The historical trend for a positive market the day before a Fed announcement was in full bloom today and helped by positive earnings from Dow components 3M, JNJ and PG.

Market Statistics

The positive earnings from Dow components and another short squeeze in oil prices helped to overpower the major losses from Asia overnight. Chinese economics plunged again and the impact was very negative. Data showed that steel exports fell to a four-year low. China's rail freight volume declined -11.9% in 2015 compared to -3.9% in 2014.

The World Bank slashed price estimates for 80% of the world's commodities due to declining demand. For 37 of the 46 commodities the bank monitors, they revised the estimates lower for 2016. Metals are expected to decline another -10% after a -21% drop in 2015. They cut their oil price forecast for 2016 from $51 to $37 and they may still be higher than most analysts.



Fortunately, investors were focused on a flood of U.S. economic reports and earnings. Case Shiller home prices rose +5.8% for November, up from +5.5% in October. Offsetting that was a drop in the FHFA Purchase Price Index from +6.1% in October to 5.9% in November. I believe as all know that housing prices are rising because there is a shortage of inventory so those reports should not have come as a surprise.

On the downside, the Richmond Fed Manufacturing Survey declined from +6 in December to +2 in January. That equates to a reading of 53.2 on the ISM Manufacturing Index. The positive numbers were a rebound from negative numbers in the prior three months. With the headline number for January, dropping to +2 it is not very far from negative territory again. The Richmond Fed Services Survey rose from zero to 10.

New orders declined from 8.0 to 4.0 and backorders rose from zero to +4.0. Employment declined from 12 to 9. However, the gap between new orders and inventory declined from +19 to -20. That means inventories are rising sharply compared to sales.



The Texas Service Sector Outlook Survey for January fell from 3.3 to -10.4 and well into contraction. This comes after the Manufacturing Outlook Survey fell from -20.1 to -34.6 on Monday. That is the lowest reading since the financial crisis. All of the internals on the manufacturing and services surveys declined.

Texas business activity is crashing as a result of the continued decline in the energy sector and all the businesses that support and supply that sector.

Texas Manufacturing Survey

The final Consumer Confidence for January came in at 98.1, up from 96.5 in the prior release. This is the second month of gains and likely driven by the sharp drop in gasoline prices with the national average at $1.83 today. Oklahoma has the lowest average at $1.50.

The confidence internals showed that present conditions were flat at 116.4 while the expectations component rose from 83.0 to 85.9. Those respondents planning on buying a car rose from 11.3% to 12.2%. Homebuyers rose from 6.2% to 6.6% and appliance buyers rose from 51.5% to 52.4%.


The big event on the calendar for Wednesday is the Fed announcement at 2:PM. There is no post meeting press conference. The Fed is expected to try and calm markets by suggesting they could wait on further rate hikes until June. If they stick with their measured pace, four hikes in 2016, which suggests a March rate hike the market will probably be disappointed.

The GDP on Friday is also important with Atlanta Fed GDPNow real time forecast at only +0.7%.


Thank you 3M (MMM). The company reported earnings of $1.80 that easily beat estimates for $1.66. Revenue of $7.3 billion beat estimates for $7.23 billion. The company said the impact of the dollar on the revenue of their various segments was very strong. Revenue declined in Health Care (-0.8%) as a result of the dollar, Consumer (-2.4%), Industrial (-6.3%), Safety and Graphics (-5.3%) and Electronics and Energy (-11.7%).

3M affirmed guidance for $8.10-$8.45 in earnings for 2016 and they plan to accelerate their stock buyback. 3M shares rose $7.21 on the news to add about 50 Dow points.


Johnson & Johnson (JNJ) posted earnings of $1.44 compared to estimates for $1.42. Revenue of $17.81 billion missed estimates slightly for $17.9 billion. The company said stronger than expected demand for blockbuster drugs like Remicade for arthritis and psoriasis drug Stelara. This was the 20th consecutive earnings beat by JNJ. The company provided guidance for $6.43-$6.58 per share for 2016 with revenue of $70.8-$71.5 billion. That would appear to be another strong year. Shares rose $4.78 to add more than 30 Dow points.


Dow component Procter & Gamble (PG) posted earnings of $1.04 that beat estimates for 98 cents. Revenue declined -9% to $16.9 billion and barely missing estimates of $16.94 billion. The revenue was hurt by weaker currencies in Russia, Brazil, Mexico and elsewhere. Gross margins rose by +170 basis points and expenses fell by -180 basis points. The company warned the continued strong dollar would pressure 2016 revenues. Shares rose +2 points to add about 14 points to the Dow.


Dow component DuPont (DD) reported earnings of 27 cents that beat estimates for 26 cents but that was a decline from the 63 cents earned in the year ago period. Revenue of $5.299 billion missed estimates for $5.409 billion with the dollar a major factor. The company said it saw no hurdles for the merger with Dow and no need for asset sales. Shares rose 47 cents.


Freeport McMoran (FCX) posted a loss of $3.47 per share but that included $3.45 in charges. The adjusted loss was 2 cents compared to estimates for a 14-cent loss. The loss for the full year was 8 cents compared to estimates for a loss of 14 cents. Revenues declined -27.5% to $3.795 billion and missed estimates for $4.003 billion. Freeport said it would reduce its debts by $5-$10 billion through asset sales or joint ventures. Freeport has consolidated debt of $20.4 billion. Shares rallied 7% but that was only 26 cents.


After the bell, Apple (AAPL) reported earnings of $3.28 compared to estimates for $3.23. Revenue of $75.9 billion missed estimates for $76.54 billion. The strong dollar had a $5 billion impact to revenues, which in a constant currency basis would have been over $80 billion and a growth rate of +8% instead of 2%. The company said it sold 74.8 million iPhones and missing expectations for 75.46 million. They sold 74.5 million in the year ago quarter so a minor beat. Sales of iPads were 16.1 million compared to expectations for 17.93 million. Macs sold 5.3 million compared to estimates for 5.8 million.

CEO Tim Cook said "extreme conditions unlike anything we have experienced before just about anywhere we look" impacted commodity prices and weakened currencies. About two thirds of Apple's revenue is generated outside the USA and currency fluctuations have a "very meaningful impact on our results." Cook said they saw a record number of switchers from Android devices and they had their best quarter by far for Apple TV. Apple watch sales hit a new record, not hard since it is a brand new product, and customers spent billions with Apple Pay.

Cook warned for Q1 for revenue in the range of $50-$53 billion compared to already lowered analyst estimates for $55.61 billion. That is well below the $58 billion in Q1-2015. This will be the first ever decline in iPhone sales. A Nikkei report said production of iPhones was down -30% in the January-March quarter. Apple's lowered guidance suggests Q1 iPhone sales of 45-50 million, down from 61.2 million in Q1-2015. There are currently more than 1 billion active Apple devices.

Cook said the company is "long term and very optimistic" about its business in China. They are opening their 33rd Apple store in China this week. However, Cook said they are beginning to see some economic softness in China, most notably in the Hong Kong area. Revenue in China rose +14% over the prior year but 47% quarter to quarter. More than 24% of Q4 revenue came from China. Back in the Q3 earnings Cook said they saw no signs of economic slowdown in China so conditions are changing.

Shares of Apple declined -$3 in afterhours to $97.33 and S&P futures opened down -13. Nasdaq futures crashed -36 at the open. The odds are good that we are going to see lower lows on Apple in the coming days. The comments about weakness in China were probably as destructive as the warning on sales.


The big names out tomorrow with earnings are EBAY, JNPR, QCOM, ANTM, BA and UTX. Wednesday is a big day for earnings and hopefully some positive results can overcome the negative sentiment from Apple.


Crude oil rebounded again to $32.41 intraday after a report broke that there was a potential deal brewing between OPEC and Russia to cut global production. The actual report quoted the oil minister from Iraq saying Saudi Arabia and Russia are "showing signs of flexibility" on reducing the current oil glut. "We have seen more flexibility from the brothers in Saudi and a change in tone from Russia."

Russia has never previously agreed to cutting production or even discussing a production cut. Saudi has routinely said they would not cut production alone, which would cede market share to rivals, including Russia. The challenge would be how to verify production cuts from Russia. You cannot just take Putin's word for it.

Just the thought of a possible change in tone from Russia triggered another short squeeze that lifted oil from under $30 to the high of $32.41. Late in the day additional news headlines suggested the comment was overblown and not to expect an agreement in the near future and prices declined. The next OPEC production meeting is in June.

After the bell the API inventory report showed a monster gain of +11.4 million barrels for last week. The EIA report on Wednesday morning is also expected to show a giant increase.

Goldman's Jeffery Currie, global head of commodities research, warned that crude storage is near capacity restraints. Cushing Oklahoma, the delivery point for WTI, is at record levels and only has about 3 million barrels of capacity. They actually need that for operational reasons as they blend different grades of oil to ship to the coast. The lack of storage means speculators cannot buy oil and store it in hopes of higher prices in the months ahead. If there is nowhere to store it, nobody is going to buy on speculation.

Satellite tanker trackers have reported movement from the tankers storing oil for Iran in the Persian Gulf. Some of them have started moving toward the open ocean indicating the oil has been sold or is at least in play as it steams toward ports of likely buyers.


Hess Corp (HES) reported it was cutting capex spending by 40% for 2016, which is another 20% decline from the levels reported in October. The company is maintaining its forecast for production between 330,000-350,000 bpd in 2016. Hess spent $4 billion in 2015.

The constant stream of new capex cuts after a year of prior cuts shows that major companies are expecting crude to be lower for longer.

Wells Fargo (WFC) declared a dividend after the close of 37.5 cents and said the company would increase its stock buyback authorization to $17.5 billion. That is an increase of about 350 million shares to be repurchased. WFC has 5.1 billion shares outstanding. Shares did not move in afterhours trading.

Markets

The S&P recovered from its Monday plunge to 1,875 with a rebound to resistance at 1,907. This has turned into a material problem with that being the high point for the last three days. With the S&P futures at 1,888 overnight we will open well under that psychological 1,900 level as well.


There is a battle in process and indecision is extreme. The rebound from the three weeks of selling has settled into a very right range and we have had three days of 200-point moves in opposite directions on the Dow. The sellers keep trying to force it back down and the two short squeezes have lifted it back up.

Unfortunately, the 1,907 level on the S&P is not really the critical level. That belongs to 1,950 and should be a much harder level to cross.

For tomorrow the Fed announcement at 2:PM is going to be the potential turning point. Typically, we see a slight melt up ahead of the announcement, severe volatility after the announcement and then some sort of directional move. Since the Fed decision is assumed to be no hike and attempt to calm the waters we may not get any post Fed move if that comes to pass. Anything else could be disappointing for the market.

Normally when someone tries to predict post Fed market action there is always some unknown headline or twist on the Fed news that sends the market off in the opposite direction. I am not going to predict the direction but I do expect Thursday and Friday to be directional. That means we should break out of our current range and see several days in that direction.


The Dow has two components reporting earnings before the open. Those are Boeing and United Technologies. Since Boeing was up so strong, +$4.00 today on an announcement about a new rocket, I doubt their earnings will power them much higher but I could be surprised. United was in the middle of the pack but even a big surprise may not give them a big lift.

The wildcard is Apple with the big decline in afterhours. Most investors do not trade in afterhours. They will read the news tonight that Apple sales will decline in Q1 and revenue is going to be way down and many will believe the decade of growth is over and begin to liquidate positions. While Apple is still a monster company with strong earnings and mountains of cash the growth expectations have been damaged. This could cause Apple to be a drag on the Dow for the next few days.

The Dow is fighting its own battle with 16,000 and has traded on both sides for the last four days. The close at 16,168 would take a material decline to put us back under that level but the Dow futures are down nearly -100 and that could be the start of Wednesday's troubles.

Initial resistance is 16,180 where we have been stalled for the last six days. Support is 15,850.




On the Nasdaq resistance is 4,590 and 4,605 with initial support at 4,503 followed by 4,468. The big tech earnings are after the bell on Wednesday leaving the index to be knocked around by Apple during the day.

The biotech sector was down again today. Investors in that sector are schizophrenic and do not know who they are from day to day. The volatility there has been very heavy and today's drop barely saw any dip buyers. The $BTK has support at 3,000 and closed at 3,116. If the biotechs are not in rally mode, the Nasdaq will find it tough to mount any gains even if Apple is not crashing.




The Russell 2000 posted a strong gain of +20 points but failed at the same relative level as the rest of the broader indexes. That is 1,020 on the Russell. I am encouraged that the Russell stocks are no longer dragging the market lower but are participating in the rebounds.


It would appear that we are headed lower at the open on Wednesday. The pending FOMC announcement at 2:PM could provide some lift if the "Pre FOMC Announcement Drift" is still in play. However, any new positions would just be a coin toss until we see what happens after the announcement. There is no harm in waiting until Thursday to launch new positions. Hopefully we will then have a direction that is tradable.

The advertising for the EOY subscription special is over. However, we still have SEVEN sets of mouse pads and books left over so I will leave the link open until those are gone in case anyone wants to take advantage of the savings.

Enter passively, exit aggressively!

Jim Brown

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