General Electric unveiled a sweeping restructuring program and a plan to return up to $90 billion in cash to shareholders. That put GE on the top of the leader board for Dow components and helped jumpstart the market on Friday morning.

Market Statistics

GE finally pulled the plug on GE Capital and is selling the bulk of the divisions assets. About $26.5 billion in real estate assets were sold with Blackstone and Wells Fargo buying the bulk of that for $23 billion. Shares of GE soared 11% as Wall Street investors applauded the deal. GE Capital has been a drag on GE earnings for a very long time. Shedding GE Capital allows GE to turn its full attention back to manufacturing where it has been very profitable. GE said it authorized a $50 billion share buyback program and will return $90 billion to investors in the form of dividends and buybacks by 2018. They are planning on selling $165 billion in assets.

GE was founded by Thomas Edison in 1876. The company recently sold NBC Universal in 2011 and has been moving out of the appliance business. GE spun off its private label credit card business, Synchrony Financial in 2014. GE is also going to sell the majority of its commercial lending business and the leasing division and the rest of its consumer lending businesses. The only major financing operations it will keep are the ability to finance products GE manufacturers like aircraft engines, locomotives, etc.

The $50 billion stock buyback plan ties with Apple for the largest ever share repurchase program. Microsoft bought back $150 billion from July 2004 through 2007 but it was announced in stages with three $40 billion programs and one for $30 billion. GE has 10.7 billion shares outstanding.

GE shares rallied +11% to close at $28 but already analysts are talking about it returning to its all time highs of $60. After years of no material growth GE shares could be returning to "Widows and Orphans" status where anyone can buy and hold and be assured a safe return.

Somebody entered an option position on February 27th that is too good to be true. They bought 127,000 of the January 2017 $30 LEAPS at 80 cents or roughly $10.16 million dollars. Those LEAPS closed at $1.62 on Friday but I am sure they will be a lot higher before January 2017.


It was a good thing GE made some headlines on Friday because the economic calendar was very slim. The Import & Export Prices report showed import prices declined -0.3% in March after a minor +0.2% rise in February. Prices have declined in 8 of the last 9 months. The factor pushing prices higher was of course oil and oil products. This report was ignored.

The calendar for next week has a lot of reports but only two are normally market movers. The Fed Beige Book on Wednesday "should" continue to show modest growth in each of the Fed regions but given the number of times the weather excuse has been used over the last month there is the potential for a weakening of the adjectives used to describe the growth.

The Philly Fed Manufacturing Survey on Thursday is the preview of the next series of regional manufacturing reports. This is also seen as a proxy for the next ISM Manufacturing report on May 1st. The estimates for the Philly Fed which are encouraging since the headline number has fallen for the last four months from 40.2 in November to 5.0 in March. If it really does rebound to 8.6 as forecast then the worst may be over and it really was just the weather causing problems.


Netflix (NFLX) announced on Friday what could be a massive stock split. In a proxy statement filed late Friday Netflix proposed increasing the number of authorized shares from 170 million to FIVE BILLION. If shareholders approve the increase on June 9th the company will announce a stock split at a ratio "to be determined" following the meeting.

Immediately analysts were questioning what they were going to do with the monster number of shares. Are they planning on making a huge acquisition? Are they planning on doing a secondary offering to raise additional cash for acquisitions or production of additional content? Netflix said it had no plans for acquisitions or equity offerings. However, the company said the authorized shares will provide "greater flexibility" for all of those uses as well as executive compensation and other corporate purposes. Netflix said 5 billion was similar to the number of outstanding shares at other major technology companies. Netflix has only split its stock once and it was 2:1 in February 2004. With the share price at $454 it could easily do 4:1 or even 9:1 to bring the price down to $50 and in range of investors with limited budgets.


G-III Apparel announced a 2:1 split for May 4th and the stock is moving slowly higher. The company only has 22.5 million shares outstanding with 116,000 trading on Friday. It needs to do something to generate some additional interest and volume.

Brookfield Asset Management (BAM) announced a 3:2 split on Wednesday and moved to a new high. Brookfield has 631 million shares outstanding but the daily volume of 344,000 is not very heavy. A 3:2 split rarely generates a split run but never say never.


The big news for next week will be the acceleration into the earnings cycle. This is the week for the financials to report. JP Morgan and Wells Fargo lead the sector on Tuesday followed by Bank America, US Bank and Schwab on Wednesday. Goldman Sachs, American Express and Citigroup report on Thursday.

Some tech titans also report with Intel on Tuesday with Google, Netflix and SanDisk on Wednesday.


There is a lot of worry over this earnings cycle. The range of earnings estimates are from about -1.9% to as much as a -5% decline in earnings as a result of the strong dollar and severe winter weather. That compared to estimates for +5% growth at the start of Q1. Everyone is going to be using the dollar as a kitchen sink excuse and guiding lower for Q2, which is already projected to be down -2%. We may be approaching a point where the estimates are too bearish and we have the potential for some upside surprises. The bar is so low a snake would cross it. Typically when this happens the bearish expectations never come to pass.

The energy sector is going to be the biggest drag with estimates in the -59% to -62% range. If you take out energy the earnings growth for the rest of the S&P rises to about +4%. That is a lot better than the scorched earth estimates BUT only about 50% of the S&P derive a majority of their earnings from overseas and therefore are fighting the dollar impact.


The challenge is in knowing in advance which companies are really exposed to the dollar and which one only have minimal exposure. Johnson & Johnson reports on Tuesday and they have a very high exposure so expect some earnings pressure there.

This is the kickoff week for Q2 earnings and it will set the tone for the rest of the cycle. Hopefully the financial companies will not announce a new round of liabilities due to some new government witch hunt. Some of the shares of financial stocks are rising, GS and JPM as examples, so hopefully there will be some good news.

In stock news Caterpillar (CAT) rallied +2.4% after it said it was creating a big data division to capitalize on the growing importance of data analytics. Caterpillar as a cloud company? Who would have ever thought yellow bulldozers would make into the clouds. However, this is not new. GE and Komatsu are partnering to provide big data analysis for mining projects. Caterpillar said it is planning on transforming the mountains of incoming data on fleets of machines or even just an engine to provide data for the owners that will help them maintain and better manage their fleets.


The term "cloud computing" and using the "big data" buzz word is almost guaranteed to lift your stock. That is unless you are Alibaba (BABA). The company said it was launching an automotive unit and a "smart living" division that will combine its cloud computing, big data and hardware operations. The company is counting on its big data analysis and cloud computing abilities to boost its online sales in more specialized categories. They also plan to include car marketing services built around Alibaba's big data analysis. The news did not help their stock with a -2% decline. BABA shares just can't seem to hold any gains. With the lockup expiring on 1.2 billion shares on September 20th it appears nobody is buying even for a short term bounce. The bloom is definitely off this rose.


Apple (AAPL) had a good day on Friday. The shares did not move much but Friday was the first day of sales for the Apple Watch. The Watch sold out in about half an hour and delivery dates are now being quoted for a June or July ship date depending on the model. However, despite selling out quickly the lead time for the backordered watches did not get longer as the day progressed. If there had been strong demand the orders placed later in the day should have been quoted farther into the future. The watch went on sale at 3:AM Eastern time. By 6:AM the lead times were quoted as 4-6 weeks. At 7:30 it was still 4-6 weeks and at noon it was still 4-6 weeks with some styles quoted in early July.

Analysts said there was very limited inventory because of all the different versions, colors, bands, etc. This was not like an iPhone where there are 4 models and Apple can produce tens of millions in advance because they know they will eventually sell. With dozens of combinations of styles, colors and material they did not know which would be the big sellers and which were duds. By making only a few of each style they knew they could quickly manufacturer the models that were selling and not have excess inventory of the unpopular versions. Their limited inventory sold out fast and the lack of extended lead times suggests they can manufacture them to order very quickly.

Analysts don't believe Apple will rush to quote sales figures for the opening weekend. Why advertise you only sold one million watches when you only had one million to sell. People are expecting huge sales numbers and Apple would not want to disappoint.

One other factor is the "managed shortage." By saying they sold out in 30 minutes it creates artificial demand because everyone hearing the news suddenly assumes there were tens of millions of buyers. If Apple can maintain a shortage because of high demand then it makes for good headlines as long as you don't disclose how many you actually sold. The black link 42 mm watch has the longest lead time so that one could be hard to get in the near future.


There are roughly 450 million iPhones in circulation. The cult of iPhone tends to buy whatever new thing Apple produces. If only 1% of iPhone users bought a watch that is 4.5 million. If 10% bought a watch it would be 45 million. At $399 and up for the watch that is a huge amount of revenue for Apple even at the lower numbers. For most people they probably need to visit an Apple store and actually see a demo of the watch to convince them to buy. Just looking at a 30 second clip on TV or reading the features may not be enough to cause them to buy. Charging your watch every night is a new concept and buyers probably want to be able to see, feel and play with one before they buy. Apple will refund your money in full if you return the watch within 14 days.

If you really want an Apple Watch you can buy it on Ebay. Within hours of the watch going on sale, hundreds showed up on Ebay for a premium of as much as 40%. You could also rent one for a week from Lumoid, a San Francisco based startup. You can rent the Sport edition for $45 for a week or the stainless steel version for $55 a week. There are already 3,000 people on Lumiod's waiting list. Unfortunately you can't rent the $10,000 18-karat gold watch.


Symantec (SYMC) rallied 5.6% after the Wall Street Journal said the company was looking to sell its Veritas unit and it may be worth more than $8 billion. Symantec bought Veritas in 2005. Now it wants to spin off the data storage business to focus on anti-hacking services and other security technology. Symantec is reportedly talking to private equity firms and other industry participants.


Oil hit a new high for the year on Tuesday but that was before inventories rose +10.9 million barrels on Wednesday. That was the biggest weekly gain in 14 years. Oil in inventory rose to 482 million barrels and an 80 year high. While we are moving closer to the high demand driving season the demand is just now starting to creep up slowly.

Refiners took in 15.93 mbpd last week and operated at 90.1% of capacity. However, imports rose from 7.53 mbpd to 8.22 mbpd and that contributed most of the inventory gain. Refiners are still buying cheap oil because they know that prices will rise in the summer and they can refine their cheap oil in inventory and sell the refined products at much higher prices.

Active rigs declined -40 to 988 with oil rigs declining -42 to 760 and gas rigs rising +3 to 225. Offshore rigs gained +2 to 33. Active rigs are now down -48.8% from their September high at 1,931. Oil rigs have declined from 1,609 to 760 or a -52.7% drop. The pace of the rig decline in the prior two weeks was 20 per week. Analysts had started to suspect that maybe we had reached the bottom of the decline. The acceleration this week just reinforced the fact that the decline is not over. Rig counts have now fallen for 18 consecutive weeks.


Crude prices continue to hold over $50 despite news that Saudi Arabia produced a record of 10.3 mbpd in March. OPEC production in March was 31.5 mbpd, an increase of 1.2 mbpd from February and 2.0 mbpd over March 2014. The OPEC quota is only 30.0 mbpd but OPEC producers are no longer obeying their quotas. Analysts believe Saudi Arabia is trying to capture as much market share as possible before Iran is given a green light to begin selling oil again. Once that happens there will be a price war between the Persian Gulf suppliers. Saudi Arabia indicated it could produce more if there were buyers. Saudi has claimed maximum production capability of 12.5 mbpd since the recession.


U.S. crude inventories have risen 99.9 million barrels over the last 13 weeks. In the chart below the blue line is the current inventory. The gray shaded area is the average inventory range over the last five years. Clearly we are swimming in crude.


Markets

The S&P actually closed over 2100 for the first time since March 23rd. It has been a rocky road up from the 2045 low on March 26th but any gain is still a gain. Just getting over 2100 is a psychological victory but the real resistance is still ahead. The next battle is downtrend resistance at 2110 from the March highs and the lower high on March 20th. Next in line would be the historic closing high at 2117.

If the earnings from the financial sector turn out to be bad news it could be really tough for the S&P to break through those resistance levels. However, if the banks surprise to the upside it could build a fire under the market because expectations are very low.

The internals have been improving. The percentage of Nasdaq stocks over their 50-day average has risen to 64.2% and a three week high. The percentage of S&P stocks over their 50-day average is 65.6% but not nearly as positive as the Nasdaq, which is closing in on the 5000 level.



Tough test ahead with resistance at 2110 and 2117. Support is now 2075 and 2050.


The Dow hit downtrend resistance at the close at 18,050 with horizontal resistance at 18,100. With multiple Dow components reporting earnings next week the index should be volatile. The financial companies will be the biggest risk. JP Morgan and Goldman Sachs both report and Goldman is now the largest weighting in the Dow. Intel and Johnson & Johnson both report as well. Intel's low stock price would require a major move in Intel shares to dramatically impact the price weighted Dow.

The next material resistance is 18,100 followed by 18,200. Support is well back at 17,850 and then 17,600.



The Nasdaq was relatively strong last week with the Composite gaining +2.23% and the Nasdaq 100 adding +2.46%. Those were the largest gains of any of the major indexes. The Composite index closed at 4996 and just under the psychologically important 5000 mark. The closing high back on March 20th was 5026.42 making that the next target if it makes it through the 5000 level.



Despite the gains by the Nasdaq 100 it is still the weaker of the two indexes because the Nasdaq big caps do have exposure to the strong dollar. Support on the NDX is still 4300 and it has been rock solid. Resistance is 4475 and it has held twice before. If Intel and/or Google have a bad earnings report it could prevent the big caps from maintaining their momentum and the 4475 level could become insurmountable ahead of the summer doldrums. Conversely if those companies post good results it could trigger a short squeeze that powers the NDX to new highs.


The small cap Russell 2000 only gained 0.7% last week but it did manage to return to within 2 points of its historic high close of 1266.37. The Russell had a tough week with multiple intraday selling spurts but they were all bought and the index closed at the high for the week. I suspect this was profit taking as the index neared its highs and the big caps suddenly showed some renewed strength. We need for the small caps to break out to a new high to reenergize the market. We are lacking a decent catalyst to increase the upward momentum and I am concerned the big cap earnings next week could be a challenge. Having the Russell breakout would go a long way towards overcoming some less than stellar big cap results.


The FedEx news it was buying TNT in Europe helped to lift the transports but after four days of gains it is probably time for FDX to rest and the transports as well. The support at 8600 was just barely broken before FDX rescued the index from a collapse. However, if oil prices continue to rise then the transports should weaken again.


The NYSE Composite Index is only 10 points from a new historic high over 11,122 and this is a big deal. The NYSE index is heavily populated by small financials and energy stocks. If the NYSE can manage a breakout and hold its gains it would suggest the other indexes will follow. This is a very bullish setup.


While there are plenty of chances for disaster next week the steady creep higher by the Russell and the NYSE plus the sudden sprint by the NDX suggests the bulls are gaining confidence. If the NYSE and Russell can breakout to new highs it would be very bullish for the market and investors could be enticed to overlook some of the earnings misses. This is going to be a critical week for market direction and it is starting out with some bullish possibilities.

Random Thoughts

It was a good week to be Lloyd Blankfein. He is the CEO of Goldman Sachs and the board awarded him $24 million in compensation for 2014. That was a 4.3% increase. Blankfein receives $2 million in annual salary plus a cash bonus ($7.33 million) and $7.33 million in stock awards and $7.33 million in performance-based restricted stock awards. The $24 million works out to a daily income of about $92,307 for the 260 work days of 2014. That would make you want to get out of bed in the morning with a spring in your step!


The Washington Times, citing a U.S. Army analysis, reported that Iran has stepped up production of "suicide drones" specifically to target U.S. Navy vessels in the Persian Gulf and the Gulf of Aden. The Iranian military has been testing them against ship targets near the Strait of Hormuz. The drones are inexpensive, hard to see and shoot down because of their size and can be used in a swarm against Navy ships. They can also be used to limit takeoffs and landings of aircraft from naval ships. Filling the sky with a few of these in the traffic pattern could cause havoc for U.S. carriers in the Persian Gulf. They are also sharing this technology with Hamas and Hezbollah for use against Israel. What do you think they would do with a nuclear weapon?


Germany has decided to order 100 additional Leopard 2 tanks to ensure its "troops are ready for action in response to concerns over recent Russian assertiveness." I guess assertiveness is a politically correct word to use in place of aggression. This will increase Germany's tank force by 45% to 325. When the cold war ended in the 1980s Germany had 3,500 tanks. NATO has given Europe new goals on flexibility and rapid reaction time that requires all the NATO countries bordering Russia upgrade their forces. Nobody wants to be the next annexation target for Putin.


Deutsche Bank said every portfolio manager in the world should look at this chart every day. The blue line is the forecast for ECB rate hikes, currently December 2019. The red line is the Federal Reserve, currently March 2016. The implied gap between the two central banks has never been wider. Europe is expecting ECB-QE in some form to last 2-3 years. This means the euro currency is going to decline a lot further.



Because of the QE by the ECB, Japan and stimulus from 21 other central banks there is a global bull market in progress. The MSCI All Country World Index (ACWI) broke out to a new high last week. With no end in sight for global stimulus there is no reason this should not continue. Every country is trying to cheapen their currency to make their products more attractive to the rest of the world. When one country does it they can be subject to sanctions by the world body. When 23 countries do it a currency war is born. Welcome to the war!

Stocks in the Hang Seng Index rallied 7.9% last week and now up +16% YTD. The Japanese Nikkei topped 20,000 for the first time in 15 years. The Stoxx Europe 600 hit highs not seen since 2000 and up +21% since the ECB began buying bonds. Fourteen out of 47 national equity benchmarks have hit record highs in 2015.



As further evidence of the insanity in the global financial markets Switzerland sold ten-year bonds with a negative yield. Buyers are actually paying Switzerland to hold their money for ten years.

Even worse Mexico sold 100-year bonds denominated in euros at a yield of 4.2%. Yes, 100-year bonds in euros, not pesos. Mexican pesos can be devalued but the value of the euro is out of Mexico's control and therefore a safer investment. That is of course if you don't think Mexico will implode with a civil war over the next 100-years. There is another obvious question about the euro. With Greece probably going to leave the eurozone soon and several other countries likely to follow will the euro currency itself even be around for the next 100 years?

This is also a risk for Mexico. If the eurozone gets its problems worked out and the economy rebounds and the ECB halts QE and raises interest rates in 2020 to combat an economic boom then Mexico could be in trouble. In 2001 a euro bought 7.7 pesos. Today a euro buys 16.1 pesos. That is a drop of more than 50%. That would require Mexico to spend twice as many pesos to buy back their euro denominated debt. The odds are good that Mexico's economic future is far worse than Europe and the peso will decline even further. This could end up being a very bad deal for Mexico.


In the FOMC minutes last week several participants noted that the strength in the dollar was likely to restrain U.S. economic growth for "a time." That is code for we don't know how long this will last OR we can't say what we actually believe. The dollar will remain strong as long as the euro is falling and with the ECB in unlimited QE mode that could easily be a very long time. That means rate hikes are moving farther into the future.

Participants also noted lackluster spending and tepid wage growth and both are reasons the first rate hike may be later than expected.

The Fed is becoming more worried that the economy may be entering a soft patch and there was significant confusion in the minutes about the Fed's future direction. Cue a new discussion on "data dependent" rate hikes.


Venezuelan inflation rose +69% through December. The projection for 2015 is +200% according to Bank of America. The country's GDP is expected to decline -4%. The 50% drop in oil prices was a crushing blow to a country that was already in trouble as a result of the worst government in the civilized world. The bolivar has declined -74% to 257 to the dollar. The central bank is responsible for publishing the monthly inflation numbers and has not published any reports in 2015. The bank began omitting certain categories in 2014 in order to make inflation seem lower. If they included those categories in 2015 the official inflation rate could reach 250%. In order to combat the loss of revenue from oil sales the government has limited imports of consumer products in order to maintain its limited currency reserves. The lack of available consumer goods has pushed the prices of what is available to levels that nobody can afford.

The country is ripe for a revolution. Millions of hungry citizens will eventually become unmanageable and the government will fall. There is no recovery from the current economic problems until the government changes.


A Bloomberg Intelligence analyst just traveled across China and came back with terrifying reports on the state of China's economy. He saw idle cranes, empty construction sites and half finished abandoned buildings in several cities. His conversations with business executives reinforced the "gloomy" outlook. China recently lowered its GDP growth target to 7% for 2015 but officials said it would be tough to achieve. Unofficially the expectations are more in the 6.5% range and that includes all the "optimistic" bookkeeping that is used to justify the government numbers. Bloomberg Link


The tax filing deadline is April 15th but 67% of taxpayers have already filed their return. The average refund as of April 3rd was $2,815. IRS has received 99.1 million returns and paid out 77.2 million refunds, totaling $217.35 billion. A lot of that money will find its way into the stock market. Another large chunk will go to pay down credit card bills and the rest will end up in retail spending as families use the unexpected bonanza to buy a new TV or as a down payment on a car.


There is no Iranian deal. The Iranian supreme leader, Khamenei, has denied everything on the fact sheet released by the Obama administration as a lie. He said there would be no changes in the nuclear processing, sanctions would have to be lifted on day one or there would never be a deal and Iran was going to continue on its nuclear research (read as: weapons research) regardless of any claimed deal.

One former negotiator related his history with the Iranian negotiators several years ago. He said they would agree on something on one day and when they met again the next day the Iranians would claim they never agreed to it. To combat this problem the western side had all the discussions written down in Farsi. When they agreed on something at the end of the day they would read it back in Farsi and ask the Iranian negotiator if this was correct. When he said it was they had him sign it. The next day the Iranians claimed they never agreed to those claims. When they produced the papers with his signature, he claimed he never signed it and the signature was a forgery. The former western diplomat said negotiating with Iran was a waste of time. While the West was trying to get a deal the Iranians were only trying to stall for time so their research could continue. The current president of Iran, Hassan Rouhani, was a former nuclear negotiator for Iran. He has bragged many times that he was able to delay the negotiations for five years while the Iranian nuclear program grew rapidly.

I would bet there will be no deal by June 30th. If there is a deal it will not be honored. Under Sharia Law it is not a sin to lie and deceive in order to promote the spread of Islam. Iran makes full use of this exemption.


Like bacon but can't eat pork? Try Schmacon. It is made from beef. If we can cure Hepatitis C then somebody can make bacon from beef. It won the Food and Beverage Innovation award in 2014. It is real and here is the story. Schmacon


 

Enter passively and exit aggressively!

Jim Brown

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"What investors say they'll do and what they'll actually do are two different things. Everyone is a long-term investor when the market's going up, but we find out who really means it when the market falls."

Todd Wenning