The surprising news of the missile strike on Syria brought geopolitical risk back to the market.

Weekly Statistics

Friday Statistics

The S&P futures shook off a -15 point overnight decline to 2,336 and rebounded to 2,360 by Friday afternoon. However, weekend event risk suddenly took on an entirely new meaning with the Syrian headlines. Cautious investors moved to the sidelines and the afternoon gains faded back to minimal losses.

The big cap indexes all ended the day with single digit declines while the Russell 2000 was fractionally positive. The only two real gainers were the Biotech Index at +19 and the Semiconductor Index at +5.

Late Friday news broke that the Russian warship Admiral Grigorovich had entered the Eastern Mediterranean and was steaming full speed towards the two U.S. ships that fired the 60 Tomahawk cruise missiles. Russia later said "the ship, armed with the advanced Kalibar missiles would visit the logistics base in Tartus Syria." There were also headlines claiming Syrian aircraft had taken off from the same airbase in the afternoon to continue bombing civilians. Both of those headlines suggested on the surface that there could be further conflict in the future. Obviously, some investors did not want to be long over the weekend.

S&P Futures

On the economic front, there was a major upset. The Nonfarm Payrolls for March had been expected to show a gain of 180,000 jobs. That was revised down from estimates of 190,000 the prior week. The actual headline number was 98,000 and a major miss. The prior two months were revised lower by a total of 38,000 jobs.

The Nonfarm number was a surprise because the ADP Employment report on Wednesday greatly exceeded estimates for 185,000 with an actual number of 263,000 new jobs for March. That put everyone's mind at ease and the market spiked sharply higher on Wednesday.

The Nonfarm report showed that goods producers added only 28,000 jobs compared to the 95,000 in February. Construction also fell sharply to only a 6,000 job gain compared to the 59,000 in the prior month. Mining/energy added 11,000 thanks to the resurgence in the oil sector. Manufacturers showed a gain of 11,000.

Service sector job gains were only 61,000 and less than half the February total. Retailers were hammered for a 30,000 job loss. General merchandisers cut 20,000, department stores 13,000, clothing stores 6,000 and personal care -4,000.

Professional and business services remained strong at +56,000 and leisure and hospitality added +6,000.

The unemployment rate dropped to 4.5% from 4.7%, a 10-year low and the Fed's target for "full employment." The broader U6 unemployment rate fell to 8.9%, down from 9.2% and a post recession low. The labor participation rate remained at 63%.

There were two reasons being blamed for the weak jobs number. The first was the warm weather in February that drew outdoor jobs forward and then the return of winter weather in March that depressed hiring for outside jobs. The late Easter was also blamed for a delay in hiring. If this is the correct reason, the headline number should rebound in April.

The second excuse was the end of the Trump bump. Analysts said business optimism declined in March with the expected failure of the health care bill and the reality that tax restructure and infrastructure stimulus programs would be pushed well back in 2017, if not 2018. That supposedly caused employers to put off hiring until something was actually passed.

Offsetting the low 98,000 headline number on the establishment survey was the strong +472,000 increase in employed from the household survey. Analysts said the spike was due to increases at small businesses, which are captured by the ADP report but not by the Nonfarm payrolls, which only survey large businesses.

The weak payroll numbers did not impact the expectations for the next Fed rate hike. The CME Fed funds futures are predicting a 66.2% chance of a rate hike at the June meeting. There is also a 38.5% chance of a third hike at the September meeting. The various Fed speakers have tended to suggest the Fed could move faster unless they decide to begin selling off their $4.5 trillion in QE purchases, which would be the equivalent of multiple rate hikes. That potential was raised in the FOMC minutes and helped cause the market crash on Wednesday.

The various economic reports including the Nonfarm payrolls, knocked the forecast for the Atlanta Fed real time GDP for Q1 down from 1.2% on Tuesday to only +0.6% growth as of Friday. This is a material change and could impact the Fed's eventual rate hike plans.

The first look at the actual Q1 GDP will be on April 28th.

In other reports, the California Manufacturing Survey for Q1 declined slightly from 59.7 to 58.2.

U.S. Wholesale Trade for February rose from -0.2% to +0.4%. On a 12-month basis, inventories are up +3.2%. These reports were ignored.

We have a very light calendar for next week with Janet Yellen leading off with a speech on Monday. After the reaction to the Fed minutes and the topics discussed, she will probably try to calm the markets with additional "gradual" comments.

The next most important event is the bank earnings on Thursday. With Citi, JP Morgan, Wells Fargo, First Horizon, First Republic and PNC Bank all reporting on the same day there is significant potential for volatility. ALL of them report before the market opens. A trio of strong earnings beats from C, JPM and WFC could power the market higher. However, in the last cycle, earnings beats by those banks did not power them higher. With the sector down the last week, it would appear investors are pricing in some lackluster results OR they just feel the November rally has run its course until some actual deregulation appears.

With Friday a market holiday, the bank earnings on Thursday morning are going to create a flurry of volatility and then volume will drop to near zero for the rest of the day.

The yield on the ten-year treasury dipped to 2.27% and a five-month low after the Syrian attack was announced. When it appeared to be a "one of one" event and not a prelude to active long-term intervention in Syria, the yields began to rise slightly to 2.31% at 12:00. After NY Fed President William Dudley spoke at the Princeton Club, the yields spiked again to close at 2.37%. Dudley said the Fed might pause in its plan to normalize rates if it decided to begin reducing its balance sheet. He also said the U.S. should consider some small adjustments in the Dodd-Frank law which toughened oversight for financial institutions.

The last time the unemployment rate was 4.5% the yield on the ten-year was 4.75% and the Fed funds rate was 5.25%. The Fed claims their new normal target will be 3.0-3.5% for two years from now. If the Trump administration believes that, they should be locking in some long-term treasury debt soon. For every quarter of a point that interest rates rise it adds $50 billion a year in interest to the U.S. debt. A rise to 3.5% would add $500 billion a year in interest to the debt. We never actually pay the interest. The government sells new debt for enough to replace the old debt and cover the interest. That is like getting a cash advance on your credit card in order to make the payment on that card.

The dollar dropped sharply after the attack and the weak payroll report. However, that was a knee jerk reaction and the internals on the jobs report suggested the economy was still on track with the unemployment at a 10 year low. The dollar dip was immediately bought and then comments about a rate hike in June and September and possibly even December, set it soaring to a three-week high.

Credit Suisse said year to date in 2017 there have been 2,880 announced store closings in the retail sector. This is more than double prior years for this point on the calendar. They project as many as 8,700 store closings for the entire year. There have been 10 retail chain bankruptcies and 7 additional chains are expected to file this year. The retail sector is in a death spiral and those not able to adapt to the online model are doomed to fail.

The retail sector has lost 60,600 jobs over the last two months. That was the largest two-month contraction since December 2009 when the industry lost 62,200 jobs. Mall stores accounted for 34,700 job losses in March. Retail workers account for 10.9% of all jobs in the USA. That is down from 11.6% in 2000. Payless Shoes filed bankruptcy last week and is closing 400 stores.

The death of the mall is well documented. The Richmond Town Center outside of Cleveland had three anchor tenants. Sears, Macys and JC Penny's. Two of them have already closed and JC Penny's is closing in June.

Amazon (AMZN) announced it was going to hire 30,000 part time workers over the next year with 5,000 of those to be work from home jobs. The 5,000 workers from home will be its Virtual Customer Service Program and the remaining 25,000 will be hired at the 70 fulfillment centers across the USA. This is in addition to the 100,000 full time employees with benefits the company said it was going to hire back in January. That hiring was going to take place over the next 18 months. Part time workers who work over 20 hours are eligible for benefits that include life insurance, dental, vision and disability insurance and Amazon pays all the premiums. Amazon will also prepay 95% of tuition costs for courses related to in-demand fields even if those courses would not lead to a job at Amazon. Full time workers also get 401K matching programs and paid time off. Amazon added 150,000 employees over the last five years and had 180,000 employees at the end of 2016.

Yum Brands (YUM) said it was cutting the use of antibiotics in chickens bought for use in its KFC restaurants. The company is giving poultry suppliers until the end of 2018 to stop using the antibiotics. Yum is joining McDonalds (MCD) and Chick-Fil-A in ending the practice. KFC sells more than 65 million buckets of chicken every year. Yum normally buys only about one-third of the chickens in a seller's flock because the rest do not meet their quality standards. Chicken farms are shifting to things like putting oregano in the bird's water to kill bacteria and infuse chickens with antioxidants. Farmers are now required to wipe eggs with sanitizing wipes before sending them to a Tyson facility to be hatched. Once they arrive, Tyson puts them in a room of fog made from peracetic acid to keep the bacteria as low as possible before being placed in the incubators.

Twilio (TWLO) was upgraded by JP Morgan from neutral to overweight. They listed 7 reasons why they think Twilio is a buy. After surging to $70 post IPO, the stock fell back to $28 and now trades at only a slight valuation premium to its peers. Their 12 consecutive quarters of 70% revenue growth is impressive. Amazon, which invested in Twilio, is more of a partner than a competitor. They are adding new Twilio features to their AWS offerings almost every month. The 31 million-share lockup expiration in February has already passed. The company has cut its higher-risk variable revenue by 60% so future revenue will be more predictable. Twilio's services are more reliable than its competitors. The company's addressable market of $46 billion is more legitimate than other providers.

JPM said "customers and developers recognize Twilio as a best-in-class toolbox for communications with a multi-year industry lead." Shares rallied 4.6% on the upgrade.

WD-40 (WDFC) reported earnings of 87 cents that missed estimates for 90 cents. Revenue of $96.5 million missed estimates for $99.8 million. They guided for full year earnings of $3.64 to $3.71 and revenue of $390-$395 million. Shares fell -4.7% on the news.

PriceSmart (PSMT) reported earnings of 90 cents on revenue of $772.3 million. Analysts were expecting 92 cents and $794.4 million. Same store sales rose 2.1% in March after being flat in February and declining the prior two quarters.

Diana Shipping (DSX) saw shares rise by 9% after JP Morgan upgraded the company from neutral to overweight. JPM said rates will improve because of a more stable supply trend. The weak global economy has punished shippers but the bank believes conditions are going to improve. That would be beneficial for all shippers not just Diana.

Apple (AAPL) shares declined the last two days on new worries the iPhone 8 will be delayed. According to a news report in the Economic Daily News in China, the phone could be delayed as late as November instead of the normal September launch. The article quoted "technical issues" with components. They said the OLED screens and incorporating the 3D sensing technology into the phone were the reasons for the delay. Apple has reportedly placed an order for 70 million OLED screens from Samsung. Online website 9to5mac said the absence of leaks from Foxconn Technology, the actual maker of the phones, could signify delays. "Either Apple has tightened security to improve secrecy OR the devices are not yet being produced in mass quantities." Foxconn employs more than one million workers and once production begins, there are always a few people that post pictures and details.

Apple will be rushing to get its phones to market ahead of Google's updated Pixel phone also due out in late 2017. This is the second set of rumors suggesting a delay in production. The first came from a fire at a ST Microelectronics (STM) facility that manufactures the 3D sensors. After several weeks of tense headlines, that rumor faded but there was also a different comment last week saying STM would not be ready to ship components until September.

It would appear that Apple shares are priced for perfection and any concrete rumor that deliveries could be delayed a month or more could be catastrophic. Investors are betting on a blowout Q4.

The Syria attack helped to lift crude prices. Syria does not produce much oil but any additional instability in the Middle East is always good for oil prices. Crude actually rose despite the spike in the dollar and that suggests larger trader interest.

U.S. production increased by 52,000 bpd last week to 9.2 million bpd. That is still well below the peak of 9.61 mbpd in 2015. Active oil rigs increased by ten to 672 with most of them going to the Permian. Active gas rigs increased by 5 to 165. Continued gains in oil prices should accelerate rig activations.


Volume was light at 5.95 billion shares and decliners of 3,638 were slightly ahead of advancers at 3,272. The markets recovered from their early morning dip with the Dow at -56 at the low and returned to positive territory in early afternoon. The fear of weekend event risk saw investors heading for the sidelines just before the close.

However, the selling was light and there was nothing to suggest it will be worse next week. Given the various headline events last week, the market missed out on several opportunities to post a significant decline. That suggests the likely path is higher even though the Dow and S&P charts are still slightly bearish.

The Dow remains stuck under resistance at 20,750 but the declines have been minimal. We have had two days of lower highs and lower lows but the index is refusing to drop below 20,600 and there is even stronger support at 20,500. The bank earnings on Thursday could be a market driver in either direction. Banks have been depressed despite the Fed rate hike. Strongly positive earnings could trigger short covering and mediocre earnings could add to the depression.

The Dow leaders on Friday were an unlikely group with all the normal leaders clustered at the bottom of the list.

The S&P is also stuck in a range between 2,350 and 2,370 that has held for the last eight trading days. The overall chart is slightly bearish but only until that 2,350 support fails and then it will be solidly bearish. A move on decent volume over 2,370 that holds and then pierces the next level at 2,380 would turn the chart slightly bullish. Until the range from the last three weeks has broken, we will not know the market direction. Given the flurry of negative headlines, just holding in place is somewhat bullish from a sentiment perspective.

The resistance on the Nasdaq Composite has moved up to 5,915 after the 5,914 high close the prior Thursday. This level has been penetrated multiple times but each attempt failed at the close. The Nasdaq Composite pulled back only slightly and the bullish trend is still intact.

The Nasdaq 100 has solid resistance at 5,440 and the major big cap stocks have been ticking lower the last couple days. Despite the selling in Facebook, Apple, Amazon, Netflix and Google, the index continues to hold just below that resistance. All it would take would be one good day to set a new high but we need a positive catalyst and I do not see one on the horizon.

The small caps have not declined over the last two days. The fractional loss on the S&P-600 on Friday is not material. However, the index is holding just over support at 825 where the Nasdaq indexes are holding just under resistance. Helping the small caps on Friday were the biotechs and semiconductors.

If this index closes below 825 and last week's lows, it could signal a sentiment shift for the market. It appeared over the last couple days that rotation from big caps to small caps had returned but it is so weak we cannot claim it.

The market is closed on Friday making this a short week. With lawmakers out of town on their Easter recess until the 23rd, there will be little in the form of negative headlines unless there is another unexpected military confrontation. The economic calendar is uninspiring with the bank earnings on Thursday the only bright spot for the week.

I believe the market needs a catalyst to move higher. I have no clue what that could be but without one we could languish in a sideways range for another week.

The fireworks begin when the lawmakers return to work on the 24th with only five days to pass a funding bill and raise the debt ceiling. The fighting was already in progress before they left for the recess but it was muted because they did not want to give the folks back home something else to be mad at them about.

In theory, this week should be neutral but as Yogi Berra reportedly said, "In theory there is no difference between theory and practice. In practice there is." (The quote was actually first spoken by computer scientist Jan van de Snepscheut in the early 1980s. It first appeared in print in the 1986 book on Pascal programming by Walter Savitch and he said he heard it at a computer conference years earlier from Snepscheut. More than a decade passed before it was falsely attributed to Berra.)

Random Thoughts

The bearish crowd continues to grow with bullish investors shrinking for the second week. The shift in sentiment now shows that 71.7% of respondents do not believe the market is going higher. That means there are very few buyers to propel the market forward. On a contrarian basis, it also suggests an unexpected spike could pull a lot of traders off the sidelines or force them to cover bearish positions.

Last week results

The Trump administration warned Russia it was going to strike Syria and gave them time to move their planes and people. They did it over the de-confliction hotline that was in use to prevent inadvertent or deliberate conflicts between U.S. and Russian planes in the skies over Syria.

Late Friday, the U.S. News and World Report said Russia has shutdown the hotline saying it was no longer needed. In addition, Russian Defense Ministry spokesman Maj. Gen. Igor Konashenkov said Russia will quickly "strengthen the Syrian air defense system and increase its efficiency in order to protect Syria's most sensitive infrastructure facilities."

Russia is trying to send a message to Trump that any further attacks on Syria will be met with Russian defenses. If that response included attacking a U.S. ship that launched the missiles, we would be moving into an entirely new chapter on U.S. - Russian relations.

The real message Trump sent was also to North Korea and China. By launching the attack while at dinner with the Chinese president, he showed he was serious about red lines. North Korea has been crossing red lines at will without any negative results. The administration has said multiple times recently that the military option is on the table against North Korea if China does not control its wayward neighbor. China could stop North Korea's nuclear and missile programs very quickly but has refused to interfere. Thursday's strike on Syria probably caused Xi Jinping and Kim Jong Un to rethink their posture on flaunting those UN Security Council sanctions.

Speed of Change

3D Printing:

The price of the cheapest 3D printer came down from $18,000 to $400 within 10 years.

At the same time, it became 100 times faster.

All major shoe companies have started 3D printing of shoes.

Spare airplane parts are already 3D printed at remote airports.

The space station now has a printer that eliminates the need for the large amount of spare parts they used in the past.

At the end of this year, new smartphones will have 3D scanning possibilities.

You can then 3D scan your feet and print your perfect shoe at home.

In China, they have already 3D printed a complete 6-story office building.

By 2027, 10% of everything that's being produced will be 3D printed.


Enter passively and exit aggressively!

Jim Brown

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"A wise man can learn more from a foolish question than a fool can learn from a wise answer."

Bruce Lee


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