The Nasdaq and S&P managed to rally thanks to Google but the Dow remained in the red most of the day thanks to IBM.

Market Statistics

The market was dominated by the manhunt coverage all day Friday and stocks were regulated to the background in national news coverage. Friday was option expiration and volume at 6.3 billion shares was roughly 2:1 in favor of advancers. The expiration forced traders to close positions and after the big declines over the last week that position closure forced the indexes higher.

There was very little stock news and very little in the way of economic events. The Regional Employment report for March gave us a little more input on the disappointing Nonfarm Payrolls report. In the regional report only 23 states showed any increase in employment and that was the least since July. The District of Columbia and 26 states showed a decline in employment. Employment fell by -0.3% in East North Central, -0.2% in West North Central, -0.2% in East South Central. The Mid Atlantic, Mountain and Pacific regions saw employment rise +0.1%. New England and West South Central were flat. Alaska, Florida, New Jersey, Rhode Island, Utah, Vermont and Virginia each reported a month to month decline of -0.3%.

The regional reports only show events leading up to the sequestration. The April Nonfarm report will be the first indication of the sequester mandated hiring freezes. With the hiring rate falling to an eight-month low in March there is a good chance there will be job losses in the Nonfarm report for April.

The Philly Fed Manufacturing Survey headline number declined on Thursday from 2.0 to 1.2 but the key indicators were severely negative. The employment component fell from +2.7 to -6.8 in April and a five month low. This could begin a pattern of post sequester negativity. New orders were negative at -1.0 but backorders fell another two points to -6.8. The inventory component fell to -22.2 and the lowest level in three years. The expectations component declined from 32.5 to 19.5 and a five month low.

The Risk of Recession report for March rose from 25% to 27% and the first gain since November. This gain was due to a drop in housing permits and consumer confidence. Analysts claim they are not yet worried about a recession with the GDP for Q1 expected to be in the 3% range.

The calendar for next week is busy with two regional economic reports, one national report and two home sales reports. The Richmond and Kansas Fed reports are expected to decline. The Chicago Fed National report is expected to be flat. Home sales are expected to continue rising but recent housing numbers have been erratic. New home sales fell -4.6% in February, the biggest decline in two years. Single family home starts fell -5.0% and permits fell -3.9%.

The big report for the week is the first look at the Q1 GDP on Friday. The official expectations are for a rise to +3% but there are estimates in the 2% range. The reason for the spike from the +0.38% in Q4 is seasonal with a big gain from inventory accumulation. The full year GDP is expected to be in the +1.4% to +1.9% range. Should the Q1 number come in significantly below 3% it would be market negative.

Economic Calendar

Fitch Ratings cut the UK from AAA to AA+ and that means the country can no longer claim a triple A rating. Moody's cut them as well back in February. S&P still rates them AAA but when two out of three major agencies cut the rating the majority rules. Fitch said government debt will reach 101% of GDP in 2015. They expect the UK to grow at a lackluster 2.0-2.5% for "years into the future" meaning slow growth is here to stay. The UK would be happy to see 2.5% growth in 2013. The ratings cut by 2 of the 3 agencies means some investors will be forced to sell UK debt. Investors like pension funds are required to invest in AAA rated debt. This is going to force UK interest rates to rise and raise the amount of interest it pays each year, which will increase the amount of debt outstanding. It is a vicious circle and once started down that road it will be hard to get off.

Back on March 1st Fitch had this to say about the USA. "The debt ceiling limit which comes back into force on May 19, certainly if that wasn't addressed in a timely fashion, we don't think another debt ceiling crisis like we had in August 2011 would be consistent with the U.S. retaining its AAA rating," according to David Riley, managing director of sovereign ratings. Fitch believes the debt ceiling is an ineffective and damaging mechanism for enforcing fiscal discipline because of the threat of default. We are only four-weeks from that debt ceiling fight.

In stock news the biggest gainer for the day was Vertex Pharmaceuticals (VRTX) with a whopping +62% gain after a successful drug study. The cystic fibrosis drug VX-661 promoted greater lung function than for patients on placebo. The drug was initially approved in 2012 and could now advance into late stage clinical trials. Vertex has another CF drug called Kalydeco that was approved on Jan-31st.

Citigroup said the study results were "impressive" and kept a buy rating. They raised the price target to $110 from $63. After the +$33 gain today VRTX closed at $85.48.

VRTX Chart

Chipolte Mexican Grill (CMG) reported earnings of $2.45 compared to year ago earnings of $1.97 or roughly a 24% gain. Estimates were for $2.14. Revenue rose +13% to $726.8 million. CMG opened 48 new stores in Q1 to increase their total to 1,458. They expect to open 165-180 stores in 2013. Same store sales are expected to rise low single digits for the rest of 2013. The company plans to raise prices 3% to 5% but not until later this summer. Chipolte wants to wait and see how the economy plays out over the next few months. They bought back $51 million in stock in Q1 and added $100 million to the existing share repurchase program. CMG received upgrades from five major analysts and shares rallied +11% or $38 to $366.

CMG Chart

Capital One (COF) rallied +6% on earnings of $1.79 that easily beat consensus estimates of $1.63. This was +27% above the year ago quarter at $1.41. Revenue declined -1.3% to $5.55 billion. That missed estimates of $5.62 billion. Earnings were helped by a -7% decline in operating expenses.

Capital One Chart

General Electric (GE) reported earnings of 35 cents that was in line with estimates but revenue came in slightly lower than GE had predicted. The problems in Europe caused the most distress. Sales of power generation and water treatment equipment in Europe fell -26% and profits declined -39%. CEO Immelt said they "expected Europe to be down and similar to 2012 but it was even weaker than we expected." Profits in the energy division also declined but orders rose +24% in Q1.

The divisional losses overpowered the profits in aviation, healthcare, transportation and appliances. Aviation equipment sales rose +47% thanks to a new jet engine. Sales of NBC added 8 cents per share to earnings. GE sold 49% of NBC Universal to Comcast for $16.7 billion. Negative comments by Immelt and a warning that power, water and GE Capital would see no growth in 2013 pushed the stock lower. Those divisions make up 50% of GE's revenue.

GE's earnings are normally ignored by everyone but their guidance is critical. Their warnings over Europe and projections for no growth the rest of the year in multiple divisions left analysts with a bad feeling.

GE Chart

IBM reported earnings on Thursday night and missed estimates. Shares of IBM fell -$17 on Friday and knocked -131 points off the Dow. It is a miracle the Dow finished with a gain after that kind of drag. That was the biggest one-day dollar drop for IBM since October 18th 2000 and the biggest percentage decline since April 15th 2005. More than $19 billion was erased from its market cap.

It was the first time since 2005 that IBM missed estimates. They are known for successfully managing earnings through guidance and stock buybacks. Earnings were $3.00 per share and estimates were $3.05. Revenue was also light. They blamed it on Europe, financial services and discretionary spending. The CFO said the sales force had trouble closing deals.

IBM said it was going to spend $1 billion on job cuts in the second quarter and sell its low end server business. Lenovo is expected to be the buyer for something in the $3.5 billion range. IBM spent $803 million on layoffs in 2012. They currently have 467,000 workers. IBM maintained its full year estimate of $16.70 and its target of $20 in earnings in 2015.

IBM Chart

Dow component Microsoft (MSFT) rallied a buck after posting earnings on Thursday night. Revenues rose +8% to $18.8 billion. Operating income rose +5% to $6.7 billion. Windows sales were flat at $4.61 billion thanks to a lukewarm acceptance of Windows 8. The Windows Server division saw revenue grow +11%. SQL Server revenue led the division with 16% growth.

Microsoft's earnings were not outstanding but they were solid. The minor gain in the stock helped to offset some of the impact of IBM on the Dow.

Microsoft Chart

The stocks in the Dow were actually very positive on Friday. If it were not for IBM the Dow would have been up triple digits. American Express posted earnings earlier in the week and is still rebounding from the two week low prior to the release.

Boeing (BA) was up on news the FAA had approved the revamped Dreamliner battery charging system. The approval allows Boeing to quickly begin production of the new systems for installation in the 50 grounded planes and future new construction. The grounding of the new jet has cost Boeing about $600 million. Some airlines had to lease alternate aircraft and have said they will seek compensation from Boeing. The company says it takes five days to retrofit each plane once the battery systems are available. Boeing has ten teams in place around the world to begin installing the systems. The FAA said it would lift the grounding order next week. The NTSB should have its recommendations out next week as well. Boeing said it could take five-months to retrofit all the completed planes that are parked and have not been delivered. Even with all the problems Boeing shares are only $1 from a new high.

Despite crummy earnings and lackluster guidance Intel (INTC) is pressing resistance at $22.50 and could break out soon. This is amazing since the semiconductor sector has been warning central for the last couple weeks.

JNJ, MRK, PFE and PG are all at new highs. It is hard to complain too much when 75% of the Dow stocks have bullish charts.

Dow Stocks

Despite the Dow gain on Friday the markets suffered their worst weekly loss for 2013. The Dow, S&P and Nasdaq all lost more than -2%. The Russell 2000 lost -3.2% and the Semiconductor Index -3.8%. Oil services lost more than -5%. It was not a pretty week for anything but the Dow stocks.

Google (GOOG) helped push the Nasdaq to a decent gain of +1.25% on Friday when shares spiked +$34 on positive earnings. Unfortunately those earnings were helped by an abnormally low tax rate of 8%. They reported earnings of $11.58 on $13.97 billion in revenue and analysts were expecting $10.66 on $14.09 billion in revenue. Google reported a tax expense of only $287 million on $3.35 billion in net income. A year ago they reported a tax of $655 million on profits of $2.9 billion. If it were not for the low tax rate, a onetime tax credit event, Google would have missed earnings by -33 cents according to Shaw Wu of Sterne Agee. Earnings would have been $10.36 or -$1.22 lower.

Investors either did not care about Google's skewed earnings or did not know about the onetime tax credit. Shares rallied +$34 and nobody looked back.

Google Chart

Silver lost -10% for the week and gold -4.7%. Gold bounced slightly from the intraday bottom at $1321 on Monday to close at $1407 on Friday. Silver did not bounce or at least not very far. Silver bottomed at $22 on Monday and closed at $23.23 on Friday. The lack of a bounce is troubling for multiple reasons.

The entire commodity implosion was led by gold. On April 12th more than 16 million ounces of gold were sold short or offered for sale. That equates to 500 tons. How many investors in the world could sell 500 tons of gold worth roughly $24.8 billion? It was a massive paper short where the futures contracts were sold in hopes of covering them later. How many investors could short $24.8 billion in gold even if they wanted to? I know Goldman went public with a gold short a couple days earlier but even Goldman could not short that much at one time.

The conspiracy theories are flying fast. Central banks are blamed for the massive short but the reasons are vague. What we do know is that more than 700,000 contracts traded on the 16th and the selling hysteria was halted. That was five times normal volume and represents 70 million ounces. Now everyone is waiting for the next shoe to drop. Is the dip over or is this just a resting point?

We have seen gold demand surge around the world over the last week. A record number of gold coins were ordered from the U.S. Mint. Dealers are now quoting 5-6 weeks for delivery. Physical gold is selling like hotcakes but paper gold like the GLD has failed to recover. Dealers claim buyers for gold and silver coins have been running 50 to 1 over sellers. At the Bank of Nova Scotia in Toronto the gold window has been absolutely swamped. There were people lined up in droves for multiple-hours at a time to buy gold and silver bars and coins. UBS in Zurich, Switzerland said they are experiencing exactly the same thing. People are waiting in long lines for bullion related bars and coins.

Silver is in stepchild mode. Gold declined so far the ready buyers for precious metals have jumped into the gold market thanks to the big discount. Silver has been lagging in the rebound. This is a temporary situation. I have written about silver several times in past commentaries. I am bullish on silver because of its use in manufacturing. More than 1.2 billion ounces are used each year but mine output is only 750 million ounces. The rest comes from scrap, silverware, xrays and coins returned to the market. When the global economy finds some traction we will see silver shoot higher. Gold may be a store of wealth but silver is a manufacturing commodity. It is used in circuit boards, cell phones, solar cells, photography and thousands of other electronic products. All of which are growing in numbers.

I posted the chart below at critical price points in the past. Several readers emailed me last week and requested an update. I uploaded the Excel spreadsheet to the website so readers can download it and update it at any time. Just change the silver price in the yellow box and all the individual prices will update.

This shows the actual silver content in any U.S. silver coin. The price in the far right column is the actual value of the silver today at the $23.23 spot price. For silver dollars and silver eagles I would expect to pay a $2-$3 premium over the actual value.

Silver Coin Table

I am always asked where I buy my coins. Believe it or not I have found Ebay to be a pretty good source. For instance this link will display Peace Silver Dollar Rolls. Just buy from a seller with a lot of positive feedback. Avoid those with any negative feedback. Don't buy the collectible ones. Just buy the common, dingy, circulated coins. You are paying for the silver value not the appearance.

You can also buy from local coin stores. CALL them first and ask their selling price for junk silver dollars or circulated eagles. "I am buying junk silver dollars today at the right price. How much for 3 rolls?" Some dealers will sell them for $1-$2 over silver value, others want $5-$7. Avoid the high ones. Gun shows and coin shows are also good. Lots of competition all in one place so the prices are cheap.

I am not going to promise you silver will be $50 this year but I believe it will be well over $50 in the years ahead. Buy a roll, put it in the safe. Repeat every month.


The earnings parade is in full swing. So far the quarter is coming in better than expected. Two weeks ago the estimates were very close to breakeven and some were even negative. However, so far the S&P 500 companies have posted earnings growth of +3.4%. The numbers are normally high the first two weeks because the biggest of the blue chips report. Actual earnings decline as the cycle progresses.

So far 66% have beat earnings but only 57% beat on revenue. That revenue number spiked late in the week because it was 47% on Tuesday. Guidance warnings prior to the earnings cycle were running 3:1 negative.

The big earnings event next week will be Apple on Tuesday. Expectations are for $10.07 compared to $12.30 in the year ago quarter. That is a significant decline and analysts are worried it could be even worse with factories shutdown in Q1 because of a lack of orders. This is going to be the high point for tech earnings. The other big cap techs have already reported with mixed results.

Qualcomm on Wednesday will almost be an afterthought because all the mystery surrounding Apple will already be over. They are a major supplier to Apple but they also supply the other phone manufacturers as well. Estimates are for $1.16 compared to $1.01 a year ago.

This is the start of energy earnings with the big oil companies all reporting to kick off the cycle. Conoco and Exxon on Thursday and Chevron on Friday.

Several more Dow components report including CAT, TRV, UTX, PG, BA, CVX, MMM and XOM.

Earnings Calendar

This week should be the turning point for the markets if the major indexes are going to follow the same pattern as the last three years. This is the biggest week for earnings with 169 S&P 500 companies (34%) reporting earnings this week. After this week the outcome of the cycle will be known beyond a reasonable doubt.

For the last three years the economics and the markets turned down in May and the economics have already gotten a head start. I know some analysts are calling for a continued rally in May. I would be thrilled but I don't expect it. There are far too many factors against us this year. China, Europe, Sequester, Payrolls, Debt Ceiling, etc. I keep saying eventually fundamentals will matter but so far only the Fed has mattered. Investors are ignoring macro fundamentals and buying QE instead.

The S&P 500 broke through uptrend support on Thursday and then returned to that level on Friday and honored it as resistance. In theory this would be the perfect spot for a failure on Monday but the more likely path would be another attempt on 1,570 (thick red line) and a failure there.

The setup is too perfect for the bears and this is where they normally get into trouble. They see the textbook chart patterns and bet it all on the expected failure. The market rallies, shorts are forced to cover and a new high is born.

The turning point will be a dip below the 1539-1540 level. That sets up a retest of 1495-1497 and the beginning of the summer doldrums.

S&P Chart - Daily

S&P 500 Chart - Monthly

The Dow lost -317 points last week to go from setting new highs to testing strong support in only a few days. The uptrend support converged at 14,600 last week and the Dow finally broke through to the downside on Thursday. Friday's intraday dip of -94 points was the result of IBM's -$17 drop. That was worth -131 Dow points. If IBM had been flat the Dow would have ended with a +141 point gain and we would be looking at a different chart.

Several analysts are keying on the 14,500 level this weekend with the close at 14,547. I believe that the 14,400 support level is more important now that uptrend support at 14,600 has broken. If the Dow drops below 14,400 it could be terminal for this bull market.

Dow Chart

The Nasdaq was knocked around last week with alternating positive and negative days but the overall result was a decline of -2.7%. The Friday rebound BARELY recovered to close back over prior support at 3200. If that level fails again I don't expect it to recover. This is a critical make or break week and it will be up to Apple earnings on Tuesday to set the direction. If Apple misses we could easily see a retest of 3115. However, the bar is very low for Apple with expectations downright pessimistic. Initial resistance is 3260 and a massive beat by Apple could produce a significant short squeeze and push the Nasdaq to that level.

Nasdaq Chart

The Russell 2000 Small Cap Index lost -3.2% last week. Initial round number support at 900 held for three consecutive days with a nice rebound on Friday. I believe that rebound was option expiration pressures. Prior support at the 916 level is now resistance.

Fund manager sentiment appears to have weakened but we are approaching month end. We could see a rebound as they window dress but I think the beginning of May could be a definite trend change and failure of support. Even with the declines we have seen in April the index is still up +7.5% for the year. Managers could take profits now and sit out the next six months. Many times they have had to settle for gains smaller than 7% for the full year.

Russell 2000 Chart

The Dow Transports found support at 5900 but the trend is now down. We have two lower highs and lower lows and the next logical progression would be another lower low to the 5800 range.

The fall in oil prices will be favorable for the airlines but the sequester, shrinking economy and falling consumer spending will slow ticket sales. Whether investors will consider those factors is a different question.

Dow Transports Chart

I believe the market is in a topping process. That takes days or weeks rather than a single event that goes from bullish to bearish over a single day. The fundamentals don't support a continued bull market but then bull markets can remain illogical for a long time.

A bull market likes to climb a wall of worry and we have an Everest sized wall ahead of us. Global markets are declining. The global economy is shrinking. Economics in the U.S. are worsening. Earnings are flat to down. Commodities are imploding. Is May the right month to buy stocks?

Commodities lead equities and commodities as evidenced by the CRB Index are down -11.5% from the recent highs. The CRB Index fell -15% in the summer of 2010 and the S&P dropped -15%. The CRB fell -15% in 2011 and the S&P fell -19.5%. In 2012 the CRB fell again and the S&P dropped -11%. In theory the -11.5% in the CRB this year should be predicting a decline in the S&P. We had QE programs in place in those prior years so we can't count on that as support in 2013.

Goldman Sachs Commodity Index Chart

Narayana Kocherlakota president of the Minneapolis Fed said on Thursday, "Financial market conditions requiring the Federal Reserve to keep rates unusually low may persist for the next five to ten years." That would imply QE forever but later he said, "The Fed may have to confront the dilemma of whether to raise rates to reduce the risk of a financial crisis with the certainty that any tightening will lead to lower employment and prices." He also said the danger of continuous QE is significant instability, inflated asset prices, high asset return volatility and heightened merger activity.

Don't say you were not warned. Fed governor Jeremy Stein acknowledged that Cyprus is now a template not only for Europe but also for the USA. He said "if a too big to fail bank did fail I have little doubt that private investors (depositors) will in fact bear the losses." Depositors will be Cyprus'ed. He also said "Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution." If you think your money is safe in U.S. banks you might want to rethink that assumption.

Your retirement accounts are not safe either. The president's budget for 2014 included a proposal to cap retirement accounts like IRAs and 401Ks. Once you have made what the government considers is "enough money" you will no longer be able to contribute to those tax advantaged plans. Also, spouses that inherit IRAs would have to take taxable distributions over a five-year period rather than stretch it out over their remaining lifespan. Those higher forced payouts create higher tax payments. Other proposals in the budget include higher estate taxes and restrictions on putting assets into trusts to avoid taxes. His budget will not be approved but you know now which way the administration is headed.

The EU is floating a concept of imposing a 15% tax on all wages and calling it "retirement savings." Of course the EU gets to hold the money until you retire. It would be a piggybank for the EU like the Social Security trust fund is for the U.S. government. The U.S. takes out the cash and replaces it with treasuries. Do you see where this trend is headed? Governments are gearing up to take more of our money in order to take care of us and pay for larger social programs. Germany's Finance Minister is floating the idea of "global taxation" where everyone, everywhere will be forced to pay for everything. Moving money from country to country or even moving your residence will not let you escape your fair share of taxes. Are you worried yet?

Enter passively and exit aggressively!

Jim Brown

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"If you put the Federal Government in charge of the Sahara Desert in five years there would be a shortage of sand." ."
Milton Friedman