Weak earnings guidance from Linkedin and weak earnings from Tableau Software knocked the Nasdaq to the lowest close since October 2014.

Market Statistics

Friday Statistics

The Nasdaq rout was just that, a monster rout that crushed dozens of big names. The Nasdaq closed at 4,363 and the lowest level since October 20th, 2014. The Nasdaq is suddenly down -16.3% from its highs and nearing the bear market level at 4,175. The tech bounce out of the January lows has been erased. The carnage was unbelievable.

These are just some of the tech stocks that were crushed on Friday. These are losses for Friday only!


The Friday carnage was caused by Linkedin (LNKD) and Tableau Software (DATA) but the overall tech decline had been in progress all week. The Nasdaq stalled at just over 4,600 on Monday, which was a two week high and then dropped -273 points starting on Tuesday. The Friday close at 4,363 is only slightly above critical support at 4,330. A breakdown there targets clustered support in the 3900-4050 range and that would be a bear market level.


Linkedin reported earnings and revenue that beat estimates but gave weaker than expected guidance. A lot weaker! The company reported earnings of 94 cents on revenue of $862 million. Analysts were expecting 78 cents on $858 million in revenue.

For the current quarter, the company guided to earnings of 55 cents and revenue of $820 million. Analysts were expecting 75 cents and revenue of $858.3 million. The CEO said they were going to stop throwing money at the wall to see what would stick and instead focus on a limited number of high value, high impact initiatives. While that is a good plan long term the sharp drop in guidance crushed their stock with a -$44, -84% drop. I am sure if the CEO could relive Thursday's earnings call he would do it a lot different. He erased more than $10 billion in market cap in one conference call.


Tableau Software (DATA) reported earnings of 33 cents that easily beat estimates for 16 cents. Revenue of $202.8 million also beat estimates for $201.2 million. The company added 3,600 new customers to a total of 39,000. Unfortunately, management guided for revenue of $160-$165 million for the current quarter and well below estimates for $179.5 million. They also see a loss for the quarter of 8-12 cents per share. They also cut full year revenue estimates from $845-$865 million to $830-$850 million and well below analyst expectations for $871.5 million. Full year earnings were now expected to be in the range of 22-35 cents and analysts were looking for 62 cents. The company said this would be "another investment year" and would lead to lower earnings. It also led to a lot lower stock price. Shares fell -$49.44 or -40.4%.


The problem with the weak guidance from Tableau is that it created growth concerns for the rest of the cloud software sector. Even big companies like Adobe, SalesForce.com and Workday were crushed as investors raced to exit the sector before somebody else warned and suffered a 40% drop in the stock price. Normal investors do not get that concerned about a 4% drop but seeing a tech stock or in this case a couple of tech stocks get knocked for a 40% loss it sent them fleeing for the exit on anything tech related.

Tableau reported license revenue that missed estimates for the first time since their 2013 IPO. Growth of 31% was well below the 75% growth in the year ago quarter and 75% and 60% in the prior quarters this year. The CFO said customers had slowed spending, particularly in North America. This comment worried analysts because it could mean enterprise spending overall in every sector was slowing. This also caused the rush out of anything technology oriented on worries other companies could also report slowing sales.

It was a bad week for earnings. Also on Friday aerospace and defense supplier Esterline Technologies (ESL) reported earnings of 62 cents where analysts were expecting $1 per share. Revenue of $441.5 million missed estimates for $476.6 million. The company said the lower revenue was due to lower end-market demand and the strong dollar. Shares declined -30% on the earnings.

The company also announced an investigation for possible SEC violations by Johnson & Weaver. This is a typical "ambulance chaser" case whenever shares drop sharply and will not have any bearing on ESL in the end.


Ultimate Software (ULTI) reported earnings on Tuesday that beat the street but they were crushed on Friday as part of the tech bloodbath. They reported earnings of 83 cents that beat estimates for 73 cents. Shares rallied $15 on the news and held the gains for two days. On Friday the stock collapsed -$18.50 because of the Tableau Software disaster. This kind of guilt by association was rampant on the Nasdaq on Friday.


Athenahealth (ATHN) killed estimates when they reported earnings of 45 cents compared to estimates for 16 cents. Revenue of $257.5 million rose +21% but just missed estimates for $257.7 million. The company added 13,067 health providers to their network. They now boast more than 75,000 providers and 38 million patients for their Internet based service. They guided for full year earnings of $1.65-$1.85 on revenue of $1.09 to $1.12 billion.

Shares declined -$18 on Friday because revenue grew +20.8% but earnings declined -13.6%. Direct expenses rose +28% and selling and marketing costs rose +30%. I suspect the majority of the stock loss was Nasdaq weakness related because shares only declined -$2 in the afterhours session on Thursday after reporting results.

Shares have very strong support at $112-$115 and I would be a buyer in that range.


Palo Alto Networks (PANW) dropped -$18 on no news to break below strong support at $140. This was another casualty of the Nasdaq crash. It was a tech stock and suddenly everybody wanted out. If we see a Nasdaq bounce next week I would expect PANW to be a leader out of the depression.


There was only one economic report that mattered on Friday. That was the Nonfarm Payrolls and they showed a gain of +151,000 jobs. That was well below the initially reported December gain at 292,000 and well below estimates for January that had shrunk from 220,000 to 190,000 over the last two weeks. The December number was revised lower to 262,000. November was revised up from 252,000 to 280,000.

The unemployment rate ticked down from 5.0% to 4.9% because the BLS updated their population estimates to show a higher population. They said the civilian population rose +265,000, civilian labor force by +218,000, employment by +206,000 and unemployment by +12,000. The number of people not in the labor force increased by +47,000. In the annual benchmark revisions done in January nearly 100,000 jobs were removed from the final totals.

Accounting for the sharp drop in January payrolls was the seasonal shift away from temporary holiday hiring, which decreased -45,000. Also, a factor was a drop of -30,000 in construction worker hiring from 48,000 in December to 18,000 in January. Manufacturing helped to offset some of the declines with a very strong +29,000 jobs. Retailers hired an unexpectedly high 58,000.

Of the 151,000 new jobs, 102,000 were in the minimum wage category. The broader U6 category of unemployment was flat at 9.9%.

What riled the market was not the miss in the headline number but the sharp spike of +0.5% in average hourly wages, up +2.5% from January 2015. While this would appear to be a sudden jump in compensation that could put the Fed back in rate hike mode, it was simply the result of multiple states and cities raising the minimum wage effective January 1st. I guarantee you raising the minimum wage a buck or two is not going to suddenly spike inflation. Anyone working at a minimum wage and seeing it rise $1 an hour is not going to be bidding up prices at the local grocery store. That $30 a week is going into their gas tank and probably an extra order of fries for lunch. The consternation over the sudden jump in wages was definitely misplaced.


The calendar for next week is very light with the exception of Yellen's testimony in Washington on Wed/Thr and the Fed's Williams speaking on "The Health of the Economy" on Wednesday. That should be an interesting speech.

Much ado has been made about the Fed decisions being "dependent on the data" when in reality it appears they have been making decisions independent of the data. It will be interesting to see how Williams will get around that inconvenient truth.

The Yellen testimonies will boil down to "the economy has weakened but we expect it to pass. We are monitoring it closely." I suspect she may try to put a bullish spin on it to some extent to try and talk the equity markets back off the cliff.


No forward splits were announced last week. Top Ships (TOPS) announced a 1:10 reverse split to keep from being delisted. They split 1:7 in April 2014 so their track record is not very good. Hormel (HRL) splits 2:1 on Tuesday.

For the full split calendar click here.


The earnings calendar is devoid of a bunch of market moving announcements. Disney, a Dow component, could be a highlight on Tuesday along with Cisco Systems on Wednesday. Tesla could garner some excitement after a drop to a two-year low at $162 on Friday.

FactSet reported on Friday that overall earnings had actually improved. Blended earnings for Q4 have now declined -3.8% compared to -5.8% the prior week. To date 70% of S&P companies have beaten earnings estimates and 48% have beaten on revenue. Revenue has declined -3.4%. So far, 57 companies have issued negative guidance and 14 companies issued positive guidance. Next week 65 S&P companies will report earnings.

FactSet is not expecting positive earnings growth until Q3.


Oil prices declined to $31 at the close despite the scheduled meeting on Sunday between the Venezuelan and Saudi Arabian oil ministers. The Venezuelan minister had been on a whirlwind tour last week pleading for a production cut with anybody that would listen. He met on Friday with the Qatari oil minister, who happens to be the President of OPEC this year. That is a rotating presidency with each country in OPEC being president for a year.

The Venezuelan minister is facing a tough battle. His country is rapidly going broke with inflation expected to be 740% this year and no goods to buy or sell other than oil. The country has not been able to produce its quota for years as a result of the failed Hugo Chavez socialism project and the country is very close to complete failure. Venezuela needs to convince everyone else to cut production but you can bet Venezuela will not cut a single barrel and justify it because they are not producing their current quota.

While the Venezuelan minister has been country hopping to try and generate a call for an emergency production meeting, not a single Persian Gulf member of OPEC, including Saudi Arabia has publically backed a meeting. Nobody will do anything without Saudi Arabia on board and the Venezuelan minister meets with Ali al-Naimi in Saudi Arabia on Sunday. The odds are nearly 100% that no production meeting will be scheduled. However, you never know. Eulogio del Pino may have a pocket full of promises from all those OPEC states saying they will meet if Saudi Arabia agrees. I find that extremely unlikely but it is possible.

U.S. crude inventories rose 7.8 million barrels last week to more than 502 million and a new record high. With six more weeks of the inventory build cycle ahead we are likely to move much higher.

The price of oil is causing severe pain to producers. Conoco (COP) cut its dividend by 67% last week even after saying in months past that would be a last resort. Linn Energy (LINN) warned on Thursday it had run out of money and credit and was "exploring strategic alternatives" to shore up its balance sheet. As recently as November Linn had exchanged $2 billion in unsecured debt for $1 billion in secured debt as it tried to reduce its overall debt load, which is currently $3.6 billion. Linn made the "throwing in the towel" announcement after it drew down the remaining $919 million in its credit facility. I am sure that bank will be firing somebody soon.

Chesapeake (CHK) recently said it had run out of options and had hired Evercore Partners to help it address its $11.6 billion in debt.

The lack of cash at $30 oil is strangling producers. Baker Hughes reported on Friday that active rigs dropped a whopping -48 to 571 total rigs. That is down -1,361 from the peak of 1,931 in 2014. Oil rigs fell -31 to 467 and gas rigs declined -17 to 104. Those are both 18-year lows.

If we wake up on Monday and Saudi Arabia agrees to a production cut meeting the price of oil could be $40-$50 within weeks. If instead Saudi says no to the emergency production meeting and announces that fact, then we could see $25 oil before the week is out. Saudi knows this and they do not want to see $25 oil so there may be some headline spam to suggest the possibility of a future meeting just to keep the prices from crashing again. The entire rebound in oil prices over the last three weeks has been the result of countries trying to talk up a meeting in the press in order to lift prices.



Markets

We may have reached the fork in the road. With the Nasdaq closing at 15-month lows we have the perfect setup for a continued crash to bear market levels at 4,175. However, as I pointed out in the charts above, many stocks crashed with the market rather than on individual fundamentals. This makes them extremely oversold and without a good reason. They have become bait for dip buyers. Whether investors will attempt to catch these falling knives or wait until a bottom appears is of course unknown.

Despite the carnage in the Nasdaq the Biotech Index ($BTK) only lost -57 points for the day but it was down -155 for the week. Maybe it has reached a point where sellers are running out of stock. The biotech sector has been a major drag on the Nasdaq over the last month.

While the Nasdaq closed at a new low the intraday dip in January declined to 4,313 and about 50 points lower than Friday's close at 4,363. That intraday low would be the first line of defense with the 4,292 low in August as backup support. If we bust through those levels it could be a long drop to 4,000.

Investor sentiment has soured. The rally from the January dip now looks like a typical correction rebound and now that has failed. Typically, we would go lower from here although it is possible we could see a double bottom form. However, with sentiment now severely negative it could be at a lower low.

Some analysts are looking for a flush early next week and then a late week rebound. Markets rarely bottom on Fridays and closing on the lows will trigger some margin selling on Monday. If Monday is another decline then more margin selling will follow on Tuesday, etc, until somebody buys the dip.

On the plus side with the earnings cycle winding down the major companies are now free to buy their stock back again. They are prevented from doing that prior to earnings. At these levels, those companies with big buyback programs should be backing up the truck.

If you ask your 5th grader to look at the chart below and tell you which way the Nasdaq is going, they are going to say down. As older and more intelligent adults, we get confused by what is happening in the headlines and by what we want to see and ignore what is really happening. When in doubt, ask a 5th grader. They have no preconceived bias.



The S&P appears to be targeting 1,820 again. If you look at the August dip, rebound, dip and rally, that could be what we are setting up for this time. I doubt the 1,867 bottom from August is going to hold given the severity of the Nasdaq drop. A failure there targets 1,820 and that is far enough down that sellers should lose some intensity before we get there. Given the three prior tests of the 1,820 level most traders would be conditioned to buy that level. Whether that is the right move remains to be seen.

In the weekly and monthly charts below the outlook is bearish. Sometimes we get so caught up in the day to day market movement that we do not look at the longer term direction.


In the monthly chart, the 10-month average in blue has crossed below the 21 months in red. This is only the third time in 21 years that has happened and you can see the results. This is a super slow indicator but it works well for IRAs and long-term investments. You will not get in/out at the exact top and bottom of a move but I do not think anyone would argue with the long-term results.


The Dow was dragged down by Visa, J&J, McDonalds, Apple, Home Depot, Nike and United Health. None of them had any material news. What did they have in common? With the exception of Unitedhealth they are consumer stocks and declining job numbers suggests retail sales could turn sluggish. I am guessing Unitedhealth was down on the verbal beating the health care sector took from the Democratic debate on Thursday evening. I would bet that a weaker than expected jobs report did not suddenly create a consumer recession.

The Dow has decent support at 16,000 and again at 15,855. If those level break the August flash crash low at 15,370 would be the next target. However, the Dow chart is significantly stronger than the Nasdaq. The Dow is still in a minor uptrend from the January 20th lows.




The Russell 2000 broke out of its tight trading range of the last two weeks and could now be headed for a retest of the 958 low from January. I was somewhat encouraged over the last two weeks by the lack of weakness in the Russell. Every dip to the bottom of the range was bought and it appeared fund managers were nibbling. If the Russell declines from here it could quickly worsen sentiment and another flush could quickly retest the lows.



It was just a week ago that the Dow gained +397 points on Friday. Despite that gain it only gave back -1.6% this week compared to a -4.8% decline on the Russell and a -5.4% decline on the Nasdaq.

I mentioned last weekend that a lot of analysts were expecting a retest of the January lows once the earnings cycle was over. The majority of the big names have reported and most of what is left is the stragglers. We know how the quarter will end up with negative earnings of around -5%. The individual earnings disasters on Friday may have triggered that February retest. Time will tell.


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Random Thoughts


Citi helpd spread some doom and gloom on Friday when strategist Jonathan Stubbs said the global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market. He was definitely going for the scary headlines in this note.

He said the stronger dollar, weaker oil/commodity prices, weaker world trade, petrodollar liquidity, weaker emerging markets and global growth, etc, could lead to "Oilmageddon," a significant and "synchronized" global recession and modern-day bear market.

He did say that some analysts at Citi predicted the dollar would weaken in 2016 and oil prices would likely bottom. "The death spiral is in nobody's interest. Rational behavior, most likely will prevail."

So, release the report with scary headlines and then end it with "rational behavior, most likely will prevail." Sounds like somebody was starved for attention and wanted his 15 min of fame.


He did have one point right. The lack of a world economy floating on petrodollars is a very scary place. When oil was $100 every producing country was flush with dollars and they spent that money all around the world. This kept the global economy lubricated. With global producers now living on 30% of what they received two years ago, an entirely new dynamic is in place. These countries are broke and they are being forced to cancel/remove subsidies that kept their populations happy.

Gasoline for 20 cents a gallon is now 2-3 times that. Utility subsidies that kept electricity, gas and water flowing to poor citizens have been cancelled or reduced significantly. Government wages are being slashed, jobs cut, infrastructure projects cancelled, road maintenance postponed, etc. All of this is due to the 70% decline in oil prices. Hundreds of millions of people are living in countries where the current revenue can no longer support them in the manner in which they were accustomed.

It is no surprise that the global economy is slowing. There is a shortage of petrodollars to keep it lubricated.

This is not likely to change in the near future. Oil prices will rise in Q3/Q4 but it could be years before they return to a level where governments will be able to subsidize/support the population and economic activity like they did in the past.


Investor sentiment for the week ended on Wednesday saw bullish and bearish sentiment decline while neutral sentiment rose. Wednesday's market was positive but it was down from the Monday high. Investors are definitely confused but 72% are not bullish.



Verizon (VZ) confirmed on Friday it was considering a bid for Yahoo. Verizon acquired AOL in June. CEO Lowell McAdam said their strategy was to have great connectivity, own platforms that drive traffic to its network and own content that supports its ecosystem. McAdam said "We have to understand the trends at Yahoo but at the right price, I think marrying up some of their assets with AOL and the leadership would be good."


Mark Cuban is a big investor in Netflix (NFLX). He recently bought more shares when the stock began to drop sharply. On Friday he posted on Cyber Dust, his favorite social media platform that he was not selling his shares but he had bought puts to cover his entire position. That is a lot of puts! He already had a "large" position and added 50,000 shares in October 2014 and then added more in late 2015 and bought more in January. Nobody knows exactly how many shares he has but it is a lot. At $5 for the April $75 puts that would be a big insurance payment.


Brokers like Ameritrade claim liquidity is leaving the market. Baby Boomers are moving to cash and bonds for safety after more than a year of volatility and no gains. Millennials are 55% in cash and most of their equity investments are in IRAs or 401Ks and are not traded. High frequency trading has averaged 49% of the volume for the last three months. That means of the 9.3 billion shares traded on Friday 4.55 billion shares were high frequency churn. They never hold anything for more than a few seconds to a few minutes and they can stop trading in an instant. That is really scary except that highly directional market are highly profitable for them so they are not likely to go away. In the real flash crash from a couple years ago many did halt trading for a few minutes because the bid/ask spreads and lack of quotes put the programs into panic mode.


We hear every day that low oil prices are good for the economy. U.S. consumers are saving billions from low gasoline prices. We also hear that low interest rates are great for the economy because it reduces borrowing costs for consumers and businesses. We have both low oil prices and low interest rates but the economy grew at only +0.7% in Q4 and jobs appear to be slowing. Why? Enquiring minds want to know. You know the Fed is going crazy trying to figure out the answer.


Occidental Petroleum (OXY) reported last week that the all in cost for oil production in the Permian Basin in Texas was $22-$23 a barrel. Producers in that area can still make a few bucks on new production. However, that is the only area of the country that is profitable. Wood Mackenzie said 3.4 mbpd of global production was cash negative at $35 per Brent barrel. That means they actually lose money on every barrel produced.

Wood Mackenzie said not to expect many producers to actually shut in production. After factoring in the cost to shut off production, the cost to restart, the lost cash flow, negative or not and the danger to future production, prices would have to go a lot lower before producers would bite the bullet and shutdown the wells. When a well is shutdown, things happen underground. Producers spend millions of dollars to get oil to flow towards the pipe so it can be extracted. As long as that oil is flowing, it remains liquid. If production stops that oil can thicken and clog up the pores in the rock and when production is restarted, it may only be a fraction of what it was when it was halted. Wells need to continue running even if they are turned down to a very low rate just to keep the flows moving.


T. Boone Pickens has capitulated. He said on Friday he has closed all of his energy positions and he will not get back in until inventories begin to decline. That is normally in late April and early May. He started reducing position late last year, some of which he had held for three years. He thought prices had reached a bottom in August when they rebounded for two months. He added new positions in Q3 and then closed those in Q4 as well.

He believes we saw the lows for WTI in January but wants to wait until inventories begin to decline before rebuilding his portfolio. He warned that we could still see some extreme volatility in the weeks ahead.


From 1,000 to as many as 1,500 private jets are expected to deliver passengers to the Super Bowl causing serious congestion in the various airports around the stadium. Fortunately, the game is in Santa Clara, about 45 miles south of San Francisco. There are plenty of local airports to park the planes.

Private jet flyers are expected to spend between $75 - $85 million just getting to the game. FlexJet has as many as 100 flights coming to the game. FlexJet is offering regional food in flight from elk and other big game meats for Denver flights and ribs, pulled pork and other barbeque from the Carolinas.

NetJet is holding a special "Super Bowl BBQ" for its customers and this year will have entertainment from the band Maroon 5. Wheels Up is hosting a private party with tons of celebrities and Grateful Dead's Bob Weir is the rumored entertainment.

PrivateFly, a private charter company said a Gulfstream G550 from New York will cost $85,000 or about $6,000 a person. From Denver a 13-seat Falcon 2000 costs $35,000. BlackJet is selling single seats on private jets for $6,200 from New York of $3,700 from Chicago.

The average Super Bowl ticket was selling for $4,750 on Friday with the most expensive at $23,400 for a box.

If you want to know how the 1% lives the above is a good description. The rest of us fly coach and watch the game on TV.


 

Enter passively and exit aggressively!

Jim Brown

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"A prudent person forsees the danger ahead and takes precautions. The simpleton goes blindly on and suffers the consequences."

Proverbs 27:12