Oil prices declined again after the Iranian oil minister said they would accelerate production and they were going to discount their oil to some European countries. The price war is now in full swing.

Market Statistics

Brent crude traded down to $28.60 intraday after Iran began rattling the market with claims they were going to win back market share stolen by Saudi Arabia and others by lowering prices to customers in Europe. This comes only about a month after Saudi Arabia cut prices sharply to Europe to undercut prices for Russian oil. Saudi said they will not be undersold and they plan on not only holding onto existing market share but will aggressively pursue gaining additional market share.

This is the end of the world for those producers hoping for a rebound to higher prices. With Saudi Arabia, Iran and Russia all competing to be the lowest price to Europe we should see Brent crude prices continue to decline. That will drag WTI lower as well and the equity markets will follow suit. It is almost inconceivable that we will not test $25 in the days ahead and that may not be the lows since the inventory build season continues until the end of April.


Crude prices had risen slightly after the Chinese economic data on Monday night was not bearish. China reported Q4 GDP at 6.8% and slightly missing estimates for 6.9%. Retail sales for December rose +11.1% and missing estimates for 11.3%. Industrial production rose +5.8% and also a miss. Fixed asset investment rose +10.0% and missing estimates for 10.2%. All of the misses were minor and the Chinese markets gained on the news. The GDP for all of 2015 was 6.9% and the slowest growth since 1990. U.S. futures rallied after the Chinese numbers and caused a huge gap open this morning with the S&P rising +20 points in the first few minutes.


The U.S. economics were limited today with the NAHB Housing Market Index the only major report. The headline number for January declined from 61 to 60 and well off the high of 65 in October. Potential buyer traffic declined from 46 to 44 after a high of 48 in November. The Midwest was the only region that posted a gain with a jump from 54 to 58.

This was still a decent report because conditions normally decline in the winter months. Cold weather and snow tends to keep people at home in front of the TV rather than trudging through the slush to look at a dozen new homes. Higher home prices and slowly rising interest rates also slowed buyer interest.

The calendar for tomorrow is highlighted by the new residential construction and the consumer price index (CPI). The CPI is expected to be flat but odds are good that we could see a miss to the downside.

The big report for the week is the Philly Fed Manufacturing Survey on Thursday. With the manufacturing sector in a recession, it will be interesting to see if the Philly estimates for a +2 will come true after a -10.2 last month.


There were some notable earnings today starting with Bank of America (BAC) this morning. BAC reported adjusted earnings of 29 cents ($3.01 billion) compared to estimates for 26 cents. Revenue rose +4.3% to $19.53 billion. The bank had to increase loan loss reserves by $264 million due to exposure to energy loans. They said they had $21.3 billion in total energy exposure. They warned if oil prices continued lower they could see loss reserves rise another $900 million. JPM and WFC also warned they had raised loss reserves due to energy exposure and those losses could rise. Shares declined slightly on the report.


Morgan Stanley (MS) reported earnings of 43 cents compared to estimates for 33 cents. That was a huge beat but it only managed to produce a 29-cent gain in the stock. Revenue was $7.7 billion compared to estimates for $7.59 billion. Total non-interest costs fell -41% for the quarter. Trading revenue rose +1% to $1.47 billion.


UnitedHealth Group (UNH) reported adjusted earnings of $1.40 that beat estimates for $1.36. However, that was a 19% decline from the year ago quarter and the company blamed it on Obamacare. Revenue was $43.6 billion, up +30%. The company is still considering withdrawing from the Obamacare exchanges at the end of 2016. They said the people enrolled in the plans were sicker and tended to use a lot more medical care than those in the general population. In order to remain in the exchanges UnitedHealth will have to raise premiums dramatically to match the risk profile of the enrollees. Shares gained $3.30 on the news.


After the bell, IBM reported earnings of $4.84 compared to estimates for $4.81. Revenue of $22.06 billion narrowly beat estimates for $22.02 billion. The strong dollar reduced IBM revenue for the full year by -$7 billion, with a -$300 million hit in Q4. That is a monster number to overcome and still beat on earnings. Revenue from "strategic imperatives" including cloud, data analytics, social and security software rose about 10%. Given the negative expectations for IBM over the last year, this was still a decent earnings report.

On the downside IBM warned that revenue could continue to slide. This was the 15th consecutive quarter of revenue declines. Shares declined -$5 in afterhours.


Netflix (NFLX) reported earnings of 7 cents compared to estimates for 2 cents. Revenue of $1.82 billion missed estimates for $1.83 billion. In the more important subscriber metric, they reported 5.59 million new subscribers with 4 million of those overseas to push their total subscribers close to 75 million with 30 million outside the USA. U.S. subscriber growth fell short at 1.56 million compared to estimates for 1.62 million. The company is predicting the addition of 6.1 million in Q1.

Netflix said the average subscription price rose between 4-5% and they were seeing increased adoption of the $12 plan. The price freeze on the 22 million U.S. subscribers at $8 expires in May. They are going to show 600 hours of new original content in 2016 compared to 450 hours in 2015. They streamed 42.5 billion hours of content in 2015 compared to 29 billion hours in 2014. The company plans to spend about $5 billion on content licensing in 2016 in addition to the $9 billion they have previously committed to pay studios by September 2018. Netflix ended the year with $2.3 billion in cash.

They expanded from 60 countries to 190 countries in the first week of 2016 but they are not open in China. They said they were working hard to move into China but it may not happen in 2016. Shares rallied $8 in afterhours to $115 after gaining nearly $4 in regular trading.


Goldman Sachs (GS) is the big dog out with earnings on Wednesday and they are trading at a 52-week low. Expectations are not high so there is the potential for an upside surprise. However, legal fees are likely to weigh on results.


Tiffany (TIF) warned this morning that holiday sales disappointed. The company said the important gifting season of November and December were hit by "weak tourist spending" in multiple markets. Global net sales declined -3% with same store sales down -5%. In constant dollars worldwide sales fell -6%. They said sales were constrained by challenging global economic conditions and events that slowed tourist travel between countries.

Tiffany guided for a 10% decline in earnings for 2015, down from the prior outlook for a 5% to 10% decline. New guidance is for earnings of $3.78 compared to analyst estimates for $3.88. The company said it expects minimal growth in net sales and earnings in 2016. Earnings are due out on March 18th.


McDonalds (MCD) was upgraded by BTIG from neutral to buy with a $130 price target. The analyst said the all day breakfast, Game Time Gold and the new McPick 2 value menu should generate "meaningful improvement" in the U.S. business. Shares rose +$2.32 on the upgrade.


Procter & Gamble (PG) rallied +1.75 after Stifel upgraded the consumer products company from hold to buy with a price target at $85. The analyst said improving year over year comparisons, rising market share and improving execution would power the stock higher. P&G currently has a 3.5% dividend yield.


Goldman Sachs reiterated a buy rating on Apple (AAPL) with a $155 price target despite deteriorating sales expectations. The analyst said the declining expectations have provided a buying opportunity in the shares given that the low guidance is now priced into the stock. The analyst expects revenues for the December quarter of $76.8 billion and EPS at $3.28. That is just over the consensus estimates. For the March quarter, Goldman expects $57.1 billion and $2.30 in earnings. They expect Apple to guide lower (conservatively) for the March quarter in order to reduce expectations while they clean up their excess inventory problem. I would be a buyer of Apple only after the Q4 earnings, which could be very volatile.


Helping to depress oil prices today was an update from the IEA saying the world might "drown" in oil in 2016. The IEA said oil demand growth slowed significantly in Q4 due to weak economic conditions in Russia, China and Brazil. The agency said crude inventories could rise another 285 million barrels ahead of the summer demand season. That is in addition to the more than 1 billion barrel increase in 2015 to more than 3 billion barrels.

In addition, a new report using satellite imagery showed that Iran had significantly more oil in storage on tankers in the Persian Gulf. New estimates put the total at 50 million barrels, up from 30-36 million in prior estimates. As of January 18th, none of the tankers had moved so the oil remains unsold. An Iran official said "Iran is not interested in entering the market in a disorderly manner, which is self defeating. However, it is also not interested in sacrificing further, to benefit those who gained from its absence" from the market. "It will require a delicate balance." Those comments came on the same day Iran said it was cutting prices to Europe so it appears the calming talk is just talk.

As long as oil prices continue lower we should expect to see equity markets continue lower as well.

Markets

The Dow gapped up about +185 points at the open to 16,171 and almost immediately began to fade. The index went negative in late afternoon but was rescued with a buy program that triggered with the drop to 15,900. That added +174 points in the closing hour but that also faded at the close to end with only a 28-point gain.

The S&P rebounded at the open to 1,900 and came to an immediate stop. The afternoon decline knocked it back to the August lows at 1,867 before the buy program lifted the index back into positive territory with a 1-point gain.

Needless to say it was a very volatile day and there was no direction. However, we may have traded to a stalemate. The bulls tried to manage some gains and failed. The bears tried to sell it off again and failed. In the end the indexes closed near neutral territory with no clear winner.

This was the day after a three-day weekend, which is normally bullish. It was also the day after option expiration, which is normally flat as traders square positions, resell stock that was put to them and launch new positions for the next option cycle. Post expiration Monday rarely has any direction because of the option settlement process.

Basically the day was a draw and tomorrow will be the directional day. The S&P needs to continue holding above that 1,867 level from August or the next target is 1,820. Resistance is now 1,900 and 1,950.


The Dow was helped by the stocks making the news today. UnitedHealth on earnings and McDonalds and Procter & Gamble on analyst upgrades. Chevron and Exxon were the big losers as oil prices fell back below $29. In after hours tonight crude is down to $27.97.

Goldman's earnings on Wednesday could be detrimental to the Dow but falling oil prices and the -$5 drop in IBM in afterhours are going to be the biggest drags.

The Dow is the weakest of the three major indexes and has already broken below 16,000 twice in the last two days only to recover that level at the close. The next dip is not likely to repeat that feat. The Dow's target is the 15,370 low from August and the 15,350 low from February 2014.

Resistance would be today's high at 16,171 but that may be wishful thinking.



The Nasdaq struggled valiantly to remain positive after the morning gap open but it was not to be. The index ended with a loss of -11 after being up +60 at the open. Netflix will be a big help at the open with its +8 gain in afterhours trading. However, sellers are still piling on any rebound in tech stocks. Without any material tech earnings on Wednesday, it will be tough to maintain any positive sentiment.

Support is 4,432 and the lows from the last two days of trading. A break below that level targets 4,292 and the August flash crash low followed by 4,130 from October 2014.



The Russell 2000 returned to Friday's lows and failed to penetrate but the rebound was lackluster and the Russell lost -13 points for the day or -1.27% and the biggest loss for the major indexes. The small cap rout is still in progress and this suggests the market will continue lower.

The index closed well under the 1,000 level at 994.84 and the next material support is around 900 and then 800.


The Biotech sector was the biggest sector loser with a -2.7% decline. This dragged the Nasdaq and the Russell lower. Until the biotechs find a bottom, they will compete with oil prices as the biggest drag on the market.


With crude oil at $27.97 tonight the market has very little chance of a material rally. Futures were up +5 early in the session and then suddenly dropped to -8 around 7:15 ET on no news. Something happened but it has not hit the newswires yet. It may be due to the drop in oil prices but without a headline we just do not know.

I would continue to be cautious about new long positions until it appears the market has found a bottom. The lack of a strong short squeeze suggests traders are willing to let their shorts ride instead of race to cover on every little bounce.

It is ok not to be in the market. You do not have to trade. Being bored is a lot better than being broke.

The advertising for the EOY subscription special is over. However, we still have some mouse pads and books left over so I will leave the link open for a few days in case anyone wants to take advantage of the savings.

Enter passively, exit aggressively!

Jim Brown

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