% with 93,175 million not in the labor force. This is the lowest participation since February 1978. The unemployment rate was flat at 5.5%.

Analysts pointed out that we can't blame the weather in March since it was not nearly as bad as February and that month produced 264,000 new jobs. The strong dollar was blamed because of the decline in manufacturing, exports and corporate profits. I am sure there was a weather component but it was far weaker than February.

Manufacturing jobs declined -13,000 and the first decline since July 2013. Job gains in the restaurant sector were the lowest since June 2012 and this has been a strong gainer in recent months as job seekers took restaurant jobs to pay the bills while they continued to look for full time employment. More than 531,000 people took part time jobs because they could not find full time work. This was up from the recent average of 450,000. Job gains in the construction sector were -30,000 less than February and leisure and hospitality job gains declined -57,000 from February. Restaurants only added 8,700 jobs and the least since June 2012.

Involuntary part time workers rose from 6.6 to 6.7 million and the first rise since June. This indicator was specifically mentioned by Janet Yellen in recent speeches as a troubling sign of excessive slack in the labor market. Rising +100,000 in March it is going to give her no reason to hike rates.

The mining and logging category that includes oilfield workers saw a decline of -11,000 jobs after falling by a similar amount in February. The last three months has seen a decline of -29,000 jobs in that category. That is the worst drop since July 2009.



The odds of a June rate hike declined to 11% as evidenced by the fed funds futures and the odds for September declined from 39% to 35%.

While the equity markets were not open on Friday the futures markets were active until 9:15. The S&P futures declined -20 points from 2059 to 2039. The Dow futures declined -165 points. There is a lot of darkness between now and Monday's open but without a significant rebound it is going to be an ugly Monday.



The dollar declined sharply on Friday morning on expectations that the Fed will not raise rates until September at the earliest and possibly March 2016.


The Atlanta Fed GDPNow forecast rose to 0.1% on April 2nd after being zero on April 1st. Atlanta Fed Link


The economic calendar for next week is nearly devoid of material events. The FOMC Minutes on Wednesday will be the highlight for insight into the conversations behind the formation of the FOMC statement two weeks ago.

The only other report of interest will be the ISM Nonmanufacturing (services) Index on Monday. With the decline in the recent economic reports a positive Nonmanufacturing report will give the economic bulls a life preserver to grasp in a sea of economic misses.

This is the last week before the Q1 earnings cycle kicks off and the list of reports this week is pretty slim. Greenbrier (GBX) on Tuesday, Family Dollar (FDO), Alcoa (AA) and Bed Bath and Beyond (BBBY) report on Wednesday. Thursday has Rite Aid (RAD), Walgreens (WBA) and Constellation Brands (STZ). The following week will begin the flood of reports from the S&P-500 companies.


In stock news Tesla announced on Friday morning it had delivered a record 10,030 vehicles in Q1. That is a 55% increase over Q1-2014. The company had guided for 9,500. Tesla also announced in the future it would release the number of vehicles delivered within three days of quarter end. The company said it had to take this direct approach because of the inaccuracies in the press from analyst estimates. Tesla said a "delivery" is only counted if the car is transferred to the customer and all the paperwork is correct and complete. In the letter to shareholders in July the company said it expected to "end" 2015 with an annual delivery rate of 100,000 units. Tesla expects to lift annual production to 500,000 cars by 2020. The Model X SUV is expected to begin delivering later this year with more than 16,500 already preordered. The mass market Model 3 is expected to begin deliveries in 2017.

The biggest boost to production will come from the completion of the Gigafactory to make batteries in large quantities and significantly cheaper. The factory is ahead of schedule and should be completed in late 2016. The factory will occupy 10 million square feet on a 500 acre parcel and employ 6,500 workers. The cost is expected to be between $4-$5 billion.


Motorola Solutions (MSI) shares declined -6% late Thursday after Bloomberg reported that people with knowledge of the matter said it had failed to find a buyer. The company put itself up for sale in February and approached private equity firms as well as Honeywell (HON) and Tyco (TYC). The rumor in the analyst community is that Motorola is too large for one entity to make an offer despite only a $13 billion market cap. Secondly, they fear that Motorola's technology may become obsolete too quickly to justify a large purchase price. Adjusted earnings declined -45% in 2014 and sales for 2015 are projected to be flat or lower.


Lumber Liquidators (LL) said sales rose +5.6% in Q1 but declined -17.8% in March after the expose about potential carcinogenic flooring aired on 60 Minutes. The company said more than 10,000 customers have asked for free test kits to check their floors for formaldehyde seepage. The company said revenue rose to $260 million and slightly over analyst estimates of $256.8 million. The company will release full results on April 29th.

Despite the sales drop in March the company's revenue held up better than some analysts had expected. The key will be what happens this quarter and whether sales continue to be down that 17% per month. Shares have been trying to recover but struggling.


GoPro (GPRO) shares recovered slightly on Thursday after a -7% drop on Wednesday. There are growing concerns that new Chinese competitor Xiaomi is going to steal market share from GoPro. Xiaomi announced a new 16-megapixel point-of-view camera and Apple has already obtained a patent on a similar camera. The recent unexpected resignation of the COO has also weighed on the shares. After rebounding from $37 to $44 several analysts thought Thursday's decline was just profit taking in an ugly market.


One year ago last week on March 27th Google (GOOGL) split its stock 2:1 but caused significant investor grief because the new shares had no voting rights. In an effort retain total control of the company co-founders Larry Page and Sergey Brin hatched a plan to own as many of the voting shares as possible. They were afraid that the constant outflow of new shares to employees and those used in acquisitions would eventually dilute their voting block and they could lose control. There were already two classes of stock. The A shares have one vote each and the B shares have 10 votes each. Page and Brin own virtually all the class B shares. The new shares given out in the split were C shares with no votes.

The existing A share holders were outraged that their new shares had no votes and sued Google. Page and Brin argued that the A and C shares would basically be worth the same since the pair had majority control just with their B share votes. They agreed to settle the class action suit by paying the A share holders if the price of the C shares fell more than 1% below the A shares in the first year of trading. Google disclosed in a filing that as of December 31st they would owe the A share holders about $593 million in compensation. Since the first full year just ended on March 27th that number could change. Based on the numbers of A shares at the time of the split that would mean they would have received $1.74 per share in compensation had December 31st been the 1-year anniversary.

If the spread between the value of the shares had been more than 5% the amount owed would have been as much as $7.5 billion. That makes the $593 million estimate pocket change. That is of course if you have the $64 billion in cash that Google had on their last statements. The $1.74 compensation is nothing relative to the $541 price on the stock. Since Page and Brin had full control before the split the entire case was a waste of effort.

Shares would return to the $600 level or higher if Google would quit investing in wind energy, moon races, algae farms, contact lenses and high altitude WiFi blimps. Unfortunately without voting rights the shareholders can't force them to rethink their multitude of endeavors.


Garmin (GRMN) was downgraded to neutral from buy at Goldman Sachs. The price target was lowered from $63 to $54 with a close at $47. Shares hit a 52-week low on Thursday. The highest price target on the street is currently $68 but I would expect that to drop soon. Garmin still has a place in the industry but it is shrinking fast. The vast majority of directions now come from your mobile phone. However, I still use my Garmin about once a week and I have had it for nearly 10 years. Maybe that is why their sales are declining. The product last so long they don't get repeat sales.


Micron (MU) was reiterated as a hold at Topeka Capital but the price target was cut from $33 to $30. Credit Suisse reiterated an outperform rating with a $50 target. Needham reiterated its strong buy rating but slashed its target from $60 to $50. I am sure Micron investors would love to see $50 since that is almost a 100% gain from here.


IMAX announced a new laser projection system that will double the size of screens from 75 feet to 140 feet. The older technology was limited to a max width of 86 feet. Only one theater in the U.S. currently has this technology but they are rolling it out to the rest as soon as possible. Analysts that have seen it claim the images are sharper, brighter and with more contrast. Basically they are going from a normal projection system to High Definition. The new movie Furious 7 is the first one to play on the new high def screens. IMAX was started at outperform at Macquarie with a $39 price target.


Allegiant Travel (ALGT) averted disaster late Wednesday when a court blocked a pilot strike over the holiday weekend. However, shares collapsed -10% on Thursday after a -6% decline on Wednesday. The court order saved more than 33,000 passengers from being stuck in airports with more than 250 flights grounded. Unfortunately the restraining order was only temporary and the pilots union will be back in court on April 6th to press their case and the judge said he would rule by April 10th. The odds are pretty good that the pilots will eventually strike. Their list of grievances dates back more than two years and Allegiant has delayed any resolution at any opportunity according to press reports. Allegiant shares could have farther to fall.


Crude prices were very volatile on Thursday as news broke that Iran and the P5+1 nations had arrived at some sort of "framework" agreement to resolve the existing sanctions against them. For oil to move on this news shows how many novice traders were involved. First, the framework is just a set of talking points that will have to be committed to paper by the end of June. This will be a prime example of the devil in the details and the odds of getting an actual agreement completed are very low.

Even if they were to miraculously get some detailed agreement signed by June 30th the sanctions are not going to be lifted until it can be verified that Iran has done everything they claim to be agreeing to today. Some analysts believe it could take a year for the sanctions to be lifted, if ever. Iran has never fulfilled any agreement that it signed with the P5+1 nations and the IAEA. Never! Over the last two weeks they were found to still be violating the last set of agreements they signed. Not releasing the sanctions until they comply could take a very long time. Iran is notorious for "hide and cheat" and the current president has mentioned several times how proud he was at having delayed prior nuclear talks for more than 6 years. He was the nuclear negotiator at the time.

Iran produces about 2.8 mbpd but can only legally export 1.0 mbpd because of the sanctions. It currently has about 30 million barrels stored on tankers and ready to be shipped once the sanctions are lifted. Obviously if the sanctions were lifted tomorrow the price of oil would plunge on the flood of new supply. That is not going to happen but oil prices fluctuated on the uncertainty and came to rest just under $50.


For some reason refiners crashed on the news. Valero (VLO) fell -6%, Tesoro (TSO) declined -5% and Holly Frontier (HFC) dropped -6%.


The drop in active rigs appears to be slowing. Active rigs declined -20 for the week ended on Friday compared to -21 the prior week compared to an average of 67 per week for the previous 7 weeks. Whether this is just a lull in the pace of terminations or a new slowing trend that will eventually fade to nothing is unknown.

Oil rigs declined -11 to 802, gas rigs declined -11 to 222 and offshore rigs declined -3 to 31. Miscellaneous rigs rose +2 to 4. The real problem here is the offshore rig count at 31, down from 60 in January. That is a -50% decline in three months. A drop in offshore activity of that magnitude is going to cause a lot of job losses around the Gulf and some serious red ink on the balance sheets of Transocean Offshore (RIG) and the other drillers. Transocean announced it was scrapping two more rigs, bringing the total to 18 over the last several months. Cowen & Co said "Within the last six-months 32 rigs have been scrapped across all the dillers. Given our outlook for rig demand through the end of 2016, we believe that over 100 rigs should be removed from supply in order to balance the market."

The severity of the pain that this would cause the offshore drillers is unthinkable. However, with oil at $50 it does not pay to spend $500,000 a day to drill deepwater wells and produce oil that costs $75. To modify a book title by Robert Heinlein, "Reality is a Harsh Mistress." The law of supply and demand has caught up with the offshore drillers and it may be a long time before they get out of debtors prison. It is amazing that just two years ago there were not enough rigs to go around and there were bidding wars whenever a rig came off lease.


Markets

The S&P rallied to gain +7 on Thursday and it was probably mostly short covering ahead of the weekend and the payroll report. The only bright side about Thursday's minor gain is that it kept the S&P from making a lower low. Initial support at 2050 held on Wednesday and the stronger support at the 2040 level was not tested.

Unfortunately even before the big futures plunge on Friday the chart pattern was still bearish with a series of lower highs and the complete reversal of the big short squeeze on Monday. On the bright side having that strong support at 2040 may give investors come confidence to buy the dip on Monday. The S&P futures drop on Friday closed at 2039.

We do not want to break below 2040 because that would target 1985. The 100-day average is struggling as support with multiple intraday declines below that level. It we get a close much under 2060 the new support average would be the 150-day at 2029.

Support is 2050, 2040 and resistance 2080, 2090, 2113.


The Dow chart was even more negative with the Wednesday dip coming within only 6 points of a lower low at 17,579. The rebound was lackluster and the index is poised for a potential failure at the 17,600 support level. The Dow futures closed at 17,511 on Friday and that suggests support on the cash index could fail. Gainers far outweighed losers but tech stocks continue to drag the index lower. Microsoft, Cisco and Intel are all showing a negative trend with MSFT closing in on a 52-week low. Fortunately those stocks have relatively low stock prices and they have to move a lot to have any real impact on the index.



We need to focus on the 17,600 level next week for market direction. If support does crack as a result of the payroll report it could be a swift trip to the January lows.


The Nasdaq continues to hold above support at 4850 but it has been a fight. The Nasdaq lost ground for the week with a -4 point loss but the Nasdaq 100 gave back -17 points. The big cap index is clinging to support at 4300 but appears to be lowing its grip. The low on Thursday was 4302 and the close at 4315. If we lose that 4300 level the next stop could be 4085-4100.

The Nasdaq 100 futures declined from 4311 to 4262 on Friday. That is a clear break of that 4300 support mentioned above.

Google has been a drag on the big caps with a $40 drop since early March. Apple has flat lined and is trading in a range from $123-$126. The post Dow entry and post Watch announcement decline has put Apple into consolidation mode and that is actually keeping the Nasdaq from declining further.



The key level to watch was 4300 on the NDX and 4850 on the Nasdaq Composite. If those levels break the broader market is likely to collapse. We are going to have to rebound +40 points in the futures to regain 4300.




The small caps continue to outperform with the Russell 2000 posting a +1.23% gain for the week. The S&P Small Cap 600 ($SML) is also strong with a close only 6 points below a new high. The trend to buy small caps to avoid the impact of the strong dollar is still intact.



The Russell futures imploded to close at 1236 and very close to critical cash support at 1230.


Monday will be interesting to say the least. In the past bad economics were sometimes good for the market because it meant the Fed would wait even longer before raising interest rates. However, at some level of economic decline the fundamentals eventually begin to matter and bad news is actually bad news for the markets.

I have mixed feelings about the payroll numbers. One month does not make a trend and people are going to blame the weather, strong dollar, the west coast port slowdown, etc. They will find something to blame other than the continued decline in the economic numbers that we have been seeing. In other words they will find a reason to blame to support their bullish bias and they will want to buy the dip.

At the same time the market has been weak of late and there is quite a bit of indecision. The payroll news could push some portfolio managers into protection mode and stocks would get sold and bonds bought. We saw some of that on Friday morning when the yield on the ten-year treasury declined about 10 basis points to 1.82% after the payroll numbers.

I would probably be a little more cautious than normal about buying this dip until we see if there is any follow through. It if turns out to be a one day wonder then make a decision about buying the rebound.

Random Thoughts

So far in Q1, 85 companies in the S&P have issued negative earnings guidance. Only 16 have issued positive guidance. That is the lowest number of companies giving positive guidance since Q1-2006. The five-year average is 34 and the average of the prior 4 quarters is 27.

Earnings for Q1 are expected to decline -3% with energy down -63%. Earnings are trending negative, revenue is trending negative and profit margins are trending negative. The only thing rising is valuations.


Russian soldiers have given up pretending they are not fighting in Ukraine. After several thousand photographs and dozens of soldiers being captured the strategic lie is no longer being told. LINK


Margin debt on the Chinese stock market has now passed 1 trillion Yuan or $161 billion. Since July the SSEC is up a whopping 84% and Chinese investors are betting the farm to chase the market higher. The 1 trillion Yuan is four times what it was 12 months ago. Experienced traders in the U.S. know what is about to happen. This spike is similar to the Nasdaq spike in 2000 when margin debt was through the roof. When this house of cards comes tumbling down a lot of Chinese traders are going to lose a lot of money. They will learn that leverage works both ways. Since the government endorsed investing in equities for regular Chinese investors last year the number of trading accounts has soared. Just since mid March more than 2.8 million new accounts have been opened. This is a monster equity bubble and somewhere there is a pin headed their way.



Greece said it will run out of money on April 9th and issued an appeal to the EU finance ministers for more funds. The appeal was denied because Greece has not implemented any of the required reforms to qualify for more bailout funds. Greece has a 450 million euro payment to the IMF due on April 9th as part of a prior bailout. Interior Minister Nikos Voutsis said if it came down to either paying the IMF or salaries and pensions they would pay the people instead of the IMF. Greece can get 7.2 billion euros of previously approved bailout funds if it implements the reforms agreed to by the previous administration. The current administration has refused to enact the reforms saying the prior administration no longer exists and neither does the requirement to enact those reforms. Time is growing short for Greece and we could be watching the last desperate acts before a major change in direction that could include an exit from the eurozone. Reportedly Greece is drawing up drastic plans to nationalize the banking system and reissue the Drachma as a parallel currency in order to pay bills. In other words, a bankrupt country is going to print worthless money to pay its debts.


Everyone has probably seen the Obama administration taking a victory lap on the completion of a "framework" deal on the Iranian nuclear problem. Unfortunately everyone else at the table other than Iran is talking down the deal and saying the U.S. forced the other western nations into accepting the terms, which everyone else considers weak.

In theory the deal contains these points.

Iran will reduce the number of active centrifuges enriching uranium from 19,000 to 6,104.

No enrichment will take place at the heavily fortified underground facility at Fordow for the next 15 years. The 13,000 existing centrifuges at Fordow will remain in place and functional but Iran agreed not to enrich uranium there but use the site for nuclear research.

Enrichment will only occur at Natanz using the older centrifuges.

The Arak heavy water reactor will be redesigned and rebuilt to reduce the amount of plutonium it is capable of producing.

The International Atomic Energy Agency (IAEA) will inspect suspicious sites and activities.

A "possible military dimension" will be addressed in future talks.

Sanctions will be suspended after Iran is found to be in compliance and can be "snapped back" if Iran is found to be cheating.

While President Obama is hailing this as an historic agreement the press keeps replaying his red line speech from 2013 saying he will never accept any agreement that allows Iran to retain any nuclear infrastructure.

The Tehran News, the official government newspaper, said this. "In the framework of the agreement none of Iran's nuclear facilities as well as previous activities will be stopped, shutdown or suspended and Iran's nuclear activities in all of its nuclear facilities including Natanz, Fordow, Lsfahan and Arak will continue." Obviously this is spin for the Iranian people just like President Obama's speech parade this weekend is spin to support the victory photo op.

The real problems are pretty basic. The IAEA said it could not enforce this agreement under the conditions stated in the framework. They will NOT be able to do snap inspections. They have to request permission to visit facilities weeks in advance and permission can be denied for multiple reasons including preserving military secrets. With no snap inspections Iran will be able to play "hide and cheat" almost from day one.

The IAEA has been trying to inspect various sites for the last 12 years under previous agreements and were always denied entry because they were "military locations" and off limits to inspectors. By declaring any location a military location they can avoid inspections.

The snap back sanctions are not really immediate. The P5+1 nations would have to go through the UN and get another resolution to reactivate sanctions. This resolution could be blocked by Russia with its veto power.

Iran says the sanctions will be lifted when the June 30th deal is signed. President Obama says sanctions will only be released over time as Iran complies with the details of the agreement and that could take years. Somebody is fibbing.

The French negotiators wanted to reject the deal for multiple reasons including the potential for a nuclear arms race in the Middle East but Kerry demanded they accept it saying Iran would walk out of the negotiations if the deal was not accepted.

The deal is far from done. Agreeing in principle is easy but the devil is in the details. Committing all of this to paper with detailed steps for compliance and detailed penalties for non compliance is NOT going to be done by the June 30th deadline. Iran understands this is a political badge of honor for President Obama and they are not going to agree to any drastic curtailment of their programs. They will stonewall for the next three months and threaten to end talks at least once a week.

They have the trump cards here because the P5+1 nations led by the U.S. want to just get something on paper so they can claim a win and let the next administration in each country be faced with the actual implementation and noncompliance. The P5+1 nations will be able to say "We signed a historic agreement with Iran" when what they really did was kick the nuclear can down the road so they could put a checkmark on their do list of accomplishments.

Regardless of what is eventually signed the odds of Iran having a nuclear weapon before 2020 are pretty close to 100%. Reportedly they are only 2 months away today and the "deal" hopes to stretch that to 12 months with the restrictions. Of course that assumes Iran complies with the deal. Iran has cheated on every prior agreement and there is no reason to expect they will not cheat on this one.


Nuclear armed Pakistan is on the verge of signing a deal with China to buy eight submarines for up to $5 billion. China has been developing new models of both diesel and nuclear submarines as they rapidly expand their own submarine force, which now outnumbers the U.S. sub fleet. China is now the third largest arms exporter. Pakistan is also talking with Germany, Britain and France about purchasing additional used submarines.


China is one step closer to making the yuan one of the world's reserve currencies. China is expecting a deal with the IMF later this year to include the yuan as a currency in the IMF basket of currencies that make up the IMF Special Drawing Rights or SDR. The basket already includes the dollar, euro, yen and pound sterling. The yuan, otherwise known as the renminbi is already the world's fifth most-used trade currency. The IMF is considering China's request to be added to the SDR and a decision will be made in November.

Germany, France and Italy already support adding the yuan to the SDR. Japan, which has existing conflicts with China, is against the move. It would be the first emerging market currency to be added to the SDR. In order to be added it must be "fully convertible" into other currencies and "freely usable." China has not yet completed its liberalization and still controls its convertibility. Having the yuan added to the SDR is one more step towards China's goal of replacing the dollar as the world's primary currency. Once that happens the world as we know it will change because the dollar could decline 50% or more in the years that follow. With China overtaking the U.S. as the world's biggest economy we may be closer to at dollar devaluation than we think.

China currently has $3.8 trillion in U.S. dollar reserves to "keep the yuan steady" in the global markets but the yuan rose +11% in value in 2014. Offshore trading of the yuan soared more than 350% in 2014 on the Thomson Reuters trading platforms.


 

Enter passively and exit aggressively!

Jim Brown

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"When all the experts and forecasts agree — something else is going to happen."

Bob Farrell