Volume was very low but the results were outstanding. All the indexes finished higher but the strength of the gains was surprising.

Market Statistics

The markets gapped open but then went dormant until 2:30 and that gave all the bears time to load up on shorts in anticipation of a decline into the close. For the second day in a row the trend into the close was positive and those shorts were forced to cover. The move up was surprising with the Nasdaq now only 16 points from a new multi year high.

There were no major economic reports to roil the market so everyone was focused on the Microsoft/Skype deal and the continued rise in commodities.

Import and Export Prices rose +2.2% in April compared to +2.7% in March. Since imported petroleum prices rose +7.2% for the month, still less than 9.8% gain in March, that makes the +2.2% overall gain actually pretty tame. That suggests the inflation worries may actually be easing.

The U.S. Wholesale Inventories for March rose by +1.1% compared to +1.0% in February. This was basically inline with estimates the internals were positive. Sales rebounded strongly by +2.9% after a -0.3% decline in February. Durable goods sales rose +2.3%. Computer inventories declined -3.9%. The increase in sales pushed the inventory to sales ratio down to 1.13. That matched its all time low set in June 2008. The inventory to sales ratio measures the number of months it would take to deplete inventories at the current pace of sales. A low ratio like we have today means manufacturers will need to step up production to rebuild inventory levels.

The negative report for the day was not a surprise. The National Association of Realtors (NAR) said home prices declined in Q1 by -4.6% over Q1-2010 levels even though sales remained relatively the same. The decline was broad based with the Midwest falling -5.3% while the south slipped only -0.6%. 118 out of the 153 metro areas saw prices decline. Miami and Chicago are still the most depressed with Chicago prices -11.7% below Q1-2010 and Miami prices down -19.7%.

However, in Q1-2010 there were homebuyer tax credits to boost sales and prices. Without any stimulus in 2011 it is up to the seller to provide the stimulus by discounting the sales price. The number of single-family homes on the market is more than twice the normal average although the supply is declining. The number of foreclosures is expected to decline by year-end and prospects are increasing for a housing rally in 2012.

The economic calendar for the rest of the week is mostly noise with the exception of the two price indexes and their readings on inflation. The Jobless Claims will also be of interest given the sharp spike last week to 474,000.

Economic Calendar

The big item making the news today was the Microsoft purchase of Skype for $8.5 billion. It was widely seen as significantly more than it was worth with some analysts suggesting something more in the $4.5 billion range would have been reasonable. Microsoft claims Skype will be accretive in 2012. The offer was unsolicited and it was the largest acquisition in the company's history.

Ebay bought Skype in 2005 for $2.6 billion. They sold 70% of the company in 2009 to Silverlake Investors for $2.0 billion. The $8.5 billion of the entire company today will give Ebay about $2.975 billion in cash for their remaining share. The company that made out like a bandit was Silverlake. They saw their $2 billion investment turn into $5.75 billion in two years. There will be champagne flowing there this week.

In theory Microsoft is going to integrate Skype with xBox, Windows and the mobile phone and tablet operating systems. The challenge is going to be how to monetize the purchase. Since 99% of Skype users pay no money it will either require a change in that business model or the implementation of an advertising component. Microsoft has not been very successful in that area in the past.

While Microsoft has been very successful as a company and generates tons of cash they have never been successful in acquisitions and nearly every venture outside their normal Windows business has failed to produce any material revenue with the exception of the xBox and that division produced losses for years. Microsoft stock has been dead money for the last ten years.

Microsoft Chart

Ebay Chart

There were some earnings making news today. Fossil (FOSL) reported earnings that rose +55% on a +37% rise in revenue. Earnings of 86-cents beat analyst estimates of 66-cents. Sales in Asia rose +57%. The company warned that Q2 earnings would only be in the range of 70-73 cents and analysts were expecting 76-cents. They are expecting a hit from a higher tax rate of 26-cents. However, traders ignored the warning and sent Fossil shares up +12.7% to $106.

Fossil Chart

Boston Scientific (BSX) shares declined -9% after the company announced their new CEO of two years will retire in December. CEO Ray Elliott, age 61, said he would stay on as a director and help hunt for his successor. He had previously been lauded for his work at Simmer Holdings (ZMR). Now analysts and investors are wondering why the hand picked CEO to lead BSX out of its many problems is suddenly taking retirement at an early age after only two years on the job. Investors worry is there is something wrong with the company and the CEO is bailing to avoid being painted with the blame when the news breaks or maybe the company is forcing him out. In an interview with the WSJ Elliott stressed the departure is entirely his decision and he claimed the restructuring plan should be mostly completed by year-end.

Boston Scientific Chart

After the close Disney (DIS) reported earnings that disappointed the street. Disney reported earnings of 49-cents compared to estimates of 57-cents. Disney blamed the miss on the box office bomb "Mars Needs Moms" that drove a $70 million drop in studio profits. They also blamed the earthquake in Japan and the temporary closure of theme parks in Japan. Disney also saw higher cost to launch their newest cruise ship even though it is already 75% to 90% booked throughout the rest of the year. They also warned Q3 would face some difficult comparisons since Disney had the World Cup soccer tournament and the Celtic-Lakers NBA final that went seven gains. The CEO also said the late date for Easter and some severe weather also impacted attendance at theme parks. Bottom line, it was a kitchen sink quarter. Once they knew they were going to miss the bar they threw everything they could into the quarter to make sure they got the most mileage out of the problems.

Disney Chart

Stec Inc (STEC) a manufacturer of flash memory warned for Q2 due to the earthquake in Japan and a drop in orders while Japan recovers. They said customers have been impacted by a shortage of material from Japan that would delay products made from that material all the way through the food chain. The company said earnings could decline as low as 21-cents and analysts were expecting 31-cents. Shares declined sharply.

Stec Chart

Molycorp (MCP) posted earnings after the close of a penny when analysts were expecting 7-cents. Revenue was also much lower than estimates at $26.3 million from street views of $41.6 million. If you just looked at it from year ago levels it was a decent improvement from the 16-cent loss in Q1-2010. Sales surged to $26.3 million from $3 million.

Shares were crushed on the news. However, I believe this "will be" a buying opportunity. The rare earth story continues to get better and prices continue to rise. Molycorp is restarting a mine that was closed years ago and the fact they have any sales is amazing. Basically they are collecting the scraps that were left over when the mine was closed many years ago and selling those scraps. Once they get the mine open and actually begin to sell new production they will be very profitable. Molycorp was formed and went public in August 2010 in order to reopen this mine. How many companies faced with the complexities of mining are highly profitable in the first couple years? Molycorp has also been acquiring key producers around the world in an effort to have different rare earth minerals available on their menu of products. I believe MCP is going to be a killer play but not today.

In the Oil Slick newsletter I recommended MCP at $35 a share and then we closed the position at $70 on April 25th in anticipation of a coming event. We will be buying it back once that event passes. I am referring to the giant lockup expiration of 39 million shares on May 11th. This will double the number of shares available to trade. The last expiration saw shares decline -$20. In the Oil Slick newsletter we went long MCP puts last week. I plan on riding MCP down on the lockup expiration and then going long again once support appears. We got a good start on the decline today with shares falling to $62 after the earnings report.

Molycorp Chart

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The CME tried to create a flush in the oil market yesterday when they raised the margin for trading crude futures by +25%. This was the second hike this year. They claimed it was due to the excess volatility. I wrote several times how they killed the silver market last week by raising margin rates five times in a two-week period. When oil was holding at $114 last week there was considerable worry the CME would also target crude futures. I am sure that was some of the worry that helped push crude -$10 lower last Thursday.

The CME raised the initial margin for crude futures from $6,750 per contract to $8,438. Back in March they raised them significantly less from $6,075 to $6,750. So basically it costs a trader $2500 more per contract today to buy futures than it did on March 1st.

Crude prices declined from $103.40 to $100.12 on the news but trades shook it off and pushed prices higher. In this case it appears the damage was done last week and once the second shoe had dropped they came back into the market. There may be a hit on Wednesday when traders who are not paying attention get a margin call in their broker age account but I suspect it will not last.

There are too many factors pushing oil prices higher. Gasoline prices have nearly rebounded to their highs from last week on worries the Mississippi flood will hit the 11 refineries in the Louisiana area. They produce roughly 900,000 bpd and 10% of the nations gasoline supply. Gasoline futures declined from $3.44 last week to $3.09 on the commodity dip and they were back at $3.35 today.

The MasterCard Spending Pulse report showed gasoline demand for last week declined by -0.5% to -2.4% lower than the same week in 2010 BUT it was the slowest rate of decline in the last six weeks. The EIA is now predicting the average price for gasoline this summer will be $3.81. That is down from the actual average price of $3.985 last week.

The energy sector is expected to post earnings growth of 36% for all of 2011. That is the highest growth sector.

WTI Chart

Brent Chart

GM is doing its part to populate the highways with more cars. GM said it was going to invest $2 billion in 17 plants and "create or save" 4,000 jobs. Personally I thought we were past that "create or save jobs" claim that was used a lot a couple years ago. Every time it turns up the speaker gets ridiculed but apparently it is still alive. GM said the new investment would be in addition to the $3.4 billion invested and the 9,000 jobs created or saved over the past two years.

In Toledo, GM will invest $204 million and "retain" 250 jobs to work on a new 8-speed automatic transmission to increase fuel economy on future vehicles. The Center for Automotive Research predicted the ripple effect of the upgrades and investments would add $2.9 billion to GDP and create or retain more than 28,000 jobs. You have to wonder who is writing these press releases.

GM Chart

The Dow Transports closed at a new historic high at 5527 thanks to strong gains in the railroads. Airlines were mostly positive but the gains were minimal. This is obviously a knee jerk reaction to the drop in oil prices last week but somebody needs to tell investors that one-week does not make a trend. Businesses that use fuel made from oil are only going to see costs continue to rise. That is airlines, trucking companies, shippers, etc.

Dow Transports

For instance the Postal Service said today they lost $2.2 billion in the first quarter. That compares to a $1.6 billion loss in Q1-2010. Even worse they said they would likely default on their debts before year-end. They will exceed their $15 billion funding by September 30th. Unless Congress intervenes the Postal Service will not be able to make certain payments to the government or be able to continue billions in payments to a trust fund for health care benefits for future retirees. The reason they gave for the continued losses was the rising price of fuel and a 3% decline in mail volume. Mail volume for the quarter fell from 42.3 billion pieces to 41.0 billion. The Postal Service has cut over 130,000 jobs over the last three years and it is continuing to cut with 7,500 administrators in regional offices getting their paychecks cancelled. However, the Postal Service claims all their efforts to trim costs are being offset by rising fuel prices. The Postal Service is asking Congress to allow them to stop Saturday mail delivery.

The S&P continued its rebound with a +11 point gain to 1357. That puts it just 13 points away from a new multiyear high at 1370. This is confusing a lot of traders and the slow and stealthy way it is moving higher does not produce a lot of conviction. Volume yesterday was 5.6 billion shares and the second lowest day of the year. However, we were missing the 450 million shares of Citigroup pre-split volume that had been so common. Citi reverse split 1:10 on Monday so the volume was also cut by 90%. Citi volume today was 42 million shares.

If we take today's market volume of 6.5 billion and add in the lost volume from Citi we are still weak at just under 7.0 billion and the slowest day other than Monday in more than two weeks. Remember, we are only 13 points away from a new high and this is May. Conventional wisdom would be for a weaker market as we head into the summer doldrums.

For traders we need to trade the trend and not trade what we think the trend may be. We had a great opportunity for a serious sell off last week and it never appeared. Support at 1330-1340 held and new 52-week highs on individual stocks are soaring again. There were 445 on Tuesday. If we don't believe in the trend then we should trade smaller positions but go with the trend, don't fight it. If the S&P does successfully break over 1370 and into new high territory I suspect that volume will pick up significantly and we want to be long when/if it happens.

S&P Chart

The Dow is 116 points from a new two-year high. All but four Dow stocks were positive with only MMM, MSFT, AXP and AA fractionally negative with MMM the biggest loser at -0.28 cents. CAT and IBM were the biggest gainers.

The new high on the Transports suggests we will see a new high on the Dow Industrials. Of course that new transport high could be brief if oil prices continue to rise.

Resistance on the Dow is 12,800 and it should be pretty decent resistance. The Dow stalled there for three days on the last attempt. There was some positive news out of China tonight suggesting their economy had slowed only slightly and that could lift the U.S. markets on Wednesday.

Dow Chart

The Nasdaq Composite is within ONE point of a new closing high at 2872.02. The Nasdaq 100 is two points away. Tech stocks seem to be accelerating out of last week's bout of profit taking after finding solid support at 2825. The big gains came without Apple. Those shares have been trading sideways since April 21st although they did manage a +1.85 today. If the Nasdaq breaks out to a new closing high it would be very positive for market sentiment. It would help a lot if it were a strong breakout and not just a point or two.

Nasdaq Chart

The Russell was the biggest percentage gainer of the major indexes by a wide margin. However, it was unable to move over historic resistance at 855. I am hoping this is just a temporary stall and the Russell does breakout to a new high. Otherwise this could turn into a head and shoulders pattern and that would be bearish. I like the strong gains but we are not home yet.

Russell Chart

After the bell today China's trade surplus rebounded to $11.4 billion for April after posting an unexpected decline in the prior report. This should be positive for the U.S. markets and the price of oil is rising again, now over $104.50 on expectations demand in China will increase. The dollar is falling again.

While there is plenty of darkness before morning this could be a positive influence on Wednesday's open. Like I said earlier we need to trade the trend and prepare for a breakout to new highs. If that breakout does not happen then we will deal with it then. There are no earth shaking economics on the calendar for Wednesday but Cisco reports earnings after the close. That could be a drag but they have already guided lower so it should not be unexpected.

Enter passively and exit aggressively.

Jim Brown

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