The markets sank lower once again as they digested the gains from last week and waited for earnings to begin.

Market Statistics

There was not an overabundance of sellers today but a lack of buyers. Traders were patiently waiting for the market to consolidate ahead of the Q4 earnings cycle. With Dow component Alcoa officially kicking off the earnings cycle after the bell traders were waiting for a clue to the earnings direction. We needed a pullback after the short squeeze last week and so far this has been the perfect decline. It has been orderly, on low volume and the declines have been minimal. Traders should be very happy.

The economics for the day were not market friendly but the impact was also minimal. The weekly Chain store Sales Snapshot showed sales declined -4.2% after a +0.6% gain the prior week. On the surface that would appear really negative but think about it for a minute. This is for the week ended Jan 5th and it compares to the week including Christmas and the after Christmas sales. I would have been surprised if sales had risen. This was a nonevent for the equity markets.

The California Manufacturing Survey for Q1 declined to 53.1 from 58.0. The peak This is the second monthly decline and this is the lowest level since the financial crisis. New orders fell from 60.9 to 54.3. The prior number was 65.7 so the two quarter slide was more than 11 points. Employment fell into contraction territory at 49.7, down from 52.9 in Q4 and 56.0 in Q3. Production fell from 64.6 to 59.3 and the third consecutive decline. High-tech goods fell from 61.7 to 51.8 and the largest drop since 2011-Q1. This is a troubling report but it is not widely followed. This is a forecast rather than a historical survey of actual events as in the regional reports from the Fed. This suggests manufacturer sentiment is sinking fast.

Moody's California Manufacturing Chart

Consumer Credit for November rose from $14.1 billion to $16.0 billion. Installment loans for things like cars, furniture and student loans accounted for the vast majority of the rise at $15.2 billion. Credit card debt rose only $800 million. Consumers were likely keeping card balances low ahead of the holidays and that number will shoot up in the December report. The decline in gasoline prices helped keep card balances low.

It was a light day economically and Wednesday will be even lighter with only the Mortgage Applications and EIA Oil Inventories on the schedule.

Economic Calendar

Alcoa (AA) reported earnings after the bell of 6 cents, which was in line with estimates. Revenue was $5.9 billion compared to estimates of $5.6 billion. The commentary from the CEO was optimistic but still somewhat cautious. He expects aluminum demand will grow by 7% in 2013. He said he would not be surprised to see China grow at more than an 8% rate. He said conditions in China were rebounding sharply. He said the upstream and downstream units at Alcoa were functioning at new record profits.

Overall it was a positive report and shares of AA rose slightly in late trading. The key here is that they did not disappoint. They have reported some lackluster quarters over the past two years so a positive quarter with a positive outlook even if only cautiously optimistic is a plus.

Alcoa Chart

Monsanto (MON) reported earnings before the open and it was a very good report. They posted earnings of 62 cents compared to estimates of 36 cents. They raised full year estimates to $4.30-$.40 up from $4.18 to $4.32. That brought them into the same range as the analyst estimate at $4.40. Monsanto normally issues conservative guidance and then over delivers. Analysts understand this and estimate higher than the company's guidance.

Monsanto CEO said seed sales in Latin America were booming and farmers in the U.S. were placing early seed orders after the worst drought since the 1930s. Seed revenues rose +27%. The company also saw prices rise on its Roundup herbicide. Cash on hand rose to a record $4 billion and they raised their free cash flow estimates to as high as $2 billion, up from prior estimates of $1.7 billion. Monsanto said they were focused on returning cash to shareholders. They are waiting on approval of their Roundup resistance soybeans to China and Brazil. The markets there exceed 100 million acres. That could be some huge seed orders.

Monsanto Chart

The largest for-profit college Apollo Group (APOL) reported earnings of $1.22 share that disappointed analysts. The company reported lower student enrollments and guided for lower profits in future quarters. In October Apollo said it would cut 800 jobs and close 25 campuses to save costs because of falling enrollment. Costs declined -8% for the quarter but profits fell as well due to the falling enrollment. New student enrollments fell -15% to 54,100 in the November quarter. Profit guidance for the full year declined from $525-$575 million to $500-$550 million. Shares of APOL declined -2.6% on the news.

APOL Chart

WD-40 Company (WDFC) reported earnings after the close of 69 cents compared to 42 cents in the year ago quarter. The gross margin rose to their goal of 50.1%. Revenue rose +12% to $95.2 million. Net income was $10.9 million. The company recently raised its dividend to 31 cents and is payable on January 31st to holders at the close on Monday. Shares of WDFC did not move after the close because it is not a highly watched stock.

WD-40 Chart

After the close Seagate (STX) said it would report better than expected earnings for the quarter. Seagate said it shipped 58 million hard drives in Q4. Analysts had expected lower shipments because of the weak acceptance of Windows 8 on PCs. Seagate said it expects revenue of $3.6 billion compared to analyst estimates for $3.53 billion. The company said it expected gross margins to be 27%. Shares rallied $1 in afterhours to $32.40.

This is positive for the PC sector since it means there were more PC sales than analysts expected.

Seagate Chart

Also after the bell Dish Network (DISH) offered to buy Clearwire (CLWR) for $3.30 a share or roughly $2.28 billion. That is better than the current offer by major shareholder Sprint (S) and could interfere with Softbank's plans to take a majority 70% position in Sprint for $20 billion. Sprint owns 50% of Clearwire. Sprint had offered to buy the 50% it does not own for $2.97 per share. Sprint sent a letter to Clearwire saying they thought the Dish offer was "illusory, inferior to the Sprint offer and not viable." Let the bidding war begin.

Dish has wanted to enter the wireless spectrum for several years and has amassed billions of dollars of spectrum in the process. Shares of Clearwire spiked from $2.92 to $3.18 on the news. Analysts believe the price will go higher now that there are two bidders. However, since Sprint owns 50% already it may be tough to get shareholder approval for the Dish deal.

Clearwire Chart

YUM Brands (YUM) saw their shares fall -4% after the company said same store sales in China fell -6% after a government review of poultry suppliers in China revealed high levels of antibiotics and growth hormones at two suppliers. YUM had previously disclosed the review and had terminated the suppliers even before the review began.

YUM receives 44% of its revenue from China in 2011. YUM brands include KFC and that was a serious blow to the KFC sales in China. The company is trying to mount a major advertising campaign to reassure customers that the products are safe. However, analysts said trust is a major problem in China and it could take 3-6 months before buyers return.

As part of the YUM filing they also reported preliminary adjusted profits of $3.24 and that was slightly below the analyst estimates of $3.26.

YUM Chart

Boeing (BA) shares fell nearly -3% after two unrelated problems were reported in 787 Dreamliners on the same day. One problem was an electrical fire in a battery compartment used for starting the power generators used while on the ground. The second was a fuel leak discovered on a 787 just before takeoff. Boeing has had a lot of these nuisance issues and it is common with a new product as complex as the 787 Dreamliner. Boeing shares fell -$2 today after a similar loss yesterday.

Boeing has a record backlog of orders across all products so future profitability is not in doubt. They are currently producing the revamped 737 models at a one plane per day rate with a major backlog.

Boeing Chart

Sears Holding (SHLD) shares fell -6% after the company said CEO Louis D'Ambrosio, who is leaving in February for health matters, would be replaced by hedge fund billionaire Edward Lambert. Lambert owns the majority of Sears stock and is currently Chairman. He has been a hands on Chairman and has taken an active role in trying to resurrect Sears and Kmart. The assumption of the CEO title is simply formalizing what has been transpiring for the last year.

Lambert rescued Kmart from bankruptcy in 2003 and then organized the merger of Sears and Kmart in 2005. He has sunk much of his personal wealth in Sears and has an extremely vested interest in making sure the company succeeds. In 2012 Sears cut $400 million in costs and sold off $1.8 billion in assets. The company announced on Monday that revenue for the nine-week holiday period declined -1.8% due to sales declines in consumer electronics. However, same store sales rose +0.5% for the quarter and the first increase since 2010-Q1. Sears expects to post a Q4 loss of $2.64 to $3.40 per share. Excluding items there will be a profit of $1.25 to $2.00 per share. Earnings will be Feb 28th.

Sears Chart

S&P earnings for Q4 are expected to have grown by +3%. That is down from initial estimates of 11% to 13% six months ago. In the Q3 earnings cycle 74% of companies missed top line revenue estimates. The poor earnings helped push the market lower in November.

Analysts are still unsure what to expect for Q4 but they do believe earnings will be better than expected. The estimates were pushed too low after the Q3 disappointments and many expect those lowered estimates to be too low. Time will tell.

The next earnings report to watch is Wells Fargo (WFC) on Friday. They will set the tone for the banking sector and probably the market.

The sound bites over the coming debt debate are easing. Positions have been stated and now the headliners are withdrawing from the daily news as they focus on other matters. The Treasury Dept says the government will run out of money sometime between Feb-15th and March 1st. The extraordinary measures will have been exhausted and some bills will start being unpaid.

That gives us the potential timeline for the debt debate to heat up. I would target February 1st as the beginning of the battle with a daily increase in intensity until it is finally solved. That means the market can proceed more or less normally through the rest of January before investors will begin heading for the sidelines.

The S&P declined from Friday's five-year high close at 1466 to close at 1457 today. Clearly the amount of decline has been minimal and yesterday and today the lows came just before lunch and then buyers began to appear. The buyers are patient and are nibbling a positions rather than jumping in ahead of earnings.

The low on the S&P today was 1451 and right at what I consider as initial support at 1450. If that 1450 level breaks we could be in for another leg down and a worse bout of profit taking than I am expecting. With the Alcoa, Seagate and Monsanto earnings news today I expect traders to be somewhat encouraged and Wednesday could be a positive day.

S&P Chart

The Dow was handicapped today by the decline in Boeing. Caterpillar also declined slightly losing -1.21 but given its recent gains this was a minor amount of profit taking. Fear of Alcoa's earnings also kept the index under pressure.

The Dow declined to support at 13,300 and the rebound was listless because of the problems above. With the Seagate news tonight the tech stocks in the Dow should have a better day on Wednesday. A decline under 13,300 could telegraph a bigger problem and potentially setup a retest of 13,000 but I am not expecting it.

Dow Chart

The Nasdaq lost a trival -7 points but that was after a +15 point rebound off the lows at 3076. I would consider that a successful day. Apple traded flat and slightly positive on rumors of an iPhone mini in the pipeline. Biotechs including CELG and ISRG helped to support the Nasdaq while SHLD and NFLX were the biggest drags with a -$2 loss each.

The Nasdaq should benefit from the Seagate news and hopes for the PC sector. However, until the tech earnings begin to flow next week the rebound may be lethargic.

The 3125 level remains decent resistance and the 3090-3075 level is critical support.

Nasdaq Chart

The most bullish chart remains the Russell 2000. The index lost only one point to close at 874 and only -4 points below its historic closing high on Friday. Given the potential for a strong bout of profit taking in small caps this minor decline over two days is very bullish. With any good news at all, the Russell could again print a new high and trigger buying across all the indexes.

Russell Chart

I continue to believe we are in buy the dip mode and today's S&P dip back to 1450 was the perfect opportunity. The Seagate news after the bell and a decent report from Alcoa could be all the market needs to move higher on Wednesday.

I suggest putting aside the worries over the debt threat and concentrating on the potential for a new leg higher in the market if we get any additional good news.

I remain in buy the dip mode until proven wrong.

Enter passively, exit aggressively!

Jim Brown

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