The Dow narrowly avoided five consecutive days of losses that would have been the longest losing streak since March of last year. Friday's +34 point gain was a struggle and were it not for a +26 point spike in the last 20 minutes of trading it would have been a lot closer to negative territory. The spike was due to a +6% gain in Intel at 3:45 which added +13 Dow points and stimulated some late day short covering.

Market Statistics

The Dow was relatively flat with only a 28 point range from noon until 3:35 and was hugging the flat line with about a 5 point gain. News broke that Intel (INTC) may be in talks to acquire Altera (ALTR) and both stocks shot higher along with the entire semiconductor sector. The semiconductor ETF (SMH) rallied +3.2% in the last 15 minutes of trading. The semiconductor ETF spiked because Intel is 17% of the SMH. The semiconductor sector declined -5% for the week despite the +2.8% gain on Friday. Altera rallied +28% and increased its market cap from $10.4 billion to $13 billion in a period of about 15 minutes. Neither company would comment about the rumor. The news at the close on a lackluster Friday helped the Dow avoid that fifth day of losses.

The morning economic reports depressed the markets with the final revision of the Q4-GDP missing estimates at +2.22% growth. This compares to the prior revision at +2.19% but well under the consensus forecast of +2.4% growth and +4.97% in Q3. The current Atlanta Fed forecast for Q1 GDP growth is only +0.2%, which is better than the -2.11% decline in Q4-2013 but still weak.

The consumer was the main driver of the Q4 gains with consumption rising +2.98% compared to +2.21% in Q3. Exports produced a -1.03% drag thanks to the strong dollar, inventories -0.10% and government spending added a -0.35% decline. Fixed investment spending added +0.72%. The Personal Consumption Expenditures index (PCE) showed deflation of -0.4% in Q4 compared to +1.2% inflation in Q3. Corporate profits declined -1.4% after a +3.1% rise in Q3.

The Atlanta Fed GDPNow forecast is dropping fast. As of march 25th it declined to forecast only +0.2% GDP growth in Q1. The consensus analyst forecast is +2.4% so there is still a lot of denial in the analyst community but the consensus is declining. Everyone is blaming the weather for the weak economy but that remains to be seen. Atlanta Fed Link

The regional and state employment report for February showed payrolls increased in 36 states, declined in 13 states and were unchanged in Wyoming. California, New York and Georgia posted the biggest gains and Connecticut, West Virginia and Rhode Island. Washington DC and Nevada had the highest unemployment and Nebraska the lowest. The report was a lagging report for February and was ignored.

The final reading for Consumer sentiment for March rose slightly from the original release of 91.2 to 93.0 but it was still down from the 95.4 in February and 98.1 in January. The present conditions component declined from 106.9 to 105.0 and the expectations component declined from 88.0 to 85.3.

Forty-four percent of survey respondents said their personal finances were better off than in March 2014 with 27% saying they were worse off. More than 49% felt their finances would not change in 2015 but the other 51% thought their incomes would rise later this year.

An indicator I don't mention much is the Weekly Leading Index. The index rose slightly from 131.2 to 131.6 but that is not the key point. The smoothed annual growth rate derived from the index is anticipating a -3.2% economic decline. The growth rate has been in decline for 23 consecutive weeks. However, it has improved from the -4.6% decline rate in the February 27th report. This suggests conditions are beginning to improve but they have a long way to go.

The economic calendar for next week is heavily weighted to Fed speakers. Now that the FOMC meeting is behind them and the quiet period has expired they are free to find a microphone and state their economic outlooks and the chances for a rate hike. For what should be a low volume trading week this produces a minefield of Fedspeak.

The three biggest reports for the week are the ADP Employment, Nonfarm Payrolls and the ISM Manufacturing. The other reports in green are of interest but rarely move the market unless they miss estimates badly.

There is a smattering of earnings but nobody that is likely to move the market if they miss estimates. Their stock will be crushed in the low volume but there should be little collateral damage.

Just before the bell on Friday Janet Yellen spoke in San Francisco and her remarks weighed on the markets in parts and lifted the market in others. Overall there was little impact but there may be a delayed reaction next week. She was still speaking at the close.

I am going to list the high points of the speech in short form rather than type it out.

"I expect that conditions may warrant an increase in the federal funds rate target sometime this year."

"What matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase."

"The return of the federal funds rate to a more normal level is likely to be gradual." And, "There will be no predetermined course of tightening."

"The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation."

She warned the Fed wanted to avoid the fate of central banks in Japan and Sweden that tightened too soon in their recoveries, resulting in disinflation and "appreciable economic costs."

The Fed "does not need to see an increase in core inflation BEFORE hiking rates." That sentence is the one that could have a delayed reaction on Monday. However, she later followed with this. "A significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted." She wants to have it both ways by saying she may or may not raise rates based on inflation.

However, she said the Fed "would be unlikely to raise rates if wage growth and inflation continued to decline."

"The economy is still weak by historical standards." And, "At this level of accommodation the economy should be booming." She was referring to a zero interest rate for more than six years and the lack of a strong rebound as seen in prior recessions.

”Dollar appreciation appears to be restraining net exports, low oil prices are prompting a cutback in drilling activity, and the recovery in residential construction remains subdued."

Progress on meeting our inflation goal is "noticeably absent." The weakness in inflation "likely reflects continuing slack" in labor markets.

The bottom line is that she wanted to make sure the market understood the Fed can now raise rates at any time but they are not obligated to raise rates based on the data. I know that sounds contrary to their supposed "data dependent" stance but it is all about flexibility. The Fed wants to inject some volatility into the bond market so rates will rise, or at least not go down. As long as investors are worried the Fed could raise rates the treasury yields will not go down materially. This is known as "talking up the rates."

The fear of the Fed has caused the biggest exodus of funds from the equity markets since 2009. So far this year $44 billion has flowed out of U.S. stock funds according to Bank of America Merrill Lynch. At the same time European funds have seen inflows of $46.6 billion and Japan $10.5 billion.

The driving force behind these moves is the strong dollar, weak euro and European and Japanese QE. Buy when euro denominated equities are low and the dollar is high. You get more bang for your buck and when the euro finally rallies and your investments will be worth more. At the same time the ECB QE is driving down interest rates into negative territory and that forces new money to flow into equities instead of bonds.

Most analysts believe the rush to European equities is about over. One of the most popular vehicles is the WisdomTree Europe Hedged Equity ETF (HEDJ). The ETF has risen +75% since the low in 2011 with an +18% spike in just the last three months. The herd has stampeded into Europe and now the rally is getting tired.

Investors are also leaving U.S. equities because earnings are crashing. S&P is now predicting a -5.6% decline in earnings for Q1. If that number holds it will be the first earnings decline since Q3-2012. Earnings are expected to decline -4.0% for Q2 and -0.8% for Q3. Since December 31st the estimate for Q1 earnings has fallen -8.2% and the biggest drop since Q1-2009.

Chart from Sam Stoval at S&P Capital IQ

For the full year the estimates are for a minor gain of +1.8% and a revenue decline of -3%. Of all the S&P-500 companies providing guidance for Q1, 84% have been negative.

This is even worse than the 81% in Q1 of 2014 when the Polar Vortex caused GDP to decline more than -2%. It is also well above the five-year average of 68% according to FactSet. Companies are blaming the strong dollar this year rather than the weather.

This potential profit recession or two quarters of declining earnings, with the markets at historical highs, is causing many investors to rethink their investment decisions. I have said many times that eventually fundamentals will matter and there is a good possibility we are approaching that point.

It is not that stocks are specifically overvalued. It is just that a continued price rise with declining earnings will make them overvalued. If a stock is earning $3.50 a year with a price of $50 that would be a PE of roughly 15. If the earnings declined to $2.50 that same PE would require that stock to decline to $37. If the stock did not go down the PE would then be calculated at 20 and would be seen by many as overvalued. With the markets hitting new highs a week ago stock prices were rising while earnings were declining. This means PE ratios were accelerating higher as fundamentals declined. This is a recipe for a correction. According to S&P the PE for the S&P-500 is now 19 and a five-year high.

I am not calling for a correction. I am only pointing out why some investors are raising cash to either seek safety on the sidelines, park it in treasuries or buy overseas equities.

The dip buyers were noticeably absent last week. The Dow lost more than -414 points and there was no material rebound. For any market watcher this should be troubling. The Dow closed just over support and the S&P closed right on the support of the 100-day average. When there is no material rebound after a big plunge it normally means there is more to come. However, with Yellen speaking at the close and Saudi Arabia and others bombing and planning on invading Iran backed Yemen I could see why dip buyers may have wanted to wait until Monday.

Stock news was fairly muted with most companies entering the quiet period ahead of earnings. Dow Chemical (DOW) said it was spinning off its chlorine business and merging it with Olin Corp (OLN), which will result in Dow shareholders owning 50.5% of Olin. The deal is valued at $5 billion. The new entity will have expected revenues of $7 billion. Shares of Olin spiked +14% on the news. DOW shares rallied +3%.

Carnival Corp (CCL) rallied +6% after posting adjusted earnings of 20 cents on revenues of $3.5 billion. Carnival said advance bookings for the rest of 2015 were ahead of the prior year and at higher prices. The company expects revenue to increase 3-4% in 2015 and 6.5-7.5% in Q2 alone. "We are experiencing an ongoing improvement in underlying fundamentals based on our successful initiatives to drive demand. We are also seeing results from our ongoing public relations efforts and creative marketing campaign designed to attract new customers to cruise." Their Super Bowl ad has exceeded 10 billion views to date.

However, unfavorable currency exchange rates reduced full year earnings expectations by $219 million or 28 cents per share. Carnival expects outbound cruise passengers from China to exceed one million for the first time and the company expects to book close to 50% of those passengers. Royal Caribbean (RCL) will get the rest. Carnival and Royal Caribbean are both adding ships and ports in China.

RBC Bearings (ROLL) signed a deal with Dover Corporation (DOV) to acquire the Sargent Aerospace & Defense business for $500 million. The acquisition will be financed with cash and senior notes and will close in Q1-2016. Sargent engineers specialized products for aircraft engines, airframes, rotorcraft, submarines and land vehicles. The company has revenues of $195 million. This is a big deal for RBC because it will add 25-35 cents to RBC earnings in the first year. Shares rolled to a +21% gain.

Shares of BioMarin Pharmaceuticals (BMRN) rallied +11% to $129 after Deutsche Bank said shares could move to $300 over the next year. The analyst said BioMarin had several promising drugs in the pipeline dealing with Hemophilia, muscular dystrophy, Pompe and Batten disease. The analyst said successful drug trials would put BioMarin into the sights of several larger companies that would want to add those drugs to their inventory. The analyst said in a "blue-sky" scenario where all the drugs were successful a merger valuation of $308 to $418 was possible. According to DB, "We believe that not everything in the pipeline needs to be successful to command an M&A premium."

Oxford Industries (OXM), owner of the Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes brands posted earnings of $1.08 compared to estimates for $1.04. Revenue of $274.5 million matched forecasts. Shares spiked +19% because they raised guidance for the current quarter to earnings of $1.15-$1.25 when analysts were expecting only $1.02. Apparently business is booming.

The biotech sector had been under pressure for the last week with sharp declines in all the favorites in the sector. The biotechs declined -4.89% for the week even after the +2% rise on Friday. However, the 50-day average provided support once again and Friday saw significant short covering with the sector rising +2%. That was a perfect entry point for a speculative play. We launched a long position on the BBH in Ultimate Investor at the open on Friday. Whether that play will be a winner remains to be seen since one day does not make a trend.

The Dow transports also declined -4.89% for the week and with oil prices rising the odds are good they will decline some more. The support at 8600 is solid but probably doomed to fail. The slowing economy and rising fuel prices are going to be a serious headwind. The railroads are suddenly suffering from a huge surplus of railcars previously used to transport frac sand, well pipe and coal. You know about the decline in activity in the energy sector but the coal sector is also in a bear market. Arbitrary EPA rules are shutting down a significant number of coal fired electric generation plants and coal shipments are shrinking fast. The only transport sector prospering today is the airlines thanks to reduced capacity and rising prices.

The U.S. package delivery services index is at a six-month low with UPS and FDX leading the decline. Blame this on higher fuel prices and lower off season package shipments. Both carriers warned in January that shipments were down and the strong dollar was a problem.

The transportation sector has long been considered a leading indicator of economic activity. The Bureau of Transportation Statistics in the Dept of Transportation did a study showing over the last three decades a decline in the Dow Transports "led slowdowns in the economy by an average of 4-5 months." LINK HERE

Crude prices rebounded +4.3% for the week but that was after a -5.8% decline on Friday alone. At one point crude prices were up +9% for the week. Friday was profit taking after a strong run. The coalition headed by Saudi Arabia that is bombing and planning on invading Yemen caused a brief spike on worries that rebels would try and attack Saudi oil installations in retaliation or possibly close down the Bab-el-Mandeb strait between the Arabian Peninsula and Djibouti on the Horn of Africa. The name means Gateway of Anguish and 3.82 mbpd of crude oil flows through the 20 mile wide strait headed for the Mediterranean through the Suez Canal. However, cooler heads prevailed and the potential for rebels to actually close the strait is considered very unlikely. The bigger risk is that rebels would try to strike back against Saudi Arabia by attacking their oil facilities. However, those are also heavily guarded and with Saudi Arabia on a war footing I am sure they are even more secure.

Baker Hughes said active rigs declined only -21 last week to 1,048. That is the smallest decline in the last 16 weeks and suggests the worst may be over for the drilling sector. However, the oil majors have all projected active rigs cuts in their capex plans through July so I doubt there will be any rigs added at least until Q3 or even later. It all depends on oil prices and inventories. Currently there are 813 active oil rigs and 233 active gas rigs.

In 2008/2009 the rig count declined 18 consecutive weeks and fell -57% over a 41 week period. The current 16 week decline is the biggest in 30 years.

The U.S. added another 8.2 million barrels to raise inventories to 466.7 million and a new record. That is an increase of 84.2 million barrels or +22% in the last 11 weeks. Cushing Oklahoma, the delivery point for crude futures saw a gain of 1.9 million to 56.3 million barrels and also a new record. That puts Cushing at 80% of capacity and a level that is normally the maximum allowed in order to retain operational capability. Next week's inventory report will be interesting to see if they accepted more oil.


The S&P dropped below its 100-day average on Thursday and Friday but returned both days to close right on that support level. However, the lack of any material rebound on Friday suggests the average will fail and we could retest the 2040 support from mid March. The 150-day average is now 2028 and would be decent support if that 2040 level cracks. The worst case scenario would be a decline to the 1985 level and support from January. This would represent a significant breakdown from the March highs and a -6.2% decline from the 2117 high.

We have not had a 10% decline since 2011 and 3-5% declines have been common. While last week's decline may have seemed harsh we only declined -2.2% from the 2108 close on the prior Friday. That is only a minor dip in the overall market picture. As long as you are using stop losses and raising them on every move higher that is an acceptable loss. For the prior several weeks I warned repeatedly that the week after option expiration in March was typically negative. History did repeat itself and the average decline of -1.6% was only slightly exceeded.

At this point we should be very focused on the 2050-2040 level as an indicator of a larger decline in progress. In the current environment there is a good chance 2040 will be tested. That would be a speculative buy on any rebound from that level. Any further decline would be a shorting opportunity with a target of 1985-2000.

Apple (AAPL) appears to have fallen victim to the Dow curse. Tech stocks added to the Dow tend to decline over the next several weeks and Apple is on the verge of a two-month low. Apple ignored Friday's tech rally to give back another buck to close at $123.24. The natural target is the 100-day average at $117.

The Dow dipped to the March lows on Thursday but recovered to close above the 17,620 level from mid March. Friday's low was 17,630 so that support is still in play. The lack of any meaningful rebound on Friday suggests there may be more weakness ahead. If that level breaks I would expect to see support from January at 17,130 tested. This is not a bullish chart with a lower high and lower low even though the low was only intraday. The 100-day average has failed but the Dow is not normally reactive to averages.

The Nasdaq Composite is the only slightly bullish chart in the big cap group. The Nasdaq dipped to support at 4850 and immediately rebounded. This is a much higher level of support than the Dow and S&P are currently testing. You can thank the biotech sector for the rebound. As long as that 4850 level holds the other major averages should not decline much further. If the Nasdaq cracks I would expect downward acceleration on the Dow and S&P.

It was amazing to see the Nasdaq post a gain of +27 points on Friday with the number of big caps like Google in the losers list below.

The Russell 2000 imploded on Wednesday but recovered somewhat on Friday. The 1250 level is now resistance and 1230 is support. The small caps should continue to show relative strength as long as the dollar remains strong. If we see the Russell start to crumble we should head to the exits because the underlying story has changed.

Ok, the week after expiration is over and the next two days are the end of the month and quarter. Fund managers may have some extra cash to put back into the market but the key question is will they do it? With earnings plunging and declining economic strength the fundamentals don't support a bullish scenario. While that has not stopped many bull markets in the past the fundamentals will eventually matter. Once the herd turns bearish it could take a long time to resurrect the rally.

The percentage of stocks trading under their 200-day average has declined to 66.2% and on the verge of a two month low. This is important because it means market breadth is declining. The market was rising on fewer and fewer stocks and we may be quickly running out of leaders.

I would continue to be cautious this low volume, holiday shortened week. Wait for a clear buying opportunity and be conscious of the internals.

Random Thoughts

The Atlanta Fed may be projecting Q1 GDP of +0.2% but blue chip advisors are still in denial but they are starting to trim forecasts. Morgan Stanley cut their estimates from 1.2% to 0.9%. Barclays dropped their forecast from 1.3% to 1.2%. Macroeconomic Advisers cut their estimate from 1.5% to 1.2%. Goldman cut their forecast from 2.0% to 1.8%. JP Morgan whacked their estimates from 2.0% to 1.5% saying a decline in investment by oil companies could offset the benefits of higher consumer spending. (I said that nearly two months ago.)

Core business spending in this chart from the Fed is at the lowest point since March 2014 and is accelerating to the downside.

I didn't get the memo! Standard Chartered Plc analyst Paul Horsnell is predicting oil prices will rise to $90 a barrel in Q4. Bank of America analyst Francisco Blanch is predicting $58. Six months ago they were only $1 apart.

Energy analysts only have one thing in common today and that is confusion. Almost everyone failed to predict the decline in crude prices that began last July and now they are scrambling around trying to feed off each other's research to try and get the next call right.

Horsnell believes production is declining faster than everyone expects and will push prices higher once demand exceeds production. Unfortunately, I think Horsnell was smoking something funny when he made that prediction. U.S. production is still setting 35 year records every week but I do expect it to decline by the end of December. I just don' think it will decline that much. We could see a 350-500,000 bpd decline because shale wells deplete very rapidly. Producers will drill about 4,500 fewer wells in Q2 after a -3,000+ well drop in Q1. However, there are well over 1,000 wells that have been drilled but not fracked and will not be completed until prices rise. There are several offshore fields with major projects that will come online later this year with the potential for 100,000-150,000 bpd in new production.

Long term as in 12-18 months this will reduce U.S. production but we are only part of the problem. Every country on earth that produces oil is currently trying to maximize production in order to offset the lower prices. That is not going to stop. If Iran agrees to a nuclear deal there is widespread belief that they will immediately begin producing more oil even if the sanctions don't allow it. They will basically dare the U.S. to interfere.

Libya is going to get its rebel problem under control and they have 1.0 mbpd offline and ready to go to market once a truce is reached. Venezuela is signing a deal with China to provide $5 billion in capital to expand production. They can increase production very quickly if their government was not in the way. While it probably would not happen in any quantity in 2015 it would definitely appear in 2016.

I just don't see the reason for $90 oil in Q4. Demand would have to increase significantly over the normal 1.0 mbpd per year. Could it expand by 2.0 mbpd in 2015? I doubt it. With 1.5 mbpd of excess production today we are rapidly filling up storage capacity around the world. When that capacity fills up prices are going to go down.

Tax revenues for the first five months of Fiscal 2015 ending in February totaled a record $1,185,613,000,000 but the government still ran a deficit of $386,537,000,000. This is eventually going to kill us economically. Once the Fed begins to raise rates the interest on the national debt is going to rise from the current $300 billion a year to close to $1 trillion. When that happens we will be adding $1 trillion a year to the debt and it will only be a matter of time until the U.S. self destructs.

Some analysts believe the U.S. will soon issue 50 year bonds to refinance all its debt while rates are low. Considering that most of our current debt is in 2, 3, 7, 10 year increments that would be a wise plan. Once rates start higher the interest on those short term treasuries are going to explode higher. Of course the interest on a 50 year bond today would be double the rates the U.S. is currently paying so that would double the annual interest on the debt. While that is short term pain it would be long term gain as rates return to "normal" in the 4.5% range.

John Mauldin had an interesting article on debt this weekend. LINK HERE

Alan Greenspan, Fed Chairman for 19 years, warned last week that the $18.5 trillion in debt and $4 trillion in QE was going to be a disaster. He said the Fed will not be able to end the era of QE without "serious repercussions" and a "significant market event." He is predicting gold will go "measurably higher" as the dollar eventually collapses. Greenspan is saying that the dollar collapse is virtually inevitable at this point and that most Americans will be surprised and unprepared. A quadrupling of cost of living will cause rioting in the streets as people lose access to basic necessities. This will continue until the economy finds its way again.

A paper written by Joseph Sommer at the Federal Reserve specifically indicates that bank deposits are bank liabilities, which are clearly affected by a bankruptcy. Depositors are "loaning" the deposits to the banks and the banks can default on repayment in the event of a bankruptcy. When Cyprus banks had trouble a couple years ago they took customer deposits to bail them out of trouble. In Germany in July 2014 the government passed a "Bail-in Deposit Confiscation Plan." Canada is also putting laws in place to allow the confiscation of deposits to bail out the banking system. Australia, China, Italy, Japan and the UK are all preparing deposit confiscation plans.

Greek depositors have caught on to the potential for bank failures and deposit confiscation.

Bloomberg Chart

If you don't think we are heading into troubling times over the next decade you are not paying attention.

April has been the best performing month for the Dow since 1950. Over the last 20 years the Dow has posted gains 16 times with an average of +0.56%. Granted that is not much and only equates to about 90 points. The first trading day of April is the worst "post holiday" session of the year. However, the first two weeks of April are normally bullish with an average gain of +1.22%. The average gain for the first two weeks of the other 11 months is only 0.3%.

April is the end of the "best six months of the year" for the markets and May begins the "worst six months." I just call it the summer doldrums but numerous analysts have built very successful trading strategies around the best/worst six month periods. The "sell in May" strategy has a pretty good record but it is not infallible. With earnings plunging I would say we could have a head start on that worst six month period.

Since 2000 the cost of a 50 inch plasma TV has fallen from $20,000 to $550. No inflation there!

The S&P 500 has not had back-to-back gains since Feb 13-17. That's 28 straight days and the longest such streak in over 20 years. This has only happened twice since World War II. Hat tip to Eddy Elfenbein.

Since the Affordable Care Act was passed, 48 rural hospital hospitals have closed. Officials cite "declining federal reimbursements for hospitals" under the act as the principal reason for the recent closures. The law reduced payments to hospitals for uninsured patients but the hospitals still have to accept anyone that shows up for treatment.

The Fox broadcast network announced plans to bring back the X-Files with the original cast and series creator Chris Carter for a six show run with production starting later this year. The show was a cult favorite with a 9 year run that ended 13 years ago. The show won 16 Emmy Awards, five Golden Globes and a Peabody Award. David Duchovny is now 54 and Gillian Anderson is 46. The truth is out there!


Enter passively and exit aggressively!

Jim Brown

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"The usual bull market successfully weathers a number of tests until it is considered invulnerable, whereupon it is ripe for a bust."

George Soros