The announcement of stronger Russian sanctions by the EU and the U.S. knocked the markets into negative territory after a positive open.

Market Statistics

The expectations for painful sanctions by the U.S. and EU sent the markets lower for multiple reasons. Russia is a major trading partner for Europe and reducing that trade through sanctions will lower profits for international companies and slow economies all over Europe. There is also the threat of reverse sanctions by Russia against the U.S. and EU.

Sanctions were increased on the Russian banking sector restricting access to bank financing and equity markets for Russian companies. Russian state-owned banks can no longer sell shares or bonds in Europe. The EU also restricted the export of oil equipment and technology necessary for Russian's energy sector. New contracts to sell arms, machinery, electronics and other civilian products with potential military uses will also be banned.

The U.S. slapped sanctions on three state owned banks prohibiting them from selling shares or bonds in the U.S. or receiving financing from U.S. firms. The U.S. also sanctioned United Shipbuilding of St Petersburg and said their assets in the U.S. would be frozen and U.S. companies would be prohibited from doing any business with them.

Russian lawmakers have reportedly drafted amendments that would brand countries that impose sanctions on Russia as "aggressor countries." The amendments would create a mechanism for restricting companies from those countries from doing business in Russia. They specifically included Deloitte, KPMG, Ernst and Young, Boston Consulting Group and McKinsey from supplying auditing and consulting services in Russia. It is theorized they singled out the auditing companies because those companies frequently find evidence of government bribes, payments and corruption and cause problems for the Russian companies. Kicking those auditors out of the country allows Russian companies to legitimately use a Russian auditor that will look the other way when that corruption is found. However, some of the public companies have covenants that require them to use U.S. or European based auditors for exactly those reasons. Prohibiting them from using a reputable firm will further prevent them from selling shares or being traded on the global markets. This could backfire against Russia.

The government has already started attacking companies like McDonalds, Tyson Foods and others. McDonalds was told they could not sell certain menu items because they were illegal. Russia said the nutrition information on the menu did not conform to the rules even though they had been previously approved by authorities.

This is a typical tactic by the Russian government. They come up with some bogus claim to prevent the company from operating but not one that would produce blowback from consumers. Telling consumers the nutrition content was misstated and illegal makes it seem like the government is looking out for its citizens. When it is an oil company they claim they violated EPA regulations and revoke their license. This has happened to more than one company and Russia took them over and gave their assets to a Russian owned energy company.

Russia said it may ban imports of chicken from the U.S. and fruit from Europe if additional sanctions were imposed by those countries. Russia said it may be forced to ban those items for "food safety" reasons. Russia was the second largest market for U.S. chickens behind Mexico in 2013. Russia said it was also considering a ban of U.S. media. Clearly Russia does not want the truth disclosed to Russian citizens.

The equity markets are concerned this will turn into an economic war with each side continuing to ratchet up sanctions and counter sanctions until Putin is forced to increase his military efforts to save face at home. Putin is not concerned about sanctions that only scratch the surface. He knows he has the trump card because Europe depends on Russia's gas and oil supplies. If he cut off the gas and oil Europe's united front would crumble within weeks. Putin is a bully and he has a strangle hold on Europe. This may not turn out well in the months ahead. Europe's economy is struggling with 1% growth and the U.S. is not far behind.

The U.S. warned that Russia broke the 1987 anti-missile treaty when it test fired a ground launched cruise missile with a range between 300-3,400 miles last week. Why do you think Putin chose last week to break the treaty and test new missile technology? It was a warning that he still holds the military cards and could ratchet up the conflict in the Ukraine to include other border states and there is nothing the U.S. or NATO can do about it. This is a dangerous situation and Putin has no fear of reprisals from any European country. He knows President Obama is not going to war to stop Russia's land grab. Putin is so sure nobody is going to stop him that Russian forces have been firing artillery into the Ukraine from Russia for the last two weeks. Basically that is an act of war but nobody can do anything about it.

The equity markets have been relatively tame as the Ukrainian crisis grew from disturbances to protests to slicing off Crimea and now trying to carve up Ukraine even further. At some point the markets will take notice if the situation appears to be increasing in severity.

The markets opened higher after the Consumer Confidence for July spiked +4.5 points from 86.4 to 90.9 and a seven year high. Economists had only expected a +1 point gain. The number for June was revised up from 85.2 to 86.4. Consumers said the job market had improved and that buoyed the long term outlook.

The current conditions component rose from 86.3 to 88.3 but the expectations component spiked from 86.4 to 92.7, a whopping 6.3 points. Those respondents that felt jobs were plentiful rose from 14.6% to 15.9% and a six-year high. This could point to higher employment numbers later this week.

Contrary to the soaring confidence the buying plans declined. Those planning on buying a car fell from 12.2% to 11.6%, home 5.4% to 4.4% and a major appliance from 50.4% to 46.5%.

The Case Shiller home prices for May rose +9.3% year over year compared to +10.8% in April. This is a lagging number and was ignored.

The Texas Service Sector Outlook for July rose from 21.1 to 22.4. The gain in the headline number was due to a sharp jump in the revenue component from 16.9 to 21.5. That is the highest reading since February 2012. However, the employment component declined sharply from 16.5 to 4.6. Hours worked declined from 7.3 to 3.9. Unlike the positive employment growth in the Consumer Confidence these numbers suggest a decline in hiring in Texas.

Foreclosure filings in June fell -2.4% from May to 107,145. This is down -16.1% from the same period in 2013. Bank repossessions declined -5.2%. Foreclosure inventories were up +10.5% for the month but are down -7% over June 2013.

The market has been rather calm the last two days because the fireworks are about to start tomorrow. The early week economic reports were just sound bites but the big guns come out on Wednesday. The ADP Employment is looking for a drop in new jobs from 281,000 to 200,000. The GDP could be in the range of 2.5% to 3.0% or it could miss that range by 2% in either direction. The whisper numbers are all over the map. The lowest I have heard was +1.5% growth. We have had numerous companies complain about weather impacting their Q2 earnings so there may have been some lingering impact from Q1. Just remember that initial estimates are normally revised lower in the revision next month.

The Fed meeting announcement could also be a wild card. With confidence soaring and the potential for another strong payroll number the Fed heads could tweak their comments to suggest a quicker end to QE or a faster move to the first rate hike. Many analysts think the Fed is behind the curve and the Fed heads do read the news. This could make them more agreeable to accelerating the time table.

What we should see is a slightly improved statement saying the economy is still recovering modestly and another $10 billion cut in QE. They may say something about ending it at the October meeting since Yellen alluded to that in her last testimony.

The Nonfarm Payrolls on Friday are expected to decline from 288,000 new jobs to 247,000 new jobs. This is just educated speculation since there are 154 million people in the workforce and 4.5 million quit every month and 4.5 million are hired. There is no way to accurately count the number of new workers in the month it happened. They know three months from now because they have the payroll records. Far too much importance is placed on the monthly Nonfarm Payroll guesses.

The ISM Manufacturing index for July will be important because it is a broader look at the health of the manufacturing economy on a national basis. Expectations are for a fractional improvement.

UPS stirred up the market this morning when they reported a -58% decline in profits and they cut their full year outlook. Adjusted earnings were $1.21 per share compared to estimates for $1.24. UPS had to take a charge of $665 million for a transfer of liabilities for Teamster employees to a defined contribution health care plan.

UPS also lowered full year forecasts from $5.05 to $4.90-$5.00 as a result of spending $175 million to improve infrastructure ahead of the holiday season. A late December surge last year had UPS and FDX backlogged and delivering packages several days late after Christmas. UPS is adding 50 new sorting facilities, which will increase capacity by 5% and accelerating implementation of new software that will more effectively route delivery trucks. They are also going to operate on Black Friday, a traditional holiday for UPS employees. Shares fell -4% on the news.

Aetna (AET) fell -3.5% after the insurer reported a rise in medical costs. The benefit from a bunch of new drugs that are conquering existing diseases is being felt by insurers as the cost of these drugs is rising. The Hep C drug Sovaldi marketed by Gilead Sciences (GILD) cures Hep C in 97% of patients and prevents the need for liver transplants and patient deaths but it costs $84,000 for a 12 week course of treatment. More than 80,000 patients have been treated but the CDC said there are 2.7 million people in the U.S. with the disease. The World Health Organization said there are 130 million people around the world with the disease. That is a huge market for Gilead but here at home it is a major blow to costs for insurers. WellCare (WCG) reported a hit to earnings due to higher drug costs as well. This is likely to be seen all across the insurance sector.

Twitter (TWTR) reported earnings after the bell of +2 cents compared to estimates for a loss of a penny. Revenue rose to $312 million compared to estimates for $283 million. They raised guidance for the full year from $1.2-1.25 billion to a range of $1.3-$1.33 billion. There revenue per active user rose to $1.02 compared to estimates of 96 cents. The number of monthly active users rose to 271 million, a +24% increase, compared to estimates for 267 million. TWTR shares rallied +29% or +$12 in afterhours.

American Express (AXP) reported earnings of $8.66 that was in line with estimates but revenue of $1.43 billion beat estimates of $1.38 billion. Shares were flat after the report.

Amgen (AMGN) reported earnings after the close that rose +23% to $2.37 that beat estimates by 30 cents. Revenue rose +11% to $5.18 billion compared to estimates of $4.92 billion. The company said it will lay off 12-15% of its workforce and close four sites to reduce expenses. This will reduce its real estate footprint by -23%. They will take a charge of up to $950 million through 2015.

Buffalo Wild Wings (BWLD) reported earnings that rose +43% to $1.25 and beat forecasts by a nickel. Lower chicken prices helped grow operating margins from 7.9% to 9.6%. Revenue rose +20% to $366 million beating estimates of $359.5 million. Same store sales rose +7.7% at company owned stores. BWLD said the World Cup added a full percent to same store sales.

However, the company sees full year earnings growth of 25-30% and Wall Street was expecting 35.8%. This led to a sharp decline of -$18 in afterhours.

The rest of the week is peppered with earnings from some big companies. So far the earnings cycle has been far better than expected with earnings growth of +8.3%. There are still abnormally high revenue misses at 37% but overall it has been a good reporting cycle.

The stream of earnings news after the bell pushed the S&P futures up +2 points. The S&P cash closed at 1,970 in regular trading and close to breaking Monday's low at 1,967. It would be hard to make a reasonable judgment on market direction from the trading activity so far this week. This has been the calm before the storm of economic events. Once we get to the weekend we should have a much better read on direction.

The S&P support is still in the 1950-1960 range and resistance at 1985 and 1990.

The Dow rose to +75 at the open but as the sanction headlines began to hit the wires it began to fade. After the president's speech just after 3:PM the decline accelerated. The rising support from February was broken on Monday and that became resistance today at 17,000. The Dow closed at 16,917 and -133 points off its high for the day.

If the Dow continues lower the next material support is 16,720 and 16,800. The Dow has put in a pattern of lower highs since the 16th.

The four biggest losers were companies that have already reported earnings and are experiencing post earnings depression.

The Nasdaq Composite has failed for three days to return to the resistance high at 4,485 from last Thursday. It is not that tech stocks have really sold off but they are definitely not performing. They are still well above support at 4,344-4,350 so we could see several more days of declines without breaking the trend. The Nasdaq would have to break below 4,344 to turn bearish.

The Russell 2000 was actually the best performer today with a minor gain of +2 points. That is significant because it did not turn negative when the Dow was falling -133 points from its high. This suggests fund managers are not afraid of the small caps and may actually be nibbling at some stocks. However, it is far too small a movement to draw any real conclusions. The Russell declined to 1,132 on Monday and just above the 1,131 low from the 18th. This could have been seen as a double bottom by some investors. I would not jump to that conclusion just yet. We knew there would be some support there but it did not produce a giant rebound. We need to get past the next three days and see if that support holds in the face of some potentially negative economics. However, if those economics were positive this would be a perfect spot for a bounce.

On the flipside the Dow Transports are in a tail spin. The Transports hit a new high of 8,515 on Wednesday and Thursday and then crashed back to 8,218 today. This was the second day of significant declines with a -115 point loss and nearly -300 points since Thursday's high. This is a negative signal since the Transports and Dow tend to move in sync in rallies with the Transports leading to the downside. The 100-day average at 7,895 is support with a round number bump in the road at 8,000.

The Russell 3000, a broad market index of the largest 3,000 stocks in the market tends to revert to its 100-day average about once every three months. It has been 2.5 months since the last test. The index has not been able to move up since the new high on July 3rd. This suggests the breadth of the market is fading and we could see some weakness in August.

I believe the earnings news still has some spark left for the market although the quantity and quality of earnings will decline starting next week. The economics over the next three days are the key for market direction in August. I would continue to be careful about buying the dips because we could see a deeper decline at any time now. I don't think the market is going to crash but probably just consolidate at a lower level in August.

Enter passively, exit aggressively!

Jim Brown

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