Declining economics and a move to negative interest rates by the Bank of Japan has removed the potential for a rate hike until February 2017 according to the CME futures.

Market Statistics

Friday Statistics

The Bank of Japan introduced a negative interest rate policy targeting banks that park money at the BOJ. The bank will charge commercial banks a 0.1% fee on current deposits. This will encourage the banks to make more loans and put their cash to work. The Japanese economy is expected to grow a miniscule 1.1% in 2015 and 1.7% in 2016. This is just the first shot and the rate was kept low to begin the process but the BOJ said they would increase the rate until and as long as needed until the inflation rate reaches 2.0%.

This is a new process for Japan but not new in the world of central banks. The ECB rate is now -0.3%, Sweden -0.35%, Denmark -0.65% and Switzerland -0.75%. The Japanese market spiked +2.8% and China's Shanghai Composite rallied +3.1%.

In the U.S. the first GDP reading for Q4 fell to +0.7%, down from +2.0% in Q3. We knew this was coming because the Atlanta Fed GDPNow had been declining for the last month. Inventories reduced the GDP by -0.45%, exports -0.47% and fixed nonresidential investment by -0.24%. Consumer spending added +1.46% and residential investment +0.27%.

The headline number was still below most forecasts with the consensus estimates falling to -0.8% growth but the average of the blue chip forecasters tracked by the Atlanta Fed was still +1.8%, down from +2.7% forecasted in September.

The outlook is going to get worse before it gets better. Q1 has been weak for the last couple years and this year could be worse. Q1-2015 initially came in negative at -.75% but was revised up to +0.6%. Q1-2014 ended at -2.11%. However, the BEA changed their formula in the middle of 2015 to "compensate" for the trend in Q1 weakness. This is why you can never compare current data with old data in any economic report. The government continually adjusts they way they account for it to make it look better.



It is widely believed that Mario Draghi and the ECB are going to increase stimulus again in March. When combined with the move by the BOJ and the declining economics in the U.S. the potential for more Fed rate hikes has dwindled to nearly zero. According to the CME's FedWatchTool using the Fed funds futures, the chance for a rate hike in March are less than 16%. April has fallen to 21%, June 33%, July 35%, September 43% and November 46%. December is the only month in 2016 that currently has better than a 50% chance of a rate hike, currently 53%. February 2017 jumps up to 56% and not very convincing.

The Fed will try to talk those chances higher in order to maintain control over treasury prices but a continued drop in U.S. economics and another move by the ECB will make it tough.

Yields on the ten-year Treasury closed at a nine-month low of 1.93% on Friday. The Dollar Index jumped more than 1% on the Japanese news despite the drop in our GDP. The dollar index is nearing the critical 100 level. It has not been above that level since April 2003. This means more pain for U.S. manufacturers and international retailers.



Consumer Sentiment for January declined from 93.3 to 92.0 for January. The present conditions component declined from 108.1 to 106.4 and the expectations component was flat at 82.7. The expectations component has been roughly flat for the last four months at that 82.7 level. Analysts blamed the three-week decline in the equity markets for the decline in sentiment. Even falling gasoline prices could not provide a gain.


There are a lot of reports on the calendar for next week but only three really matter. The national ISM Manufacturing Index on Monday will update on the health of the sector. Manufacturing has been in a recession for two months and that is expected to continue.

The ADP Employment on Wednesday is expected to show 220,000 job gains and that would be a Goldilocks number. The Nonfarm Payrolls on Friday are also expected to show more than 210,000 new jobs and that is right at the threshold that the Fed needs to see to remain positive on future rate hikes.

However, the weekly jobless claims are at six-month highs and while this is a seasonal event that does suggest employment could be weaker than expected.


The only splits announced last week were reverse splits in order for companies to maintain their listings.

For the full split calendar click here.


The markets overcame some serious headwinds to post major gains on Friday. The biggest headwind on the Nasdaq was Amazon (AMZN). Shares had been down as much as -$95 on Thursday evening after they reported a major earnings miss.

Amazon reported earnings of $1.00 compared to estimates for $1.56. Revenue rose +22% to $35.75 billion. That was slightly below the $35.93 billion analysts expected. Amazon has now posted a profit for three consecutive quarters.

Amazon Web Services saw revenue rise +69% to $2.41 billion and above estimates for $2.38 billion. Profits rose +187% to $687 million in that division and operating margins rose to 28.5%.

North American retail revenue rose +24% to $21.5 billion and international revenue rose +12% to $11.84 billion. The strong dollar knocked $1.2 billion off international revenue. Overall operating income rose 88% to $1.1 billion.

Full year net revenue rose +20% to $107 billion. Prime memberships rose 51% but the company still will not say how many Prime members there are. Amazon guided to a range of $26.5 to $29 billion for revenue in Q1 compared to analyst estimates for $27.8 billion. The company gave a wide range for profits from $100 to $700 million, compared to analyst estimates for $665 million.

Analysts said the monster afterhours drop to long-term support was a buying opportunity and shares rallied off the $540 lows to close at $587.


Facebook (FB) shares continued their post earnings sprint with an additional gain of +$3. Analysts cannot say enough good things about Facebook's earnings. The company reported earnings of 79 cents that beat estimates by 11 cents. Revenue spiked 54% to $5.84 billion compared to estimates for $5.37 billion. Some analysts believe the Oculus Rift virtual reality headset will be the most popular retail product hitting shelves in 2017 and could easily outsell PlayStation. Everything Facebook is doing is working and they have a lot more inventory of potential advertising on Facebook owned sites including Instagram and WhatsApp.


Chevron (CVX) reported a loss of 31 cents on Friday that was well below consensus estimates for a profit of 47 cents. The low oil prices were the biggest blow to earnings. The company said it was cutting capex spending by 24% in 2016 to about $25 billion. If prices do not recover, they will cut it even more to the $20 billion range in 2017.

That was the first quarterly loss since 2002. To put things in perspective that -31 cents equates to about a $588 million loss on $28 billion in revenue despite a 50% decline in oil prices. For the full year, Chevron earned $4.6 billion so the minor loss is a drop in a very big bucket. That was down from $19.2 billion in 2014 and Chevron had $11.3 billion in cash at year-end. Chevron is handling the downturn very well. The CEO has said multiple times that maintaining the dividend, currently over 5%, as Chevron's top priority. Everyone knows that oil prices will go back up and Chevron is just passing time until they do.

Chevron added 1.2 billion barrels of proved reserves in 2015. Production rose to 2.67 million barrels of oil equivalent per day in December. Chevron has multiple major projects that will come online over the next two years that will increase production significantly. Chevron is a leader in the energy sector and with their commitment to maintain the dividend while they increase production. Even if crude goes lower in the short term as expected, I doubt Chevron will retest its lows.


MasterCard (MA) reported earnings of 79 cents compared to estimates for 69 cents. Revenue rose +4.4% to $2.5 billion but missing estimates for $2.6 billion. Gross dollar volume of transactions rose +12% to $1.2 trillion and a 12% increase in the number of transactions processed to 12.3 billion. The number of MasterCards in circulation rose +100 million to 2.3 billion.

The earnings beat and rise in revenue is not following the economic forecasts for a global slowdown and the weak retail sales for Q4. With transactions and dollar volume both up +12% it would seem like the consumer is alive and well. However, some analysts were expecting revenue growth of +6% and were disappointed by the results. On a constant currency basis, revenue growth would have been 5% higher and earnings 8% higher. Shares rose +7% on the news.


American Airlines (AAL) reported adjusted earnings of $2.00 compared to estimates for $1.97. The airline benefitted from a 40% decline in fuel prices over the year ago quarter. American earned $1.3 billion for the quarter and $6.3 billion for the year. That represents a lot of bag fees. The company bought back $1.1 billion in shares in Q4 and about 10% of its stock in the last two quarters.

Rising competition from low cost rivals and the rapidly spreading Zika virus put a cloud over future expectations. Weak demand from Latin America saw revenue from the area decline -17% and that was before the Zika virus scare. Overall passenger unit revenue declined -6% in Q4. American will take delivery of more than 100 new planes in 2016.


Honeywell (HON) reported earnings of $1.58 on revenue of $9.98 billion. Both matched analyst estimates. That was 24.9% growth in earnings for the quarter. They made $6 billion in acquisitions in 2015 that will bolster their positions in various sectors in 2016. They increased the dividend by 15% and returned $3.5 billion to shareholders. Costs declined -8.6%. Honeywell is one of those companies that most investors overlook. They are not a sexy tech stock and they are rarely in the headlines but they continue to deliver. They just need to figure out how to make their stock price rise again after consolidating for a year.


Xerox (XRX) reversed course from last year and said they were going to split into two companies. The CEO said they were going to split the business process business out from the document technology business. Basically, hardware will go into one company and the service businesses in the other with each as a public company. Activists had pressured them for the last couple years and about a year ago the company made a strong case for why they should stay together. Activists finally got their point across and the split is now on the table.

The company reported earnings of 32 cents compared to estimates for 29 cents. Revenue of $4.653 billion missed estimates for $4.729 billion. That was also down from the $5.033 billion in the year-ago quarter. The company guided conservatively for 2016. Shares rose +6% on the split news.


Colgate (CL) posted better than expected earnings but revenue declined for the 11th consecutive quarter. Earnings of 73 cents beat by a penny but revenue declined -7.5% to $3.899 billion and under estimates for $3.95 billion. The problem was the dollar, which reduced revenue by a whopping -11.5%. North American sales rose +1% but elsewhere it was dismal. Latin American sales fell -12%, Europe/South Pacific fell -14.5%, Asia declined -5% and Africa/Eurasia fell -16.5%. Much of those declines were related to the currency problem. Shares rallied +4% on strength in North America.


As of Friday 40% of the S&P-500 companies have reported. Of those 72% have beaten on earnings and 50% have beaten on revenue. Those beats come on a set of significantly lowered expectations. The average earnings beat has been 1.7% compared to the five-year average of 4.7%. To date the earnings have declined -5.8% and is on track for the third consecutive quarter of earnings declines. The last time that happened was in 2009. Revenue has declined -3.5%.

Thirty-three companies have issued negative guidance and only six have issued positive guidance. Next week 118 S&P companies will report earnings.

The last of the FANG stocks reports earnings on Monday. Google (Alphabet) is expected to report $8.10 per share. UPS reports on Tuesday with the results of their holiday shipping season. GoPro reports on Wednesday and it could be ugly. Linkedin is the highlight on Thursday and Berkshire Hathaway on Friday.


The energy sector was up a lot last week and it was all due to headlines by people that have a lot to gain by oil prices rising. The rumor began the prior week that Russia and Saudi Arabia were discussing a deal where OPEC and Russia would cut production by 5%. Comments from multiple officials in Russia, OPEC and Saudi Arabia made headlines all week but everyone in Saudi Arabia and officials in OPEC said there was no truth to the rumor. As the week progressed, various officials in Russia made offhand comments about "meeting with oil officials to discuss a production cut" and Saudi officials said they were always willing to discuss global production cuts to rebalance the market. However, once every comment was traced back to its source it turned out to be far less than what the press was claiming.

After Saudi Arabia denied making the 5% proposal for about the 5th time, they said this was an old proposal made by Venezuela months ago.

The key here is that Russia produces about 10.6 million barrels per day and Saudi Arabia about 10.2 mbpd. Russia exports about 8 mbpd of crude and refined products and Saudi Arabia exports about 8 mbpd of crude. At $100 oil, they were both bringing in about $1 billion a day in revenue. At $30 oil, they are losing more than $600 million a day.

Russian officials figured out that by floating these headlines in the press they could spike oil prices significantly. A $5 increase per barrel at 8 million barrels per day is a lot of money.

It started with Russian energy minister Alexander Novak. He is the one that first commented on the months old proposal from Venezuela as through it was new and from Saudi Arabia. A day later Russian Deputy Prime Minister Arkady Dvorkovich said Russia would not intervene to balance the market. "We take the position that our oil sector is, to a significant extent, private, and is commercially minded. It is not under the direct control of the state. Our market is governed by the decisions of individual companies, and that is how it will continue," Dvorkovich said. His comments over shadowed Novak's.

Just a few hours later Russia's foreign ministry said veteran minister Sergei Lavrov, who almost never comments on oil policies, would visit the UAE and Oman to discuss the oil market. Even Putin got into the act when he was quoted as saying he was open to discussions. That is about as vague as you can get.

This weekend a headline is claiming the Venezuelan oil minister is headed to Russia to talk about production cuts. Whether he actually goes or not is immaterial. It is the headline that will probably spike prices on Monday.

As long as the Russians are going to continue spamming the headlines with random comments the price of oil may remain firm. However, on Friday Iran jumped into the act and said they would not cut production. Iraq bragged they were producing a record amount at 4.1 mbpd and expected to increase that in the months ahead. That kills the idea of a deal with OPEC for an across the board cut.

Most analysts claim there are only two chances for a Russia/OPEC deal. Those are slim and none.

Prices dipped intraday on Friday to $32.65 but shorts covered at the close and prices rebounded to $33.67.

In theory, we should see these rumors fade away and the buildup in inventory levels weigh on prices. Inventories rose by 8 million barrels last week to a record high at 494.9 million barrels. Record inventory levels and rising prices do not match. We should see another build this week and for the next eight weeks.

Baker Hughes said active rigs declined by -18 last week to 619. Oil rigs fell -12 to 498 and gas rigs declined -6 to 121. Both of those are 18-year lows. However, U.S. production declined only 14,000 bpd to 9.221 mbpd. Eventually production is going to decline significantly and that will be the start of the end game for this oil cycle.



Markets

The Dow rallied nearly 400 points on Friday in what would appear on the surface as a major market event. Volume was strong at 10 billion shares. Advancing volume was 9:1 over declining and advancers were 6:1 over decliners. However, there was some index shuffling at the close and some reallocation by funds. The ratios between equities and treasuries became skewed over the last several months and the end of January is when those ratios are rebalanced. With treasuries at nine-month highs and equities at two-year lows, there was a lot to rebalance. The move by Japan overnight triggered another short squeeze with futures up +20 before the open and it was a perfect storm for equities. Longer-term shorts were suddenly caught off balance when the S&P moved over 1,915 at the open.

Another factor juicing the market on Friday was the completion of the Precision cast Parts (PCP) acquisition by Berkshire Hathaway. This was an all cash acquisition for $37.2 billion. This had been widely anticipated to complete on Friday and that was a major injection of cash into the market. Anyone holding those shares had a week to decide what they were going to buy to put that money back to work. The notices went out on Monday and investors spent the money on Friday. Art Cashin reported there was $4 billion in market on close orders to buy on the NYSE at the close.


As if that was not enough surplus cash flowing through the market the $36 billion acquisition of Broadcom (BRCM) by Avago (AVGO) was also completed at the close on Friday. The new shares of the merged company, Broadcom Limited, will begin trading on Monday. Approximately 315 million shares elected to receive cash at $54.50 per share ($17.167 billion). That means there was an additional $17 billion in cash looking for a new home Friday and Monday.

Nothing really changed in the fundamentals. The market had been basing for the last two weeks at the 1,900 level on the S&P with alternating days of triple digit gains and losses on the Dow. However, we did have a decent run of high profile companies beating on earnings. Amazon was the exception. I am sure some investors decided to throw in the towel on the sell side and not risk the Asian markets exploding higher on Sunday night. Their decision was aided by the surge in buying from the PCP/BRCM cash.

The Chinese markets could be volatile next week because they are closed the following week for the Lunar New Year. They will be closed from the 8th through the 12th. That means traders will be squaring positions ahead of the closures. Given the recent volatility, it will be interesting to see how their markets react. It was not a good week for the Chinese markets with a decline of -5.14% on the Shanghai Composite. Would you leave your long positions intact ahead of a week long holiday after weeks of market declines?


Oil prices were up for the week but depending on the headline spam, they are not expected to be up next week. The correlation between oil and the S&P is currently the highest in 26 years. That suggests a return to falling oil prices next week could derail any continued market rally.


The S&P surged +47 points on Friday and closed +126 points off last week's lows at 1,812. Friday's close at 1,938 is just below decent resistance at 1,950 and a potential trouble spot for next week. I am sure there is still some PCP/BRCM cash that remains unspent and that could give the market a pop on Monday. That 1,950 level will be the key number to watch.


The Dow gained +372 points for the week after a +397 gain on Friday. That alone should give you an idea of how volatile the week had been. Only three Dow components report earnings next week so the impact to the Dow should be minimal. Exxon and Pfizer report on Tuesday and Merck on Wednesday.

The upside level to watch on the Dow is 16,590, call it 16,600 as the closest round number. Near term support is 15,885 followed by 15,450 from the prior Wednesday's low.

All 30 Dow stocks were positive on Friday with a lot of strong gainers. A lot of the big gainers were stocks that were near their lows on Thursday. This was short covering hell for many traders.



The Nasdaq added a very minor +23 points for the week. The reason was the implosion in the biotech sector. The Biotech Index ($BTK) declined a whopping -9.5% or -306 points for the week. The sector is in retreat and there does not seem to be any relief in sight. Support at 3,000 failed and now we are testing 2,880. If that fails, we could be looking at 2,700 very quickly. Helping to push biotech stocks lower was comments from Trump about high drug prices. He joined Hillary and Sanders in complaining about excess profits.


Google is the big Nasdaq reporter on Monday and expectations are high. If they miss, I would not expect as big a decline as we saw in Amazon but it could be painful. The last two earnings reports saw significant upside spikes and that is where the expectation was created for this report. Google is going to breakout all their businesses in this report so we will be able to see who is a drag and who is contributing to their success.


The Nasdaq eased over resistance at 4,605 on Friday with the next material level at 4,715. If the biotechs are still weak and the PCP/BRCM buyout cash dries up we could see that 4,600 level come back into play.



The Russell 2000 gapped open to 1,020 and moved sideways until after lunch they surged another 14 points at the close to 1,034. This was a major move and clearly short covering at the open and then a short squeeze at the close as the buyout cash was put back to work.

The next material resistance would be in the 1,050 range followed by 1,082. We cannot make any determination on market direction from the Russell since they were threatening to break support on Thursday at 1,001 and then suddenly spiked 32 points on short covering. This was not investors suddenly deciding to buy small caps. This was heavily shorted small caps in a short covering frenzy.



I wish I could tell you the Friday rally was the start of a new bull market but we cannot make that determination from a cash infused short squeeze. One day does not make a trend. We did see a week of uncertainty and consolidation at the bottom and that is how lasting bottoms are formed. It is just too early to tell if this one is going to stick.

If oil prices roll over next week and head back to $30 the equity market is going to follow oil lower. We need several days of gains that are not stimulated by some news headline. We just want to see investors buying stock because they want to own it at this level. We need to see the sellers either run out of stock or decide it is no longer safe to be short.

Friday's +397 point spike and the likely gain at the open on Monday should put some fear into sellers and maybe we will see some balance return to the market. A lot of analysts are calling for a retest of the lows in February once the earnings cycle is over. I really hope they are wrong but we need to be prepared just in case. Trade what the market give us rather than what we want to see.


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Random Thoughts


With Donald Trump out of the Apprentice TV shows they needed some new blood or in this case some old blood. Warren Buffett has agreed to be an advisor on the next Celebrity Apprentice. Along with Warren will be Steve Ballmer, former CEO of Microsoft, Tyra Banks, Jessica Alba and Patrick Schwarzenegger, nephew of Arnold Schwarzenegger. Arnold will take over as the new head of the boardroom. That gives "your fired" an entirely new meaning.


For the week ended on Wednesday, which was a -227 point day for the Dow, the AAII investor sentiment poll showed a big jump of +8.2% in the bullish category and -8.7% decline in bearish sentiment. Apparently, the bulls were right.



Sweden said it was sending home 80,000 refugee immigrants after law and order collapsed and violence and crime escalated. German Chancellor Angela Merkel said on Saturday that the 1.1 million immigrants in Germany would need to go home once the war is over. Violence in Germany has reached multi-decade highs. The right wing Alternative for Germany party said new immigrants trying to cross the border into Germany should be shot by border police. Europe expects more than 1 million additional immigrants in the spring.


Remember Greece? The international lenders will meet in Greece this week to review the progress Greece has made in implementing the required reforms agreed to in the last bailout program last year. Needless to say the group is not expecting wide ranging progress.


Facebook has now banned gun sales on the social network. That shows you how uninformed I am. I did not know there was a thriving person-to-person private gun sale network on Facebook. The company said licensed retailers will still be able to promote their websites but no sales can be made online. Online sales by dealers are already illegal so nothing changed there.


At the end of September Sanmaay Ved saw Google.com on the list of domains available for sale at his registrar. He thought there was some mistake but he bought the name anyway for $12 and charged it on his Discover card. When Google discovered their error in not renewing the domain name they tried to cancel the transaction. He was never able to actually change the landing page on the domain because Google realized their mistake almost immediately when the transaction went through. Initially Google offered him $6006.13, which they claimed was the numerical version of the word google. He declined and said he was going to donate the domain to charity. Google immediately doubled their offer to $12,000. Ved directed that the money be donated to the Art of Living India Foundation and gave the domain back to Google. He had previously been a Google employee for 5 years. Ved is now a MBA student at Boston College. I would say he let them off cheap.


Tesla Ceo Elon Musk picked up a few more shares of Tesla last week for the bargain price of $6.63 each. He exercised an option that allowed him to buy 532,000 shares of Tesla at the December 4th, 2009 price when he was given the option. Unfortunately, he had to pay $50 million in taxes on that exercise plus the $3.5 million as the exercise price. The shares are worth $101 million today. That big tax bill is part of living in California. He paid that tax bill out of his personal funds and did not sell any Tesla shares to raise the $50 million. Musk now owns slightly more than 28.9 million shares in Tesla worth more than $5.5 billion at Friday's close.


Forbes published a list of interesting factoids about the Super Bowl next weekend.

Did you know:

Over ONE BILLION chicken wings will be consumed.

Ten million pounds of ribs will be eaten. The 4th biggest day of the year.

12.5 million pounds of bacon will be put on the table.

11.2 million pounds of potato chips.

8.2 million pounds of tortilla chips.

3.8 million pounds of popcorn. That is a lot of popcorn!

3 million pounds of nuts.

The Super Bowl is the 5th busiest day of the year for pizza delivery.

The average viewer will consume 2,400 calories in the four-hour event.


 

Enter passively and exit aggressively!

Jim Brown

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"The one fact pertaining to all conditions is that they will change."

Charles Dow, 1900