The major indexes had a good month of gains in only the last week. Commodities were not so lucky.

Market Statistics

Investors saw new record highs on the big cap indexes and 2% to 3% gains for the week. This was a bullish week for anyone holding big cap stocks. April is living up to its historical trend of being the best month of the year for Dow gains. The Dow rebounded from a -73 point drop at the open to end with only a -0.08 point loss for the day. That is a very nice rebound considering all the economics this morning were disappointing. Fundamentals don't matter when the bad news bulls are in charge and the Fed is filling the punchbowl with a fire hose.

Starting off the bad news this morning was a sharp drop in March Retail Sales. The headline number declined -0.4% compared to a gain of +1.1% in February. The consensus estimate was for zero growth as a result of the sequestration impact. January sales were revised down from +0.2% to -0.1% and February declined from 1.1% to 1.0%. Those are not big numbers but it was the sentiment impact that was important.

General merchandisers saw sales decline -1.2% in March. Electronics stores -1.6% and gasoline stations -2.2% as a result of a dip in gasoline prices. Overall sales compared to March of 2012 rose only +2.8% compared to the +4.4% we saw in February. There was definitely a hit as a result of the sequester.

Analysts also claim the colder than normal weather took its toll. March was 17% colder than forecast and the coldest March in more than a decade. Weekly snow storms kept people at home rather than out shopping. It should also be noted that building supply stores are still benefitting from the rebuilding after Sandy. Without those sales the overall numbers would have been even worse.

April sales are likely to be worse as the real impact of the sequester begins to filter through the economy. Wage cuts, furloughs and layoffs are going to impact the spending ability of federal workers and contractors.

Moody's Retail Sales Chart

The second dose of bad news came from the Consumer Sentiment report for April. The headline number fell back to 72.3 from 78.6. That is the lowest reading on sentiment since last July. Consensus expectations were for a minor decline to 78.0 and Moody's was looking for a rise to 80.

Both internal components fell sharply. The present conditions component declined from 90.7 to 84.8 and the lowest level since July. The expectations component fell from 70.8 to 64.2 and a four-month low.

With bad news almost daily from the economic data the new highs in the equity markets are probably the only thing keeping sentiment from declining even further. When the markets finally turn lower this summer we could see sentiment decline as well.

Consumer Sentiment Chart

Filling out the trio of bad reports was a sharp decline in Producer Prices for March. The headline number on the PPI declined -0.6% compared to a +0.7% gain in February and expectations for no change in March. The year over year gain declined to +1.1% from +1.8% in February.

The Fed's efforts to create inflation are not showing up in producer prices. The slowing economy and high unemployment is producing a lack of demand and producers can't support price increases.

The headline number was dragged lower by a -4.7% decline in crude goods and the biggest decline since 2009. That will eventually help consumer sentiment as gasoline prices decline with the price of oil. The core rate, excluding food and energy, rose +0.2% and is now up +1.7% year over year.

The PPI was a negative report because of the implied underlying slack in the producing economy. Demand is weak and it is not expected to get better over the next quarter. This will slow inflation even further and bring back the Fed's worries over deflation.

Commodities were crushed as a result of the PPI report with copper, oil and precious metals all falling sharply. The PPI report served as punctuation for the string of weak global economic reports suggesting the global economy is falling back towards recession.

The Consumer Price Index is due out on Tuesday and it is expected to also show a decline in prices.

The economic calendar for next week has two major reports. Those are the Fed Beige Book on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The Beige Book could show a weakening in economic activity across the twelve Fed districts. The last couple of reports have been weak but showed slight improvement. As the first survey of the Fed districts since the sequester it will be scrutinized for signs of increasing weakness.

The Philly Fed Survey on Thursday will set the tone for the rest of the regional updates later in the month. After disappointments in the ISM, ISM Services and payrolls a negative tone in the Philly Fed could be a major speed bump for the market.

The Housing Market Index and New Residential Construction will be watched but earnings are likely to steal the headlines and push the housing data to the sidelines.

Economic Calendar

Some of the more bullish events over the last two weeks were the comments from Charles Evans the president of the Chicago Fed. We have been getting conflicting comments from various Fed heads about tapering on the QE program but none really give any details on what would make the Fed change its stance. Evans was asked what would cause the Fed to change its current posture and he said better economic growth for some period of time. He was further asked about the jobs growth since it is not likely the Fed will see its target of 6.5% this year and maybe not even in 2014.

Evans said he would like to see job growth over 200,000 jobs per month for six months before backing a reduction in QE purchases. He also said some months with gains over 250,000 "would be a good sign." Rick Santelli researched the last time the country had job growth that robust and found you have to go back to 1997 for a six month string of gains over 200,000 jobs. On the same panel as Evans was Atlanta Fed president Dennis Lockhart and he said that he would like to see "several months of job growth over 180,000" and then he would consider tapering QE in late 2013 or early 2014.

Fed Governor Daniel Tarullo said while some economic data has exceeded expectations he wants more consistent job growth before he could support an end to QE purchases. "At the very least what I would like to see is some good healthy peaks that have job creation well above the rate of new entrants into the labor market" followed by a "plateau that can be the basis for some more peaks later." Approximately 150,000-175,000 people enter the job market every month. That means he needs to see job gains of 200,000 or more to fit his criteria. Obviously that scenario would take a minimum of six months of strong data with "peaks" so he will not be supporting any tapering in the near future.

Investors put the Fed comments together and realized the chance for tapering in 2013 is nearly zero despite all the tapering comments in the press.

The "D" word is coming back to haunt us as global growth slows. Deflation is a clear threat in Europe. Greece is already in deflation for the first time in 45 years. Cyprus will be there soon. The impact from money hoarding all across Europe is going to cause a sharp decline in retail sales and retailers and producers will be forced to cut prices to stimulate sales. Inflation in Portugal is only +0.3% and Spain is +0.7%. France slowed to +1.1% in March. This does not yet represent the impact to money flows post Cyprus. The ECB is definitely on deflation watch and should cut rates soon to try and stimulate the economy. Currently rates are 0.75% so they don't have a lot to work with. Unemployment is rising all across Europe with Greece at 27.2%, Spain 26%, Portugal 17% and the eurozone average is 12%. Deflation is harder for a central bank to fight than inflation so we should expect some "unconventional measures" as Mario Draghi mentioned in his recent press conference.

The deflation monster has not yet awakened in the U.S. but you can bet the Fed is on high alert. Declines in retail sales and price indexes are troubling but the real impact of the sequester has yet to be seen in the economy.

I just don't see the Fed changing its QE policy this year. If we were to suddenly see the economy gain traction then we can all change our outlook but for now the economy appears to be losing traction.

The National Federation of Independent Business (NFIB) survey for March showed confidence fell -1.3 points from 90.8 to 89.5. Over 75% of business owners surveyed believe conditions in six months will be "no better or possibly worse than they currently are" according to the NFIB chief economist Bill Dunkleberg. There are almost no plans to increase employment in the coming months. Respondent plans to create new jobs fell -4 points to ZERO in the March survey. Small businesses are where jobs are created. Large corporations normally remain flat to down as improvements in automation, streamlining and cost cuts keep employment growth at a minimum.

Dunkleberg said, "For the sector that produces half the private GDP and employs half the private sector workforce, the fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy." The net percent of respondents expecting the economy to improve was -28%. That means there were vastly more respondents expecting a decline than expecting improvement.

You have to admit the economic results so far in April have been a disappointment. The equity market has disconnected from the economic reality. Only two of the twenty reports have beaten the estimates. With this kind of economic data there is no chance the Fed will taper QE in the near future.

April Results

The Bloomberg chart says it best. The S&P has disconnected from the macro economics.

Bloomberg Chart

U.S. rail traffic rose only +0.2% last week. For the first 14 weeks of 2013 U.S. railroads reported cumulative volume of 3,851,622 carloads. That is down -2.5% from the same week in 2012. Total traffic including intermodal loads was 7,168,186 carloads, up +0.8% from the same week in 2012. When you consider the sharp increase in shipment of oil over rail since the prior year the only conclusion is that regular rail traffic is down from year ago levels.

The Congressional Budget Office is predicting only 1.4% GDP growth for all of 2013 despite some estimates for 3.0% growth in Q1. The sequester is now expected to reduce GDP by -1.5% leaving us very little positive growth. If the CBO full year growth estimate of 1.4% comes to pass it will be the worst four years of consecutive growth since the data series was first started in 1930. The worst growth in 80 years and the markets are hitting new highs thanks to trillions in stimulus programs and QE. What is wrong with this picture? What will happen when the stimulus ends?

The IMF is expected to cut GDP forecasts for the U.S. from +2.0% to +1.7% in its next World Economic Outlook update. It blames the Obama administration for the sequester and the forced spending cuts. The data came from a leaked report published by Bloomberg.

The whiff of deflation crushed commodities with gold losing -6.7% for the week or -$106 to close at $1476 and a two-year low. Major support levels were broken and some analysts believe there are more losses to come. The 200-week average at 1435 is going to be strong support if tested. The last time gold traded under its 200-week average was January 2002.

The gold ETF (GLD) traded 55 million shares. That was more than five times normal volume. Several analysts believe the need to raise money for taxes forced investors to sell gold. Equities are going up, gold is not, sell the loser. In the first two weeks of April last year gold declined from $1672 to $1526, a -$146 decline. The three prior Aprils all saw gains in gold prices.

Gold Chart

Silver declined -5.6% to $25.76 and also a two-year low. Silver still has a chance to rebound from that level but any further breakdown would target something in the $18 range. I can't even believe what I typed in that last sentence. I am bullish on silver. I have been bullish since we were at this level back in April 2012. Silver demand is roughly 1.2 billion ounces a year and mine output is roughly 750 million ounces. The rest is made up of recycled scrap silver and coins, silverware, etc that is sold back into the metals market. If the global economy ever reverses higher the demand is going to far outstrip mine output and prices are going to explode. Add in the rampant inflation that will eventually appear as a result of all the QE from central banks and silver will outperform gold.

While I am not happy about the impact of the price drop on my current silver investments I am very happy about the potential to buy silver at two-year lows. Invest in assets when nobody else wants them. That would definitely apply to gold and silver today. The risk is that we do slip into deflation or a depression. All assets decline in value in that case. You only have to look back to 2008 when gold dipped to $681 and silver hit $8.40. While I would love to see those prices again I would not want to go through the economic stress and equity devaluation that would accompany it.

Anyone buying silver today should be thrilled to buy at two-year lows but you should also be prepared to hold it until the global economy recovers.

Silver Chart

In stock news the biggest loser was Infosys (INFY). The company issued earnings guidance and the street was not happy. Infosys said net income rose +39% for the full year but did not provide any profit guidance for the current year that started in April. They did say revenue would grow 6-10%. That would imply revenue of $7.8-$8.1 billion and analysts were expecting $8.3 billion. Infosys reported profits of $3.02 per share and analysts were looking for $3.25.

Infosys also said the U.S. market was "extremely fragile" as a result of the uncertainty surrounding the sequester. Using those words in earnings guidance is guaranteed to be reflected in your stock price. INFY fell -21% to $43.

Infosys Chart

The tech sector was already weak after IDC said PC shipments in Q1 totaled 76.3 million units. That was a -13.9% decline over the same period in 2012. That is the worst quarterly decline ever. The prior IDC forecast was for a drop of -7.7%. The company said disappointing acceptance of Windows 8 and the flood of tablets into the market was depressing PC sales. Windows 8 not only failed to provide a positive boost to PC sales but appears to have slowed the market according to IDC. Consumers are confused and don't know what to buy so they buy nothing.

However, the company said those factors may have influenced PC sales in the U.S. but the slowing global economy, particularly in the emerging markets, is the primary culprit of the sales slowdown.

IDC said 9 of the top 25 chipmakers suffered double digit declines in sales with most of them producing chips for the PC market. Intel had a -2.7% decline while Nvidia saw +6% growth.

In PC shipments Hewlett Packard held a 15.7% share with nearly 12 million units shipped. However, that was a -23.7% decline from the year ago quarter. Lenovo shipped 11.7 million units and that was flat from the year ago quarter. Given the big declines by other manufacturers that was a solid win for Lenovo. Dell shipped just over 9 million for a -10.9% decline. Acer shipped 6.2 million for a -31.3% decline and Asus 4.3 million for a -19.2% decline.

Microsoft (MSFT) is getting daily downgrades and target price cuts by the broker community. The Window's 8 disaster may not be overcome until Windows 8.1 codenamed "blue" when there will be an option for a more standardized Windows feel. Microsoft enterprise is still printing money but they need it to ramp up the development of the next Windows as quickly as possible.

You would think after the Vista disaster they would be immune from operating system errors for at least a couple of releases. They got one good release in Windows 7 but it may take a couple releases to get to the next platform everyone can love. FYI - Windows XP, now 12 years old, goes off maintenance on April 8th, 2014. They definitely got their money's worth on that one.

Microsoft Chart

JP Morgan (JPM) reported record earnings on Friday but analysts were not excited. JPM reported adjusted earnings of $1.41 compared to estimates for $1.39. That equated to profits of $5.28 billion for the quarter. Revenues declined -3% to $25.8 billion because of a slowdown in mortgage banking. The refinance wave has crested and banks are scrambling to get their share of new mortgages. It is a very competitive market and profits are actually shrinking on new loans.

Investment banking income rose +28% to $2.6 billion on revenue of $10.1 billion. Trading revenue rose +50% from Q4 but was down single digits from the year ago quarter. Asset management income rose +26% to $487 million.

The bank said credit card charge-offs were near record lows and consumer credits were improving quickly. It was the 13th consecutive quarter of earnings growth and the 8th consecutive quarter of record earnings.

Analysts were disappointed about several of the JP Morgan metrics but thrilled about others. Shares of JPM reflected the differences in opinions and declined -30 cents. Almost all agreed that even with some income restructuring in progress JPM was still a bargain at a PE of 9.

JPM Chart

Wells Fargo (WFC) reported earnings of 92 cents compared to estimates of 88 cents. That represented earnings of $5.2 billion on revenue of $21.3 billion. The revenue was slightly below estimates for $21.5 billion. Wells saw a +37% rise in investment banking revenue thanks to the Warren Buffet acquisition of Heinz. Mortgage loan originations declined slightly and Wells has stopped acquiring loans from other originators. Shares of WFC declined -30 cents.

Wells Fargo Chart

JC Penny (JCP) hired Blackstone Group (BX) to help it raise $1 billion in cash. The returning CEO, Myron Ullman, who served for seven years before Ron Johnson replaced him, has begun dialing for dollars. Not only did he call up Blackstone but has also generated a list of outside advisors to help the chain raise money and save money. The company would not disclose the list saying it was private.

Some analysts are wondering why the sudden dash for cash. JCP officials have repeatedly said the company had sufficient working capital. In theory they have $1.85 billion in a revolving line of credit they have not used. Analysts believe by going out for money today they can claim the revolver is unused and get a better deal on an alternate source of funds. It would be harder to get cash if they had drawn down the credit line. Once drawn it becomes a liability rather than an asset. If they can sell equity for the billion dollars there is no repayment liability. They had $930 million in cash in February.

Shares of JCP have declined -9% since the CEO switch was announced last week.

JCP Chart

The most current earnings estimate for the S&P for Q1 is now +1.0% growth according to S&P Capital IQ. That is up from their last estimate a week ago at +0.4%. As each company reports they adjust earnings expectations for everyone else in that sector.

The bar is very low and the slow economy, recession in Europe and the strength in the dollar is going to be weighing on this quarter. Expect to hear the "sequester ate my earnings" excuse a lot.

Notable for next week are the big tech companies Intel, Google, IBM, Microsoft, Ebay, Sandisk and Yahoo.

Goldman Sachs will be the most watched bank but Morgan Stanley could have some European issues so don't ignore them. There could be a negative surprise. Several Dow components report so the Dow could be volatile.

GE closes the week as the biggest conglomerate and their guidance is going to be critical. If they say the economy is weak people will believe them.

Earnings Calendar

The S&P rallied to 1597.35 on Thursday before fading into the close. Friday's decline on poor economics was the excuse used for profit taking. The S&P had gained +57 points since the intraday low at 1540 the prior Friday. That was a +3.7% gain from the intraday low to the intraday high in only five days. Add that to the +11% since December and it was due for a rest at whatever round number resistance point appeared in its path.

The uptrend resistance from late January became the perfect reaction point for sellers. Being only -3 points from 1600 was an added bonus.

However, the Friday dip was bought. The Dow saw the biggest gains but the S&P rebounded to recapture 60% of its opening loss. The S&P rebounded to within 4 points of a new record high ahead of a weekend with major headline potential. Headlines from North Korea and China could tank the market by Monday's open but nobody seemed to care.

Anything can happen this weekend. Traders would have been perfectly justified in pulling the trigger to exit all their gains. North Korea is likely to launch its missiles on the 15th. That is Sunday night for the USA. China is releasing another set of economic numbers this weekend that could end the commodity sell off or push it over the cliff for another monster decline.

Facing those events I think the S&P was bullish to end with only a -4 point decline from a record high.

S&P Chart

The Dow closed within 0.09 points of a new high after gaining +299 points for the week. The Dow lost -73 points at the open and recovered them all to close flat on the day on a Friday. This was a bullish day for the big caps.

With multiple Dow components reporting next week the Dow could be volatile. Normally when a Dow component reports the stock declines because the expectations are so well documented there is no real surprise. That is the risk we face next week.

The odds of a print at 15,000 are growing by the day. This is the unofficial target and we are close enough it could happen at any time. Will that be the sell signal for the market? Nobody knows but there were no sellers in the market last week. It will be interesting to watch that high profile price target and the Dow reaction when it is hit. Initial support is 14,800.

Dow Chart

The Nasdaq Composite sprinted to a new 12-year high on Wednesday and spent two days trying to hold that high at the 3,300 level. Given all the earnings warnings on tech stocks, semiconductor stocks and the PC sales news from IDC I am amazed the gains held. This suggests the bad news bulls are truly in control.

The Nasdaq gained more than 125 points from the prior Friday's lows. It blasted right through the congestion range that kept the Nasdaq in check for all of March without so much as a blink.

With IBM, INTC, MSFT, EBAY, YHOO and SNDK reporting earnings this week the deck is stacked against the Nasdaq. If tech stocks finish higher next week it will be the equivalent of a miracle. Stranger things have happened and expectations are VERY low so the bar should be easy to jump.

Nasdaq Chart

The Russell 2000 small caps and the Dow Transports are still lagging the big cap indexes. Both are showing lower highs and relative weakness on Friday. These indexes are going to be the sentiment indicators over the next two weeks. If these indexes begin to weaken at a faster rate I would tighten stops on any longs and be ready to hit the exit.

Russell 2000 Chart

Dow Transports Chart

Despite the high risk levels of Dow 15,000 and S&P 1,600 there is a serious contrarian indicator that suggests they won't stop the gains. The AAII Sentiment Survey has gone VERY bearish. You may remember it was extremely bullish just six weeks ago. Now the market is making new highs almost every day but sentiment has changed. Only 19.3% of respondents are bullish today and a whopping 54.5% are bearish. That is a one week gain of +28.3 points for the bearish camp. That is massive. That is the highest reading on bearish sentiment since July 2010. That suggests investors are suddenly extremely bearish and you have to assume they are structuring their plays to profit from the expected decline. On a contrarian basis that means any further gains will force strong short covering and force those in neutral positions to chase stocks higher.

The survey also showed investor cash allocations had risen to 22.8%, up +4.8% and a 16-month high. Stocks accounted for 59.5% and bonds 17.7% of investor portfolios. This suggests respondents are actually under invested and will be forced to chase stocks if the rally continues.

AAII Investor Sentiment

Europe continues to circle the drain. Three more board members at the Cypriot Central Bank have resigned. The ECB has nearly completed its stealth takeover despite the claim that central banks must remain independent. The bank was ordered by Mario Draghi to sell its gold. Apparently euros are easier to confiscate from electronic accounts than gold bars.

Cyprus admitted the hole in its banking system was bigger than previously thought. The troika approved a loan of $10 billion once Cyprus agreed to levy on deposited funds. Cyprus was told it had to come up with 5.8 billion euros through the deposit tax to complete the bailout. Now it appears Cyprus will have to come up with a total of 13 billion instead of 5.8 billion. That is double the initial estimate and not within the capabilities of the country to produce. The size of the current bank bailout at 23 billion euros is now bigger than the GDP of Cyprus.

The EU finance ministers are scheduled to consider a proposal this week to seize deposits from any bank in the eurozone. That is not just customer deposits but even interbank deposits at the ECB or on loan to other banks. That means any deposit at any eurozone bank would be subject to confiscation. This is going to create further outflows of funds all across the eurozone and a lot of that money will make its way to the U.S. markets.

However, the demise of the European banking system is not going to be overlooked just because the fleeing deposits are pushing our markets to new highs. Eventually global fundamentals will matter. Several other EU countries are already talking about taxing deposits, retirement accounts and money market funds. The ex-president of Portugal, Mario Soares, said Portugal cannot pay its debts and is calling for an Argentine style default. Anyone that doubts the eventual end of the eurozone as we know it is not paying attention.

In the stranger than fiction category the U.S. failed again to label China as a currency manipulator despite their continued intervention. This will never happen for multiple reasons. However, Jack Lew dropped a bomb in the same report saying "We will continue to press Japan to adhere to the commitments agreed to in the G7 and G20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes." Yes, China got a pass but Japan got the warning not to devalue its currency. Japan, the country that just announced a $1.2 trillion QE program to stimulate its economy out of a 20 year depression. The warning came from the king of currency manipulators where the Fed is adding $1 trillion a year in QE to devaluate the dollar and create inflation. I never cease to be amazed at how the government functions.

The USD/YEN declined -60 bips in the last 15 minutes of trading on Friday when this tape bomb was dropped after the regular market close. If you want to see what the government is trying to sweep under the rug you only need to scan the late news on Fridays.


The Dow gained +299 points last week to push it to +13.44% for the year. The S&P is up +11.4% and the Dow Transports +15.8%. It has been a great year. We all know this sprint higher has to eventually end. The Dow 15,000, S&P 1,600 levels would be a perfect spot for sellers to target but so far there have been no sellers.

I thought for sure we would have seen a more substantial dip by now but shorting this market has been more dangerous than skinny dipping with snapping turtles.

Next week is the real start of the Q1 earnings cycle with the big cap techs confessing their sins. There is a real chance the tech earnings could be ugly given the IDC news on the worst quarterly drop in PC sales ever. That could weaken sentiment just enough to tilt the scales back into the bearish column.

With only two weeks left before the "sell in May and go away" cycle begins there should be a lot of investors ready to move to the sidelines for the summer. We also know there are a lot of buyers still waiting for a decent dip to buy so predicting market direction remains a fool's errand.

I would be extremely cautious about new longs and be prepared for a quick exit. As long as you keep your stops tight you can continue to play the trend until it ends.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Risk is what's left over when you think you've thought of everything else." ."
Carl Richards