After declining 10 of the last 11 sessions Apple announced blowout earnings then warned on weakness in the current quarter.

Market Statistics

The worry over the mother of all earnings reports weighed on the Nasdaq for the last week and those worries were in vain. Apple posted blowout earnings of $12.30 compared to estimates of $10.04. Revenue was also a blowout at $39.2 billion compared to estimates of $36.8 billion. Apple shares were down -11 to close at $560 before the report. Despite the guidance warning for the current quarter Apple shares rallied more than $40 in after hours to $601.

Apple sold 35.1 million iPhones in Q1 compared to estimates of 32 million. Shipments of the iPad came in at 11.8 million and the low end of the expected range. The weakness was due to the late quarter arrival of the latest model. Earnings rose +92% from the $6.40 earned in Q1-2011. Mac shipments at 4.0 million and iPod at 7.7 million were in line with estimates.

Year over year Asia Pacific sales rose +114% and Japan +91%. However, quarter over quarter Asian sales were up +32% but all other regions declined.

Apple shares had been declining after AT&T and Verizon both said iPhone sales were lower than expected. Clearly global growth more than made up for weakness in the USA. iPhone revenue was down -7% from Q4 but up +85% year over year. iPad revenue was down -28% from Q4 but up +132% year over year.

In the U.S. the school system is loving the iPad. The San Diego school district bought 10,000 in the March quarter and plans to buy another 15,000 in this quarter. CEO Tim Cook said the lowered price point on the old iPad at $399 is opening up some new demand areas where the price of the new version is too high. The app store now has over 600,000 apps with more than 200,000 just for the iPad. The iTunes store generated $1.9 billion in revenue a gain of 35%.

For the current quarter Apple forecast earnings of $8.68 per share on revenue of $34 billion. Analysts were expecting $10.02 on revenue of $37.7 billion. While it could be considered a warning if other companies did it, Apple typically issues a conservative forecast so the lowball forecast was mostly ignored. Apple ended the quarter with $110 billion in cash and that represents 20% of its market cap. About 70% of that cash is overseas and can't be brought back to the U.S. without a massive tax hit.

The decline in Apple shares was responsible for 65% of the recent Nasdaq loss. That will be erased on Wednesday with the +$40 after hours gain.

Apple Chart

Juniper (JNPR) will also be helping the Nasdaq on Wednesday after reporting earnings of 16 cents compared to estimates of 13 cents. Revenue was $1.03 billion compared to estimates of $980 million. Juniper guided to 15-17 cents for the current quarter and analysts were expecting 20 cents. Juniper said there was a slower ramp into adoption of its new product line but that was finally accelerating. Juniper shares rallied +10% when the earnings were released by mistake before the close.

Juniper Chart

Lexmark (LXK) reported earnings of $1.05 that was in line with estimates. Revenue declined to $992.5 million. The company predicted earnings of .95-1.05 for Q2 with a -8% decline in revenue to $950 million. Analysts were expecting $985.6 million. Shares declined -6% on the news.

Lexmark Chart

United Technology (UTX) reported adjusted earnings of $1.31 compared to estimates of $1.21. UTX removed some of the income from business units they have up for sale. Revenue of $12.42 billion was less than the $12.88 billion expected. Earnings declined at three of the five major UTX business units. Shares were unchanged on the news.

3M (MMM) reported earnings of $1.59 compared to estimates of $1.44. Revenue of $7.49 billion was higher than estimates of $6.95 billion. 3M raised its guidance to $6.35-$6.50 from $6.25-$6.50. The company said they were experiencing a sales slowdown in consumer electronics. Manufacturers using their products to manufacture electronics like flat screen TVs were reducing orders. 3M shares rallied slightly on the earnings despite the electronics concerns.

MMM Chart

Big Lots (BIG) also warned that consumer purchases of electronic products were slowing. Big Lots blamed their sales declines on consumers buying more products online. BIG projected same store sales to decline compared to prior forecasts for a 2-4% increase. Multiple analysts immediately slashed ratings on the stock. The situation was made worse by the revelation that the CEO sold $10 million in stock on March 20th and $4.9 million on March 27th after he had told investors in the first week of March that trends were improving. Shares of BIG declined -24% on the news.

Big Lots Chart

Netflix (NFLX) declined another 14% after reporting better than expected earnings after the close on Monday but warned on slower subscriber growth. Netflix said they expected to add 200,000 to 800,000 streaming video subscribers in Q2. That was below prior estimates around 1.2 million. Netflix currently has 26 million subscribers. The company said the slow growth was due to seasonal trends and they still expect to add 7.0 million new customers in 2012. That is a major increase from the expected Q2 growth so most analysts were not impressed. Netflix shares fell -14% on the news.

Netflix Chart

Radio Shack (RSH) fell more than -10% to a 31 year low after posting an 8 cent loss compared to 33 cent profit in the year ago quarter. Analysts had predicted earnings of 4 cents. The company said consumers were window shopping their stores and then buying online from competitors. Welcome to reality. Same store sales fell -4.2%. Radio Shack has about 6,200 stores in North America and 1,100 dealers worldwide. The last time the price was this low (1981) people were buying the TRS-80 computers as state of the art equipment and Microsoft was a startup. Microsoft did not IPO until 1986. Since then Microsoft has created five billionaires and 12,000 millionaires from its employee ranks. Radio Shack rallied to $79.50 just before Y2K but short of a miracle or a major reverse stock split they will not see that level again.

Bill Gates & Paul Allen 1981

Radio Shack Chart

AT&T (T) rallied +4% after reporting earnings of 60 cents, up +5.2%. That beat analyst estimates. Ironically AT&T said its profits were higher because it did not sell as many iPhones as expected so the carrier subsidy payments to Apple had been lower. When a carrier like AT&T sells an iPhone at a discounted $199 rate they have to pay Apple the $599 price so they make up the difference. They recover their investment over the life of the contract because of the monthly fees, data plans, text messages, airtime, etc. AT&T sold 4.3 million iPhones for the quarter and added 187,000 new customers. The lower than expected iPhone sales matched the same news from Verizon. That prompted numerous analysts to predict Apple's sales would be lower than expected. Clearly they were not factoring in the better than 100% sales growth in Asia. Tonight those analysts are probably not answering their phones.

AT&T also said the average smartphone bill had fallen declined -9%. The average monthly bill for a contract based plan was $64.46. The average smartphone bill was $80. Competition is increasing and customer budgets are shrinking.

AT&T Chart

First Solar (FSLR) is now trading below its 2006 IPO price of $20 per share and its market cap has declined to $1.7 billion. The company is facing a potential eviction from the S&P-500 if the stock does not rally soon. It takes a market cap of $4 billion to be included in the S&P-500 but the requirement to stay in the index is lower. A S&P spokesman would not comment on the potential for FSLR being removed but they do take action routinely when stocks are underperforming. Currently there are 46 stocks in the S&P with market caps under $4 billion. Maxim Group analyst Aaron Chew slashed his rating to a sell and said there could be another 50% decline to go with a price target of $9. FSLR has lost its competitive advantage and recently cut capacity by 33%. The company is transitioning from manufacturing solar panels to developing solar projects for utility companies. That is not a sexy business and it is very low margin.

FSLR Chart

Earnings for the rest of the week will be highlighted by Boeing and Caterpillar on Wednesday and Amazon and UPS on Thursday.

Earnings Calendar

On the economic front it was a busy day. The Consumer Confidence for April declined to 69.2 from 70.2. That was the second monthly decline since hitting a peak of 71.6 in February. The present conditions component rose slightly to 51.4 from 49.9 but the expectations component declined from 82.5 to 81.1. Those planning on buying a car declined from 12.3% to 9.3% and those planning on home shopping declined from 4.9% to 4.4%.

Those expecting the stock market to post gains over the next year rose to 35.7% and the highest level in more than a year.

Consumer Confidence Chart

New Home Sales continued their volatile upward trajectory. In February the Census Bureau originally said new home sales were running at an annual pace of 313,000. In today's report they said March sales rose to a pace of 328,000. However, they dramatically revised the February number to 353,000 so technically March was a decline even though it was much higher than the initial estimate. They also revised the January number up from 318,000 to 329,000. Bottom line, new home sales are improving significantly but still not a boom.

New Home Sales

Home prices rose +0.4% year over year in February according to the FHFA Purchase Only Home Price Index. That compares to a decline of -0.7% in the prior month. Six out of the nine regions surveyed saw home prices rise.

The Richmond Fed Manufacturing Survey rose to 14.0 from 7.0 for April. New orders rose slightly from 11.0 to 13.0 but backorders declined slightly from 4.0 to 2.0. The overall report was neutral except for the jump in the employment component from 6.0 to 10.0. We saw an outsized jump in the employment component in the Philly Fed Survey last week from 6.8 to 17.9. The same component in the NY Empire survey the prior week rose sharply to 19.3 from 13.6. It would appear there is a hiring surge underway in the manufacturing sector and this could be reflected in future nonfarm payroll reports.

The Fed will be paying close attention to these employment statistics during the FOMC meeting currently in progress. These stronger numbers could keep the Fed on hold and reduce the chances for additional stimulus. They could counteract the sharp decline in the payroll report for March.

Richmond Fed Chart

In a separate report Mass Layoffs declined again in March to 1,293 events, down from 1,293 events in February. The number of workers impacted rose slightly to 121,310 from 119,463 but the overall down trend remained intact. The industries with the most layoff claims included temporary help services (11,732), food service contractors (9,629) and school and employee bus transportation (6,815). Manufacturing accounted for 22% of the events and 21% of the initial claims. That would contradict somewhat the stronger manufacturer components in the regional manufacturing studies. Hopefully this is just a factor of lag time in reporting.

The economics were not strongly bullish but they were enough to keep commodity prices firmly planted in positive territory. Crude prices rose slightly and remained in the current upward trend.

WTI Chart

Brent Chart

Live cattle futures were an exception. A new case of mad cow disease was reported in California and futures dropped limit down of -$3.00. The last time a case was reported the futures limited down for multiple consecutive days. The problem here is the export rules for Japan. They are already afraid of our beef and should they react to the new case the price of beef would drop dramatically.

Live Cattle Futures Chart

The remainder of the week is highlighted by the FOMC meeting and Bernanke press conference on Wednesday. That will control the market direction for the rest of the week.

Economic Calendar

The analysts have settled in on consensus expectations for the Fed announcement. They expect the Fed to dial down their expectations for growth as a result of the lower economic numbers we have seen in April. However, they expect the Fed to keep its long term forecast intact and not announce any additional stimulus measures. They do expect the Fed to issue guidance on continuing Operation Twist, which is currently set to expire in June.

If they did not extend Twist it would be a form of monetary policy tightening and nobody expects them to take that chance. They can say they will continue to buy longer term treasuries with the funds from maturing investments. Treasuries and securities they purchased over the last four years mature every month and those proceeds can be put back to work and used to keep longer term interest rates lower without requiring any additional outlays by the Fed. This is a no risk extension program that keeps the Fed in play but does not extend the balance sheet any further.

Regardless of what the Fed says the market is probably going to react violently. The Apple earnings tonight will power the Nasdaq higher on Wednesday and create another short squeeze for the indexes. The Dow closed right on 13,000 and once again in neutral territory. The Nasdaq closed at 2961 and will likely retest prior support, which should now be resistance at 3,000.

The S&P gained +5 points to close at 1372 after testing initial support at 1360 on Monday. The S&P rebound was lackluster but that was a factor of Apple's decline as well as several other big cap techs.

The S&P numbers to watch now are resistance at 1390 and initial support at 1360. A break outside that range in either direction is likely to be strong since traders are looking for a new direction to occur. They will be shorting 1390 and buying the dip at 1360. Exceeding those levels will cause a strong reversal of those trades and a new trend could be born.

Today's rebound did NOT alter the negative chart pattern currently developing.

S&P Chart

S&P Chart - Daily

The Dow rebounded to close right at 13,000 once again. This is a neutral area of light resistance with the 50-day at 13,016. The Dow rebounded on the strength of four stocks. AT&T and MMM posted earnings that beat the street. IBM raised its dividend and buyback and CAT rallied ahead Wednesday's earnings. With a majority of the Dow's blue chips already reported it will take some new incentive to push it much higher. I am sure there be some additional gains as a result of the Apple short squeeze on Wednesday but the Dow futures are up only 26 points tonight. That is not very exciting and there are bound to be some negative headlines from Europe later tonight. I would be very surprised if the Dow moved over resistance at 13,100-13,125. I have been surprised before and predicting directions and velocity after a FOMC meeting is practically impossible.

Dow Chart

Dow Chart - Daily

The Nasdaq broke down on Monday with a -40 point decline under prior support at 3,000. Today's -9 point decline was mostly Apple with BIDU contributing -16 and NFLX -13 to keep the pressure on the index.

The Nasdaq futures are showing a +36 point gain tonight and that would put the index right back at prior support of 3,000, which should now be resistance. It is hard to say how a massive Apple short squeeze will impact the index tonight because that will send the QQQs much higher and that means all the stocks in that ETF will rise.

Apple's conference call was very bullish so the Apple faithful could roar back into the shares on Wednesday. There were a lot of people who were hoping for a buying opportunity but did not want to buy before earnings just in case there was a disaster. Those investors will be chasing the stock higher on Wednesday and the Nasdaq will follow it.

Nasdaq Chart

Nasdaq Chart - Daily

The small cap Russell 2000 dipped to initial support at 785 on Monday and then rebounded to gain more points than the S&P today. However, it remains at the lower end of its recent range. Today's rebound was not bullish, just an oversold bounce from Monday.

Russell Chart - Daily

The FOMC will determine our fate after the early morning short squeeze in techs. Dow components CAT and BA both report at the open and what they say will impact the Dow's reaction to the Apple squeeze. Futures are not currently suggesting a big reaction.

Earnings have been much better than expected because estimates were so low. Nearly 82% of reporters have beaten the estimates but the indexes were nearing support lows on Monday. Once the good news is out and the obligatory single stock short squeezes have passed there is little reason for traders to remain in those stocks. Typically those already reported will be sold and traders will go hunting for a new trade with an earnings date later in the cycle. There is normally a lack of forward momentum for those stocks already reported. With 150 reporting last week and nearly 500 this week those stocks then become a drag to the market going forward.

While the Fed may control our destiny into the close, it will take some positive Fed action to push us materially higher. I don't think earnings are going to do it. Without a Fed boost I expect further declines in the weeks ahead.

Jim Brown

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