After a weak day in the markets the futures took a serious hit in late trading after Google released earnings that missed estimates and the stock was knocked back to $546 on the news.

Market Statistics

The markets started off weak after Goldman downgraded the banking sector to neutral from overweight and jobless claims shot unexpectedly higher. The PC sector suffered from another report showing slower sales and Google topped it off with an earnings report that failed to impress.

On the economic side the Jobless Claims for last week spiked to 412,000 and the highest level since Feb 12th. This is up from the 385,000 the prior week. With a steady trend lower over the last couple months a spike of this magnitude was unsettling but I seriously doubt it represents a change in the trend. The jobless claims are very volatile and are impacted by things like weather, holidays, pay periods and layoffs due to temporary plant closings like we are seeing in the automotive sector as a result of the Japanese quake.

I do not see anything to be concerned about unless this turned into a multi-week trend higher. The JOLTS data earlier in the week showed the number of job openings rose +2.3% in February to 3.093 million from 2.741 million in January. In the Beige Book on Wednesday the Fed noted an increase in hiring with only three districts out of twelve noting delayed or limited hiring. All temporary staffing firms reported an increase in hiring and a major New York agency citing March as the "best month in years."

The Manufacturers Alliance MAPI survey for Q1 declined slightly from 75 to 72 but remains well into expansion territory over 50. The new orders component rose from 87 to 91 and 90% of respondents expect order volume to increase. This was a bullish report but it covered Q1 so it is seen as a lagging report and mostly ignored.

The Producer Price Index (PPI) rose by +0.7% for March compared to a +1.6% gain in February. The Core PPI rose by +0.3%. The rise in the headline number was almost entirely due to the rise in energy prices of 2.6% in finished goods. That is the result of a +5.7% rise in energy prices over the March period.

Core prices rose +0.3% and due mostly to a +0.9% rise in auto prices and +0.7% rise in truck prices. Steel rose +5.3% and air transportation rose +2.4%. The Fed should be pleased with this report. With most of the gains as a result of the hike in oil prices and the Fed's expectations for that price spike to be temporary it suggests inflation will remain low. Capacity utilization is still low and manufacturers cannot pass through prices at a rapid enough pace to hike inflation at the consumer level. The Consumer Price Index (CPI) will be released on Friday.

Also on Friday will be the NY Empire Manufacturing Survey, Industrial Production and Consumer Sentiment.

The market was lackluster ahead of the Google earnings after the close and evidently for a good reason. Google missed estimates after spending more on hiring and marketing to defend against competitors making inroads on their market share. Income rose to $7.04 billion from $1.96 billion but even the $5 billion jump in profits was not enough to beat analyst estimates. Profits were $8.08 per share and analysts were expecting $8.12. Google announced plans to add 6,000 employees in January and raise salaries +10%.

Google is also defending itself against regulators all around the world as its tentacles increase their grip on not only the search space but also dozens of other efforts including Internet access and mobile phones and tablets.

The new CEO, Larry Page, appears to be putting the company into acquisition overdrive mode and has made it public knowledge he is looking for some big opportunities. Google had 26,316 employees at the end of the quarter. That was a +7.9% rise since year-end. Research and development costs rose +50% and sales and marketing rose +69%.

Analysts don't really know how to value Google. The assets are diverse and new acquisitions are only going to broaden its various business models. With Page in business expansion mode there is a risk Google will over pay and over reach and end up with businesses that sounded good at the time but end up being a drag on Google rather than a benefit. You only have to look at Cisco and the Flip Video for a prime example.

Shares plunged in after hours to close at $546.95 and -$32 from the close in regular trading. This is well under the 200-day average at 559 and under support from March at $550. This could be the beginning of a major decline even though earnings were great. The fear of regulatory problems and rapidly rising expenses may force a revaluation that could drag the stock back to $450 if the market enters a correction phase.

Google Chart

Research in Motion (RIMM) sank to a five month low after some harsh reviews of the new PlayBook tablet. Noted tech reviewer Walt Mossberg recommended consumers avoid the tablet until newer models are released and the software catches up with expectations. Another reviewer, Joshua Topolsky, writer for, said "I can't think of a single reason to recommend the PlayBook over the iPad or the Xoom. A New York Times reporter, David Pogue, said "RIM just shipped a BlackBerry product that cannot do email. It must be ice skating season in hell." David Bell of said the PlayBook shows off some powerful new features of the BlackBerry operating system but the small size of the PlayBook diminishes many of its best features." Sterne Agee said the lack of email and the lack of a 3G connection will limit the ability and acceptance of the device and appeal may be limited. They also cited a 5-hour battery life rather than the 8-10 hours RIM claims.

That was just a handful of the negative comments surrounding the release of the PlayBook this week. Without a sudden reversal of the negative comments it would appear RIMM shares could continue to drop with a possible return to the September lows around $43.

Chart of RIMM

It was a bad day in general for tech stocks despite the relatively small decline in the Nasdaq. On Wednesday both IDC and the Gartner Group reported a decline in first quarter PC shipments due to the rise in tablet purchases and decline in general PC demand. Nomura Equity Research warned that weak PC shipments suggested a cautious stance ahead of Intel's earnings next Tuesday.

IDC said global PC shipments declined -3.2% during the first quarter. That was significantly below IDC's already lowered estimates for a rise of +1.5%. IDC said analysts were attempting to blame the decline on the rise in tablet sales but IDC felt there were other factors in play. PCs have reached a level of computing capability where they don't have to be replaced as often. A basic 2.0Ghz PC from three years ago is just as capable as a more expensive units today for anyone except for a person heavily into gaming. Video cards reached a level where most users can't tell the difference between a $39 component and a $300 component so there is no real need to make the big purchase of a replacement PC. The slow growth in hiring is preventing an upsurge in PC buying in the corporate world. Lastly, significant price drops have lowered the initial cost on a PC to the point where companies have to sell two PCs to equal the same dollar amount as one PC four years ago. That makes sales comparisons difficult. Companies may be selling more units but receiving less revenue.

IDC Computer Shipments Chart

Downgrades were flying on computer makers and parts suppliers. Microsoft was caught in the crossfire when Barclays lowered its revenue target saying the PC data "underscores persistent headwinds for Microsoft's Windows business in coming quarters." Even Intel is moving to expand the use of its Atom chip in tablet devices running the Android OS rather than a Windows product. DigiTImes reported Intel is paying tablet makers Acer, Lenovo, Cisco and Asus $10 per tablet to help build Intel's market share. Android tablets shipped to date have used chips built by Intel rival ARM. The Windows-Intel (WinTel) partnership has not broken up but Intel understand that other operating systems are exploding with new capabilities and features at a faster rate than the Window's OS. Microsoft is designing the next version of Windows to run on ARM processors so Microsoft is also breaking away from the WinTel mold. Normal PCs and servers will be around forever so WinTel will always share a segment of the market but that segment is shrinking.

The opening drop in the market was also fueled by a blistering report issued by the Senate on Goldman Sachs. The report said Goldman acted in its own best interest when it sold mortgage assets to investors and misled them about the potential risks. The 600-page report said Goldman was a "case study" of the recklessness and greed that set off the 2008 financial crisis. "Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing," according to Sen. Carl Levin.

The sector was under fire from all sides with the Federal Reserve saying it was planning to fine some of the country's largest banks for errors in the way they handled foreclosures.

If that was not enough Goldman lowered its outlook on the sector from overweight to neutral. The banking index closed at a three week low.

Goldman ended the day predicting the S&P would rise to 1,425 in the next three months and 1,525 by year-end. They based this estimate on expected S&P earnings growth of 15% this year and 11% in 2012. The Goldman note was credited with a minor uptick in trading towards day's end.

A big winner for the day was Supervalue (SVU). The stock rallied +17% on better than expected earnings. They were the top percentage gainer on the S&P after they posted earnings and a full year forecast that beat the street. They now expect a median range of $1.30 for earnings this year and analysts were expecting $1.15. Ironically the chain said same store sales declined -2.5% in the quarter. That was better than the expected -3.1% decline but still a decline. Obviously they are raising prices and cutting costs somewhere if they are growing earnings on slowing sales.

JB Hunt (JBHT) saw their shares rise +7% on earnings of 40 cents that beat the street by two cents. JBHT said the gains came on higher margins and a 15% jump in shipping volume. That should be good news for the economy that trucking volume is growing.

JBHT Chart

Dow Transports Chart

Crude prices rebounded slightly from Tuesday's low at just over $105. This was due to the drop in gasoline inventory of seven million barrels on Wednesday. It was also a factor of increased fighting in Libya and the return by the U.S. in flying attack sorties. Recent reports from various officials trying to workout a ceasefire suggest there will not be one until Gaddafi either dies or leaves the country. France and Britain are discussing a more in depth role in helping the rebels other than just flying air cover. All of these reports suggest conditions could get worse before they get better.

The rise in crude prices is solely based on the increased security premium on fears of a long-term loss of Libyan oil. There is no actual shortage of oil. Saudi Arabia said on Tuesday they had cut production back to pre Libyan levels because there were no buyers for the extra oil.

The current WTI crude contract expires on Tuesday so there is plenty of chance for further volatility.

WTI Crude Chart

Yields are rising sharply all over the Eurozone with worries Greece will eventually have to restructure their debt and European banks, especially Germany and France, will take huge hits. This is causing a new round of investor worry that the Greece problem could be replicated in the rest of the weaker countries like Spain and Ireland.

The rising yields in Europe helped backstop the auction of our 30-year bonds. The Treasury Dept sold $13 billion in 30-year bonds today with a yield of 4.531% and lower than traders expected. The bid to cover ratio was 2.83 and slightly higher than the 2.73 average from the last four auctions. Foreign central banks bought 47.2% and that was higher than the recent average of 40.1%. Evidently the U.S. is still the safe haven for at least a little longer.

The S&P declined -12 points at the open on the bank downgrades and the -3% decline in Goldman Sachs. The dip to nearly 1300 and round number support would be bullish if it had been followed by a decent rebound and some additional volume. The total market volume was a relatively small 6.7 billion shares. There was definitely a continued lack of conviction. The dip to 1300 could have been a key reversal point but we really won't know until next week.

The $30 drop in Google tonight will pressure the S&P at the open but strangely the S&P and Nasdaq futures are positive tonight. If that holds until daylight it could be a signal traders are done with the selling. Earnings will pickup significantly next week and most traders appear to be ignoring any bad news and focusing on the future and the prospects for future gains.

Thursday was a defensive day with traders very cautious about staking out new positions. That trend will have to change if we are going to move materially higher. S&P 1300 remains the key level for Friday with 1325 on the upside as a key confirmation point for the bulls.

S&P-500 Chart

The Dow dipped to 12,163 and -107 at the open. It came to a dead stop when it hit the dual support of the 30 and 50 day averages at 12,169-12,179. The rebound was lackluster but it did rebound. More stocks gained in the Dow with only three losing more than a dollar (IBM, KO, CVX) and only one, JPM, losing more than a dollar.

I view this rebound from those averages as bullish and I also view the close back above 12,250 as also bullish. However, we need to see another day of gains as confirmation the selling is over. If the Dow can close with a decent gain on Friday, with serious geopolitical event risk over the weekend, I would breathe a lot easier. It looks like a perfect setup for a rebound but looks can be deceiving.

Dow Chart

The Nasdaq closed well off its lows but still in negative territory. Given Google's pattern of big earnings surprises I am sure quite a few tech investors and traders deciding that cash was a position ahead of Google's earnings.

The $30 drop in Google has not impacted the S&P or Nasdaq future so far tonight. As we get closer to morning that may not be the case. The IDC and Gartner Group news about lower than expected PC shipments could create worries that Intel is also going to disappoint on Tuesday. This could be a rough earnings cycle but the markets may not take the problems to heart until after Tuesday. There may be enough hope left for a positive earnings cycle that traders continue to buy the dip ahead of Intel/IBM on Tuesday. After those reports we will take another look at the future and see if the crystal ball is any clearer.

The Nasdaq chart did not change on Tuesday. The support level for the last three days held and there was no resistance test.

Nasdaq Chart

The Russell rebounded from the 50-day at 819 and returned almost to critical resistance at 830. A break over 830 would be a key signal for the markets. We don't know how the Google news will affect the small caps but I am hoping they ignore it. Google is as far away from a small cap as you can get and in reality their earnings power was excellent. They just grew expenses as well.

The keys for the Russell are 830 resistance and 820 support.

Russell Chart

I am still neutral on the markets until the S&P is back over 1325 and that would turn me bullish again. However, seeing the Russell move over 830 would have the equivalent impact. Friday could be a throw away day with weekend event risk and the threat of further earnings surprises on Tuesday. I would be calm about entering new positions until we have a clear signal.

Enter passively, exit aggressively until conditions change.

Jim Brown

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