With the Dow down -200 the WSJ published an article saying the Fed could act as soon as next week.

Market Statistics

Unfortunately the WSJ article was only a collection of old news headlines and contained nothing new. With the market so oversold any headline about the Fed, true or not, was sure to produce a spike. Once the details of the article became more widely circulated the spike faded but there was another blip just before the close. That was probably from shorts unsure what to believe about the Fed and possibly concerned about the Apple earnings.

The morning started off grim after Europe spiraled closer to the drain and EU leaders announced the Greek restructuring plan was going to fail (surprise!) and would need additional bailouts. Spain's 10-year bond yields rose to 7.629% and rapidly approaching 8% and the potential for a full sovereign collapse.

I am not going to spend a lot of time on Europe. It is the same story I have reported dozens of times and it will eventually end badly. Expect headlines out of Europe to continue to roil the world markets for many more months. Expect further economic slowdowns in Europe to impact earnings for S&P companies.

On the U.S. economic front the news was not any better. The Richmond Fed Manufacturing Survey declined from -3 to -17 for July. Any negative number represents contraction. This is a major worsening of conditions in the Richmond region and a two year low.

The internal components were even worse. The new orders component fell from -7.4 to -25. The backorders component fell from -13.7 to -27.3 and that is the 16th consecutive month in contraction territory. The gap between new orders and inventory fell from -16.6 to -46.1. That is an indication of future activity and it is rapidly falling off a cliff.

This was the worst report out of the Richmond district since the recession and it would appear it is rapidly falling back into recession. Employment declined sharply from 7.9 to 1.0 and barely in expansion territory. The average workweek declined from -0.2 to -7.1 and that is the first time in negative territory since the recession and an indication manufacturers are cutting hours and probably workers.

Richmond Fed Chart

The sharp decline in the Richmond survey sets up negative expectations for the Kansas survey on Thursday. It also weighs on the GDP estimates for Q2, which will be released on Friday. The official consensus is still 1.4% but more whisper numbers at just over 1% are appearing every day. There is also a slight possibility we could see a number less than 1.0%. That would be VERY bearish for the market.

Economic Calendar

The real market mover this morning was the earnings from UPS. The company posted earnings of $1.15 that missed estimates of $1.17. The earnings miss was not the big news. UPS warned the global economy was weakening faster than expected. CEO Scott Davis said, "Economies around the world are showing signs of weakening and our customers are increasingly nervous." UPS lowered guidance for the full year and lowered its growth estimates for the U.S. economy as well. UPS said the U.S. economy would only grow +1.0% in 2012 citing falling package shipments, lower retail sales and high unemployment. The company said conditions were worse than UPS anticipated just three months ago. Economists are still expecting U.S. growth of 1.8% to 2.0% for the full year although I think that is wishful thinking.

UPS cut full year estimates by 25 cents to $4.50. Analysts were expecting $4.82. UPS said revenue in Europe and Asia declined by -4% and revenue per package was falling. UPS freight revenue declined by -1.7%.

Last month FedEx (FDX) also warned that slowing global growth would depress profits for the next 12 months. UPS said it was cutting flights out of Asia and reducing the frequency of others over the next several quarters to counter slowing demand. That would be another 10% capacity cut on top of an already announced 10% cut. UPS shares fell -5% on the news.

UPS Chart

DuPont (DD) reported earnings of $1.48 compared to estimates of $1.46 but everything else was bad. DuPont warned that full year earnings would be at the low end of the previously predicted range. DuPont said economic uncertainty around the world was depressing sales of chemicals and seeds. However, seed sales in North America helped lift overall earnings. Higher taxes and currency conversion costs would also depress future earnings. Most international companies have been blaming currency issues for about a 4% decline in earnings. DuPont said Europe was still in recession and "bumping along the bottom." DuPont shares declined -2.4% on the earnings news but the full year warning in addition to the UPS warning helped push the market lower.

Dow component AT&T (T) reported earnings of 66 cents compared to estimates of 63 cents. AT&T accomplished this earnings beat by selling fewer smartphones. The company activated 5.1 million smartphones compared to 5.5 million in the year ago quarter. In an effort to increase profitability AT&T is limiting upgrades for existing customers to once every two years rather than annually as it had in the past. By slowing the upgrade cycle AT&T was able to stretch out the upfront subsidies to manufacturers. When the company sells a phone for $199 they have to pay the manufacturer an average of $600 so they lose $400 at the start of the contract. They make this up over the life of the contract at an average of $80 per month for a fully featured contract. If they can force the user to upgrade every two years instead of annually then the contract is more profitable. The annual iPhone upgrade is playing havoc with AT&T's plans but that is the cost of doing business. Only 6% of AT&T subscribers upgraded during the quarter. That is an all time low.

AT&T added a net 320,000 subscribers in the quarter compared to a gain of 888,000 for Verizon. AT&T shares fell -2% on the earnings report.

Dow component Cisco (CSCO) slashed its wrists again today and the stock fell -6%. Cisco said it was cutting another 1,300 employees. That is another 2% reduction in the workforce after announcing cuts of 6,500 several months ago. This new announcement caused investors to worry that sales are slowing at the networking giant. Earnings are not until August 15th.

Another problem for Cisco was the announcement by VMware (VMW) that it was buying computer networking startup Nicira for $1.26 billion. Like VMware, Nicira specializes in virtualization. That is the availability to run hundreds or even thousands of virtual computers on dozens of servers. This increases server utilization and reduces costs. The EMC, VMware, Nicira combination will produce even more competition for Cisco.

Cisco Chart

Rubbing salt into the Cisco wounds, Juniper (JNPR) reported earnings of 19 cents compared to estimates of 16 cents. The company's core router products are gaining traction BUT Juniper guided analysts to a lower than expected Q3 citing global economic uncertainty. Juniper expects Q3 earnings to be between 15-18 cents and analysts were expecting 21 cents. Shares of JNPR rallied +6% in afterhours.

Riverbed Technology (RVBD) reported earnings of 23 cents compared to estimates of 21 cents. Revenue of $199 million was also above estimates. Riverbed bucked the trend and guided higher for Q3 saying earnings would be in the 25-26 cent range compared to existing estimates at 24 cents. Revenues are expected to be $214-$219 million compared to estimates of $209 million.

Competitors F5 Networks (FFIV) and Acme Packet (APKT) had previously warned about the rest of 2012 so having Riverbed guide higher definitely shows which company is the one to watch. Riverbed shares spiked $3 to $18 in afterhours trading.

Riverbed Chart

Switching sectors auto parts maker Gentex (GNTX) posted earnings of 28 cents compared to estimates of 29 cents with revenue basically inline. However, the company warned about future quarters and shares fell -29% to $15. Warnings for any reason are turning out to be deadly to stock prices.

Gentex Chart

Netflix (NFLX) posted earnings of 11 cents compared to estimates of 7 cents. You would have thought that was good news. Unfortunately the company warned that revenue for Q3 would be lower because of the Olympics. With the games monopolizing TV viewing over the next two weeks the company expects fewer downloads over that period. Netflix recently reported they downloaded more than one billion hours of programs in June. Netflix also said new subscriber additions would probably slow as well because of the Olympics.

Netflix said it added 1.1 million net new subscribers to the streaming service in Q2. They added 1.8 million in Q2-2011. They currently have 30.1 million unique subscribers. Shares of NFLX fell -$13 in afterhours.

NFLX Chart

Panera Bred (PNRA) posted earnings of $1.50, up from $1.18 in the comparison quarter. Revenue rose +18% to $530.6 million. Same store sales rose by +7.1% and better than analyst estimates of 5.2%. Panera raised 2012 estimates to $5.72-$5.78 from $5.58-$5.63. Shares of Panera rose +$10 in afterhours.

Panera Chart

Buffalo Wild Wings (BWLD) reported earnings of 62 cents compared to estimates of 68 cents. Revenue was also lower than expected but did rise +29.7%. Unfortunately shares were crushed after the report. Shares fell -$12 after the news.

BWLD Chart

I saved the best for last. Apple (AAPL) missed earnings and the stock was crushed after the close. Apple posted earnings of $9.32 per share compared to estimates of $10.36 and whisper numbers over $11. This is a major miss and Apple shares dropped -$35 in afterhours trading.

Apple said consumers were buying cheaper Apple products causing the slowest revenue growth in more than two years. Revenue was $35 billion compared to estimates for $37.1 billion. Average selling prices fell to levels not seen since 2010 for the iPhone and the lowest levels ever for the iPad. When Apple introduced new products in March they kept the older, cheaper products in stores.

In the table below the items in green are the only one where results exceeded expectations. They missed on iPhone sales by 3.0 million units and some estimates were as high as 35 million. Apple typically gives low guidance but this is extreme for Q3. They are predicting $7.65 per share compared to current estimates for $10.22.

Sales in China actually slowed but CEO Tim Cook said it was an inventory issue relating to the release of the iPhone 4S and not a real decline. Apple had pre stocked inventories in China ahead of the sale so that pushed a lot of devices through the channel all at once. Sales in Europe rose slower than expected at +16% but Asia Pacific revenues rose +48% with iPhone sales doubling. Apple's Q2 profit growth was the slowest in 11 quarters and revenue growth was the slowest in 10 quarters.

Apple is expected to announce the next version of the iPhone in late September for delivery in October. That will supercharge the fourth quarter as everyone upgrades to the new product. They are also expected to announce a mini iPad with a 7" screen to compete with the Kindle and the Nexus 7. There may be an iTV in the future as well. CEO Cook would not discuss specific products but he did say there was a "fall product transition" cycle ahead. iPhone 5 upgrades are expected to make up 40% to 45% of sales compared to 30% in the past. The carrier upgrade policies I discussed in the AT&T earnings above are going to hinder future sales cycles.

Apple shares fell -$35 after earnings to close at $567. Nasdaq futures are down -28 overnight. S&P futures are down -7.

Apple Estimates Vs Earnings
Yellow items are misses

Apple Chart

Corn prices declined slightly as traders took profits after forecasters said several states could get rain later this week. In reality they only expect scattered thundershowers and it will be too little, too late. Goldman was out today saying corn will go to $9 and soybeans $20. After the big gains this is just some well deserved profit taking.

Corn Chart

There was so much earnings news today there is no way to report it all. What we did see was guidance warnings from almost every single company that has reported earnings this week. Couple that with bad economics, more bad news out of Europe and the outlook is not good.

Before the WSJ article the yield on the ten-year note declined to a record low at 1.394%. The Treasury Dept sold $35 billion in two-year notes today at a yield of 0.22%. That is also a record and the bid to cover ratio was 4.0. That means there were $4 in bids for every $1 of notes available. That is also a record dating back to the early 1980s. There has only been one auction in the last 30 years with a 4.0 BTC ratio and that was in November 2011.

Clearly the U.S. is the safe haven and everyone wants to be in bonds and not stocks.

Ten Year Yield Chart

The situation in Europe took another turn for the worse when Moody's downgraded the outlook for Germany, the Netherlands and Luxembourg to negative from stable. Those are triple AAA rated countries that will have to cough up cash for Greece, Spain and Italy. Moody's said those countries face extended risk as the potential for Greece to leave the euro increases. Even if Greece survives the richer nations would likely shoulder a greater percentage of the financial burden for the eurozone.

This downgrade of the outlook from stable to negative means their AAA credit ratings are at risk for a future cut. It is just one more step as the European debt crisis drags the eurozone lower.

The market may have reacted to the WSJ article but it was old news. There was nothing new in the article and nothing direct from the Fed. This was just an opinion piece ahead of the FOMC meeting next week. The timing of the release was clearly aimed at attracting attention and CNBC did their best to hype the headlines. Most of the on air reporters had no clue it was just an opinion piece and had no direct comments from the Fed. Read it here: Fed Sees Action if No Growth

The sudden flurry of activity on CNBC surrounding the headlines helped to lift the markets off their -200 lows to close down -104 on the Dow. I would call it a CNBC rally not a FOMC rally. I normally ignore the bubblevision comments about CNBC but in this case this was bad reporting and it clearly impacted the market.

The S&P rebounded +9 points on the Fed hysteria. The low for the day was 1329 and right at what some were calling strong support. The entire range from 1325 to 1337 is considered support with a decline under 1325 a setup for a retest of 1310 and then 1295. I view this as entirely possible. As I stated in the weekend newsletter I think the market is in trouble.

Europe, economics and earnings are all going against us and the added uncertainty of the fiscal cliff and the debt ceiling in September is going to give us an August similar to last year. I am looking for a lower low than we saw in June at 1266 if the Fed does not act next week. They are out of big bullets but any Fed action, no matter how anemic, should bring some traders back to the market. If we get no action and another bad payroll report that Friday then it is lights out.

Resistance at this point is 1350 and real support 1332 and 1325. With the futures down -8 tonight we should see the 1332 level tested at the open.

S&P Chart

The Dow had four components in the green after the headline bounce. Those were DIS, HD, JPM and WMT. Chevron, United Technology and 3M were the only components that lost more than a dollar.

The Dow has critical support at 12,500 and again at 12,400. Those levels could be tested on Wednesday and depending on the headlines by Friday for sure. The Dow has now declined triple digits for three consecutive days and that has not happened since September.

The bears are becoming more confident and the rash of guidance warnings with earnings is driving investors back to cash. The optimistic earnings estimates for Q3/Q4 are dropping like a rock and that means stock prices even for the Dow blue chips are probably going lower.

A drop below 12,400 should only increase the ferocity of the bears.

Dow Chart

Dow Transport Chart

With the Nasdaq futures down -28 as I write this the odds of a lower open tomorrow are about 100% but there is a lot of darkness before morning. Anything is always possible. Apple at $565 is seen as a major buying opportunity by a lot of people and we could see a serious bounce. Everyone knows the next iPhone release is going to be huge and there is also the possibility of the iPad 7 and iTV. Never count Apple out.

Even if Apple does rebound tomorrow the odds of it trading back over $600 are slim. Add in the various disasters like Netflix and BWLD and the Nasdaq should remain under pressure. The next line in the sand is 2800.

Nasdaq Winners and Sinners

Nasdaq Chart

I don't have high hopes for Wednesday but normally when the situation looks the worst something happens to cause a giant short squeeze. I don't think there is any fundamental reason for a rebound this week but anticipation over next week's Fed meeting could cause traders to rethink their bearish outlook.

As a reader reminded me today, the best trade could be no trade at all.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email