Mixed results from JPM and WFC and worries over Intel's report after the close caused mixed results in the major indexes. The Dow gained but the Nasdaq declined as the S&P tech sector lost -1.76% for the day.
The market started off with mixed headwinds with JP Morgan (JPM) beating estimates on earnings but retail sales for March coming in lower than expected. Wells Fargo also broke a streak of 18 quarters of positive earnings growth to leave investors with a dose of negative sentiment.
March retail sales rose +0.9% after declining -0.6% in February. This was only slightly less than the consensus for a +1.0% gain. After three months of declines you would have thought investors would be happy with any gain but treasuries soared on the weakness and yields on the ten-year fell back to 1.85% intraday.
The reason for the frustration was 0.5% came from auto sales. Motor vehicles and parts rebounded +2.7% after a -2.1% decline in February. Electronics and appliances declined -0.5%, food and beverages -0.5% and gasoline stations -0.6%. Building materials rose +2.1%, furniture +1.4% and clothing +1.2%. Overall I thought it was a decent report. However, on a year over year basis March sales were only up +1.3% and the weakest growth since October 2009.
The Fed got some good news with the March Producer Price Index rising +0.2% after four months of declines totaling -1.8%. However, much of the March gain was the rise in fuel prices with a +7.2% spike in gasoline prices. Food prices declined -0.8% and in line with declines over the prior two months. It would appear that commodity deflation may be easing with rising oil prices the main driver. However, food commodities are still declining. The Fed may be somewhat encouraged by this report but the positives were very minor.
The NFIB Small Business Survey declined again in March from 98.0 to 95.2. The recent high was 100.4 in December and the March reading was the lowest since June. All 10 sub components declined. Job openings declined. Credit conditions worsened. Earnings trends, sales trends and expansion plans all declined. Those expecting the economy to improve declined from a net of -1% to -7%. Those planning on raising prices declined from 19% to 15% and those planning on raising compensation declined from 17% in December to 13% in March.
Analysts were quick to blame severe winter weather but this is a nationwide survey not simply the Northeast. They also blamed the West Coast port strike but there was no data to support that claim. While we may not be at the point where recession fears come back into play there is a definite lack of growth drivers in the U.S. economy.
Business Inventories for February rose +0.3% and slightly ahead of expectations for a +0.2% rise compared to -0.02% decline in January. Business sales were unchanged after falling -2.3% in January. This was not a bullish report.
The Atlanta Fed GDPNow forecast ticked down slightly to +0.2% growth after the Retail Sales and Business Inventories reports. Consumption growth declined from 2.1% to 1.9% and the Q1 inventory investment increased slightly from -$5 billion to -$2 billion. That means inventory trends improved slightly but are still negative. As you can see in the chart from the Atlanta Fed the blue chip forecasts for Q1 GDP are dropping rapidly but are still well above the Fed's forecast.
The economic calendar for Wednesday is headlined by the Fed Beige Book and the economic conditions in each of the Fed regions. Typically they try to say something positive about each region but the "modest" growth adjective from last month may have worsened in several regions. I am sure there will be some mention of weather as a cause for weakness but more of an excuse than a real cause.
The NAHB Housing Markets Index is expected to increase slightly as April is the start of the spring buying season. Industrial production is expected to have declined even further and this will weigh on GDP estimates.
The most important report for the rest of the week is the Philly Fed Manufacturing Survey on Thursday. We need to see an improvement in that report or analysts will really start slashing their economic forecasts.
This was the first real day of earnings season with JP Morgan (JPM) leading the parade with earnings before the open. Income rose +11% to $1.45 compared to estimates for $1.39. Revenue was in line at $24.1 billion. Trading revenue was $5.67 billion up from $5.20 billion. Credit card revenue rose from $10.5 billion to $10.7 billion. Chase originated $24.7 billion in mortgages, up from $17 billion in Q1-2014. Legal expenses were $687 million for the quarter.
CEO Jamie Dimon complains constantly about excessive government regulation but the bank still earned $5.9 billion for the quarter. While Dimon is correct about some of the excessive regulation he has skillfully managed to maneuver through the labyrinth of regulations to build a profit machine.
Shares rallied $1 on the news.
Wells Fargo (WFC) reported earnings of $1.04 compared to $1.05 in the year ago quarter. Revenue rose from $20.6 billion to $21.3 billion. Analysts were expecting 98 cents and $21.3 billion.
Net profit of $5.8 billion was down -2% from the year ago quarter and marked the first year on year decline since 2008. The community banking division saw profits drop -5% to $3.7 billion as banking fees declined due to competition. Credit loss reserves rose another $617 million this quarter to total $13 billion. Wells Fargo saw staffing costs rise +6% as they elected to pay more for quality employees. WFC shares declined -40 cents in regular trading.
Dow component Johnson & Johnson (JNJ) reported earnings of $1.56 or $4.32 billion, compared to estimates for $1.54. This was down from the $1.64 it earned in the same quarter in 2014. Global drug sales rose +3% despite a -7.2% hit from the strong dollar. The company said continued dollar strength could knock -42 cents off full year earnings. JNJ gets half its revenue from overseas. U.S. drug sales jumped +17% on demand for new drugs for cancer, blood clots and diabetes.
The company lowered full year estimates from $6.12-$6.27 to $6.04-$6.19. JNJ had previously adjusted forecasts for the 42 cents in currency translation. The company earned $5.97 in 2014. Shares of JNJ declined only fractionally.
After the close Intel (INTC) reported earnings of 41 cents that was in line with analyst estimates. Revenue of $12.8 billion missed estimates of $12.9 billion by a small amount. Intel guided for Q2 for revenue of $12.7 to $13.7 billion and below the analyst estimates for $13.5 billion. Intel said sales from PC processors and chips for smartphones, tablets and mobile devices, declined -8% to $7.4 billion. Intel said, "We see no growth environment for PCs long term, but server growth, expansion in mobility and growth in the Internet of Things will drive revenues higher." The company forecasted full year revenue of $55.87 billion with the consensus at $55.65 billion.
Intel provided chips for 46 million tablets in 2014 but they had to provide manufacturers a subsidy to get them to use Intel chips. Intel is hoping Windows 10 will finally provide a PC upgrade path from older Windows operating systems.
Shares of Intel rose about 95 cents in afterhours.
CSX (CSX) reported earnings of 45 cents or $442 million that beat estimates by a penny. That was an improvement from $398 million and 40 cents in the year ago quarter. Revenue was flat at $3.03 billion and freight volumes only increased +1% for the quarter. The majority of the profit gains came from a -39% decline in fuel costs to $270 million. The company authorized a $2 billion stock buyback program and a dividend increase from 16 to 18 cents. Shares rallied +$1.18 to $34.16 in afterhours. The profit beat was a relief after Norfolk Southern (NSC) warned after the close on Monday.
Norfolk Southern (NSC) shares fell -4% on Tuesday after they warned Monday after the close. The railroad now expects to earn $1 per share and analysts were expecting $1.28. Revenue is expected to decline -5% to $2.6 billion. The railroad said weak coal shipments were to blame as coal exports declined. China imports a lot of coal but with their economy falling sharply the amount of coal imports has declined. Most of that now comes from Australia because of cheaper shipping.
Norfolk is also suffering from declining shipments related to the energy sector. Lower volumes of frac sand and well pipe are also reducing the number of shipments. Not to be left out of the crowd the railroad also blamed the winter weather for delays.
Companies on the earnings calendar for Wednesday include Bank America and US Bank plus tech giant Google and NetFlix.
Shares of Alcatel-Lucent (ALU) rallied +13% after news broke that Nokia (NOK) was in late stage talks to buy the company. This would be the combination of the 3rd and 4th largest wireless equipment makers. It is sure to cause regulatory problems. Alcatel has a market cap of about $14 billion. Alcatel is a major supplier to AT&T and Verizon and that would give Nokia an expanded opportunity in the USA. ALU has about 52,000 employees worldwide. Nokia has about 62,000. Nokia shares declined about 34 cents.
The broader market rallied today thanks to JPM/WFC earnings that were not a disaster and the rise in the majority of energy stocks after crude prices rallied to four-month high at resistance just under $54. There was no specific news to power the rise in crude but we are approaching the peak refining months from May through July. Investors are expecting a slowdown in inventory gains and even a decline in inventories once May arrives. This should lift oil prices through the high demand summer driving season.
The S&P Oil Exploration ETF is approaching resistance at $54 and any change in the velocity of inventory gains is likely to produce a breakout. Energy names are severely oversold although quite a few have already seen plenty of investors buy the dip.
The Dow and S&P posted minor gains while the Nasdaq struggled in vain to recover morning losses. The S&P tech sector declined -1.76% but there were no really big losers. Apple declined after it announced the acquisition of camera technology firm LinX for $20 million. The camera maker for mobile devices will quickly see its technology migrate into Apple products. Bernstein also published a research note pointing out five reasons why Apple may be exploring its options on manufacturing a car. Bernstein pointed out that China's auto manufacturing capacity would rise to 26 million vehicles a year in 2016 and Apple could easily contract with a Chinese manufacturer to produce an electric car. Apple has declined -$2 from Monday's high at $128.50. Maybe investors don't want Apple to pour billions into an electric car.
The S&P touched the 2100 level on Friday and Monday but failed at the 2107 high to dip back to 2092 today. After about two-hours of weakness at the open the dip was bought and the index closed at 2096. The 2100 level is still resistance followed by 2110 and 2117. Support is now 2090, 2075 and 2050. The S&P may struggle with that 2100-2110 range, which is downtrend resistance from the February high. With the economy weak and S&P earnings expected to decline as much as -5.9% it may be hard for investors to avoid the urge to use the "Sell in May and go away" strategy. The buying in treasuries this morning suggests there may be some rotation in progress.
The Dow was helped by Chevron, Exxon and Goldman Sachs. Obviously the oil companies were up on the +3% rise in crude prices and Goldman Sachs was up on the positive results from JPM and WFC. Goldman reports on Thursday. As the largest component in the Dow and positive earnings surprise could power the Dow higher.
The Dow continues to struggle with the resistance at 18,100 and downtrend resistance from the February highs. Today did not give us a reason to pick a direction. This was a confusing mess as some stocks rose and some declined and there was no overriding theme.
For instance there were far more big gainers on the Nasdaq than big losers but the breadth of the rank and file stocks was negative. On the Dow, were it not for Exxon, Chevron, Goldman and JP Morgan the Dow would have closed in negative territory. You can't say it was a bullish day when only four stocks kept the Dow in positive territory and well off its +99 intraday high.
Resistance on the Dow is 18,100 and 18,200 with support at 17,900 and 17,850.
The Nasdaq Composite touched 5024 on Monday and declined to 4952 today. That is a pretty big spread with no specific news to power the tech stocks lower. With the Nasdaq leading the charge higher in the prior week this could have been simple profit taking. That psychological resistance at 5000 is strong and we have the makings of a head and shoulders pattern if the index does not blast higher over the next several days. Remember, the market does not need a reason to correct. Sometimes things happen for a reason and sometimes it is just the herd moving in the same direction.
Resistance remains 5000 and 5026 and support is 4950 and 4850.
The Russell is also struggling after spiking to a new intraday high on Monday. The selling began at 11:30 on Monday and continued until 10:30 today. The morning dip was bought but the rebound was lackluster and sellers returned around 12:30 and the index drifted lower for the rest of the day. However, a closing decline of only 0.23 points is hardly a material sell off. We need to watch the index for direction for the rest of the week.
Like the Russell the NYSE Composite is struggling at resistance in an attempt to make a new high. The NYSE has closed right below the 11,110 level for the last three days with the historic high closing resistance at 11,122 on February 24th. This broad market index could be an even better market indicator if it were to suddenly breakout OR breakdown.
Goldman Sachs was widely quoted this morning with a market call on overpriced stocks. Goldman said it was time to sell those "overpriced" stocks in the current market. Analyst David Kostin sees the S&P-500 closing at 2100 at year end. That is only +5 points from the market's close today.
Stocks Goldman recommended shorting include:
CELG, KLAC, JEC, COH, DO, HST, NDAQ, TDC, FLS, ARG, DISCA, KSS, CTL, MOS, NVDA, WU, ORLY, RHT, EQR.
Overpriced stocks Goldman recommended selling to take profits.
FB, YELP, TWTR, LNG, LNKD, FEYE, SCTY, V, PANW, Z.
Stocks Goldman thought had the most upside:
DAL, JNPR, LUV, GM, KORS, NFLX, CF, CI, GT, CHK, VLO, BRCM, UHS.
Link to Goldman tables with price targets.
With Goldman suggesting quite a few stocks in addition to those above are also overpriced it put a cloud over the market. Whether that cloud will lift on Wednesday is of course unknown. The S&P has a current forward PE of 18 and that is fairly valued for almost every institutional investor. When stocks like Under Armour (UA) are selling at a PE of 85 it requires a perfect world for the gains to continue.
I would remain cautious about holding too many long positions this week. On Friday it appeared the market was headed for new highs and Monday's intraday spikes on the NYSE and Russell did make those new highs but the selling was immediate. This suggests investors are nervous about the coming earnings cycle and additional gains could be a challenge.
Enter passively, exit aggressively!
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