The first quarter is in the books and window dressing on Wed/Thr is behind us.

Weekly Statistics

Friday Statistics

I think there were still some shenanigans underway on Friday to try and keep certain stocks pinned to their recent highs but managers lost control ahead of the close. The Dow and S&P plunged sharply in the last 20 minutes as traders tried to get in front of potential window undressing next week.

The S&P recovered from an opening drop to 2,362 to trade positive intraday but a burst of selling at 1:30 and another surge at 3:30 knocked 6 points off the index each time. The fund managers were not able to hold the S&P at its highs for the end of the quarter.

The Russell 2000 and the S&P-600 were the strongest indexes for the day but they also saw a sharp sell off at the close.

For the first quarter of 2017 the Dow gained 4.5%, Nasdaq Composite +9.8%, Nasdaq 100 +11.8%, S&P-500 +5.5% and Russell 2000 +2.3%. It was definitely a big cap tech quarter with more than twice the gains of the Dow and S&P. It was the best quarter for the market since Q4-2015.

The Semiconductor sector gained 11.6%, biotechs +16%, housing sector +12% but the banks just barely broke even at +0.3%. Oil declined -5.8% and the energy sector -6.8%.

Volume for the last week of the quarter declined with Wed/Thr at 5.8 billion shares each and the average for the week at only about 6.1 billion shares. The indexes all posted a gain for the week but it was minimal and there was no conviction. After setting a new closing high on March 1st, the Dow actually lost -149 points for the month of March and the first monthly loss since October.

The economic reports on Friday were just as lackluster as the market. The Consumer Sentiment for March came in a 96.9 and slightly below the prior reading at 97.6. The present conditions component rose from 111.5 to 113.2 and the expectations component was flat at 86.5, down from the high of 90.3 in January. This report was a long way from the blowout in Consumer Confidence earlier in the week.

Personal income for February rose +0.4% compared to the +0.5% gain in January. Income growth has been relatively steady over the last eight months averaging about 0.4%. Higher minimum wages that took effect in 19 states has helped lift the national average.

Personal spending declined -0.1% after a -0.2% decline in January. This was the largest two-month decline since the recession. The personal savings rate rose from 5.4% to 5.6%.

The drop in personal spending caused a sharp drop in the Atlanta Fed real time GDPNow forecast for Q1 from 1.3% to 0.9% growth. The forecast had spiked from 0.9% to 1.3% since March 22nd on positive economic reports but that came to a screeching halt on Friday when those gains were erased. For reference, the forecast was for 3.4% Q1 growth back on February 1st.

We have a busy calendar for next week with a lot of reports and headlined by the payroll numbers. The ADP forecast is for a decline from 298,000 to 190,000 jobs for March. The Nonfarm Payrolls are expected to decline from 235,000 to 190,000. About the only thing guaranteed is that the prior nonfarm number will see a stiff revision. Everything else is just a coin toss. We saw that last month when analysts missed the ADP estimate by roughly 100,000 jobs.

The FOMC minutes will also be a key event since the Fed raised rates, analysts will want to see how close they were to a half point hike or how likely the odds are for a June hike.

The national ISM Manufacturing Index is expected to show a slight decline from 57.7 to 57.3.

On Friday, the Senate is expected to vote to confirm Neil Gorsuch for the Supreme Court. That vote was delayed until this week and there is no telling if/when it will actually occur. It has to be this week because the Senate is going on Easter recess until April 21st. The democrats are still vowing to block the nomination and there is going to be a battle. Voting for Gorsuch specifically is not an economic issue. It is the battle between the parties that will cause trouble. With the fight over government funding and the debt ceiling the week after their recess, any lingering hostility from the Gorsuch vote will make the debt ceiling vote even tougher.

In stock news, Blackberry (BBRY) reported adjusted earnings of 4 cents that beat estimates for a loss of 1 cent. Revenue of $286 million easily beat estimates for $186 million. Software revenue rose to $193 million and that line item alone beat estimates for the entire company. Blackberry is trying to become a software and services company rather than a hardware supplier. For the full year, they produced $640 million in software revenue. Blackberry has outsourced all phone production to other companies to further reduce costs. They ended the quarter with $1.7 billion in cash.

The company said it expects to be profitable for all of FY 2018, which began in March. Gross margins were around 60% and they expect those to rise to 70%. They are heavily involved in developing software for self-driving cars and have a partnership with Ford involving in car connectivity. They also have a suite of security-focused software products and are developing operating systems for guided missiles. The CEO said we could see Blackberry branded medical devices showing up soon.

Toshiba won shareholder approval to sell its flash memory unit and there is a feeding frenzy ahead of the bid closing scheduled for next week. Broadcom (AVGO) and PE firm Silverlake Partners have offered $17.9 billion. However, there are nine other bidders including Western Digital (WDC), Micron (MU) and Hynix. The winner gets to enter the very competitive Nand flash memory market. Currently there is a shortage of memory and Micron reported prices rose around 20% last quarter. Hewlett Packard warned earnings would suffer for all of 2017 because of the shortage and the higher prices they were being forced to pay. Some analysts caution we could be nearing a top in the Nand business because shortages always cause manufacturers to add extra capacity and that could produce a surplus in 2018. Others claim the surge in Internet of Things devices and cloud server farms will continue to cause rising demand.

With WDC bidding as well, you can bet that Toshiba will get the best price for their business. WDC is riding the wave of rising memory prices and shares are at a 52-week high.

Johnson & Johnson (JNJ) said their $30 billion tender for Swiss biotech firm Actelion was a success after shareholders tendered 73.25% of the outstanding shares. JNJ said they expect the deal to close in the second quarter because the transaction has already been cleared by the U.S. and was on track in the EU. They plan on spinning out Actelion's research and development segment into a separate business called Idorsia Ltd. The main business will be added to JNJ's Swiss company Janssen, to expand the range of medicines it produces. Actelion has 15 promising treatments in its pipeline.

JNJ is well off its 2017 highs and has been a drag on the Dow for the last two weeks.

Apple (AAPL) won a confusing case in Australia regarding an attempt by banks to use Apple's iPhone payment technology without using Apple Pay. Four large Australian banks had sued to gain access to Apple's near-field communication technology (NFC) so they could add their own tap and pay apps. The court ruled in favor of Apple in what could have global implications. The Australian tap and go market is worth about $85 billion a year.

Competitor Android allows companies to use its NFC technology but Apple does not want to open that door on the iPhone. Obviously, they would like every iPhone user to have Apple Pay as their only option.

Canaccord Genuity upgraded their price target on Apple shares from $154 to $165 saying the excitement was building for the upcoming iPhone 8. The analyst said the age of existing iPhones plus the number of new features expected should provide a very strong upgrade cycle that will last long into 2018. Canaccord said they believe the iPhone installed base of more than 570 million users will provide a strong upgrade cycle for those loyal to Apple and holding an older generation phone. The analyst said the Samsung Galaxy S8 would not cause loyal Apple users to switch to an Android product this close to the iPhone 8 launch but it would cause an upgrade cycle among current Android users.

McDonalds (MCD) shares are holding at new highs after they announced they were going to use fresh beef in their Quarter Pounder burger in order to better compete with chains like Shake Shack and others. McDonalds has been using a frozen compressed burger patty since 1973. The new burgers will be cooked to order and not precooked and kept warm like the existing burgers. It will be a slow process to roll this out to all their U.S. stores but they expect to be completed by mid-2018. This will only apply to the Quarter Pounder. All the other burgers will remain frozen.

They recently said they were moving to cage free eggs with stricter antibiotic policies and they eliminated high-fructose corn syrup from "some" of their buns along with removing artificial preservatives from the chicken McNugget. They are fighting a multiyear decline in traffic because of the rise of the premium hamburger chains. The company said it had lost 500 million customers since 2012 and same store sales fell -2.9% in Q4. The menu overhaul is going to cost them $1.7 billion. They are also testing mobile ordering in California with plans to launch another pilot in Spokane Washington.

TRC Company Inc (TRR) shares spiked 46% on news it had entered into an agreement with New Mountain Capital to sell itself for $17.55 per share, a 47% premium to Thursday's close. The company is an engineering, environmental consulting and construction management firm that employs 4,100 with 120 offices.

FMC Corp (FMC) shares spiked 13% after the company said it was acquiring a significant portion of DuPont's Crop Protection business. DuPont is required to divest the business by an EU ruling in order to merge with Dow Chemical. DuPont will acquire FMC Health and Nutrition and FMC will pay DuPont $1.2 billion. FMC said the transactions will be immediately accretive upon closing. After closing FMC Agricultural Solutions will become the fifth largest crop protection chemical company in the world with revenue of $3.8 billion.

Amazon (AMZN) shares exploded higher last week after Loop Capital released a bullish research note and a $1,100 price target. That is the third highest of the 46 analysts that cover the stock. The analyst said Amazon will continue to dominate the retail market and Amazon Web Services will eventually be spun off for a potential value of more than $200 billion. Barclay's initiated coverage on Wednesday with a $1,120 price target. Stifel has $1,025, Goldman $1,050 and Credit Suisse $1,050.

Forward Pharma (FWP) fell sharply on Friday after Biogen (BIIB) won a patent victory over the active ingredient in their competing multiple sclerosis treatments. Forward had won several patent fights against Biogen and demanded royalties from that company on Tecfidera. Biogen tried to buy the patent for $1.25 billion in January but Forward refused to accept it. Biogen's win could free them to market Tecfidera without any restrictions. Since Forward's market cap is only $1 billion maybe they should have accepted the January offer. Forward plans to appeal the verdict.

In another patent case, a district court invalidated four patents on a multiple sclerosis drug named Ampyra marketed by Acorda Therapeutics (ACOR). The patents were related to the drug delivery mechanism. One patent for an extended release version was upheld. The invalidated patents mean generic competition can begin almost immediately. Teva Pharmaceuticals (TEVA) and Roxane Labratories are two of ten companies already building generic versions. Ampyra was responsible for 90% of Acorda revenue in 2016 at $519 million. Acorda expects to appeal the decision.

Crude prices helped lift the market late in the week after there was a smaller than expected build in inventories, Libyan production was interrupted and OPEC continued to talk about the potential for extending the current production cuts. WTI bounced exactly from the longer-term uptrend support ahead of the refinery restart period.

Last week refinery utilization jumped 2% to 89.3% for the second 2% weekly gain in a row. That is a multi-month high and shows the refiners are starting production on summer fuel blends. Crude inventories rose only 900,000 barrels and should begin to decline over the next two weeks and that decline trend will last until July.

U.S. production rose 20,000 bpd to 9.15 million bpd but the big news was the jump in gasoline demand from the late winter lows to 9.52 million bpd and we are not even really into spring yet. Unfortunately, with crude prices rising back towards $55, the price of gasoline is also going to be rising sharply.

Rig activations continue to surge with 15 rigs added last week. With the latest gains, active rigs have now doubled the level from last May.


One week a quarter, window dressing definitely impacts the markets and that was last week. Typically, there is some undressing the following week but this quarter could be different. Factset is forecasting the earnings growth rate for Q1 at 9.1% and that would be the highest growth since Q4-2011 at 11.6%. This anticipated rate is down from the forecast of 12.5% on December 31st, but still an outstanding number.

For Q1, 79 S&P companies have issued negative earnings guidance and 32 have issued positive guidance. Seventeen companies have already reported Q1 earnings and 13 beat earnings estimates and 9 beat revenue estimates.

The worst sector for negative guidance has been consumer discretionary with 20 companies warning and only 2 companies providing positive guidance. The second most came from technology with 18 warnings but this sector also had the most companies giving positive guidance at 19.

Since the start of Q1 the earnings forecast has declined -3.6% from $30.59 to $29.49. This is actually a smaller decline than the average of -4.5% for the last four quarters. With earnings estimates declining and the S&P rising the PE ratio has risen to 17.6.

The S&P managed to squeeze back over resistance at 2,360 but only slightly. On Friday, the index dipped 6 points to close at 2,362 and technically over that level, which could once again be recognized as support.

The March 1st closing high was 2,396 and those 34 points between Friday's close and a new high are going to be very tough to achieve. There is now resistance at 2370, 2388 and 2396. With many traders still expecting a decline, there will be an active group shorting every minor blip higher. In some ways that is good because it causes repeated short covering if the market does not roll over.

The Dow has equivalent resistance at 20,750, 20,800, 21,000 and 21,115 which was the March 1st closing high. The Dow shook off some strong declines in several components to rebound from the converging uptrend support at 20,500 on Monday. The opening drop on Monday gave the bears every opportunity to create a real decline but they were unsuccessful. Whether the rebound came from a surge of dip buying or this was the beginning of the window dressing move, we may never know. If the market craters early next week, we could surmise the prior Monday rebound was window dressing.

The Dow remains the weakest index and it needs to push through resistance at the 20,800 level to rebuild some confidence in the large cap stocks.

The Nasdaq Composite closed at a new high at 5,914 on Thursday and gave back only 2.6 points on Friday. I suspect this was definitely window dressing because the large cap techs have been so strong recently, many portfolio managers wanted to keep them pinned at their highs for quarter end. Next week will be a real test for the big caps. Some portfolio managers may not want to wait around for the next four weeks in hopes of a big pre earnings rally since April has such a strong record of market volatility. Portfolio managers have massive profits at risk in the big cap tech stocks and the road ahead could be filled with potholes.

The small cap indexes rallied all week and the Russell 2000 closed just below strong resistance at 1,388. The seven consecutive days of gains came after a triple test of support at 1,340. This appeared to be rotation out of big caps into small caps and strongly suggests it was related to end of quarter window dressing. Portfolio managers not only want to show they are in the big cap winners but have a broad portfolio of small cap hopefuls as well. The performance of the Russell next week will be key in determining if this was real buying for the future or simply cosmetic surgery ahead of quarter end.

If the coming week is positive for the market then I would expect the following week to be positive as well. Once lawmakers return from the Easter recess, there is real danger of a Washington disaster. Also, the week after April 15th is typically rocky.

The government funding runs out on April 28th and lawmakers have to deal not only with the funding but also the debt ceiling limitations. The republican conservative caucus is going to be another sticking point and democrats will be looking to block anything republicans put forth. This makes the last week of April very risky for the market. It would also suggest investors may not want to be placing big bets ahead of April 15th.

Random Thoughts

The prior week's 4.1% bounce in bullish sentiment did not last long. Those same switchers appear to have bounced back to the bearish camp to raise that level to 37.4%. That means 69.8% of investors do not expect the market to move higher this week. On a contrarian basis that means an unexpected rally could be fueled by those investors running back into the market.

Last week results

Consumer spending has declined for the last two months. Retailers reported an ugly holiday shopping season. The health of the sector is not improving. Nine retailers have filed bankruptcy in 2017. That is the same number that filed bankruptcy in all of 2016. That is half the number that filed in 2009 at the depths of the recession.

The number of brick and mortar stores is dwindling but there is still an extreme surplus. Consumers are not going to the malls or the strip malls. They are shopping online for the majority of their goods.

The number of retailers in trouble but have not yet filed bankruptcy is also at the highest level since the recession. Payless is rumored to be closing 500 stores ahead of a bankruptcy filing. Bebe Stores is also rumored to be preparing to file. Sports Authority closed 460 stores and went out of business. Aeropostale closed 600 stores. Macy's, JC Penny's, Sears, Kmart, GameStop and Abercrombie & Fitch are also closing stores.

Moody's said the following stores are in distress and could end up liquidating or restructuring. The analyst said there is a whopping $3.7 billion in debt on these companies that matures over the next five years.

99 Cent Only, Bon-Ton, Charming Charlie, J Crew, Claire's Stores, David's Bridal, Savers, Gymboree, Totes, Nine West, NYDJ Apparel, Rue21, Sears, Toms Shoes, Tops and True Religion.

So far in 2017, these retailers have filed bankruptcy.

Limited Stores
Gordmans Stores
Gander Mountain
Wet Seal
Eastern Outfitters

Sears is not expected to make it through 2017 despite recent stock purchases by the CEO and the largest stockholder, Bruce Berkowitz.

Target and JC Penny are expected to gain market share from the bankruptcies and store closings of their competitors. However, the one retailer gaining market share on everyone is still Amazon with revenue rising by 20% a year. Home Depot and Costco are the only stores thought to be Amazon proof but Amazon is still squeezing them on any item that can be shipped by UPS. Best Buy has toughened up after nearly going out of business a couple years ago and they are surviving after a tough restructuring process.

Remember the first retailer Amazon targeted? Barnes and Noble books (BKS) is still alive and operating retail bookstores. Now Amazon is experimenting with its own retail locations as well as retail grocery stores. Retail is cyclical and what is hot today may not be hot tomorrow. One of the biggest losers of the current retail recession is the malls. They are closing up by the hundreds as anchor tenants leave and the specialty stores disappear. Nobody likes to shop in a mall with a lot of vacancies. It depresses shoppers and depressed shoppers spend less and shop less at those locations. That forces retail prices lower, reduces profit margins and drives more companies out of business leading to more vacancies.

Shopping center REITS like Seritage Growth Properties are in trouble. Long term there will be more vacancies than they can handle and the properties will eventually be bulldozed and turned into office buildings or condos. That is a tough journey of ever decreasing returns until that final decision is made.

In January the giant 1.1 million square foot Galleria Mall in Pittsburgh, was sold out of foreclosure for $100 million. Wells Fargo held the mortgage and was the only bidder. The mall was built in 2005 but was recently appraised for only $11 million. It was only 55% occupied in December. REITS like Seritage own more than 100 of these types of properties but since Sears or Kmart was the anchor tenant in the Seritage malls, they are not as new and in far worse areas. I would not want to be a retailer or a mall owner in this environment.

There is a new 50-Cent making headlines. I am not talking about rapper Curtis James Jackson III, known professionally as 50 Cent. There is a new, unknown trader spending a fortune in VIX calls at 50 cents each. While that sounds like a miniscule amount of money, he or she has spent $90 million buying VIX calls at that level. Traders are now calling the unnamed trader 50 Cent.

Basically, every day the trader comes in and buys VIX calls that are priced at 50 cents. The strike does not appear material just as long as the premium is 50 cents. He recently purchased 50,000 of the May 21 calls at 49 cents or $2.5 million in premium. Unless the VIX spikes to a five-month high of 21, those calls will expire worthless at expiration. Obviously, a sharp spike that did not hit 21 could also inflate the premium if he was prepared to jump out at the right time. On the same day, 15,000 May 20 calls were purchased at 51 cents and 10,000 additional May $21 calls at 47 cents.

Option trackers claim he has spent about $90 million in premium and options costing $55 million have already expired worthless. Analysts claim total open interest in VIX calls has risen to an all time high and the massive call buying could actually be dampening volatility. Since it is hard to answer strategy questions simply by looking at one set of trades we do not really know if 50 Cent is losing money or simply hedging a massive portfolio. He could also be selling VXX futures and using the VIX options as a hedge against the short futures trade. We may never know who is pulling the trigger on these trades but he does have deep pockets. Eventually a volatility event could occur and we will be wishing we had followed his trades.

Speed of Change

In 1998, Kodak had 170,000 employees and sold 85% of all photo paper worldwide. Within just a few years, their business model disappeared and they went bankrupt. What happened to Kodak will happen in a lot of industries in the next 10 year - and most people do not see it coming.

Did you think in 1998 that 3 years later you would never take pictures on paper film again? Yet digital cameras were invented in 1975.

The first ones only had 10,000 pixels, but followed Moore's law. Today's average cameras have 24 million pixels. The iPhone 7 can take a panoramic picture with 63 million pixels. Entire movies have been shot with smartphone cameras. One hour photo processing locations have disappeared.

So as with all exponential technologies, it was a disappointment for a long time, before it became far superior and then became mainstream in only a few short years.

It will now happen with Artificial Intelligence, health, autonomous and electric cars, education, 3D printing, agriculture and jobs.

Welcome to the 4th Industrial Revolution. Welcome to the Exponential Age.


Enter passively and exit aggressively!

Jim Brown

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"A government big enough to give you everything you want, is strong enough to take everything you have."

Thomas Jefferson


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