The earnings from PG & JNJ today proved the Dow is not bulletproof.

Market Statistics

JNJ and PG both beat on earnings and revenue but both declined sharply to erase about 65 Dow points. Their declines awakened investors to the potential for post earnings declines and prior point leaders BA, CVX and CAT also declined ahead of their earnings reports.

The market is priced to perfection on earnings expectations and some of the tax ramifications are disturbing those expectations. Multiple companies took charges related to the new tax law.

Travelers beat expectations and was rewarded with a nearly 7 point gain that added about 48 Dow points. The A/D line was slightly positive on the Dow but the top 5 gainers added about 95 Dow points while the top 5 losers erased 100 Dow points.

Johnson & Johnson (JNJ) reported earnings of $1.74 that beat estimates for $1.72. Revenue of $20.20 billion rose 11.5% and beat estimates for $20.08 billion. JNJ also took a $13.6 billion charge related to tax reform that caused a GAAP earnings loss of -$3.99 compared to earnings of $1.38 in the year ago quarter. The company guided for 2018 earnings of $8.00-$8.20, above estimates for $7.88, and revenue of $80.6-$81.4 billion compared to estimates for $80.7 billion. Their pharmaceutical revenue rose 15.5% to $9.7 billion. The CEO said the company was happy about the tax reform because it would allow them to invest at a higher rate in new drugs and products. Shares fell -6.31.

JNJ was also suffering because an appeals court upheld a ruling that invalidated a crucial patent on Remicade, a blockbuster arthritis drug. The drug had sales of $4.8 billion in 2016 but slowed in 2017 as Pfizer's generic named Inflectra entered the market.

Procter & Gamble (PG) reported earnings of $1.19 that beat estimates for $1.14. Revenue of $17.40 billion barely beat estimates for $17.39 billion. The company took a charge of $628 million that was a net of repatriation taxes of $3.8 billion and a deferred tax benefit of $3.2 billion. The maintained their guidance for 3% revenue growth but raised guidance to 5%-7% earnings growth. Full year earnings are expected to decline 30%-32% because of the sale of their beauty brands portfolio in October 2016. Analysts are expecting $4.17 for full year earnings. Shares fell $3 on the news.

Travelers (TRV) reported earnings of $2.28 that rose 39% and beat estimates for $1.64. Revenue rose 3.6% to $7.5 billion and beat estimates for $7.1 billion. Net premiums written rose 6% to $6.4 billion. The company announced a quarterly dividend of 72 cents payable March 30th to holders on March 9th. They repurchased $351 million in stock for the quarter and have $4.6 billion left in their existing authorizations. They did suffer losses from the California fires but it did not impact the results thanks to a $126 million benefit from a reinsurance dispute settled in Q3. Shares exploded higher with a $7 gain.

Dow component Verizon (VZ) reported earnings of 86 cents that missed estimates for 88 cents. Revenue of $33.96 billion beat estimates for $33.15 billion. The company said it expected as much as $4 billion in additional cash flow benefits from the tax reform. They expect to spend $17-$17.8 billion in 2018 on capex compared to the $17.2 billion they spent in 2017. The company added 1.2 million customers in the quarter including 647,000 phone users. Shares spiked on the report but faded to a loss by the close.

After the bell, Texas Instruments (TXN) reported adjusted earnings of $1.09 that matched analyst estimates. Revenue of $3.75 billion narrowly beat estimates for $3.74 billion. For the full year, the company posted earnings of $3.68 billion or $3.61 per share on revenue of $14.96 billion. They guided for the current quarter for revenue of $3.49-$3.79 million compared to estimates for $3.64 billion. Do you think they picked the exact center of the estimates on purpose? Shares had been on a monster run with a $25 gain since early December but they fell sharply in afterhours on the weak numbers.

United (UAL) reported earnings of $1.40 that rose 46% and beat estimates for $1.34. Revenues of $9.44 billion narrowly beat estimates for $9.43 billion. Revpar rose only 0.2% but cargo revenue surged by 21.6%. Shares fell $4 after the company outlined aggressive growth plans while investors fear an increase in capacity will lower margins. Management said they plan to increase passenger carrying capacity by 4%-6% per year through 2020. Also, fuel prices are rising, up 20% from this period in 2016. United guided for 2018 earnings of $6.50-$8.50 and analysts were expecting $6.96.

Shares of Canadian national Railway (CNI) reported earnings of 94 cents that missed estimates for 98 cents. Revenue of $2.57 billion missed estimates for $2.61 billion. Shares declined $2 in afterhours.

Cree Inc reported a loss of 1 cent that missed estimates for earnings of 2 cents. Revenue of $367.9 million beat estimates for $249.9 million. They guided for the current quarter for a loss of 3 cents to earnings of 3 cents with revenue of $335-$355 million. Analysts were expecting $341.5 million. Shares declined about $1 in afterhours.

Capital One (COF) reported earnings of $1.66 that missed estimates for $1.85. Revenue of $7.01 billion missed estimates for $7.12 billion. Provision for credit losses rose 10% to $1.92 billion. The bank said a rising number of consumers are falling behind on their credit card payments. The bank also took a charge of $1.77 billion related to tax reform. Loans outstanding rose 1% to $254.5 billion. Shares fell about $2 in afterhours.

Disney (DIS) said it was going to give 125,000 employees a $1,000 bonus due to the tax reform. They are also committing $50 million to a new employee education program which will be available to 88,000 employees. The program will contribute to higher education or vocational training and it does not have to be related to their current job responsibilities at Disney.

Boeing, AT&T, Wells Fargo, Comcast, Bank of America and Walmart are some of the other companies that have already announced bonuses for employees. Trickle down is working this time.

Earnings for Wednesday include Dow components GE and UTX. Regardless of what GE reports they are not going to move the Dow because they are only a $16 stock. UTX could be a mover because the rally stalled two weeks ago and shares have been stuck at the $135 level. Investors may be concerned earnings could disappoint but not concerned enough to sell.

Other companies of interest would be Stanley Black & Decker, Progressive and United Rentals. The Dow has serious risk on Thursday with both Caterpillar and 3M reporting before the bell. Should both disappoint, it could be a big drop because CAT has been an outstanding performer since September. Shares have also stalled at $170 for the last week. We exited CAT in the Ultimate Investor newsletter this morning with a huge gain.

TD Ameritrade (AMTD) said trading activity is off the charts. New accounts for people 35 and younger rose 72% in Q4. Average daily trades in Q4 were 726,000 and that has jumped to more than 975,000 daily in 2018. That is a 34% increase. The CEO said trades in blockchain and marijuana related companies were nearly 10% of the total in 2018.

The Richmond Fed Manufacturing Survey for January fell from 20 to 14. The 20 in December was a historic high so a decline was expected. The biggest component decline was employment from 20 to 10. New orders remained flat at 16 and backorders bounced back into positive territory at 5.

The calendar for the rest of the week includes new and existing home sales and the Kansas manufacturing survey. We get the first look at the Q4 GDP on Friday with expectations at 3.0% growth.

The nearly final Atlanta Fed real time GDPNow has risen to 3.4% with the last update coming after the new home sales on Thursday. If the BEA GDP is 3% or higher it will be the first time since 2005 that we have seen three consecutive quarters of 3% growth.

Hurray! The government shutdown is over. Boo! The next one is just over two weeks away. As the smoke cleared from the weekend event, it appears the democrats took the most damage. Senators are already claiming they will not cave in on the next round of funding and will hold out regardless of the time involved.

Oil prices continue to hold just under $65 despite a surprise build of 4.755 million barrels in the API inventory report after the bell. Analysts had expected a 1.6 million barrel decline. Distillate inventories fell -1.28 million barrels and gasoline saw an increase of 4.117 million barrels.

Part of the weaker than expected inventory gains in January is the requirement by regulators that the Keystone pipeline run at only 80% of capacity after a 5,000-barrel leak in November. The current flow rate is 524,000 bpd and that is helping reduce inventories at Cushing. Storage in Canada hit a record high at 31.824 million barrels in December. Transcanada, operator of the pipeline, said they had already received firm 20-year commitments for 500,000 bpd on the Keystone XL pipeline. That is about 60% of the 834,000 bpd line. The pipeline is not yet complete.

Prices could be poised for a decline. Last week the CFTC reported the largest number ever of 666,000 net long futures contracts on WTI. This is a monster bullish position held by large speculators going into what is normally a weak period for crude prices. The current month contract rolled over on Monday and prices barely moved. The next expiration is February 20th. Speculators are counting all the production outages around the world and the rate of decline in global inventories. If Russia and others begin to talk about ending or reducing the OPEC production cuts at the end of June, prices could implode as these speculators race to exit their longs.


The Nasdaq powered to a new record high close thanks to the Netflix earnings and lifted the S&P and Russell 2000 to a new high as well. The Dow failed to close at a new high because of the earnings drag but a -4 point decline is not even a rounding error.

The S&P is only 11 points away from Goldman's 2018 target price of 2,850 and 16 points away from the median target price of 2,855 from 18 analysts. The index is now 236 points or 9.1% above its 100-day average and that is the widest spread on my charts dating back to the 1970s.

We know why the market is so bullish. It is the earnings expectations. However, as I pointed out last weekend the monster charges being taken as a result of the tax reform have killed the earnings growth estimates. There is no "reason" for the market to decline in the coming days but the market never needs a reason. The blame is always placed on the event after it happens by the market commentators.

The market can continue higher as long as investors continue chasing prices. As I reported earlier about TD Ameritrade trade volume spiking 34%, retail investors are going all in as though this rally will continue until year-end. We all know that is not the case. Eventually, the trend will end and the race to the exits could be epic.

I am not predicting that this week because I think investors will remain involved until after the big caps techs report and that is next week. The first full week of February could see the post earnings depression appear and I believe February could be a rocky month. When a dip finally arrives, it will be bought and we should see higher highs in March/April before what could be a rough patch over the summer doldrums. This is just my opinion and not a guarantee.

The S&P has minor support back at 2,600 and then 2,750 followed by 2,675.

The Dow is now 2,574 points above its 100-day average. To say that is overbought would be an understatement. The Dow has considerable earnings risk over the next 7 trading days. Initial support is not far below at 25,950 but the next stair step is 24,700 and that is a long drop. If the Dow continues to rise, it will only increase the overbought conditions and the severity of the decline when it comes.

The Nasdaq big caps are packing on the points and making new daily highs. The Nasdaq chart is showing an acceleration of the gains in what could be seen as an euphoric rush that typically precedes market tops. I am not predicting an imminent decline but one look at the chart should strike fear into anyone fully invested.

The Nasdaq is now 716 points or 10.6% over its 100-day average and very overextended compared to historical norms.

The Russell was somewhat encouraging with a record close just slightly above uptrend resistance. We cannot claim it as a breakout but the new high on a day when the Dow was negative is a positive sign. However, it was led by the gains in the Nasdaq rather than a broad based surge in small cap stocks.

The trend is your friend until it ends. Unfortunately, sometimes the end arrives with very little warning. The market is positive on earnings expectations. I get that. However, that does not mean we should just keep pressing our bets until the market sevens out. Craps players should understand that scenario. When a shooter is on a hot streak, winners keep raising their bets as if they expect the run to continue for hours. The shooter eventually throws a seven and the dealers scrape all the money off the table and everyone leaves depressed.

We can continue to profit from the market gains. Just keep your stop losses in place and let the market take you out when the trend ends.

Enter passively, exit aggressively!

Jim Brown

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