Positive earnings from Google and others were overshadowed by economic concerns and a plunge in the price of oil of more than 12% over the last two days.

Market Statistics

I have been telling readers this would happen once oil prices got past the Russian headline spam from last week. The multiple vague comments about production cuts and meetings with OPEC spiked crude to $34.40 last week. Over the weekend, repeated denials of any potential deal or even any talks killed that headline spike. Russia tried it again this week when Russia's energy minister and Venezuela's oil minister met to "discuss production cuts" but the headlines produced by the meeting failed to lift oil prices. They tried to create a photo op and headline but it had no impact. That suggests further headlines will have no impact and fade quickly.

The American Petroleum Institute (API) said after the close that U.S. crude inventories rose +3.8 million barrels to a new record high. Gasoline inventories rose 6.6 million barrels. This pushed crude prices even lower in afterhours trading to $29.40. The EIA inventories due out on Wednesday morning are generally accepted as more accurate and they showed an 8.4 million barrel build last week. Crude prices should remain under pressure for the next 8 weeks until the normal inventory build cycle ends and refiners begin to produce summer blend fuels ahead of the driving season.

Investors see oil prices as a proxy for the health of the global economy. If oil demand is not rising, prices fall and that suggests the global economy is weak. In the current environment, demand growth has slowed at the same time production growth has increased. Dramatically lower oil prices are forcing inflation down around the world and driving central bankers crazy. Everybody just needs to take a step back and look at the historical inventory patterns and realize that prices will rise somewhat when inventories begin to decline in April.

The economic reports did not create any confidence in the market. The ISM-NY fell to a four-month low at 54.6, down from 62.0 in December. The six-month outlook component fell from 70.7 to 63.3 and the lowest reading in six months. The purchase quantity component declined from 50.0 into contraction territory at 46.4. Current revenues declined from 60.0 to 45.8. The only component to gain materially was employment jumping from 42.9 to 56.9.

The last update from the Empire State Manufacturing Survey on January 15th saw the headline number dip to -19.4 and the lowest since the financial crisis. With the ISM-NY now confirming that decline in New York business activity the outlook is weakening. However, companies would not be adding employees if they were really concerned.

Auto sales for January came in at an annualized rate of 17.6 million and higher than expected. The December rate was 17.3 million. Considering the blizzard in the Northeast those were very strong numbers for January sales. The blizzard cost dealers a week of sales. Auto sales were flat at 7.4 million but light trucks and SUVs rose from 9.9 to a pace of 10.1 million. These numbers are seasonally adjusted so the real impact may not be seen for several months. Low gasoline prices are really helping the auto sector and people are buying larger vehicles, which helps profitability for the manufacturers.

We will get the first payroll report for January on Wednesday and expectations have declined to 195,000 from 210,000 because of rising weekly jobless claims and the seasonal declines in January. Estimates for the Nonfarm payroll number for Friday have declined from 220,000 to 190,000.

The ISM Nonmanufacturing Index on Wednesday declined slightly to 55.1 after the ISM Manufacturing report on Monday came in at 48.2 and the fourth consecutive month in contraction.

The closer we get to Friday the more likely we will see a decline in the Chinese markets ahead of their weeklong holiday next week. Investors would have to have a cast iron stomach to hold long positions over a weeklong holiday.

Alphabet (Google) posted strong earnings on Monday and shares spiked to $810 overnight and again early this morning, for a gain of $40. That gain faded as the day progressed and GOOGL closed today with only 10 points remaining of that initial $40. That was not enough to rescue the Nasdaq from a -103 point loss.

Earnings this morning did not help the market. Exxon (XOM) reported a 58% decline in profits and said it was slashing capex spending by 25%. Exxon reported earnings of 67 cents on revenue of $59.81 billion. That beat estimates for 63 cents but was way down from the $1.32 and $87.28 billion in the year ago quarter. Full year profits declined from $32.5 billion in 2014 to $16.2 billion in 2015. Production rose +3.2% with liquids up +11% to 2.33 mbpd. Exxon reduced capex -19% in 2015 to $31.1 billion and said they would cut another 25% to $23.2 billion in 2016. Exxon bought back 48 million shares of stock at a cost of $4 billion and paid $15.1 billion in dividends. Shares declined -$1.70 on the news.

Exxon's -$1.70 decline did not have an appreciable impact on the Dow but fellow component Chevron (CVX) fell more than $4 on the drop in oil and Exxon earnings news. Investors are afraid that Chevron will not be able to continue its 5.3% dividend if oil prices continue lower. The Chevron decline cost the Dow about 30 points.

BP Plc (BP) reported earnings that fell -91% to $196 million, down from $2.2 billion. The oil giant announced 7,000 planned layoffs. The CEO tried to assure investors that the dividend was secure as a result of the planned cuts in employment and capital expenditures. Shares fell -8.5% so apparently it did not work.

Royal Caribbean Cruises (RCL) reported earnings of 94 cents that beat estimates for 92 cents. Revenue of $1.9 billion missed estimates for $1.95 billion. The company provided weak guidance for Q1 of 30 cents compared to estimates for 46 cents. Full year forecasts of $5.90-$6.10 missed analyst estimates for $6.25. Despite the falling fuel costs, the cruise lines are now dealing with the Zika virus and cancellations for southern cruises. They also expect revenues to suffer a -14% decline from the strong dollar. Shares of RCL fell -15% and were the largest decliner on the S&P-500. Carnival (CCL) shares were down -8%.

UPS (UPS) reported adjusted earnings of $1.57 that beat estimates of $1.41. Revenue of $16.05 billion missed estimates for $16.27 billion. UPS delivered 1.3 billion packages in Q4, a 2% increase over 2014. They hired 95,000 seasonal workers but because of increased automation, they were able to delay some of the hiring until it was needed. The company guided to full year earnings of $5.70-$5.90 and analysts were expecting $5.72. Shares closed with a minor gain and $1.50 off their highs.

After the bell, Gilead Sciences (GILD) reported earnings of $3.32 compared to estimates for $3.00. Revenue of $8.51 billion easily beat estimates for $8.14 billion. Hep-C revenue of $4.9 billion also beat estimates for $4.45 billion. The company announced a 43-cent dividend for Q1 and increased it by 4 cents to 47 cents for Q2. They also announced another $12 billion stock buyback program in addition to the existing $15 billion authorization with $8 billion remaining to be spent. With a market cap of $119 billion, they are going to buy back roughly 20% of their stock. Gilead plans to spend $5 billion over the next three months in an accelerated buyback given the low price of their stock. Shares rose $1 in afterhours.

It is puzzling to me why Gilead shares are not moving higher. Record earnings, record cash, dividend increases and monster stock buybacks are not helping. The only excuse I can come up with is the worry over a new president clamping down on high drug prices. Gilead would be a prime target with their $90,000 Hep-C drugs.

Yahoo (YHOO) reported earnings of 13 cents that matched estimates. Revenue of $1.27 billion beat estimates for $1.19 billion. However, the company remains under pressure from shareholders to do something to improve value. The company said it was considering a reverse spin off to separate the core business from the Alibaba holdings. They are going to lay off 15% of the work force and close five offices in an effort to cut $400 million in expenses by the end of 2016. They are also considering selling off some noncore assets in a move they believe would generate $1 billion or more in cash. Shares declined slightly in afterhours.

Chipotle Mexican Grill (CMG) reported earnings of $2.17 compared to estimates for $1.85. Revenue of $997.5 million missed estimates for $1.003 billion. The decline in sales from the E.coli outbreak has been painful. Same store sales declined -14.6% and net income fell -44% to $67.9 million. The CDC ended its E.coli investigation on Monday but now the company has a bigger problem.

The U.S. Attorney's office in California served them a subpoena that broadened the scope of a previously announced criminal investigation. The original investigation focused on only one store in Simi Valley, California. The expanded investigation is now national in scope. Chipotle said it was cooperating with the investigation. Shares declined -$35 in afterhours.

Apple researcher, 9to5 Mac, said Apple could be planning on releasing a new iPhone at a March 15th event. They also expect a new iPad and new Apple Watch band options. The firm expects an upgraded 4-inch iPhone 5SE and iPad Air 3. Apple needs the smaller, cheaper iPhone to compete with the cheaper Android models in China and India.

Dow Jones is reporting that Amazon is planning on opening 300-400 brick and mortar bookstores. This came from mall operator General Growth Properties CEO Sandeep Mathrani on an earnings call with analysts. Amazon opened its first store in Seattle in November calling it a "physical extension of Amazon.com." The books and products sold at the stores are supposed to be the same price as buying online at Amazon.com. The key here is that people like to browse books and you can bet that there will be plenty of Kindles, Fire tablets and other Amazon electronics and products other than books.


The major indexes gave back nearly all their gains from the Friday market spike and the only real culprit was the drop in oil prices. There is murmuring about the health of the financial sector both here and abroad and the talk of a global recession or deflationary cycle will not go away. Oil prices are contributing to that problem by making significant impact to foreign economies.

In Russia 25% of their GDP comes from the energy sector. In Saudi Arabia 90% of their revenue comes from oil. Venezuela is circling the drain and would already be bankrupt if it were not for the daily influx of petrodollars.

In Europe, the banks are crashing because of their exposure to energy and mining plus the negative interest rates charged by the ECB. One analyst claimed today that several of the major European banks could be going to zero because of their exposure to commodity businesses. For example, Glencore, a major European mining company has more than $20 billion in debt outstanding and much of it was syndicated to European banks. There are rumors that Glencore could file bankruptcy.

In the U.S. Goldman Sachs (GS) declined -$8 today to knock about 56 points off the Dow. The bank has exposure to commodities and to energy loans but they are far from life threatening. Goldman closed at a two-year low.

According to some analysts, the problem is interbank liabilities and derivatives. How much would the collapse of Deutsche Bank (DB), Credit Suisse (CS) or the Royal Bank of Scotland (RBS), just to mention a few, impact the rest of the banking system in Europe. Is there a Lehman moment somewhere in the near future? How much would a European banking crisis impact the USA? Nobody has the answers to these questions and the indecision is causing market unrest.

In the U.S., the yield on the ten-year treasury closed at 1.84% and some analysts believe it is going to 1.5% later this year. That was the low back in 2012. Everybody appears to be rushing to the safety of treasuries in a period of uncertainty.

Earnings for Q4 are down -5.8% as of Friday with revenues down -3.5%. If the quarter finishes as expected this will be the third consecutive quarter of earnings declines and that rarely happens outside a recession. The last time was in 2009.

This is weighing on the markets along with falling commodity prices. The Baltic Dry Index hit another record low today and that means very few companies are shipping anything from country to country.

The U.S. GDP came in at a miniscule 0.7% growth in Q4 and the manufacturing sector is in a recession. There are lots of problems worrying the market and yet analysts keep projecting higher S&P prices by the end of 2016.

Where is that rally going to start? The S&P recoiled violently from resistance at 1,950 on Monday. The high was 1,947 and there was an immediate 10-point drop when that was reached. The index declined to support at 1,900 today and back into correction territory.

Quite a few analysts believe we are going to retest the lows before we begin a real rally into midyear. They are mixed on whether that means the 1,867 lows from August or the 1,812 lows from January. At this point, the S&P is only 36 points above the August lows so that would be the initial target. What happens then is the $64 question.

Initial support is now 1,878 and a break of that level could see the selling accelerate.

The Dow touched resistance at 16,500 on Monday and the selling there was instant as well with a -70 point drop from that level. The Dow has decent support at 16,025, 15,855 and 15,700. Fortunately, most of the Dow stocks have already reported earnings so there will be little headline risk. However, the decline in the financials and energy stocks are sharp enough that we do not need any additional risk to push it lower.

The tech sector is still being dragged lower by the biotechs. The Biotech Index ($BTK) declined another -4.3% today to 2,775. There is potential for a pause at 2,700 but the real target is 2,300 because of the political attacks on drug prices. The BTK is now down -38% from its highs and deeply into a bear market.

The biotechs are dragging the Nasdaq and the Russell into a bear market with them. The Nasdaq Composite is down -13.5% from its highs and could easily retest the August low at 4,292 without any significant event to rescue it from disaster. The major Nasdaq stocks have all reported earnings and are in decline.

The Russell 2000 gave back -2.3% today to close at 1,009 with support at 1,000. With biotechs and energy stocks dragging the index lower the odds are good it will move below that support and possibly retest the January low at 954 if we have another $25 print on oil prices. With crude at $29.45 as I type this that is a very good possibility we will see $25.

The last problem weighing on the market is the emergence of the Zika virus. The virus was first discovered in 1947 and is reported to cause brain damage in unborn infants if the mother contracts the virus while she is pregnant. It is thought to cause Microcephaly where the baby is born with a shrunken head and much smaller brain. More than 4,000 cases of Microcephaly have been reported in Brazil and blamed on the virus. This is causing airline passengers to cancel trips. Summer vacations to southern states and the Caribbean are already being cancelled as well as cruises in southern waters. The U.S. economy is already weak enough and it does not need another crisis but we do not get to chose when it is convenient for a crisis to appear.

S&P futures are down -10 as I write this. If nothing changes, Wednesday could be another down day. Asian indexes opened significantly lower and that is probably one of the factors in our futures decline.

Enter passively, exit aggressively!

Jim Brown

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