Whether the "Sell in May" adage is correct or not, the constant repeating of the phrase in the press creates a negative bias for the month.

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Friday Statistics

There are multiple surveys and research papers proving the "Sell in May and go away" strategy. However, every year we hear a parade of analysts tell us it is not so. Some claim the market decline from April into summer is a self-fulfilling prophecy because the phrase is repeated so often. I agree the constant repetition creates a negative market bias but research proves the validity of the strategy.

The saying originated in the late 1700s and started out as "Sell in May and go away, comeback on St Leger Day." Established in 1776 the St Leger Stakes is the last thoroughbred horserace of the year and the final leg of the English Triple Crown. The idea was that once horseracing season was over everyone could go back to betting on stocks rather than betting on horses. Coincidentally the Leger Stakes coincided with the end of the worst six months of the market.

The real reason the next six months of the year offer pour returns are simple. The weather is nice, the kids and grandkids are out of school and investors would rather be spending time on the golf course, beach, vacations, etc than glued to their computers worried about what the next market swing was going to do to their portfolio. Volume shrinks significantly and the lack of buyers allows prices to slide. Over the summer, parents/investors are always trying to scrape together money for tuition, books, etc for the 50.1 million kids returning to K-12 school. The older those kids are the more they cost. College tuition today is obscene and replicated over the 20.2 million college students in the USA today it represents more than $300 billion a year in tuition/housing/living expenses. That sucks a lot of money out of the equity market. Note in the graphic below that September is the worst performing month of the year. School Facts

In a 2012 research paper by the University of Miami, they found that market gains for the six months starting in May averaged 0.95% compared to the 10.69% gains in the six-month period from November through April. Even more important they analyzed not just the American markets but they researched 37 different markets from 1998 through 2012 to arrive at those average returns.

The Stock Trader's Almanac first published their "Best Six Months Switching Strategy" in 1986. David Aronson, author of "Evidence-Based Technical Analysis," and his colleague Dr. Timothy Masters back-tested the Best Six Months Switching Strategy using their scientific methods from 1987 to April 2006. Using the S&P-500 as their benchmark the best six months produced an annualized return of 16.3% compared to only a 3.9% return for the worst six months. They concluded the strategy was statistically significant and unlike any of the 6,402 other rules they tested for their book. The chart below from the Stock Trader's Almanac shows why this strategy works. The summer months simply do not perform over the long term.

The Almanac produced this graphic showing the difference in the compounded value of $10,000 invested in the Dow in the best and worst six-month periods since 1950. It is pretty convincing.

Before everyone reading this starts running to cash out of everything on Monday there are other things to consider. If you sell your stocks, you will owe taxes. If you are out of the market and a summer rally breaks out you will miss it. There are some years where summer rallies can produce double-digit returns. They are few and far between but they do happen.

While that graphic above showing the monster gains is intriguing, there is one key point. If you had left that $10,000 invested for the entire 12 months your total return would have only been $1,024 less. It only makes sense to cash out if you expect a material decline over the summer rather than just a flat market.

It has long been proven that timing the market is a far worse strategy than time in the market. Long term the markets go up. If you want to avoid significant market declines, the best timing model is something like the 100-week average. As long as the S&P is over the 100-week average you are long and if it drops below you remain flat or short. You can avoid the sudden exits by adding another moving average like the 50-week in the graphic below. As long as the 50 is over the 100, you remain long. If it moves below the 100, as it is about to do now, you remain flat or short. There are dozens of moving average systems covering various time frames but for long-term investors the various crossover systems are the easiest to follow.

The bottom line is that the sell in May strategy is not a hard and fast rule that is guaranteed to make you more money in the long term. It is the product of the market analysis of hundreds of analysts over time simply showing that the majority of gains come in the best six-month period. If you have a taxable account, you should ignore it completely because the tax consequences of selling will wipe out any gains from the strategy. Time in the market is the key to long-term gains.

Art Cashin called the market decline on Thr/Fri the "Icahn Flush." On Thursday, Carl Icahn repeated his concern over a coming market decline in an interview on CNBC along with news he had bailed on his position in Apple. The stock declined sharply on the news on Thr/Fri and the market sank on his warning about a "day of reckoning ahead."

On Friday, Warren Buffett disagreed with Icahn and said he did not see any specific indications that the market was about to crash. That comment was news about the time the shorts began to cover their positions ahead of the weekend.

The Q1 GDP on Thursday was better than expected at +0.5% growth but still very lethargic. The Chicago Purchasing Managers report or ISM Chicago, declined from 53.6 to 50.4. New orders slowed and backorders were down sharply. The decline in the order components suggest manufacturing activity in future months is going to be weak. When coupled with the Chicago Fed National Activity Index, which has been negative for 9 of the last 12 months and at -0.44 last week was the lowest reading since early 2014, the outlook is weakening.

The Fed statement on Wednesday also said the economy had weakened since the last Fed meeting in mid March. The economic conditions are starting to weigh on the market.

Consumer Sentiment and Confidence are also fading. Sentiment for April declined from 91.0 to 89.0 with expectations declining sharply. The present conditions component rose from 105.6 to 106.7 but the expectations component declined from 81.5 to 77.6. This was the biggest decline since September and this is the lowest level since September 2014. Almost a third of respondents expect unemployment to rise over the next year. Rising gasoline prices are also a challenge.

Next week is payroll week. The ADP Employment on Wednesday is expecting to show a gain of 194,000 jobs while the Nonfarm Payrolls on Friday is expected to show a gain of 210,000 jobs. Both estimates are down slightly from the March numbers.

The ISM Manufacturing report on Monday could be a challenge for the market if it comes in under 50. Estimates are for 51.5 but the regional reports have been weak. The ISM Services on Wednesday is expected to be flat.

The vehicle sales for April are expected to come in around 16.5 million and flat with March. This is well below the highs over 18 million in September through November. I reported last week that car inventories are soaring while truck sales remained steady. The Autonation CEO said they were cutting back on car deliveries and the manufacturers needed to slow production because they were not selling. The cheap gas bounce in the fall has given way to the reality of prices well over $2 and rising. Prices have risen 41 cents in the last 55 days. That is already putting a squeeze on vehicles sales. If the Tuesday report is much under the 16.6 million estimate it could be a problem for the market.

Halliburton (HAL) has a problem. The proposed $28 billion acquisition of Baker Hughes (BHI) is in trouble. Both the U.S. and EU regulators are objecting to the deal and the U.S. Dept of Justice said it could not be fixed because it was so anticompetitive. Halliburton announced they were delaying their earnings from April 25th until May 3rd in what may be a sign the deal is self-destructing. There is a deadline of April 30th to complete the deal, which is not going to happen, or either party can walk away and Halliburton will have to pay a breakup fee of $3.5 billion to Baker Hughes. The parties can agree to extend the deadline for the 4th time. Because Halliburton delayed their earnings, analysts believe they are going to terminate the deal. Halliburton sold $7.5 billion in debt in November in anticipation of closing the deal. They can use part of that money to pay Baker Hughes the fee.

Gilead Sciences (GILD) reported earnings that missed on both the top and bottom lines. Harvoni, their top of the line Hep-C drug, saw sales decline from $3.58 billion to $3.02 billion. U.S. sales of the drug fell 50% on pricing issues. At $94,000 for a 12-week course of treatment, it is definitely pricey but still better than the alternative of eventual liver transplant or death. Patients with insurance have already taken the drug and insurance companies are now demanding discounts of as much as 45%. Some companies are delaying approvals as long as possible as they try to wait until a cheaper alternative is available. Gilead suffered a patent loss in court and Merck (MRK) is aggressively pricing their competitive drug Zepatier. Earnings declined from $2.76 to $2.53 per share. Adjusted earnings of $3.03 missed estimates for $3.12. They ended the quarter with $21.3 billion in cash after spending $8 billion on buybacks in Q1.

Valeant Pharmaceutical (VRX) finally filed their long awaited 10K to remove the danger of a technical default on their debt. Unfortunately, it may have raised more questions than presented answers. In the document, they said they would restate 2014 revenue with a reduction of $58 million and 9 cents a share, and 2015 revenue by $21 million and increase earnings by 7 cents.

The 10K blamed the "tone at the top" referring to top management and the board for numerous errors in accounting and decision making in order to inflate the stock price. Eight of the nine board members had more than $108 million in Valeant stock at risk. CEO Michael Pearson was on the Forbes billionaire list in 2014 because of his massive stock grants. The compensation plans were built around an escalating stock price.

The lax governance, faulty accounting and questionable transactions have made them the target of more than a dozen investigations from every type of regulatory agency including Senate hearings. Five directors will not be standing for reelection and Valeant has recommended three new directors for a vote.

The new CEO Joe Papa has his work cut out for him. His compensation plan includes a $100 million payout if he can rebuild the share price to $150. He will make $500 million if the stock reaches the $270 level within four years. He is of course stepping into the lion's den with the multiple suits and investigations.

Shares spiked at the open on the filing of the 10K but investors sold the news and the stock closed down -5%.

Gilead and Valeant were instrumental in crashing the Biotech Index and that impacted the Nasdaq and the Russell 2000. The $BTK declined -2.5% on Friday after a sharp drop Thursday afternoon.

Under Armour (UA) was hit by a blatant rip off of its logo and garment styles by a Chinese company. Chinese based Tingdei Long Sporting Goods launched its "Uncle Martian" brand of sports apparel very similar to that sold by Under Armour. Just being copies of UA garments was not enough but they copied the logo as well. "Under Armour is aware of the Uncle Martian launch event. Uncle Martian's uses of Under Armour's famous logo, name, and other intellectual property are a serious concern and blatant infringement. Under Armour will vigorously pursue all business and legal courses of action." Unfortunately, with the business in China it will be very difficult to win their fight. The name and logo are registered in China but that does not mean much unless it was an exact copy.

Chinese companies are notorious for copying American products. Business Insider put together examples of some obvious copycat products. Extensive List of Copies

Sqmy Playstation?

Chevron (CVX) reported earnings on Friday that missed estimates. Adjusted earnings of 11 cents missed estimates for 20 cents. Production declined slightly to 2.67 mbpd of oil equivalent, down from 2.68 mbpd. The E&P division lost $1.46 billion because of low oil prices. On a GAAP basis earnings declined from $2.6 billion to a loss of $725 million. That is a drop from $1.37 to a 39 cent per share loss. Revenue declined by nearly one-third to $23.6 billion. The last time Chevron posted a Q1 loss was in 1992 when oil was $18 a barrel. Chevron affirmed its $1.07 dividend for June that will cost the company nearly $2 billion. Capex spending is expected to be $25-$28 billion in 2016.

Exxon (XOM) reported earnings of 43 cents that easily beat estimates for 31 cents. Revenue declined from $67.62 billion to $48.7 billion. Production averaged 4.325 mbpd of oil equivalent. Exxon's earnings beat was helped by a $1.4 billion contribution by the chemical segment. That was up +$373 million from the year ago quarter. Exxon generated $5 billion in excess cash and returned $3.1 billion to shareholders in dividends and buybacks in Q1.

The disaster of the day was Stericycle (SRCL). The company reported earnings of $1.11 and missed estimates for $1.15. Revenue of $874.2 million narrowly beat estimates for $873.6 million. The company guided for full year earnings of $4.90-$5.05, down from prior guidance of $5.26-$5.33. They said the decline in estimates was due to lower volumes of industrial wastes and higher costs associated with international operations. Shares fell -21% on the news.

The winner for the day was Monster Beverage (MNST). The company reported 80 cents and beat estimates for 75 cents. Revenue of $680 million beat estimates for $660 million. The company said its strategic deal with Coca-Cola was paying off and international sales were rapidly expanding. They also have some new products coming out in 2016. Shares rallied 13% on the news.

Earnings for next week are missing the big names we had last week. We will get Tesla, Alibaba, Priceline and Wynn Resorts but they do not have the market moving power of Apple, Amazon, Facebook, Netflix, etc. The quality of earnings should decline but on the bright side, the smaller companies do not have as much exposure to the strong dollar.

According to FactSet, 62% of the S&P have reported with 74% beating on earnings and 55% beating on revenue. Blended Q1 earnings growth improved again last week to a decline of -7.6% compared to -8.7% on March 31st and -9.0% last week. You can thank large beats by Amazon and Ford for the declining estimates. Revenue has declined -1.3%. However, 36 companies have issued negative guidance and only 18 have given positive guidance. The 12-month forward PE is 16.8 and rising. The five-year average is 14.4 and 10-year average 14.2 suggesting the market is currently at the high end of its historical valuations especially when earnings are declining. Q2 earnings estimates are for a decline of -4.4%. The technology has seen the biggest drop with earnings expected to decline -9.4% in Q2.

There are 124 S&P companies reporting this week.

Apple started this tech wreck with earnings after the close on Tuesday. Shares have fallen from $104 to initial support in the $93 range on Friday. However, while some analysts are calling it a screaming buy there are others suggesting it could fall a lot lower.

I believe the downside risk from here is minimal. The 200-week average at $93 corresponds with the horizontal support since late 2014. However, Carter Braxton Worth, an analyst at Cornerstone Macro, believes Apple could decline to the long-term uptrend support at $85 as it did in 2013 after a particularly sharp correction.

I think the bad news is priced in. Who in the market has not heard about the Q1 miss and the lowered production guidance for Q2. I am sure there are a lot of holders that are hoping for a rebound to give them a better exit point but will there really be another $15 drop from here to break that long-term trend line? Over the last five days, Apple has traded more than 325 million shares and shed $62 billion in market cap. Their normal daily volume is about 35 million shares. Anybody that really wanted out is more than likely already out. The stock will remain volatile over the next week or two but I doubt there are any big declines left. Just my 2 cents.

Crude oil rose to the high for the year at $46 thanks to the crashing dollar. The drop in the dollar sent gold surging to a 16-month high at $1,295. The Dollar Index closed at a 16-month low on Friday after the Fed failed to produce a hawkish statement, the U.S. economic reports continued to be weak and the yen rose on the lack of any action by the BOJ. If the dollar continues to fall, the commodity complex will continue to rally.

If there is any doubt about the impact of the dollar on oil prices the chart below should erase that doubt. There is nearly a 100% inverse relationship and this is overpowering the negative fundamentals for crude oil.

We learned last week that Iran has boosted exports from 700,000 bpd to 1.8 million bpd and expects to increase that by another 500,000 bpd by July. OPEC production rose 170,000 bpd from 32.47 mbpd to 32.64 mbpd in April. Saudi Arabian output is expected to rise 350,000 bpd in April. Libyan officials announced on Friday a plan to boost exports from 400,000 bpd to 1.6 mbpd and the pre Gaddafi levels thanks to the backing of the new unity government.

Oil production is rising everywhere except the U.S. and Venezuela but prices are being powered higher by the dollar not the fundamentals. U.S. production declined only 15,000 bpd last week and inventories rose 2 million barrels.

Baker Hughes said active rigs declined -11 to 420 and another new historic low. Oil rigs fell -11 to 332 and gas rigs declined -1 to 87. Miscellaneous rigs rose 1.


The markets declined last week for multiple reasons. We can blame it on Carl Icahn's "day of reckoning ahead" comments. Or, we can blame it on Apple's earnings. We could also blame a long list of tech stocks with earnings disappointments but then we would have to factor in Amazon, Baidu, Expedia and Linkedin and their huge earnings beats that were completely ignored the day after the reports. The Bank of Japan could also be a convenient scapegoat when they elected to not add further stimulus even after officials had indicated stimulus was likely. We could also blame the lackluster GDP at +0.5% growth and a two-year low.

There are lots of factors we could blame but in reality, markets do not need a reason to go down. Selling happens. When the major indexes are facing such significant resistance, I would have been more surprised to see the indexes forge ahead in light of all the events I listed above.

Resistance held and we have to deal with it. The key for us is what to expect for next week. The resistance is still there and the headline flow is going to diminish. There are plenty of earnings reports but very few high profile companies. The farther into earnings season we go the weaker the earnings will become. Misses will become more prevalent. Fortunately, those misses will not mean as much as a Microsoft or Apple because the companies are smaller. However, it should keep the downward pressure on the market.

We have talked about the very low bar for earnings estimates but we are still seeing companies miss that bar. That should remain a cloud over the market.

However, investors are supposed to buy when there is blood in the streets. This quarter could be seen as one of those events. Analysts are calling it the trough quarter for earnings. If the cycle plays out as expected with a -7.6% earnings decline and the fourth consecutive quarter of declines, that should be a signal for long term investors to buy stocks before earnings improve. While they are still expected to decline slightly in Q2 at -4.4% the Q3 and Q4 estimates are bullish at +1.6% growth and +7.5% growth respectively. We are supposed to buy in advance of the good times and sell when those good times have peaked.

I do not think investors are prepared to dive in today to capitalize on earnings nine months from now. There far too many negative headlines and we are entering the worst six months of the year for the market.

This will make the summer a buying opportunity ahead of a bullish Q4. For the next month, the markets should continue to be choppy with a downward bias. That assumes a flood of investors do not rush into the market next week still targeting those historic highs.

The events of last week may have blunted the enthusiasm investors had for a new high attempt. The S&P dipped to 2,052 on Friday and is closing in on the decent support at 2,042 followed by 2,020. Resistance remains 2,100, 2,116 and 2,128.

The Dow was crippled by Apple, Intel and Microsoft, both of which closed at a two-month low, while some of the recent reporters are going through their post earnings depression phase. The outlook for the Dow is not positive.

Dow components Pfizer and Merck report next week and they are hardly going to set the market on fire. Both reports will be ignored.

The Dow made it all the way to 18,167 the prior week and right on the verge of a breakout before losing traction. Now that more than half of the Dow components have already reported and in their depression phase it will be very difficult to regain those highs.

Support is now just over 17,500 followed by 17,400 and then a potentially long drop. Resistance remains 18,110 and 18,165.

The Nasdaq could be in trouble. The Nasdaq Composite closed at a four-week low while the Nasdaq 100 closed at a seven-week low. On the composite index, the Friday low at 4,749 is the last ditch level before a potential retest of 4,600.

On the Nasdaq 100, the index could not post a gain even after Amazon added 58 points on Friday with Priceline +26, Monster Beverage +16, Expedia +9, etc. The tech sector is reeling from a flurry of negative reports and falling guidance.

Any further decline by the Nasdaq 100 and we could be looking at a retest of 4,085.

The drop in the biotech sector is also dragging the Nasdaq lower. The biotech rebound appears to have run its course and the earnings miss by Gilead was a nail in the coffin.

The Russell 2000 had been a leading indicator for the market as the Dow tried to make new highs but the Russell failed to move over 1,150 and never even tested the stronger resistance at 1163-1165. The Russell lost more than 32 points from the Wednesday high at 1,156 to the Friday low at 1,124 or roughly -3%. Given the positive trend the prior week that could be just some needed profit taking but the weakness was pretty widespread. Real support is about 1,090 with a couple speed bumps at 1,110 and 1,100. The 200-day average at 1,126 halted the decline on Friday and it is still in play.

The event calendar is headlined by the employment reports but nobody expects any material change so they should not impact the market unless there is a big surprise. The ISM Survey is important but unless there is a large negative surprise, I would not expect that to move the market either.

The market moving events will come from the ongoing earnings cycle and the misses will be more important than the beats. The market bias has shifted to negative and given the point on the calendar it may be harder to move it back into positive as we drift towards the summer doldrums.

Warren Buffett will be cheerleading for investors all weekend in Omaha and his bullishness could be contagious for the market on Monday.

I said last week we need to avoid being too long and I think that is true for this week as well. We need to be cautious as the quarter progresses and forward estimates are revised. Despite the decline last week, the markets are still complacent.

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Random Thoughts

The current bull market just became the second longest in history. It started on March 9th, 2009 and has lasted 2,608 days through Friday's close. The now third longest started on June 14th 1949 and lasted until August 2, 1956. Bull markets do not die of old age. They die from Fed actions and economic cycles. The longest bull market started in October 1990 and lasted until March 2000 and the S&P rose 417% in that period.

The capitalist Woodstock is underway this weekend in Omaha as the Berkshire Hathaway shareholder meeting is in full bloom. Thousands of shareholders make the trip to Omaha to rub shoulders with Buffett and his team and talk first hand with some of his companies that set up booths and displays in the convention center.

Unfortunately, all the news was not good. Buffett said the railroad business had fallen off drastically and the "pain is likely to continue." He said it was off sharply in Q1 and would likely be down the rest of the year. Buffett said the BNSF railroad had let investors down but referred to the operation as its "most important non insurance business." In the preliminary earnings, the segment lost $221 million for the quarter. The insurance segment also lost $267 million because there were more catastrophe events than normal in Q1.

Buffett is known for not being tech savvy. He said we are still trying to figure out how to harness the rapid growth of online commerce, something Amazon has done very well. "We are not going to try and out-Bezos Bezos." "The internet has already disrupted plenty of people and it will disrupt more." Charlie Munger said Berkshire's business were so strong they are not particularly vulnerable to web retailers like Amazon.

Google and Amazon are in competition to build the biggest database in the world. Six years after the Flash Crash of May 2010 the Consolidated Audit Trail (CAT) project is finally showing signs of life. The CAT is supposed to contain all the identifying information for every trade across all the exchanges, including bids and offers submitted. Each transaction is going to be tagged with the identifying information showing who placed the trade/bid, through what broker, at what time, what was the market price, etc. In theory, this will allow the SEC to backtrack the next market event to determine what caused it.

The biggest problem is that capturing all that information will produce 50-100 billion records per day. That will be a massive database that will require a supercomputer to manipulate when the SEC does want to search the data.

There are three bidders. FINRA, the market regulator is teaming with Amazon Web Services. FIS is teaming up with Google and Thesys Technologies, an affiliate of Tradeworx, is going it alone. The SEC is finally done with deciding what they want to be in the database and the three bidders will decide what it will cost. The winning bidder will not be chosen until Q3 or Q4.

The next question is who will pay for it. The brokers are going to be on the hook for the eventual cost and ongoing maintenance. They will pass the costs on to their clients. Once it is built and operational, who owns the data? How will privacy be protected? Without protections, an operator could track every trade Carl Icahn has ever made including any bids and offers that did not get filled. The potential for liability is huge.

The SEC is going to produce all the rules and there will be a comment period once they are published. It will be a monumental undertaking and the volumes of data collected will be mind-boggling. Amazon may need to add an entire data center just to handle the collection and processing of the data. After this effort, putting a man on Mars will be a walk in the park.

The bulls ran for cover this week. The prior week bullish sentiment rose 5.6% but last week it declined -6%. Bearish sentiment surged 4.7%. Since the survey closes on Wednesday, the respondents reacted to the Apple earnings and the big drop on Wednesday. At the time they did not know about the coming declines on Thr/Fri. This means the survey next Wednesday could be really different as long as the market does not rebound on Monday.

An Apple employee was found in a conference room at the Infinite Loop campus with a fatal head wound and a firearm on Wednesday morning. The campus houses 16,000 Apple workers. The employee was discovered the morning after Apple reported earnings and shares crashed Wednesday morning. The death is thought to be a suicide and no names were released. You have to wonder if this had something to do with the crash in the stock. Had the individual leveraged everything in an option trade to bet on a potential rally only to be wiped out when the stock crashed instead? It would not be the first time or the last time for something like that to happen.

Amazon posted a whopping 5,421% rise in tablet sales from Q1-2015 at 40,000 to 2.2 million in Q1-2016 according to International Data Corporation (IDC). IDC said global tablet sales of all brands declined -14.7% from 46.4 million to 39.6 million in Q1. Sales of 2-in-1 tablets with a detachable keyboard saw triple digit sales increases to 4.9 million units. Microsoft was credited with creating that category but everyone is now competing in the space.

No more beer in Venezuela. The largest beer maker closed its four production plants on Friday because of inability to buy raw materials. Importers will only take dollars in exchange for their goods and the government has run out of dollars. Venezuela can print all the local currency it wants but it is worthless outside of Venezuela. In fact, it is worthless inside Venezuela. The Empresas Polar plants make 80% of the beer consumed in Venezuela. President Maduro warned Polar it would seize any plants halted by private companies and hand them over to the workers. He called it a crime against production.

However, even if he did turn them over to the workers he still does not have any dollars to pay for the raw materials to make beer. Venezuela continues to circle the drain and the citizens are reaching the point where they are going to revolt. It is only a matter of time. Analysts believe oil production will stop soon because the government cannot pay the workers or buy the materials to drill new wells or pay for the services required to keep the old wells running. Crude oil exports is the only form of cash still flowing to the government and that is about to come to an abrupt halt.


Enter passively and exit aggressively!

Jim Brown

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"We aren't addicted to oil, but our cars are."

James Woolsey