The Fed is likely to remove the word patient from its post meeting statement but then try to convince investors that it will remain patient for months to come and there are no rate hikes on the horizon. The Fed will stress its data dependence as that economic data is weakening as each day passes.

Market Statistics

The Fed talked itself into a box with the "considerable period" phrase and then replaced it with the "FOMC can remain patient" phrase. This gave the markets something to key on in the language of the Fed statement rather than the economic reality. On Wednesday the Fed will try to extract itself from the terminology box and stress data dependence but that will only shift the focus to specific data points and create an entirely new set of worries for the Fed.

You may remember they originally said they would not raise rates as long as the unemployment rate remained above 6.5%. When the rate plunged below that level they had to change the guidance because the rate fell for the wrong reason. People were leaving the workforce at an accelerated rate and the falling Labor Force Participation Rate was forcing the unemployment rate lower.

Having endured countless questions and been forced to change three focus points in the statement over the last 18 months they will be trying to craft a new statement that soothes fears about an imminent rate hike but does not contain any specific terminology that could force another statement change in the future. At the same time they want to introduce some volatility into the treasury market and have no written barriers to a rate hike at any point in the future.

This is going to be a challenge for a Fed that has tried to be more than open about its goals and guidance. It will be interesting to see how they say "rate hikes are coming but not any time soon."

The markets were confused over how they should be reacting ahead of Wednesday's statement given the continued economic disappointments. The economic data over the last six weeks has been the worst in terms of missed estimates since 2009. Today was no different. The Dow declined nearly -200 points after the Housing Starts missed estimates by a mile.

New housing starts for February declined from 1,081,000 to 897,000 or a drop of -17%. Single family starts declined -15% from 697,000 to 593,000. That is roughly only two-thirds the normal pace. Of course everyone was quick to blame the winter weather in February. I guess it has never snowed before in February.

Housing starts in the Northeast declined -56%, Midwest -37%, West -18% and South -2.5%. Clearly the weather did impact the Northeast and Midwest but they only provide about 10% of starts in a typical February and 20% of the starts nationwide in June. Yes, the weather had an impact but starts still declined in the West and South where weather was not an issue.

On the bright side overall permits, an indicator of future starts, rose slightly from 1.06 million to 1.092 million. However, it was heavily weighted to multi-family units with a +18.3% jump. Single-family permits declined -6.2% from 661,000 to 620,000.

Analysts are confused given the demand for new homes as to why the builders are not in any hurry to accelerate construction. Some believe the builders were burned so badly in the Great Recession that they are holding back and building at a much slower pace so they can better manage cash flow, raise prices, increase profits and reduce debt. Others believe we are nearing another recessionary cycle after a six-year expansion. The builders don't want to end up with a lot of inventory if the economy pulls back again. With more than 90% of the economic reports over the last six-weeks either declining or missing estimates there is a decent risk that we could see some weakness ahead.

Housing completions declined sharply at -13% from 986,000 to 850,000. With the pace of starts and permits declining along with completions we can bet that housing prices are going higher. Coupled with the difficulty of normal people getting a home loan this may be only what the rate of home builders can bear. Anecdotal reports claim more than 50% of new home purchasers are declined for their loans. That is a serious headwind for builders and the pace of building is reflecting that problem.

The State and Regional Employment report for January showed that jobs increased in 39 states, fell in 10 states and was unchanged in North Carolina. California, Michigan and Ohio had the largest increases and 24 states reported lower unemployment. This covered the January period and was ignored.

The big event on the calendar for Wednesday is of course the FOMC announcement and probably more important is the Yellen press conference. She will have to explain whatever new language they put in the FOMC statement. Analysts will be trying to determine what the next key phrase is going to be.

The FedEx earnings will also be watched closely for signs of economic weakness and lower shipments.

Another pothole for the week could be the Greek debt payment due on Friday. Greece can't access any additional funds from the 240 billion euro bailout program until certain conditions are met and that is not going to happen in the near future. The government is grabbing cash from every source possible including trying to plunder private retirement accounts held at the Bank of Greece. They are also transferring 556 million euros from a bank recapitulation fund to the state coffers. Unfortunately there is no plan B or for that matter no plan A either. The original plan was not to pay or get the Troika to postpone the debt payments. Greece is going to try and auction $1 billion euros in short term notes on Wednesday. With Greece about to default on the Troika payments the auction may not go well. Currently the yield on the 2yr notes is 20.22%. There are frantic phone calls in progress and there is an EU summit on Thursday to discuss Greek finances.

In a survey of economists 41% believe Greece will eventually leave the eurozone within 3 years. Another 25% believe Greece will remain in the EU but will be forced to implement capital controls to prevent capital from leaving Greece. The Grexit problem is not as bad as it would have been three years ago because eurozone banks no longer hold a lot of Greek debt. Recent comments from Greek officials include "The EU finance ministers know we can never repay our debt" and "The EU got themselves into this mess because they knew Greece was bankrupt." Those are odd comments from a country that is still dependent on future handouts from those ministers. It would not encourage me as a finance minister to give them billions in additional loans.

In stock news Alibaba (BABA) received an upgrade from hold to buy from Stifel Nicholas with a price target of $99. This is unusual timing given the lockup expiration of 437 million shares on Wednesday, which is more than the 330 million currently available to trade. Just over 100 million of those belong to employees and will still have some trading restrictions until after the company reports earnings in May. The analyst said negative concerns are overblown and the company has an 80% market share in China with a relatively low PE of 25.

Short interest in BABA shares has risen to 57 million as of February 27th. Put option volume dominates the option volume on BABA as investors protect their positions and speculators bet on a decline. The $80 puts were the most actively traded. However, there is only a 50:50 chance of a BABA decline after the expiration. In the hundreds of lockup expirations since 2000 it turned into a coin toss for direction. The lockups are so well publicized that the bad news is already priced in for many of the lockups. I also believe that most BABA investors believe the stock is going higher so the rush to sell may be over hyped. However, the expiration of another 1.2 billion shares in September is going to be a problem.

GM shares declined on Tuesday one day after announcing a $5 billion buyback program and raising their dividend. News broke that 4,342 families had filed claims associated with the faulty ignition switch problem. So far there have been 475 death claims, 289 disastrous injury claims and 3,578 less serious injuries that required hospitalization. So far GM has only approved 67 death claims, 11 severe injuries and claims for 102 other injuries. Previously GM had said there were only 67 death claims.

Pushing GM lower were claims by two lawyers that recent proof had surfaced that showed GM tried to cover up the problem switches. If they can prove their case that puts the potential payouts into an entirely new range and they will not be cheap. Just yesterday one family settled a suit for $5 million. GM claims the slow reaction to the problem was just incompetence rather than an attempt to cover it up. The lawyers said the evidence of the cover up will come out when the first class action suit begins in January 2016. Attorneys are in the midst of discovery and exchanging documents. They are currently deposing current and former GM engineers and executives.

Shares only declined -29 cents on the news but analysts are turning cautious on the car company.

Vivint Solar (VSLR) was upgraded to outperform at Credit Suisse with a $22 price target. The stock is currently $12 even after a +12% gain today. The CEO was bullish on Friday saying 2015 was going to be a banner year. When the company reported earnings on March 4th revenue rose +248%. The company's cost per watt has fallen from $4.25 at the beginning of 2014 to $2.96 at the end of December. They expect it to decline to as low as $2.80 in the months ahead.

Facebook (FB) made news today with a blog post saying it is rolling out a payment process as part of the Messenger app. Last year Facebook hired former Paypal president David Marcus to run the Messenger division. Astute investors realized there was probably a payment system in Facebook's future.

Facebook said the Messenger app will allow users to send and receive money from other Facebook users. Marcus wrote in the post, "Excited to start rolling out person-to-person payments in Messenger! It’s an easy, secure, truly frictionless, and almost magical experience that happens in-line with existing conversations where all of your friends and family already are."

To send money on Facebook users will have to add a Visa or MasterCard debit card issued by a U.S. bank to their Facebook account. Once they start a message with a friend they tap a money sign, enter the amount they want to send and tap pay to send the money. Facebook said the card information will be encrypted and stored behind software and hardware firewalls and will be very secure. Users can add a unique PIN number when they add their debit card for an extra level of protection. You can watch a video HERE on how it works.

After the bell Adobe (ADBE) reported adjusted earnings of 44 cents compared to analyst estimates for 39 cents. Revenue of $1.11 billion also beat estimates of $1.09 billion. However, they guided to a range of 41-47 cents for the current quarter and analysts were expecting 48 cents. They generated 517,000 Creative Cloud subscriptions for the quarter and analysts were expecting 573,000. Shares declined -$3 in afterhours to $76.75.

Oracle (ORCL) reported adjusted earnings of 68 cents that was in line with estimates. Revenue of $9.33 billion fell short of estimates at $9.46 billion. They said dollar strength cost them earnings growth. The company said cloud revenues rose +30% to $372 million. The company said it was poised for a significant increase in its cloud business in 2015 and it was growing a lot faster than and they were taking market share from their competitor. They expect to sell more than $1 billion in cloud products in 2015 and surpass Salesforce. They also raised their dividend +25% to 15 cents. Shares traded in a $6 range after the report but settled with only a 60 cent gain at $43.50.

Crude oil declined to $42.50 after the close and a new 6-year low. Today was expiration day for crude options and that could have influenced the regular session trading. There was no news that would have impacted crude prices other than expectations for another large build in inventories with they are reported on Wednesday. The shrinking storage capacity problem continues to make headlines as well as the end of the refiner strike. Crude demand in the U.S. is going to pickup once the refineries finish their maintenance cycle and begin producing summer blend gasoline. Right now we are importing gasoline and distillates from places as far away as Saudi Arabia, South Korea and Brazil. Once refiners return to normal operating status the crude oil inventories will begin to decline. That normally begins in late April and early May as shown in the EIA inventory chart below. The gray area is the five-year average range and the blue line is the current inventory level.


It was another triple digit reversal for the Dow. Over the last nine trading days the Dow has traded in a triple digit range 8 times with four days up and four days down. The ninth day was also down but it was not a triple digit day. The key here is that Q1 earnings estimates are falling and the dollar is rising. As each day passes the earnings estimates become more depressed because of the dollar's impact. The Dow stocks are all international companies and they are the most impacted by the dollar so they are the most volatile.

Of the Dow stocks there is also a group that is at or approaching 52-week lows for various reasons. This is a continued drag on the index. Some of those stocks include PG, IBM, GE, JNJ, VZ, T, CAT, KO, XOM, CVX, MSFT and AXP. It is hard for the Dow to maintain positive momentum when one-third of the index is at or near their 52-week lows. At the same time more than half of the S&P-500 stocks are also in a negative trend.

The S&P also declined sharply at the open but recovered somewhat to close down only -7 points and retain most of Monday's gain. Only 45% of the S&P derive a substantial portion of their revenue from overseas. Resistance at 2080 remained firm and that will be the challenge once the Fed news passes. We still have the same range I mentioned last week between 2040-2080 and until that is broken we are just passing time waiting for the next headline.

The S&P did honor its 100-day average at 2042 when it was tested last week. That average has risen to 2048 at today's close so that is the initial support point on any further declines. If the 2040 level is broken on a future decline the 150-day average, currently 2021, becomes support.

American Airlines (AAL) will be added to the S&P-500 after the market close on Friday. American will replace Allergan (AGN) that is being acquired by Actavis.

The Dow will undergo a significant transformation at Wednesday's close. Apple will replace AT&T (T) and Visa (V) will split its stock 4:1. Visa currently carries the heaviest weighting in the Dow and was responsible for about -30 points of the Dow's decline on Tuesday. After the split it will only carry about a 4% weighting. This will reduce the Dow volatility significantly. The swings on a $265 stocks are much larger than an $85 stock and price movement is what it is all about. After Wednesday's close a $1 move in any Dow stock will be worth about 6.75 Dow points.

Today the Dow declined -192 points just after the open and struggled to move off of those lows even though the Nasdaq turned positive in mid-afternoon. A downgrade on Dupont and the pre-split decline in Visa shares were the biggest drag. The rebound could not quite make it to the resistance at 18,000 on Monday and it could not get back to 17,900 on Tuesday. The 17,800 level was intraday support and the index was barely able to recover 50 points from that level to close at 17,847 and a loss of -128 points.

The international blue chips are simply carrying the weight of the strong dollar on their shoulders. Levels to watch on Wednesday are 17,800 and 18,000 with real support at 17,640 and the lows from last week.

The Nasdaq is coming back to life after the battle at 5000 and the fall from grace all the way back to 4845. The index declined only about -20 points at the open and dip buyers appeared at 11:AM and it gained steadily the rest of the day. With the close just under 4940 the next material resistance is 4950 and then on to 5000.

The biotechs were the leaders once again. Apple shares gained on news of a new streaming TV service and the stock rose +$2.33 but that only garnered it the 25th spot on the Nasdaq gainers list. It was enough to help power the Nasdaq back into the green for the day.

Initial support is 4912 followed by 4845. Resistance 4950 and 5000.

The Russell 2000 small caps also managed a gain to close at 1241.71. That is less than a point below their historic high close at 1242.61. The small caps have very little exposure to the strong dollar and this has become the investment bunker for those investors looking for a place to hide from the currency wars. Assuming the Fed does nothing stupid I would expect the Russell to make a new high at some point this week. We considered a long position in the Russell IWM ETF tonight but passed because of the unknowns about the post Fed market and the potential for a weak market after option expiration.

Typically on Fed announcement days there is a period of volatility after the news and then a minimal move of .3% to .6% depending on the news. It is the day after the Fed statement that we typically see a strong directional move. However, Friday is quadruple witching and that could foul up the historical trends. This is also the end of the quarter and conventional wisdom suggests portfolio managers will be taking profits and setting up their portfolios for the summer doldrums. With the economic news weakening every day this will put even more importance on how the Fed changes their statement and how fund managers setup for the summer months.

If crude oil were to find a bottom here around $40 I am sure a lot of that excess cash would be headed for energy stocks. Most managers I have heard are still scared of energy stocks until that bottom appears.

We are also approaching tax day and traders will be taking funds out of the market to pay their tax bill. Some years experience more selling than others depending on the gains from the prior year. Given the volatility in the market since October there may have been enough losses to offset gains and maybe we won't see any major tax selling in early April.

In an interesting news headline today the Secret Service wants to build a duplicate of the White House about 20 miles away in Beltsville Maryland at a cost of about $8 million. This would be on a 500 acre Secret Service training site and the replica would allow agents to train better to protect the occupants of the real White House. Right now they train on a parking lot where they have marked off the ranges of fences, trees, bushes, fountains, etc. The service said the addition of a more realistic environment would go a long way towards allowing the agents and tactical teams real life training to repel attacks. Recent breaches of the White House grounds suggest agents need additional training.

Enter passively, exit aggressively!

Jim Brown

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