The markets rolled over hard and some analysts blamed economic reports for being stronger than expected. In theory this put the Fed back in the headlines. However, the futures were already down well before the reports so they were probably just a convenient excuse for low information investors.

Market Statistics

Fed vice chair Stanley Fischer spoke on Monday and basically said the Fed is going to raise rates. You can expect some "spillover" in the global markets and the Fed is not the central bank for the world. That means the Fed is not going to delay raising rates just because some emerging market economies may decline when they do. The spillover means equity and treasury markets are going to react negatively. Lastly, anyone that does not already know the Fed is going to raise rates has not been paying attention.

Fischer did change his comments slightly from prior speeches. His terminology changed from "the Fed is going to raise rates this year" to "the Fed is going to raise rates based on the data." While that could be seen as a softening of his view Janet Yellen said last week the Fed is going to raise rates this year but she did add the data dependent qualifier.

The market sold off late Friday afternoon. Fischer spoke on Monday. The S&P futures were down -4.50 at 8:PM on Monday. The economic reports came out this morning and a minor rebound in the futures was erased. I guess you could blame both events equally.

The first economic report of the morning was the Durable Goods for April. The headline number declined -0.5% and that was just slightly below consensus of -0.4%. That was still much worse than the +5.1% rise in February that was driven by civilian aircraft orders. The internals were better. Excluding transportation, orders rose +0.5%. Nondefense capital goods ex-aircraft rose +1.0%. Shipments of nondefense capital goods rose +1.6%.

Total backorders were flat at zero and excluding transportation goods down -0.2%. Nondefense capital goods backorders rose +1.6%. Transportation orders fell -2.5% and are now -5.8% below year ago levels with the majority of that decline in civilian aircraft orders.

Calling the durable goods orders positive would be a stretch but analysts were happy that it was not worse. What does that say for us when a "less bad" report generates good feelings?

New home sales for April rose +6.8% to an annualized rate of 517,000 up from 484,000 in March. Analysts were claiming consumers came out of hibernation once the snow melted and they bought homes. Sales in the Midwest rose +36.8% and South +5.8%. Sales in the Northeast declined -5.6% and the West fell -2.3%. Home prices rose +5.3% to an average of $296,500.

I don't understand why analysts were so excited about the April rebound to 517K and talking about the end of winter rebound. February, right in the middle of the severe winter weather saw a sales pace of 538,000. April failed to return to the February levels.

I have my own theory on this. I believe February sales were lifted by consumers applying their yearend bonuses as down payments. They got a big chunk of money and they had it earmarked for a new home. The spike in April could be for the same reason only the money came from tax refunds to help with the down payment. There was probably a better weather factor in April as well. I just don't see a one month bounce in new home sales as being a green shoot showing the economy is rebounding. Let it continue for several months and then I will be convinced.

The Richmond Fed Manufacturing Survey for May rose from -3.0 to +1.0. While it was the first number above zero in four months we can hardly call it a robust rebound. New orders improved from -6 to +2 for the first reading in positive territory in four months. Backorders declined even further into contraction from -8 to -10. That was the seventh consecutive month in contraction.

The employment component declined from +7 to +3 while the average workweek component rose from +4 to +6.

About all we can say for the report is that it was positive and just barely positive. After four months in the tank a reading of +1 is hardly cheerleader material.

The separate services survey rose from 2 to 13 and a three month high. The employment index rose from 9 to 11 and the six-month outlook rose from 18 to 20. Clearly the services sector is rebounding now that warmer weather is here. Services typically see more activity in the spring and summer months when outdoor activities are being held. In the winter months services decline because the activities are limited to indoors.

In the chart below you can see the highly random nature of the Richmond manufacturing survey. There is no trend either up or down and nothing to get excited about on a single month's improvement.

The Texas Manufacturing Outlook Survey for May declined from -16.0 to -20.8 and the fifth consecutive month in contraction. This was also the lowest level since the financial crisis. The production component declined from -4.7 to -13.5. New orders declined slightly from -14.0 to -14.1. Backorders improved slightly from -15.1 to -10.6 but that is still the sixth month in contraction. The average workweek fell from -5.0 to -11.6 and employment declined from +1.8 to -8.2.

There was nothing positive about the Texas report. The continued decline is directly related to the decline in the energy sector so despite the seriously negative numbers there is a qualification. It is not the entire manufacturing sector but simply everything related to energy. It is still bad news for employment in Texas.

Consumer confidence for May improved slightly from the initial reading with a rise from 95.2 to 95.4. Analysts were just glad it did not fall back into the 94s from the prior month. The present conditions component rose from 105.1 to 108.1 and the expectations component declined from 87.1 to 86.9. This revision was ignored.

Personally I don't believe the markets declined on worries over the Fed. The economic reports were too weak to give the Fed any reason to accelerate their rate hike decision. The market decline was more likely due to the weak data rather than the sudden appearance of economic green shoots. The data was mediocre at best.

Contradicting that view was the spike in the dollar to five week highs. Why the dollar spiked so strongly on bad data is a mystery. However, there are a growing number of geopolitical issues that could be giving it a boost. A deal in Greece seems to be slipping away and Greece can't pay the IMF the 16 billion euros due in June. A default is imminent.

Britain is about to vote on leaving the eurozone. While the impact of that vote is unclear it would be a monumental change in the EU.

President Obama and NATO appear to be stepping up warnings over Russia's activities and sabers are starting to rattle.

Yields on the ten-year closed at a two-week low at 2.137% indicating treasuries are being bought. Investor don't buy bonds on good economic news so this is a market tell that suggests those cheerleaders claiming the economic numbers were better than expected should read the reports again.

There is nothing material on the economic calendar for Wednesday. The pending home sales on Thursday should be positive since new home sales rebounded. The big event is on Friday with the GDP revision. The current consensus is for a -0.9% contraction compared to the initial estimate with a +0.25% gain. The Q2 GDPNow forecast from the Atlanta Fed rose one tenth of a point to +0.8% growth. That is hardly an excuse for the Fed to raise rates in the near future.

If the Q1 revision comes in a -0.9% as expected and the Q2 closes at todays +0.8% growth then the first half of the year would have contracted -0.1%. If that ends up being the case then the Fed will be well into 2016 before they hike rates. This makes Friday's revision a critical number.

Stock news was pretty muted today with the Charter (CHTR), Time Warner Cable (TWC) deal the main topic of conversation. Charter agreed to pay $195.71 or roughly $55 billion for Time Warner. The price rose after a last minute attempt to steal TWC by French billionaire Patrick Drahi and Altice SA.

Another Charter acquisition, Bright House Networks, which it is acquiring for $10.4 billion, will be merged into the combined entity.

Previously Charter's $132.50 bid in 2014 was rejected as a "low ball offer" and Comcast jumped in with a higher offer. The regulators would not approve the Comcast/Time Warner deal and that gave Charter a second chance. Including the assumed debt the Time Warner deal is valued at roughly $78.7 billion. Charter will nearly quadruple the number of its subscribers to 17 million. That compares to Comcast at 22 million.

Time Warner shareholders will have two options. They can accept $100 in cash and 0.5409 Charter shares or they can accept $115 in cash and 0.4562 in Charter shares. The deal is expected to close in the fourth quarter and the FCC is not expected to protest. There is a $2 billion breakup fee. Liberty Broadband Corp, headed by John Malone will buy $5 billion in new Charter shares to help fund the deal.

Altice could benefit from acquiring any customers and assets that regulators will require Charter/Time Warner to offload in order to get the deal done. Drahi said he plans to increase his U.S. footprint by acquiring a lot of the smaller operators. Altice has said it is aiming to generate 50% of its revenue from the USA.

The Shack was whacked. Shake Shack (SHAK) was knocked for a -8% loss thanks to the weak market and serious profit taking after a huge run. Late last week there was chatter that a single Shake Shack restaurant was worth about $50 million because of the volume of business and the cult following. Shares rocketed higher but saner minds returned on Tuesday to take profits.

Party City (PRTY) reached the point after its IPO where brokers can finally put ratings on the stock. It was a feeding frenzy. Bank of America and Deutsche Bank initiated with a buy rating. JP Morgan and Morgan Stanley initiated with an overweight rating. Credit Suisse started with an outperform. The party pooper was Goldman Sachs with a neutral rating.

Morgan Stanley said it was time to buy and they put on a $25 target. They expect significant upside in earnings as it adds to its manufacturing base. Party City is adding to its self produced items to lower costs. Goldman disagreed. Goldman said all the positive factors are already priced into the stock and it is already trading at a higher multiple than its peers.

Shares declined slightly on the news.

Workday (WDAY) reported a loss of 2 cents compared to estimates for a -8 cent loss and a -13 cent loss in the year ago quarter. Revenues rose +57% to $251 million. Analysts were expecting $245 million. The company guided to Q2 revenue of $270-$274 million and analysts were expecting $272.3 million. Shares declined $5 in afterhours.

TiVo (TIVO) reported earnings of 8 cents that beat estimates by a penny. Revenue rose +7.2% to $114.7 million and well over estimates for $81.5 million. Subscribers rose +27% to 5.8 million. The company also said it was going to acquire Poland based Cubiware. The acquisition will allow Tivo to expand into 25 countries. Cubiware provides software for pay-TV operators with customers in Latin America, Europe, the Middle East and Asia. Shares of TIVO spiked in afterhours trading to overcome the -2.5% decline in the regular session.

Apple (AAPL) is said to be considering a 200 billion yen bond offering in Japan. It would be the largest yen-denominated bond issued by a foreign company since a Citigroup sale in 2007. The value of a 200 billion yen offering is about $1.62 billion. Apple is currently shopping about $7 billion in bond offerings to see where they can get the best rates. Apple announced with earnings they were planning a $140 billion stock buyback program, up from $90 billion, through March of 2017. Apple can't bring its cash back from overseas without paying a major tax bill. They can borrow money overseas at ridiculously low rates.

Multiple feature leaks have made the news on the next version of iOS9 and two new iPhones that are expected to be announced in July according to multiple leaks from suppliers. One new feature will be "force touch" where the phone will be able to determine the amount of force in the touch and do different things depending on the amount of force. Apple and Samsung are both rumored to be moving forward the release of their next models.

Apple shares declined -$3 to knock about 23 points off the Dow. Technicians are worried the stock could form a top at the $133 closing high from February. The April closing high was $132.65 and Friday's close was $132.57. The say the third time is the charm but in this case does that mean a breakout or a real failure?

First Solar (FSLR) shares fell -7% after RBC Capital Markets cut the stock from sector perform to underperform. They cut the price target from $54 to $34. The analyst said they see flat earnings for 2015-2016 despite the company's guidance for 19% growth in 2015 and 2.5% growth in 2016. RBC expects the company to earn $1.37 compared to consensus estimates for $3.48 and company guidance for a range of $3.50 to $5.00. If RBC is right and actual earnings are less than half what the company is forecasting this would be a major blow for First Solar.

Crude oil dropped -$1.43 to $58 after Iraq said it planned to increase oil shipments by 26% or +800,000 bpd to 3.75 million bpd starting in June. The increase alone is more than Qatar produces. There is some debate on Iraq's ability to actually accomplish this feat. Some claim Iraq's export capacity is capped at 3.1 mbpd and they can't physically ship 3.75 mbpd even if they have it. This could be a stunt ahead of the June 5th OPEC production meeting in order to upgrade their status and give them a bigger seat at the table. In OPEC your standing is directly proportional to your production capability.

If Iraq is able to upgrade its export capability by 800,000 bpd it would be a real blow to crude prices. That would be far in excess of what the U.S. could see in production declines over the next year if drilling did not resume.


Tuesday's decline was a real shocker for some investors that only believe the market will move higher. In reality we are due for at least a minimal dip to give fund managers something to buy before the first half of the year ends in June. With the largest cash allocations since the financial crisis they should be thrilled to see a significant decline.

Today's decline may have been scary on the surface but a -200 point drop on the Dow after two weeks of gains is no big deal. If you remember back a few weeks we were having 200 point moves on the Dow on a frequent basis.

I have written multiple times about the lack of conviction at the highs and the low volume. We did see the volume pick up today to 6.27 billion shares but that is just over the 5.6 billion average for the last couple of weeks. This was not a market crash. It was just profit taking on mediocre volume. There was no conviction on the downside just like there was none on the upside. This was a blip on the radar.

However, real market declines sometimes start with a low volume hiccup. It causes people to rethink their positions and additional selling appears in the days that follow.

In theory the worst case should be a 3-5% dip with the best case a rebound from the 100-day average at 2080 or even higher. We closed at 2104 today.

The S&P struggled at its new high of 2130 for all five days last week with volume shrinking as the week progressed. Today was a reaction to the lack of a breakout. If we fail at resistance long enough the urge to sell begins to infect the bulls. After a day or two of declines they become more energized with all the "bargains" and a rebound appears. Let's hope that is the case this time around.

The Dow began its decline a couple days earlier but did not gain speed until today's dump. The close below 18,100 is slightly troubling but the real downside targets are the 100-day at 17,897 and recent support at 17,800. A dip to either area would not be troubling. A further dip to 18,600 would definitely increase the hysteria but unless that level failed it is just post earnings profit taking. We have been to the 17,800 level four times since early April and the world did not end.

Tech traders may have been whining and clenching their teeth in panic but the -56 point drop in the Nasdaq was barely a blip. Note in the chart that the drop did not even reach the 5000 level and support at 5008 was not even tested. This was a head fake and not a very good one.

Until support around 5000 fails and we start testing the 100-day at 4890 there is nothing to be worried about. The worst case is that we drop back to the levels from early May.

The small cap Russell 2000 is a carbon copy of the other indexes with the same -1% decline. If the Russell had lost significantly more than the other indexes then I would have been worried. A 1% drop is only one-third of the gains since the May 6th lows at 1211.

We did have a serious failure at resistance at 1260 but nothing any worse than the Dow and S&P. The small caps are not telling us anything other than what we see elsewhere.

The Dow Transports ($TRAN) were the biggest losers with a -1.55% drop. The 50-day is crossing over the 200-day in what is called the death cross. (not shown) The picture could not be any worse for the transports chart and we could easily see a retest of 8000 or even lower.

The biggest worry of the broader market is that the transports finally begin to drag the Dow Industrials lower. This deserves careful watching in the days ahead.

Last Tuesday I suggested keeping some cash on hand in case a buying opportunity appeared. This may be it. While I would not rush into the market to add longs at the open on Wednesday I would look for a bottoming process in the days ahead. Any visible sign of a bottom forming could be very fast. If those fund managers begin to throw that excess cash at the dip we could see a sharp rebound. You know the shorts have loaded up on this drop and any sudden rebound could prompt a serious short squeeze.

I remain cautiously long until proven wrong. Translated that means maintain a few long positions but retain some cash and keep your stop losses in place.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now