The late day revelations that President Trump reportedly asked Comey to drop the Flynn investigation and put reporters in prison, is tanking the futures.

Market Statistics

It turns out that former FBI Director Comey is a compulsive note taker. A memo has surfaced claiming Trump asked Comey to "let the Flynn investigation go" and the implications are huge. Since Comey was still in the early "interview" stages of his new relationship with the president, the urging of the president to end the investigation could easily be seen as coercion and obstruction of justice. Comey's refusal to end the investigation is now being seen as the real reason for his termination. In the same New York Times article, Trump also called for Comey to begin arresting reporters for leaking and publishing classified information. That would also be illegal since it has long been held that a reporter has no responsibility to keep information private. It is up to the original holder of that information to keep it secret. Comey had shared his notes from the meetings with senior FBI officials who interpreted Trump's remarks as coercion.

The democrats are already using the "I" word and calling for even tougher special prosecutors and more testimony. The republicans have vanished. Nobody from the House, Senate or White House has been willing to go on camera as of 8:15 PM to rebut any of these allegations. Since many people have gone out on a limb for Trump to rebut various events over the last several weeks only to have that limb sawed off behind them, the lack of volunteers for a new suicide mission is not surprising.

With commentators talking about impeachable offenses it is not surprising the S&P futures are down -18 points as I type this. Whether this qualifies or not or even if it is true or not, no longer matters. President Trump will be battling this event for months to come. His agenda is dead and his position could be in serious jeopardy. Senators are already saying they will subpoena all of the White House records, notes, tapes, etc along with any notes and memos from Comey and the FBI and there is no doubt that Comey will have to testify multiple times. After the rude way he was fired and the slander he received afterwards, he will not likely testify favorably about the conversations with the president.

This could actually turn into a constitutional crisis that at a minimum kills the Trump agenda and at a maximum lead to a resignation or worse.

The news above makes everything that happened in the market today nearly meaningless but I will report it.

New home construction starts for April declined from 1.203 million to 1.172 million. The decline was in multifamily units. Starts for single-family homes rose from 832,000 to 835,000. Multi-family starts declined from 371,000 to 337,000. Permits, a good indication of future starts, declined from 1.260 million to 1.229 million. Single-family permits declined from 826,000 to 789,000. Multi-family permits rose from 434,000 to 440,000.

Industrial production for April rose +1% after a +0.4% rise in March. This was the best monthly gain since February 2014. Manufacturing production rose from -0.4% to +1.0%. Durable goods rose from -0.8% to 1.0%. Motor vehicles and parts posted a sharp rebound from -3.6% to +5.0%. Business equipment rebounded from -0.3% to +1.2%. This was a very strong report.

The industrial production gains provided a springboard for revised GDP estimates. The Atlanta Fed real time GDPNow forecast for Q2 jumped to 4.1%, up from 3.5% just a couple days ago.


The calendar for the rest of the week is headlined by the Philly Fed Manufacturing Survey on Thursday. Everything else is just filler.


Dow component Home Depot (HD) reported earnings of $1.67 that beat estimates for $1.61. Revenue of $23.9 billion rose $1.1 billion and beat estimates for $23.8 billion. Same store sales rose 5.5%. For a company doing $100 billion a year in revenue, posting same store sales that strong was amazing. They guided for full year revenue to rise 4.6% with full year earnings of $7.15. Analysts were expecting $7.20. Shares rallied $1.40 to a new high but would have gone higher were it not for the earnings guidance. HD ended the quarter with 2,281 US stores and more than 400,000 employees.


Retailer Dick's Sporting Goods (DKS) reported earnings of 54 cents that rose 8% and met estimates. Revenues of $1.825 billion rose 9.9% but missed estimates for $1.834 billion. Same store sales rose 2.4% and missed the company's own guidance of 3% to 4%. Analysts expected 3.5%. Dick's guided for the full year to earnings of $3.65-$3.75 with same store sales of 1% to 3% compared to the 2.5% previously projected. Analysts were expecting $3.74 for earnings. For the current quarter, the company guided for $1.02 to $1.07 and analysts were expecting $1. Dick's had 609 Dick's stores, 100 Golf Galaxy stores and 30 Field and Stream stores at the end of the quarter. They plan to open 15-20 locations next year with 5-10 in 2019. They will open 43 in 2017. Management said it was waiting for real estate prices to decline and could consolidate some of its locations. Shares were crushed on the same store sales miss.


Staples (SPLS) reported earnings of 17 cents that declined -11% but matched estimates. Revenue of $4.15 billion missed estimates for $4.54 billion. Same store sales fell -2.6%. The company guided for earnings of 10-13 cents for the current quarter. They closed 18 stores in Q1 and are planning on closing 70 stores in fiscal 2017. Shares fell slightly on the news.


Retailer TJX Companies (TJX) reported earnings of 82 cents that beat estimates for 79 cents. Revenue of $7.78 billion missed estimates for $7.88 billion. Same store sales rose 1% but missed estimates for a 1.6% increase. The company guided for Q2 earnings of 81-83 cents and well below analyst estimates for 92 cents. Full year guidance was $3.71-$3.78 and analysts were expecting $3.90. Shares fell $3 on the news.


Virtusa Corp (VRTU) reported earnings of 43 cents that missed estimates for 46 cents. Revenue of $226 million missed estimates for $227.2 million. They guided for the current quarter for earnings of 24-30 cents and revenue of $222.5 million to $337.5 million. For the full year, they expect $1.42-$1.66 per share and $920-$950 million. Shares fell 15% on the earnings miss.


Jack in the Box (JACK) reported earnings of 98 cents that beat estimates for 91 cents. Revenue of $369.4 million beat estimates for $369.2 million. Same store sales fell -0.8% but sales at Qdoba fell -3.2%. They guided for the current quarter for same store sales at both brands to be down 1% to up 1%. Full year comps are expected to be up +1% compared to prior guidance for a 2% rise.

JACK said the quarter started sluggishly because of late tax refunds and record rainfall in California. Sales improved near the end of the quarter. Qdoba sales comps were impacted by aggressive discounting in the year ago quarter when Chipotle was having trouble. They tried to pull in as many of those customers as possible. Earnings were impacted from the rise in the minimum wage in California starting in January.

Despite the mixed commentary, shares rallied $10 in afterhours trading. The gain came after the company said it had retained Morgan Stanley to research strategic alternatives for the Qdoba brand. JACK said its overall valuation had been impacted by having two different business models. That suggests Qdoba will be spun off soon.


Red Robin Gourmet Burgers (RRGB) reported blowout earnings of 89 cents compared to estimates for 57 cents. Revenue of $419 million was only slightly better than estimates for $416 million. They guided for full year earnings of $2.80-$3.10 and analysts were only expecting $2.76.


Earnings for Wednesday include Dow component CSCO, retailers Target, L Brands and American Eagle.


Citigroup cut Pfizer (PFE) from neutral to sell on earnings concerns. When Pfizer reported Q1 earnings, they beat estimates by 2 cents but missed on revenue.


Goldman initiated coverage on Intuitive Surgical (ISRG) with a $1,000 target price. The bank said robot assisted surgeries will double over the next two years. "With less than 4% of U.S. surgeries employing robotics today, we think investors should own this structural winner as the market doubles in the next few years." Only 3% of tier-three hospitals in China have the Intuitive Surgical robot system. Those are facilities with more than 500 beds. The tier three market in China is the same size as the entire U.S. market. "We see new product cycles, an expanding platform, high hurdles for physician training and significant financial resources as tail winds to the ISRG competitive position." Shares rose $9 to close at $860.


Microsoft shares spiked 2% because the recent WannaCry ransomware outbreak will probably spark millions of people around the world to upgrade from Windows XP and Windows 7 to the much better security of Windows 10. This could be a windfall for Microsoft since out of date Windows systems tend to linger forever because users are hesitant to take the time and trouble to upgrade a working system.

The outbreak has thought to have infected up to 300,000 systems in 150 countries and all have the same common denominator of being an older Windows operating system. Credit Suisse reiterated an outperform rating on the company. The analyst wrote, "If you are not current on Windows, you are toast." He believes the ransomware attacks could accelerate due to the success of the recent attack. Hundreds of other hackers see the successful attack as free money and they will immediately copy the code to construct their own versions. Last weekend's attack is now considered the first wave of many more self-replicating attacks.

Credit Suisse said this could also accelerate the upgrade cycle on enterprise software. Millions of servers are still using Windows 2003 and 2008 server operating systems and those are also out of date. Companies are even more hesitant to upgrade if they do not have to because of the complexity of moving installed programs and applications code. The ransomware attack could push those companies into making the move. CS estimates that 85% of companies have not yet upgraded business PCs to Windows 10. That is another huge base of potential upgrades. Last week Microsoft announced the next big release of the Windows 10 Fall Creators Update. This is a major refresh of the Windows 10 operating system and right in time for the expected rush to upgrade.


After the bell, the API inventories were announced. Crude oil inventories rose 882,000 barrels compared to an expected decline of -2.3 million. Gasoline inventories fell -1.88 million barrels. The API report is mostly ignored because it does not track with the government's EIA inventories that are released on Wednesday mornings. However, crude prices did decline 48 cents to $48.08 after a 26-cent decline in the normal session.


Markets

This was another day of major divergence in the broader markets. The Dow rose just over 21,000 thanks to Home Depot earnings. After peaking at 20,133 at the open, the decline was immediate. The low of 20,932, a -101 point drop, came by 10:30. It was a battle the rest of the day with the index trading on both sides of zero and ending the day with a 2-point loss. This is a good spot for the Star Wars line, "Nothing to see here, move along." Tomorrow could be a different story if the political events blossom even further overnight. With the Dow the weakest index, there could be a meltdown.



The S&P closed at a new high on Monday at 2,402 but it was not a breakout. It was only a marginal close over the prior high and the index was still in the grip of resistance at 2,400. Today's move from 2396-2406 saw the index close almost in the middle and right on that 2,400 level.

In theory, this was a positive event that suggested sellers were losing their conviction. The real test will be whether the bulls can hold the index over 2,380 if we get a washout at the open.


The Nasdaq indexes each gained another 20 points and both closed above prior uptrend resistance. If we could ignore the Dow and S&P this would be a runaway bull market. Unfortunately, this divergence cannot continue. It is only a matter of time before the indexes begin moving in the same direction again the odds are not in favor of a continued move higher. I could be wrong but the Nasdaq overextension is due for a rest.



Small caps ended the day flat but they did rebound from a sharp decline at the open. If traders are trying to derive their small cap clues from the direction of the big cap indexes they must be greatly confused.


The real danger for Wednesday is the damage to market sentiment. Since we seem to be developing a pattern of a crisis a day from the White House, traders will either grow numb from the constant headline stream or they are eventually going to throw up their hands in disgust and move to the sidelines.

If sentiment is damaged, we could get the correction everyone has been expecting since January. This is the sell in May and go away period and selling excuses are rapidly becoming more prevalent.

I will be watching for the dip buyers to appear after the opening drop. As long as they appear and can keep the losses to a minimum, we should be ok. If the first dip is bought and a second dip makes a lower low, I would move to the sidelines.

Futures are improving slightly with only a -13 print as I hit the email send button.

Enter passively, exit aggressively!

Jim Brown

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