Apple's earnings were yesterday but the resulting market decline was a serious hangover. Not only did Apple decline but also all of the stocks that feed into the Apple ecosystem tanked knocking nearly -3% off the semiconductor index.

Market Statistics

Apple shares recovered quickly from their $122 opening low and traded in the $125 range the rest of the day. It is amazing that a company with $202 billion in cash that sold a record number of iPhones could decline so strongly and impact the entire tech sector.

Analysts were flooding the wires today with their forecasts and while most were still bullish on Apple they were not recommending investors buy the dip. The weak watch sales as implied by the small gain in the "other" revenue category was causing analysts to rethink full year revenue. The strong iPhone sales in Q1/Q2 were also causing analysts to wonder if the 6s refresh cycle in September would be as strong as in prior years. Apparently, the iPhone 6 is so good and so popular that sales may have been pulled forward from later quarters. Apple's performance in the current quarter is being questioned despite full year earnings estimates remaining in place. When a stock outperforms every quarter everyone begins to speculate on when the outperformance will end.

Apple shares lost -$6 in regular trading but remain well above the 200-day average at $120. That appears to be the level where everyone would like to be a buyer.


On the economic front existing home sales hit a post recession high at 5.49 million homes on an annualized basis. This was a +3.2% rise from the revised May totals and +9.6% higher than June 2014. All four regions showed good gains with the Midwest rising _4.7%, Northeast +4.3%, West +2.5% and South +2.3%. Single-family home sales rose +2.8% from May and multifamily sales rose +6.6%. There are 2.3 million homes on the market, which equates to about a five-month supply. Sales are still well below the June 2005 peak of 7.35 million. This report did not move the market.


There are two Fed reports due out on Thursday and neither is expected to move the market. The FOMC meeting next week is the next market hurdle.


It was another big day for earnings and a lot of big moves. Illumina (ILMN) reported earnings of 80 cents that beat estimates for 78 cents. However, revenue of $539.4 million missed estimates of $542.6 million. This was the first time in nearly 6 years that Illumina failed to beat the consensus estimates. It was also the third consecutive quarter that sales growth declined. Shares fell -8% on the news.


Boeing (BA) reported adjusted earnings of $1.62 that beat estimates for $1.37. The company took a charge of 77 cents per share ($536 million) on a military tanker contract. This caused them to lower full year estimates by 50 cents to $7.70-$7.90 per share. Revenue rose +11% to $24.54 billion as it delivered a record 197 planes. Boeing shares rose slightly on the news.


American Express (AXP) reported earnings that declined -5% to $1.52 per share. This beat estimates for $1.33 but revenue of $8.28 billion missed forecasts. The strong dollar caused about a 5% decline in overseas revenues. U.S. card holders spent $181.6 billion, up +5% while international spending fell -5% to $80.4 billion. Shares declined -$2 to $77.40 in the extended session. That will impact the Dow at the open on Thursday.


Qualcomm (QCOM) reported earnings of 99 cents that beat estimates for 95 cents. Revenue of $5.8 billion declined by -14% and missed estimates for $5.84 billion. The bad news came from the guidance. The company projected current quarter earnings of 75-95 cents on revenue of $4.7-5.7 billion. Analysts were expecting $1.08 on revenue of $6.13 billion. Qualcomm said they were going to cut annual costs by $1.1 billion and reduce the workforce by 15% from the 31,300 currently employed. Shares declined -$2 in afterhours.

The company said it had signed a standstill agreement with Jana Partners while it evaluates Jana's proposed split of the company into two components. Qualcomm recently announced a $10 billion buyback.


Sandisk (SNDK) shares rallied +$7 in the extended session after reporting earnings of 66 cents that blew away estimates for 34 cents. Revenue of $1.24 billion also beat estimates for $1.2 billion. The company recently announced some new products or datacenters that improve performance and reduce the need for additional servers. The company also announced a 30-cent dividend. They had $1.76 billion in cash at the end of the quarter.


Las Vegas Sands (LVS) reported earnings of 60 cents that declined -30% and missed estimates by a penny. Revenue of $2.92 billion missed estimates for $2.96 billion. Shares rose +$2 in afterhours trading on hopes for a rebound in Macau activity. Revenue at the Sands China fell -26% to $1.77 billion. However, China just relaxed the rules for visas to let gamblers visit more often. Macau is also relaxing the no smoking rules that have also limited time at the tables for heavy smokers.


Dow component Caterpillar (CAT) declined -$2.50 after posting an 8K that said global sales fell -14% in Q2 after a -12% decline in Q1. Earnings are due out on Thursday and analysts are expecting earnings of $1.26 on revenue of $12.67 billion. With commodities falling like a rock I would not expect that sales of earth moving equipment are moving higher in the near future.


Earnings highlights for Thursday include Dow components CAT, MMM, MCD, V and GM. Amazon will be the big news after the bell.


LifeLock (LOCK) was crushed for a 50% loss on Tuesday on an FTC headline about false advertising. In 2010 the company paid a $12 million fine for false advertising. The FTC is now back on the case claiming the company is violating their 2010 settlement agreement for the exact same reasons. According to the FTC the company failed to "protect its users sensitive and personal data, including credit card, social security and bank account numbers." Shares rebounded +9% but that was only 75 cents after the big haircut on Tuesday. The company said it disagreed with the FTC claims and would fight them in court.


Crude oil declined to $49.04 intraday and closed at $49.20 after inventories rose +2.5 million barrels when analysts were expecting a -1.8 million barrel decline. U.S production at 9.558 million barrels per day (Mbpd) remains very close to the 40-year high at 9.61 mbpd set on June 5th. Production is not declining as analysts expected. On the positive side gasoline prices are going to continue to decline.

Crude imports averaged 7.941 mbpd and a three-month high. That suggests the glut is increasing.


Baker Hughes (BHI) dropped nearly $10 intraday after Bloomberg broke a story saying there were antitrust concerns with the BHI/Halliburton merger. Reportedly, Justice Dept officials are worried that the combination of the 2nd and 3rd largest companies would reduce competition and raise prices in the space. Halliburton has proposed selling some assets to reduce concerns but government officials do not seem to be convinced the plan would work. The companies are expecting a cost savings of $2 billion after the merger. If the merger fails, Halliburton will have to pay 10% of the $34.6 billion transaction value as a breakup fee. That is a significant incentive to make it work.


Caesars Entertainment (CZR) may be forced into bankruptcy after a judge said the company must face lawsuits over handling of debts over the last several years. The operating company is already in bankruptcy but the public parent is not. Creditors are claiming that Caesars put too much debt and too few assets into the operating company in an effort to avoid bankruptcy of the parent. By not adequately funding the operating company and allowing it to go through bankruptcy Caesars hoped to extinguish a large portion of the $31 billion in debt it took on just prior to the recession in a monster leveraged buyout. Caesar's shares fell -59% intraday.


Markets

The markets performed about like you would have expected given the Apple and Microsoft earnings on Tuesday. The Dow lost 68 points after being down triple digits intraday. The S&P found rock solid support at 2110 with two intraday tests at the open and the close.

This is very encouraging. This suggests the decline may be over unless some new headline appears to knock the markets lower. If that were the case, the -20 point decline in the S&P would only be about a -1% drop. That is hardly material for two days of losses on some serious post earnings declines.

Volume was higher at 6.83 billion shares and declining volume was 2:1 over advancing volume. Actual declining stocks were 4:3 over advancers.

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



The Dow was the major beneficiary of the negative earnings news. Apple was the biggest decliner but the news on Caterpillar as well as some continued weakness from previously reported stocks combined to knock the Dow for a 68 point loss to 17,851. The intraday low at just over support at 17,800 was bought and that suggests the buyers are looking for an entry point. Resistance is still 18,100 or 250 points above the close.

Assuming one of the Dow components reporting on Thursday does not announce a major earnings miss that causes a $5 drop or more it would appear the worst is over. As long as the Dow can hold above 17,750-17,800 the bulls should gain some conviction.



The Nasdaq only lost -35 points after being down -60 intraday. Support at 5150 held on the opening drop and buyers nibbled at tech stocks all day. I view this as a win since the bad earnings news could have turned sentiment negative. That did not occur and there were a lot more big winners than sinners on the top 25 list below.

If the Nasdaq can continue to hold over 5150 it could build a base at that level that could lead to new highs as long as the earnings parade does not take a wrong turn. It would be hard to look at the Nasdaq chart and create a bearish bias.

Resistance remains 5230 with support 5150-5160.



In a surprising change of events, the Russell 2000 actually posted a gain today. At +4 points, it was not big but given the declines in the other indexes, it was remarkable. This suggests investors are starting to rotate out of the big caps and back into small caps. However, when markets tank the stocks that had been out of favor tend to be bought first. With the Russell out of favor for the last week those stocks may have simply looked like bargains.


I am encouraged by the lack of a material decline today. However, while earnings started out better than expected they are rapidly deteriorating. The earnings per share metric is holding its own with some decent beats but almost every company has missed on revenue. The strong dollar and weak economies are causing some substantial revenue misses.

The beats on earnings could be a result of the large share buybacks in 2015. S&P reported that more than 25% of the S&P has reduced their outstanding shares by more than 4% in 2015. Fewer outstanding shares means higher earnings per share.

After the earnings reports on Thursday we will know how the cycle should turn out. The biggest blue chip companies will have reported and those to follow will have smaller businesses but they will not have as much strong dollar impact.

When the tracking companies report the earnings breakdown on Friday it may not be in glowing terms but it should still be positive. The market acts like it wants to go higher. There was a huge opportunity to really tank over the last couple of days and it did not happen. We did see declines but they were muted. This could be a signal that investors are ready to buy the dip again.

The FOMC meeting next week is the next major hurdle. Nobody expects a rate hike but we can never say never. What the Fed says about September will be the key.

Keene will be back on Thursday.

Enter passively, exit aggressively!

Jim Brown

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