The market was very calm ahead of Apple's earnings on fears they would miss and implode.

Market Statistics

Apple reported earnings of $2.10 compared to estimates for $2.02. Revenue rose 4.6% to $52.9 billion to a new Q1 record but missed estimates for $53.02 billion. Revenue from Greater China fell -14.1% to $10.73 billion as lower priced competitors steal market share.

Revenue from the services business rose 17.5% to $7.04 billion and well over estimates for a 13% increase. The "other" category that contains Apple TV, Apple Watch, and Beats headphones saw revenue rise 18% to $7.04 billion.

The problems came from weak iPhone sales. They sold 50.76 million, down from 51.19 million in the year ago quarter and below estimates for $52.27 million. Many buyers are waiting for the iPhone 8 later this year, which is expected to have some significant new features. The average selling price for a phone was $655 and analysts were expecting $666.

iPad sales declined -13% to 8.9 million but Mac sales rose 4% to 4.2 million units.

Apple guided for Q2 revenue of $43.5 to $45.5 billion and analysts were expecting $45.6 billion. The company is expected to sell 42.31 million iPhones in Q2.

In an effort to ease the pain from the revenue miss, Apple said it was boosting its dividend by 10.5% to 63 cents per share and boosted their share buyback authorization to $210 billion. They plan to return $300 billion to shareholders by the end of March 2019. At $13.2 billion in annual dividends, Apple is now the world's largest dividend payer.

I personally do not believe the iPhone sales miss is relative. Everyone knows that many buyers are holding off in order to buy an iPhone 8. There are multiple sources reporting various production delays in components that could push deliveries out until late November or even farther. Some claim the problems are so serious that Apple could skip the model 8 and announce a 7s instead. This would push the 8 into 2018 and it would be a major blow to the stock. Others believe Apple will still announce the 8 but with a long lead-time for delivery. I am sure they do not want a problem like Samsung's exploding battery so they want to get it right the first time. One of the production issues is reportedly overheating with the wireless charging. Since it is too late to remove that feature, they will have to figure out how to make it work and that could mean changes to components.

Apple shares fell from the $147.51 close to $144.40 in afterhours. That will be a 21 point drag on the Dow if the drop carries over into Wednesday's open.


Apple was the only topic of discussion in the news today but there were other events. Auto sales for April rose only slightly from 16.6 million to 16.9 million and missed estimates for 17.3 million. This represents a 3% decline from year ago levels and a -2.3% decline from the recent average. The peak was in December at 18.4 million annualized.

Manufacturers offered record high incentives last month but inventories are still rising. They currently have more than 90 days of inventory in stock and 60 days is the target level. They increased incentives but prices were still up 2% from year ago levels. Raise the price and offer discounts, nothing new there. Incentives averaged $3,500 per vehicle and approximately 10% of the sales price. Light truck & SUV sales were 10.46 million, up from 10.3 million. Sales are running at their slowest pace since last August. Auto sales of 6.42 million were also up slightly from 6.31 million but are running at the lowest rate since November 2011.

With oil prices falling, the low gasoline prices should be with us for a few more weeks and now that the weather is better, the shopping season is just beginning.

The ISM NY headline number declined from 56.4 to 55.8 for April. The quantity of purchase component declined from 57.4 to 48.4 and the employment component fell from 47.7 to 45.1. While the report is still positive, analysts do not like to see declining numbers. Anything over 50 is expansion and under 50 is contraction. That means the two main components above are both in contraction territory. The report was ignored.

Wednesday is a big day for events with the ADP Employment, Fed decision and the ISM Nonmanufacturing Index. The Fed is not expected to make any changes. This will be all about their guidance. The ADP report is expected to show a gain of 180,000 jobs. That is down from the 190,000 estimate at Friday's close.

The Nonfarm Payrolls on Friday are now expected to show a gain of 185,000 jobs and that is up from the 177,500 estimate on Friday. Last month the ADP report was a blowout at 263,000 compared to estimates for 190,000. Everyone raised their estimates for the Nonfarm report to a gain of 190,000 jobs and the actual number came in at 98,000 and that was a shock to the system. What that means is that analysts really do not have any idea what the numbers will be and another low number like last month could be negative to market sentiment.

I took off the government shutdown line for Friday because of the reported compromise deal on the budget. However, it has not been voted on by either the House or Senate and there are still some changes in progress. Until the bill passes and hits Trump's desk there is still a shutdown risk.

President Trump said on Tuesday he was upset with the process and a "government shutdown in September could be a good thing." He is already laying the groundwork for some budget demands that the democrats vetoed in this current agreement. It is going to be a real fight in September.


There were other companies reporting earnings besides Apple but you would not have known it from the news headlines. Dow component Merck (MRK) reported earnings of 88 cents compared to estimates for 83 cents. Revenue of $9.4 billion beat estimates for $9.3 billion. The company guided for 2017 for adjusted earnings of $3.76-$3.88. That was up from prior guidance of $3.72 to $3.87. Analyst estimates were $3.83 per share. Revenue is expected to be $39.1 to $40.3 billion, up slightly from $38.6 to $40.1 billion. Analysts were expecting $39.7 billion. Shares were up fractionally on the news.


Pfizer (PFE) reported earnings of 69 cents compared to estimates for 67 cents. Revenue of $12.78 missed estimates for $13.04 billion. Pfizer expects full year earnings of $2.50-$2.60 and revenue of $52-$54 billion. Shares declined fractionally on the news.


Health insurer Aetna (AET) reported a net GAAP loss of $1.11 (-$381 million) compared to a profit of $2.08 in the year ago quarter. Aetna was forced to drop the bid for Humana after it was blocked by regulators. The earnings miss was due to losses incurred in the aborted transaction. On an adjusted basis, they posted earnings of $2.71 that rose 17% and beat estimates for $2.36. However, revenue of $15.2 billion missed estimates for $15.47 billion. Revenues declined -3.2% because of lower premiums in the health care segment. Aetna ended the quarter with 22.4 million members. They guided for the full year for earnings of $8.80-$9.00. Shares were up sharply to a new high.


CVS Health (CVS) saw profits decline 17% as major customers moved to other vendors and CVS was excluded from some prescription networks. They posted earnings of $1.17 on revenue of $44.51 billion. Analysts expected $1.10 and $44.24 billion. The company guided for 2017 to earnings of $5.77 to $5.93 and analysts were expecting $5.86. They took a charge of $199 million after closing 60 stores. Same store sales fell -4.7% but their PBM business rose 8% to $31 billion. CVX operated more than 9,700 retail locations. Shares declined $3 on the news.


Cummins (CMI) reported earnings of $2.36 compared to estimates for $1.80. Revenue rose 7% to $4.59 billion and easily beat estimates for $4.15 billion. North American sales rose only 1% but international sales rose 17% with strength in China and Europe. Shares rose $9 on the news.


MasterCard (MA) reported earnings of $1.01 compared to estimates for 95 cents. Revenue of $2.7 billion matched estimates. Earnings rose 12.7% and revenue +11.8%. MasterCard and Visa are the perfect business. They have no credit risk but are simply toll takers for every consumer charge.


Facebook and Tesla are the big reports for Wednesday followed by Activision on Thursday. YUM Brands will also generate interest on Wednesday along with Fitbit.


Companies reporting earnings on Monday evening with stocks reacting on Tuesday included Chegg Inc (CHGG). They rent textbooks online, offer study programs to enable students to prepare for tests and move from high school, through college and into the work force. The company reported adjusted earnings of 6 cents compared to estimates for 3 cents. Revenue of $62.6 million beat estimates for $58.4 million. They guided for full year revenue of $235-$240 million and Q2 of $52-%54 million. Shares spiked 28% on the earnings.


Shopify (SHOP) reported an adjusted loss of 4 cents compared to estimates for a 10 cent loss. Revenue of $127.4 million spiked sharply from $72.7 million. Their merchant solutions business saw revenue nearly double to $65.3 million. They raised their full year revenue guidance from $580-$600 million to $615-$630 million. Shares spiked $6 on the news.


Advanced Micro Devices (AMD) reported a loss of 4 cents compared to estimates for 4 cents. Revenue of $984 million missed estimates for $985 million. The company said it experienced a decline in mobile and graphics processor sales. They guided for the current quarter for $1.15 billion and analysts were expecting $1.12 billion. On the call, they guided for gross profits to be flat to slightly lower at 33%. The company said it expects to sell more video chips in Q2 and that will lower overall margins. (They have to sell at a discount to compete with Nvidia.) Inventories also rose sharply and the company blamed it on new products. Shares fell -24% on volume of 268 million shares compared to an average volume of 52 million. Everyone was expecting a big revenue boost from the launch of the Ryzen 7 processor and it did not happen.


Oil prices collapsed again with the loss of $1.22 on growing worries that expanding production from Libya, Canada and the U.S. would offset the OPEC production cuts and prolong the current glut.

After the bell API reported a -4.158 million-barrel decline in inventories and crude is up 48 cents in afterhours. The real key will be the EIA inventories on Wednesday morning.


Markets

Nothing happened in the markets today despite volume of more than 7 billion shares powered by AMD and other earnings reports. Decliners barely beat advancers 3,624 to 3,415. Advancing/declining volume was almost dead even at 3.4 billion shares. Everyone was waiting on Apple to report instead of establishing new positions in front of a potential freight train.

That does not appear to be a risk for Wednesday. Nasdaq futures are only down about 13 points, Dow futures are flat and S&P futures are down -1. There is nothing to see here, move along.

The one bright spot was a close at 2,391 by the S&P and just over that pesky 2,388 resistance level that held it back over the last five days. The next challenge is the 2,395 and 2,400 levels and we will likely need a catalyst to make a jump through that resistance. The high close was 2,395.96 on March 1st.


The Dow continues to be boxed in by the resistance at 21,000 but it did post a 36-point gain to recover the points lost on Monday. Apple will subtract 21 points at the open if the decline holds overnight. There are no other Dow components reporting this week. The Cummins earnings should have benefitted Caterpillar but they didn't. Home Depot and Lowe's were upgraded today and that helped to lift HD into the top 5 contributors. MasterCard earnings lifted Visa into the number 2 position.

The high close on March 1st was 21,115 and that looks a long way off tonight. Post earnings depression is starting to settle in and support at 20,900 is looking fragile.



The Nasdaq is suffering from a lack of FAANG movement. Note there are no FAANG stocks in the point gainer list below. The index has risen to long-term uptrend resistance at 6,100 and came to an abrupt halt. Obviously, the impending Apple earnings were the biggest reason for the dormancy but a decline in Apple on Wednesday will also be a drag.

The Nasdaq indexes remains overbought and unsupported with major gaps well below the current levels.




The Russell rebound over the prior two weeks is fading. This may be only temporary or it may be a symptom of a larger problem. As long as the index remains over 1,388 there is hope. A decline below that level would be a sell signal.


The bullish market from early last week has evaporated. We can blame it on multiple things but it is probably just exhaustion. On the positive side, there have not been any material declines. Buyers are still there, only in weaker numbers. I believe everyone is looking for a dip to buy and there is none.

I believe the dip in Apple will be bought because they did not say anything about iPhone production problems and everyone understands the iPhone 8 buzz is sucking all the oxygen out of the iPhone 7 market.

If the Fed does nothing and says nothing about the balance sheet reduction plans, the meeting will be ignored.

The market will be free to find its own level and sometimes that is not a good thing. A two-year old child left unattended can cause all kinds of trouble. A market at its current highs and left without a catalyst could stray into a minefield. Be cautious about adding long positions until the market moves over current resistance levels. Do not ignore the potential for a "Sell in May and go away" event.

Enter passively, exit aggressively!

Jim Brown

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