The decline today was led by the Russell 2000, S&P Small Cap 600 and the S&P Midcap 400. These indexes rolled over around 12:30 and selling increased as the day progressed. For weeks we have been warning that the small caps were the strongest indexes because of no dollar exposure and when they weakened there could be trouble ahead.

Market Statistics

It was not that the dollar suddenly turned around and began falling and making small caps became less desirable. The dollar index rallied +1.2% today to rebound from prior support at 96.25 and the 50-day average. The ECB said it was able to buy all of its 60 billion euro QE target for March. This pushed the euro currency lower and lifted the dollar.

I suspect this is more signs of a tired market rather than a specific headline pushing stocks lower. Stocks have been chopping around at these levels for the last four months as represented by the Dow. When momentum fades the average investors begins wondering if the next move is going to be lower and they take action to protect their portfolios.



The weak jobs report is probably still weighing on the market. The bad news was good news if you want the rate hikes to be pushed farther out into the future but it was still bad news. The Atlanta Fed real time GDPNow forecast is still for only +0.1% GDP growth in Q1. While everyone wants to blame the weather the weak jobs numbers in a month that was not really impacted by weather suggests the economy may be slowing. This is a challenge for portfolio managers.


The Job Openings and Labor Turnover Survey (JOLTS) released today showed job openings rose +3.5% for February. However, we already knew that since the February jobs report showed a gain of +264,000 jobs, but revised down from +295,000 last Friday. That was still a good month.

The JOLTS survey showed that job openings rose from 4.965 million to 5.133 million in February. However, hiring declined for the second month from 4.994 million to 4.916 million. December hiring was much higher at 5.239 million.

If you have been paying attention to the monthly payroll numbers you know that this JOLTS data is a lagging indicator. The market ignored the news.

Outstanding consumer credit in February rose from $10.8 billion to $15.5 billion. Revolving credit declined sharply with a -$3.9 billion drop and the second consecutive monthly decline. Now you know where those gasoline savings are going. Tax refunds are also used to pay down that credit card debt. The nonrevolving segment soared from $11.8 to $19.2 billion thanks to the largest rate of auto sales since the recession.

The biggest report of the week will be tomorrow with the FOMC minutes. These minutes will be crucial since this was the meeting where they removed the word "patient" from the statement. Clues will be sought on the odds for a June rate hike.

The rest of the week is pretty dull as for as economics are concerned. With earnings due to start next week we need to be more worried about any additional earnings warnings for this cycle.


FedEx (FDX) started off with a bang when it announced it was spending $4.8 billion to buy Dutch rival TNT Express (TNTEY). TNT operates in Europe and 70% of its shipments are ground based. This will allow FedEx to better compete with UPS in Europe. The deal works out to $8.75 per TNT share or a 33% premium to Monday's closing price. FDX shares also rallied on the news.

Two years ago UPS tried to buy TNT but had to back out due to objections by European regulators. The FedEx CEO said there would be significant synergies in the transaction and allow them to consolidate duplicate operations.



Axalta Coating (AXTA) shares rallied +10% to $31.11 on news that Warren Buffett increased his stake in the company by acquiring 20 million shares from Carlyle for $28 each. This increases Buffett's stake in Axalta to 9% or $560 million. Axalta is a 145-year old seller of coatings for cars, SUVs and commercial vehicles. Buffett has been aggressively adding to his automobile portfolio and this fits right into the mix. In October Buffett bought nationwide dealership chain Van Tuyl for an undisclosed amount. Van Tuyl has $9 billion a year in vehicle sales making it Buffett's 9th largest subsidiary. He also owns Lubrizol, an automotive lubricant, which he acquired for $9 billion in 2011.

Carlyle bought Axalta from DuPont in 2013 for $4.9 billion and then took the company public by selling 50 million shares for $19.50 each. Buffett's increased position size suggests we could see him buy the entire company if the earnings performance continues. Axalta has a $6.5 billion market cap and Buffett now owns just under 10%. I would buy this stock on any material dip. You can bet Buffett will be adding to his position at the same time.


AthenaHealth (ATHN) declined -5% to $116 after hedge fund manager David Einhorn reiterated his sell rating on the company. Einhorn has a significant short position on the company. He recommended shorting ATHN at the Sohn Investment Conference nearly a year ago. He said it was one of a basket of bubble stocks he was shorting. Shares have been relatively flat since the short call last May.


Twitter (TWTR) shares jumped on rumors of a possible takeover play in the near future. Google (GOOGL) was the rumored acquirer. Google is getting killed in the social networking field after Google Plus flopped. Analysts claim Google Circles is dead. There was a rumor that Twitter has hired advisers to rebuff a takeover bid from two companies. Twitter options were very active on Tuesday with more than 250,000 contracts trading. Call options beat puts 3:1.

Dan Niles from AlphaOne also made news saying he had bought Twitter shares after being short for a long time. He said the new search contract with Google plus the new Periscope feature would aid in bringing more people into the twittersphere.

Apple (AAPL) could also be a potential acquirer and Twitter's $33 billion market cap would not be a problem since it has $178 billion in cash. Apple does not have a real social media product. There were even some rumors Facebook (FB) might be interested in order to round out its product line. Twitter users are a different segment of the population than Facebook users so the company could fill a niche that it doesn't currently have.

Twitter acquisition rumors come around about once a quarter but this time there is a little more strength behind the rumors. Who knows, maybe Twitter is about to get some new management the hard way.


Shire Plc (SHPG) said it had reached an agreement with the FDA on a clear regulatory path for SHP465. This is an investigational oral stimulant medication being evaluated as a potential treatment for ADHD in adults. Shire has agreed to do a short term study in pediatric patients with ADHD ages 6-17. Shire plans to market the drug for adults but the FDA requested the additional pediatric data to better understand the benefits in the event the drug is approved for this segment as well. Shire has patent protection for its multiple ADHD drug franchise that extends to 2029. SHP465 is expected to be available to the market in 2017.


Starbucks (SBUX) announced it was going to give eligible employees a full ride four year scholarship. The catch is that they have to work a minimum of 20 hours a week and take the online program from Arizona State University. The company has set aside $250 million and will reimburse the tuition for the full four years. In the current program they only reimburse the last two years of tuition while freshmen and sophomores could only get a partial reimbursement.

Out of the 144,000 employees only 2,000 are enrolled in the current program. Starbucks believes it can attract a better class of worker and encourage existing workers to get a degree by expanding the program to cover all four years. Tuition costs will be reimbursed at the end of each semester. The company wants to help 25,000 employees graduate by 2025. ASU offers 49 undergraduate programs for the program and there is no requirement to continue working for Starbucks after graduating.


Energy company Royal Dutch Shell (RDS.A) said it wa sin talks to buy BG Group (BRGYY) for roughly $68 billion. BG Group is heavily involved in natural gas and LNG. This deal would give Shell access to significant oil and gas reserves as well as existing production and LNG assets around the world. Shell would gain a large position in the deepwater reserves offshore Brazil and the unconventional gas in Australia. BG is one of the world's largest producers and traders of LNG and when combined with Shell the entity will dominate LNG on a global scale. BG recently completed a $20 billion LNG project in Australia. BG Group shares gained +6% on the news. This makes me wonder if all the news is accurate since BG Group only has a market cap of $46 billion. A $20 premium would be a monster premium and worth more than a 5% spike. No deal has been done but I would have expected a bigger gain. After checking again the first news broke at 4:30 PM so the spike may come tomorrow.


Railcar manufacturer Greenbrier (GBX) reported earnings of $1.57 compared to estimates for $1.23. Revenue rose +23% to $630.1 million but missed estimates of $637 million. I suspect nobody will care about the revenue miss. The company now expects to earn $5.65-$5.95 for the full year, up from $5.20-$5.50. They expect to deliver 21,500 railcars in 2015 with a gross margin of 19.9%. They delivered 5,200 in Q1, up from 4,000 in the November quarter. Shares spiked +6% on the news but faded to a +3% gain as market selling accelerated near the close.


Crude oil rallied +3% in regular trading to close at $53.86 and the highest close of the year. Bullish sentiment for crude is increasing as we move closer to the Memorial Day kickoff for the summer driving season. Even though inventories are still increasing the crack spread is also increasing and that means enormous profits for refiners. Refining margins in March rose to $28.09 a barrel and the most since March 2013. This is a huge profit and it means refiners will be racing to refine that oil they have stockpiled at very low prices. As oil prices rise their profits will increase because they have full tanks that they bought over the last several months at prices in the mid to low $40s.

Historically refiners increase their consumption of crude by an average of 1.1 million barrels per day from April through July. I would expect it to be even higher this year as the race to capitalize on this profit opportunity. Ironically shares in the major refiners are plunging because retail investors don't realize how profitable this scenario really is.


Markets

While nobody knows why the market was weak this afternoon there is a trend that nobody is talking about. Bearish puts on the S&P-500 outnumber calls by the most since October 2008. Obviously market sentiment is far from bullish. There could be several reasons for this. The sharp decline in the economic numbers over the last two months has worried portfolio managers so they are protecting their positions with puts rather than sell the stocks. Economic data is missing forecasts by the most in six years. The ISM Manufacturing Index declined to 51.5 in March and the fifth consecutive decline. This is the longest streak of declines since 2008.

Secondly, traders may be speculating on the sell in May cycle that will hit in a couple weeks. Third, with earnings expected to be so negative speculators are loading up on puts to profit from any decline. Lastly, the lack of forward motion for the last four months may have convinced many investors that the next major move is going to be lower. If you remember the quarter end numbers the Dow and S&P were flat for Q1 and the Nasdaq and Russell 2000 only gained about +3.5% YTD. Momentum has died. Dan Niles said today he expects a 10-20% correction this summer.

Analysts are speculating this week that the market is listless because companies are in their quiet period before earnings and can't buy back stock until after they report. Stock buybacks have been a major factor in market movement over the last year because they shrink the float. Companies are returning cash to shareholders through monster buyback programs. As an example Qualcomm (QCOM) recently announced a $15 billion buyback.

We have also seen a record $500 billion in new corporate bonds issued in Q1. That is the most ever and some of that cash will be used to buy back stock but not until after earnings. It will also be used for mergers and acquisitions but that is a longer process.

Market volume was very weak today at only 5.6 billion shares. Volume on the S&P-500 ETF (SPY) was only 81 million shares compared to the normal 115 million on average. There are no catalysts to drive the market higher and recently the only major up moves we have seen have been short squeezes. The shorts are very active but so far they have been relatively unsuccessful.

The S&P has been stuck in a tight range for the last two weeks between 2050 and 2090. Today was no exception with the high at 2089.91. That is about as close as you can get to 2090 without touching it. The 100-day average has risen to 2060 and that was just about where the index rebounded on Monday's market drop at the open. So far the 150-day average now at 2030 has not been touched since January.


The Dow only lost -5 points for the day but closed -108 points off its intraday high. That is not a good sign. Apple was the biggest loser again along with American Express (AXP) after being downgraded to a sell at Oppenheimer. Decent gains in Boeing and the oil stocks were holding the index to a minor loss.

Despite the negative close the Dow is still at the upper end of its range over the last several days. The support at 17,620 is still intact but the index feels heavy. That probably means it will confound the charts and move higher but the resistance at 18,000 is still strong. The high today was 17,983 so close but not quite enough. Sellers were waiting.

The key levels are going to be 17,620 and 18,000 and everything in the middle is just noise.



The Dow Transports posted a gain on Tuesday thanks to FedEx. With oil prices rising and economic declining I seriously doubt the gain will last. The transports are clinging to the critical support at 8600 and once that breaks it could be a long drop. This is key because the movement in the transports rubs off on the Dow. Any material decline here could drag the Dow lower.


On the Nasdaq the resistance at 4950 was rock solid with the high for the day at 4948.88. Fortunately the support at 4850 is equally as strong. The tech stocks are still suffering from the same ailment as the Dow. The big caps are going to have terrible earnings because of the strength in the dollar.

To take a phrase from Star Wars, "Move along, nothing to see here."



Despite the Russell 2000 leading the decline today it is still the strongest index. The moment that is no longer the case we should be moving to the sidelines. Whether today was just fund manager profit taking from the rebound since January of the leading edge of something bigger we will not know until tomorrow. However, Russell futures are slightly negative tonight while the Dow, Nasdaq and S&P futures are slightly positive. Is that a clue for tomorrow?


I would remain cautious for the rest of the week. While we might get an afternoon bounce out of the FOMC minutes on Wednesday there is an equal chance they could send us lower. The markets have lost momentum and without a catalyst the path of least resistance is lower.

Analyst comments on earnings are improving. While S&P earnings are expected to decline -3% for Q1 the majority of that is a -63% decline in energy. If you take out energy we actually get +4% growth. If that metric gets repeated enough it could boost sentiment and attract some buyers. I know that is a big IF but it is all we have to hope for today.

Enter passively, exit aggressively!

Jim Brown

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