Monster declines in IBM and United Technology knocked the Dow for a major loss. 3M, United Health and Boeing were credited with an assist. Suddenly, earnings matter.

Market Statistics

United Technology (UTX) took the elevator down today after the company cited the strong dollar and slowing economies in China and Europe for a drop in revenue and a cut to forward guidance. Q2 earnings of $1.73 beat estimates of $1.72 but revenue declined -5% to $16.3 billion. Second quarter orders from China declined -10% and net sales to China declined -8% to $3.1 billion. The company cut guidance for the full year from $6.35-$6.55 to $6.15-$6.30. The median full year revenue forecast of $57.5 billion was below the prior range at $58.5 billion.

The company said it was acquiring Sikorsky for $9 billion and will close by Q1-2016. The board also approved a 75 million-share buyback to offset the earnings impact of the transaction. The CEO said they were not done with acquisitions and were evaluating targets between $500 million to $5 billion. Shares declined -$7.77 on the news and were responsible for about 60 points of the Dow's loss.


IBM was the other disappointment when they reported earnings after the bell on Monday. Revenue has declined for 13 consecutive quarters. Revenue declined -13% in the quarter to $20.8 billion. Most of that drop was related to the strong dollar and the divestment of the server division. Gross margins declined -2% due to lower realized prices and higher costs. Sales in China declined -25% and Brazil declined -16%. Earnings declined -15% to $3.58 per share. Shares of IBM fell -$10.15 to knock about 78 points off the Dow.


There were no economic reports of note today. The most important report for Wednesday is the Existing Home Sales with New Home Sales coming on Friday. The biggest economic event is the FOMC meeting next week. This could put a damper on the market on worries over a coming rate hike. The fed Funds Futures are only pricing in about a 50% chance of a hike in 2015. About 72% of analysts are expecting a hike in September.


The big earnings report everyone was waiting on was Apple and it was a disappointment. Apple sold 47.5 million iPhones in the quarter, up +35%. Analysts were expecting 48.8 million on average but there were several whisper numbers over 50 million. Earnings of $1.85 beat estimates for $1.81 with revenue rising +33% to $49.6 billion, slightly over estimates for $49.4 billion. Gross margin was 39.7% and above the forecast for 38.5-39.5%. Revenue from China more than doubled to $13.2 billion. Apple did not disclose watch sales and lumped that revenue into the "other" category with iPods, Beats Headphones, etc. That revenue category rose +49% to $2.64 billion. Analysts were expecting watch sales of 3.4 million with an average selling price of $499 according to a Bloomberg survey. That equates to $1.84 billion in Watch sales alone. Since the "other" category totaled only $2.64 billion, up from $1.77 billion in the year ago quarter that suggests watch sales only amounted to $870 million or less than half of estimates.

iPads sold 10.9 million, down -18% but in line with estimates. Mac units sold 4.8 million compared to estimates for 4.9 million. Apple forecast revenue for the current quarter of $49-$51 billion that fell short of analyst estimates for $51.1 billion. Apple shares fell from the $130.75 close to $119.20 at the afterhours low. If that -$11 drop holds it will knock another 85 points off the Dow at the open.


Microsoft (MSFT) reported adjusted earnings after the bell of 62 cents that beat estimates for 58 cents. However, there were some difficult charges. Microsoft took a $780 million charge for restructuring and a $7.5 billion charge to write down the Nokia phone business it bought just over a year ago. Oops! Revenue declined from $23.28 billion to $22.18 billion but beat estimates for $22.05 billion. Device sales declined -13% to $8.7 billion. On the bright side revenue from the cloud business rose +88%. Microsoft Shares of Microsoft declined about $2 in afterhours, which would knock about 15 points off the Dow on Wednesday.


GoPro (GPRO) crushed earnings estimates for 26 cents with earnings of 35 cents, which rose +337%. Revenue rose +72% to $419.9 million and beat estimates for $395 million. The company said the cameras are now sold in more than 40,000 stores worldwide. Gross margin rose from 42.2% to 46.4%. They announced a new deal with Toyota last week where the car company will attach a GoPro camera to every Toyota sold starting with the 2016 models. The GoPro app was downloaded more than 2.5 million times in Q2. Shares fell sharply on the initial report from $62 to $57 but eventually rebounded to more than $64 in afterhours.


Yahoo (YHOO) reported earnings of 16 cents that missed estimates for 18 cents. That is down from 37 cents in the comparison quarter. Revenue of $1.04 billion beat estimates for $1.03 billion. They guided for revenue of $1.0-$1.04 billion for Q3 but that was below analyst estimates for $1.07 billion. Yahoo shares fell -$1 initially but rebound to a 50 cent loss.


Intuitive Surgical (ISRG) may rescue the Nasdaq on Wednesday from the declines in Apple, Microsoft and Yahoo with a +$60 surge in afterhours. Earnings of $4.57 easily beat estimates for $3.98. The company sold 118 systems in Q2 compared to 96 a year ago. Revenue rose +14% to $586 million and beat estimates for $567 million.


Chipolte Mexican Grill (CMG) reported earnings of $4.45 that beat estimates by a penny. That was up from $3.50 in the comparison quarter. Revenue of $1.2 billion missed estimates of $1.22 billion and hurt by the withdrawal of pork products from one third of its stores because of the lack of suppliers. Same store sales came in at +4.3% but less than the +5.8% analysts expected. This was also due to the pork shortage.

Shares immediately declined from the close at $673 to $607 after earnings and then rebounded to close the afterhours session at $681 and a gain of +$8. That is some extreme volatility. The rebound came after the company said on the call that the pork shortage had been resolved and carnitas would be returning to the stores and sales would rebound quickly.


This was a big day for the earnings cycle and Wednesday could be seen as somewhat of a slowdown. However, the next two days are still very busy. About 275 companies report over the next three days.


Tesla (TSLA) shares declined -$15 after UBS cut them to a "sell" rating with a price target of $210. UBS said Tesla shares may have gotten ahead of the company and may disappoint investors. UBS said the company will sell fewer cars and battery systems than Tesla has predicted. Earlier in July Pacific Crest and Deutsche Bank also downgraded Tesla on concerns about valuation.

Tesla said it received $800 million in orders in the first five days of announcing battery systems were available for sale. However, nobody was required to post a deposit so that number may be misleading. UBS said the current price implies deliveries of 1.5 million cars and full utilization of manufacturing capacity on batteries within 10 years and "both are unlikely."


Shake Shack (SHAK) announced a secondary offering of 4 million shares on Monday and the stock sold off. The secondary will be shares held by insiders including the founder and the Shack will not receive any of the proceeds. There is also a lockup expiring on July 29th. Apparently, investors saw that as a buying opportunity with the stock spiking +6.9% today. Shake Shack only has 42 stores and it amazes me they get so much attention in the market. Those hamburgers must really be good.


Late this evening news broke that the FCC was ready to approve the $48.5 billion AT&T/DirecTV merger. The chairman of the FCC, Tom Wheeler, asked fellow commissioners to approve the transaction. In return for the approval, Wheeler demanded AT&T build additional high-speed internet lines to homes and offer broadband at an affordable price. The full FCC committee could vote as early as late this week. The news came too late for shares to trade. The chart is positively boring and I would not own it.


Markets

This was a crazy day in the markets with the Dow down -200 most of the day and the Nasdaq and S&P down only a handful of points. It was clearly a Dow dominated drop due to the big moves in several Dow stocks. I mentioned this risk on Sunday that a couple of Dow stocks could cause dramatic swings and today was that proof.

Travelers (TRV) was the hero with earnings of $2.52 compared to estimates for $2.12. This allowed the Dow component to gain nearly $2 even on a bad day.

Expiring crude futures caused a spike in WTI from a low of $49.77 to a high of $51.02 intraday. That gave Chevron a Dow lifting gain and brought Exxon back to neutral.

The volatility in the Dow was amplified by another failure at the 18,100 resistance level and that encouraged the bears to pile on. The close at 17,919 will be obliterated at the open on Wednesday by the big losses in Apple and Microsoft. We should see another triple digit decline at the open to knock the Dow back to initial support at 17,800. With more Dow components reporting on Thursday we still have the potential for an even lower print before the week is over. McDonalds, Boeing, 3M, American Express, Caterpillar, AT&T, Coke, GM and Visa will report over the next two days.



The S&P tried desperately to close at a new high on Monday but could not quite close the deal. The S&P closed at 2128.28 and just under the 2130.82 high from May. The -9 point decline today was not material and only produced a decline to 2117, which held as interim support for the rest of the day. The S&P is well above any prior support including 2100, 2080, 2040. It will take a lot more selling to push us back to those levels.

The problem with earnings is the volume and the high rate of revenue misses. The S&P should open lower on Wednesday with the futures currently trading at 2107. If we continue to have revenue issues with the morning reports we could see a retest of 2100 but that is still not a crisis level. The S&P declined -4% to 2044 two weeks ago and rebounded to the highs. It would take a lot of negative earnings to knock us back there again.

Keene pointed out last night that the last five months have seen sharp declines on the week after option expiration. July expiration is normally troublesome anyway so our declines for this week may not be over once the Apple driven drop occurs.

Resistance remains 2130 and support, 2110, 2100, 2080, 2040.


The Nasdaq resisted the decline today but Wednesday will be a different story. With Apple the largest component in the index the huge afterhours drop will be damaging. The winners and sinners list below reflects afterhours prices. There are significantly more decliners than advancers.


The Nasdaq futures are showing a -60 point drop as of 7:30 ET with the Dow futures off -63 and S&P futures down -7.50. The Russell futures are continuing their decline with a -10 point drop.

A 60-point drop on the Nasdaq Composite would put the index back to about 5150. That is still above the congestion from 5000-5100. The Nasdaq would still be in an uptrend with plenty of cushion.


The Russell 2000 lost -5 points today and is showing another -10 point drop in the futures. The index closed on support at 1254 so the futures are suggesting a drop back to the mid 1240s. That has been support in the past.

The real problem is that the Russell has been leading to the downside since last Thursday. The dead stop at 1275 was met with a lot of selling and the trend is continuing. We should watch the Russell for a retest of 1230 as a critical level heading into the typically weak August/September period.


Wednesday is shaping up as an ugly open but there are already notes in the news about buying Apple at the 200-day average. That is currently $119.81 and shares are trading in the afterhours session at $121.88. I agree that the 200-day is decent support but it is possible the metrics on Apple have changed. The poor performance on the implied watch sales and the weak guidance could depress Apple shares for more than a day or two.

I would be cautious about adding longs this week unless we get a blowout drop. I cannot imagine what news could be worse than the combination of IBM, AAPL, MSFT and UTX but anything is always possible. This is a week to watch and wait rather than catch falling knives.

Enter passively, exit aggressively!

Jim Brown

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