Ben Bernanke did not specifically say there would be a new version of QE in the near future but he did not say no.

Market Statistics

It was a rocky morning in the markets with earnings and testimony sending the indexes on a roller coaster ride. The Dow gapped open +75 points then declined -150 points before rebounding again +184 points. Morning earnings were mixed as expected but the earnings misses were not as bad as they could have been. The real bout of market volatility was generated by Bernanke's testimony.

Bernanke gave no hint that the Fed is planning a new QE program in the near future. The lack of any clues in his prepared testimony sent the markets to their lows. However, as the testimony drug on some analysts saw a little QE daylight under the carefully phrased answers.

Bernanke painted a grim picture of the U.S. economy and warned that Congress had to act immediately to delay the fiscal cliff. He put the monkey for reviving the economy back on Congress saying "Congress is in charge here, not the Federal Reserve." It is anticipated that not delaying the various fiscal cliff issues could cost two million jobs in 2013.

However, Senators said they had no control over the future. Senator Schumer said, "Given the political realities of this year's election, I believe the Fed is the only game in town. I would urge you, now more than ever, to take whatever actions are warranted. So get to work, Mr. Chairman." Given the somewhat hostile relationship between Congress and Bernanke for senators to say they were powerless and direct the Fed to take further action we have seen a tidal shift in sentiment.

The market rebounded after those comments were made. Bernanke said the recovery was slowing and the Fed would likely reduce its economic outlook in the next update. He indicated Q2 growth could be less than 2% and slowing.

That is another key point. Multiple times he said the Fed was prepared to act IF the economy slowed any further. In other comments he indicated the economy was continuing to slow. Is that Fed doublespeak for we are preparing to take action at the next meeting?

Analysts are split on whether the Fed will do anything when they meet on July 31st but consensus is growing that something will be done at the Sept 11th meeting. Bernanke said if the Fed did take action it would probably be balance sheet related. That means QE in some form. It is unlikely they will change Operation Twist since it is now scheduled to continue through December. The Fed will update its new economic projections at the September meeting and that would be the perfect time to announce new monetary stimulus. The lowered economic outlook would be political cover for the move.

He also said repeatedly that future action could include some form of expanded communication. Translated that means they could extend the expected target date for raising interest rates farther into the future. Currently the Fed statements target 2014 as the period when rate hikes could occur. That communication change could come at the July 31st meeting.

Senators asked Bernanke if he had plenty of bullets left in his gun and he replied yes. However, as Art Cashin pointed out what would you expect him to say? "No, we are out of bullets and the Indians are headed our way." He can't say he is out of bazooka rounds but we have plenty of spitballs.

The Fed Beige book is due out on Wednesday but not until 2:PM. That means Bernanke won't say anything directly about the numbers but he will know what the Beige Book says. He testifies again on Wednesday morning in front of the House.

The Fed does not have to worry about inflation as a hindrance for further action. The Consumer Price Index (CPI) for June showed prices remained unchanged. The headline number has either been flat or down for three consecutive months. That is primarily due to the declines in the energy markets. Energy accounted for a -1.4% decline in June and offset a +0.2% hike in food prices. Energy prices in the CPI are now down -3.9% year over year with food up +2.7%.

The core CPI, excluding food and energy, posted +0.2% increase for the fourth consecutive month with increases in medical care costs leading the gains.

The food component is poised for a major spike thanks to the severe drought across most of the USA. More than 66% of the corn crop has been damaged by the drought and 33% is listed by the USDA as severely impacted. Only 31% of the crop is listed as satisfactory or better. Corn prices have exploded +53% since June 18th and soybeans are next in the crop cycle with a critical period in their growth cycle over the next three weeks.

Corn Chart

Industrial Production for June rose a better than expected +0.4% compared to a decline of -0.1% in May. Analysts were expecting a rise of +0.2%. Unfortunately motor vehicles rose +1.9% while most other sectors were relatively tame. Output in the utility sector declined -1.9% for June. For the entire quarter utility production increased 14.9% thanks to the heat wave.

Overall the headline number may have been better than expected but the internal components pointed to a very slow start for Q3 and expectations are for further declines in production.

The most positive report for the day was the NAHB Housing Market Index. The July headline number rose to 35 from 29 in June. Analysts had expected the number to be flat at 29. This was the highest one-month gain in almost a decade. The internal components were very positive with buyer traffic increasing from 23 to 29. Six month expectations increased from 33 to 44. That is a 35% increase and the highest level since June 2006!

The biggest hindrance to further gains in the housing market is tight loans. Morgan Stanley surveyed the sector recently and found that the average credit score required to get a loan was 762 for a mortgage backed by Fannie or Freddie. The report pointed out that two thirds of U.S. consumers have scores below that level and therefore can't get loans.

NAHB Housing Index Chart

The economic calendar for the rest of the week will be dominated by the Fed with Bernanke getting another chance to roil the markets at 10:AM and the Beige Book possibly depressing the markets at 2:PM.

Economic Calendar

Mattel (MAT) reported earnings of 28 cents compared to 23 cents in the year ago quarter and analyst estimates of 21 cents. The company said price increases had helped margins and allowed the company to offset the coast of raw materials. Margins increased +3.4 points to 51.3%. Income rose +20% to 96.2 million. Shares of Mattel spiked +10% on the news.

Mattel Chart

Wynn Resorts (WYNN) reported earnings of $1.37 compared to analyst estimates of $1.51. The big earnings miss came on a decline in revenue from $1.37 billion to $1.25 billion. Revenue fell -12% in Las Vegas and -7% in Macau. That was the first time in three years that revenue has declined in Macau. The economic slowdown in Asia is finally hitting the high dollar consumer. Shares of WYNN rose +63 cents in afterhours.

Johnson & Johnson (JNJ) reported adjusted earnings of $1.30 compared to estimates of $1.29 but revenue declined slightly to $16.48 billion. JNJ had $2.2 billion in charges compared to income of $3.63 billion. Unfavorable currency exchange rates knocked 4.2% from total revenue. The stronger dollar and weaker euro is killing companies that do business in Europe.

State Street (STT) said its net income fell -4% due to slowdowns in the global markets. Earnings still came in at $1.01 per share and analysts were expecting 98 cents. Revenue fell -3% to $2.42 billion. Trading services revenue declined -18%. The CEO said the economic environment was "challenging" with increasing weakness in international markets. Shares of STT fell -6.4%.

State Street Chart

Goldman Sachs (GS) said net income declined -11% for Q2 to $962 million or $1.78 per share. That is less than the $1.09 billion and $1.85 in the comparison quarter. However, analysts were only expecting $1.17 per share. Goldman said weakness in international debt markets was weighing on earnings and its outlook. Investment banking revenue declined -17%, M&A -26% and underwriting revenue fell -9%. Trading in mortgage backed securities and commodities rose +37%. You would think posting such a big earnings beat would really power the stock higher but Goldman gained only 30 cents for the day. The weak comments on global business and outlook killed the initial spike in the stock.

Goldman Sachs Chart

After the bell Intel (INTC) reported earnings of 54 cents, flat with the comparison quarter and slightly above analyst estimates of 52 cents. Revenue was $13.5 billion, slightly below estimates of $13.56 billion but slightly above the $13.0 billion in the year ago quarter. The big news was a guidance warning. Intel said revenue for the second half would grow 3-5% compared to prior forecasts of high single digits. That translates into revenue of $14.3 billion for Q3, give or take $500 million, and analysts were expecting $14.6 billion. CEO Paul Otellini said "growth will be slower than we anticipated due to a more challenging macroeconomic environment." Intel shares declined slightly in afterhours trading.

Intel Chart

Yahoo (YHOO) posted earnings of 27 cents compared to estimates of 23 cents. Revenue of $1.08 billion was slightly below estimates of $1.1 billion. Yahoo's big earnings per share beat came after Yahoo bought back 30 million shares during the quarter for $456 million. Reducing the outstanding shares increases the earnings per remaining share. This is a common ploy by IBM when earnings are tight. Shares of YHOO declined slightly in afterhours after the report.

Yahoo made news yesterday when they announced Marissa Meyers, age 37, had been named CEO. That is the fifth CEO in the last five years and all prior CEOs have failed to provide the boost necessary to revive Yahoo. Meyer is now the youngest CEO of a S&P 500 company. She also announced to the press last night that she is pregnant and expecting a baby in October. She told the Yahoo board about the pregnancy in June when they made her the job offer. She said she would work through her pregnancy leave then the time came.

Meyer has been at Google for the last 13 years. She was the 20th employee hired at Google and the founders have nothing but positive things to say about her. She oversaw the development of Google Maps and Google Earth while at Google. Meyer may find it frustrating to move from working at a company with unlimited funds to a company with no funds. Getting innovation installed and operating on a shoestring budget may cause her to reconsider her decision in the months ahead. Yahoo's cash flow declined -17% in Q2.

Yahoo Chart

The Q2 earnings cycle is off and running and so far there are two clear trends. Companies are for the most part beating the drastically lowered estimates. Unfortunately they are also warning that Europe and the dollar are depressing earnings and the slowing global economy, specifically Asia is expected to produce further problems in the second half of the year.

The earnings beats coupled with the guidance warnings prevented most stocks from gaining ground on their earnings news. Traders don't know which way to move. The better than expected earnings are really just "less bad" since the estimates have been cut so far. Everyone also knew the global economy was weakening so that is also not a new development.

Should traders buy today on the less bad earnings or stay away because of the guidance warnings? I suspect traders will remain uncommitted until the next two days of earnings are known. There are still some big guns to report and traders always hold out hope for improving news.

The market rebound today was not really earnings related. The rebound came on hopes for some Fed action at month end and the sharp decline in the dollar when Bernanke left the door open on future QE action.

The dollar spiked on the initial Bernanke comments and no mention of QE but then crashed once traders realized he was leaving the door open for action in the weeks ahead.

In the charts below you can easily see how the dollar spike and crash was mirrored in the S&P for the same period.

Dollar Index Chart

S&P Chart - 15 Min

Crude Oil Chart

For Wednesday Bernanke will be the headliner but AXP, BAC, IBM, USB, EBAY and YUM will be the supporting cast. IBM should be the key. They have a great business but they are definitely going to be impacted by events in Europe and Asia. If they warn about the rest of the year most traders would believe them. Conversely, if they downplay the impact of Europe and Asia the buyers may come back to the market.

Earnings Calendar

The S&P rebounded back over the 100-day average at 1360 but the gains came to a dead stop at 1:PM once the Senate circus ended. If the S&P were to continue forward it is going to face strong resistance in the 1370-1375 range. That should be our line in the sand. As long as the S&P does not move over 1375 the market will be setting up for a sell the news event on Friday.

The S&P has dipped to 1350 twice over the last two days and was immediately bought. However, today's dip made a lower low at 1345 but it also made a higher high so technically we have an outside day and anything is possible for the rest of the week.

S&P Chart

The Dow failed to reach its 100-day average at 12,840 and the 184 point range was amazing. Volume was slightly higher at 6.2 billion shares but still light. The higher volume undoubtedly because of the shorts that loaded up in the morning and then were forced to cover on the Bernanke bounce. Even stronger resistance at 12,900 was not even touched. The Dow will be reactive to IBM, AXP, MSFT and BAC earnings. Intel was down only about a dime in afterhours so they should not be a factor.

The Dow is still in still in wait and see mode despite the broad range today. Until it powers over the 12,900 level I am still bearish.

Dow Chart

The Nasdaq also had a big range of 45 points but only ended with a gain of +13. The rebound screeched to a dead stop at resistance of 2910 and futures are slightly negative after the Intel and Yahoo earnings tonight. Traders are not likely to commit any big money until IBM and MSFT report and then they will turn in the direction of the skid.

The Nasdaq chart is the least bullish of the big three with a clear lower high compared to the left shoulder of the chart in mid June. It would take a continued rally to 2935 to exceed that level and a major move over 2980 to make a new relative high.

Nasdaq Chart - 15 min

Nasdaq Chart - Daily

The Dow Transports are not confirming the Dow move. The Transports lost -38 points when the Dow gained +78. The low oil prices should be bullish for the transports even though fuel prices have ticked up slightly over the last week. The transports are weak because shipping is weakening. FedEx and UPS have both said package volume is declining. If the transports don't begin to move higher the Dow rally is doomed.

Dow Transport Chart

I am not yet convinced the market rebound today means my bearish outlook is wrong. This was a Bernanke induced rebound when he left the door open for additional QE3. Shorts that piled on when the initial text of his comments was released were them forced to cover when the Q&A session suggested there could be actions soon. The Schumer directive that Bernanke should act and act now was a powerful image on TV. That command could keep a floor under the market regardless of how negative earnings become.

However, we are seeing the "less bad" earnings fail to push the markets lower. The better than expected results even with guidance warnings could be building confidence among investors and keeping a bid under the market.

Just remember it is not over until it is over. Greece said it needed a new emergency loan of 11 billion euros today. The earnings week is not over until the GE reports on Friday morning. That is the last Dow stock to report and market direction should appear shortly thereafter. If I were long I would probably not want to go into the weekend with profits at risk. Friday is also option expiration so anything is possible.

Enter passively, exit aggressively!

Jim Brown

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