The Dow, Nasdaq and Russell stretched their winning streak to eight weeks.

Weekly Statistics

Friday Statistics

Any winning streak that lasts eight weeks has got to generate some consternation on the part of investors. However, after a couple weeks of choppy trading the market just keeps moving higher. At the current level investors are starting to see those big round number targets and without a headline disaster we could see them hit.

When the indexes get close enough to a high-profile level it acts like a tractor beam that pulls them higher and higher until it is reached. Unfortunately, sometimes when those targets are reached, investors don't know what to do next. "Ok, now what?"

In the case of the Dow the 25,800 level was the round number target dating back to the October 16th close. Twice before it had been broken only to be sold hard in the days that followed. Obviously, closing over that level is only one part of the process. Now we need to hold over that level.

We are still catching up with all the reports delayed by the government shutdown so there were a bunch on Friday. The consumer sentiment for February rebounded sharply to 95.5 from the low 91.2 reading for January. Now that the shutdown was over, sentiment began to accelerate back to the upside. The present conditions component only rose a point from 109.9 to 110.0 but the expectations component rose from 79.9 to 86.2 for a 6.3 point gain.

Business conditions spiked 9 points from 34% of respondents to 52% reporting better conditions. That is still 7 points below the December level before the shutdown began. Overall economic optimism rose 8 points but remains 5 points below December.

Now that the government funding is behind us and the Chinese trade negotiations are heating up, we should see sentiment continue higher.

The NY Empire Manufacturing Survey for February rebounded 5 points from 3.9 to 8.8 but that is still well below the 21.4 level in November. There was a 10 point drop in December as the budget battle was beginning and fell to the lowest level since May of 2017.

New orders rose from 3.5 to 7.5 and backorders recovered from -7.6 to -0.7 but still in contraction. Employment declined from 7.4 to 4.1. However, the price components made big moves in the right direction. Prices paid declined from 35.9 to 27.1 and prices received rose from 13.1 to 22.9. Those planning on increasing their capital expenditure plans jumped from 17.9 to 29.3. This suggests the price pressures are fading and owners are feeling more confident about the future.

Industrial production for January declined -0.6% and the first decline in nine months. Manufacturing output declined 0.9%. Motor vehicles and parts fell -8.8% and the second loss in four months. The tariffs on Chinese materials was cited as the main problem. Manufacturers are holding off on resupply in hopes a deal can be concluded and tariffs dropped. Those not able to postpone buying are decreasing the size of their orders.

Surprisingly import prices declined -0.5% in January. This was the third consecutive decline with December down -1.0% and November down -1.7%. The majority of the prior month declines were related to oil prices. Excluding oil, import prices would have declined only 0.4% total for the three-month period. Export prices declined -0.6% driven by the strong dollar.

There are no signs of inflation at the import, production or consumer levels. Thursday's producer price index saw prices fall -0.1% for January and the consumer price index on Tuesday showed prices were flat for the third consecutive month.

Unfortunately, the impact from the shutdown and the weakness in Europe and Asia has been substantial. The Atlanta Fed real time GDPNow forecast for Q4 GDP has fallen from 2.7% growth to only 1.5% growth. The large decline in retail sales and inventories slashed the personal consumption expenditures (PCE) growth from 3.7% to 2.6%. This rippled throughout the forecast to cause an economic earthquake.

On the positive side, the 12-month outlook for the Fed is for no hike and a 19% chance of a rate cut. This chart is for the January 2020 meeting.

We have a light calendar for next week with the FOMC minutes the highlight. The Philly Fed Manufacturing Survey and the Existing Home Sales are the next most important.

Chinese trade negotiators will travel again to Washington this week in hopes of getting closer to a final deal before the March 1st trade deadline. The meeting days have not been published.

The Q4 earnings cycle is 80% over with 394 S&P companies having already reported. Q4 earnings growth is now projected at 16.4% with 6.0% revenue growth. Some 69.5% of companies have beaten estimates and 61.7% beat on revenue. For Q1 there have been 56 guidance warnings and 23 guidance upgrades. The are 51 S&P companies reporting this week. The forward PE has risen to 16.3%. The Q1 earnings forecast has declined to -0.5%. Energy is the biggest drag with a projected decline of -13.6% and healthcare is the strongest sector with a +6.2% forecast.

The earnings calendar is shrinking. Dow component Walmart will report on Tuesday. Agilent, CVS, Dominoes Pizza and Hewlett Packard Enterprise should be the most watched for the rest of the week.

Mattel (MAT) reported an earnings surprise on February 7th and shares shot up from $12.30 to $17.25 on the news. They reported earnings of 4 cents and analysts were expecting a 16-cent loss. For five days the stock rose and analysts bragged on how they had beaten the Toys-R-Us curse that tanked Hasbro the prior week.

On Friday at 2:PM the company warned that 2019 revenue would be flat with 2018 and analysts had been expecting 3.5% growth. They said Q1 revenue would be down due to currency issues and weakness in China. The company said weakness in Thomas & Friends and American Girl brands were responsible. They did not give earnings guidance, but analyst said based on their revenue and commentary the expected 5 cent earnings would likely turn into a loss. Shares collapsed with an 18% drop and the worst single day percentage decline since 1999. There are bound to be lawsuits on this given the way they delayed the announcement. Anybody that bought Mattel after the earnings, thinking the company was in good shape, would have a case against them for losses on the negative guidance. This selective data release is not the right way to do it.

Newell Brands (NWL), formerly known as Newell Rubbermaid, reported earnings of 71 cents that beat estimates for 67 cents. Revenue declined 6% to $2.3 billion and missed estimates for $2.43 billion. Food and appliance sales of $824 million missed estimates for $844 million. Outdoor living sales declined -7.2% to $809 million and missed estimates for $855 million. Learning and development sales fell -3.2% to $707 million and missed estimates for $735 million.

They guided for earnings of $1.50-$1.65 and analysts were expecting $1.91. Revenue guidance of $8.2 billion also missed estimates for $8.79 billion. Shares fell -21% on the news.

PepsiCo (PEP) reported earnings of $1.49 that matched estimates. Revenue of $19.524 billion narrowly beat estimates for $19.51 billion. Frito Lay revenue rose 4% to $5.0 billion and topped estimated for $4.94 billion. Beverage revenue rose 2% to $6.01 billion. Pepsi said 2019 earnings were expected to decline about 1% but analysts were expecting 3.4% growth. They raised their annual dividend by 3% to $3.82. Shares spiked over $3.

XPO Logistics (XPO) reported disastrous earnings of 62 cents, down from $1.42 in the year ago quarter and well below analyst estimates for 84 cents. Revenue of $4.39 billion missed estimates for $4.56 billion. They authorized a $1.5 billion buyback and projected revenue growth in 2019 of 3% to 5%.

However, the company said their "largest customer" (assumed to be Amazon) was "substantially downsizing its business with XPO starting in Q1." Projected volume is expected to drop by 66%. Amazon paid XPO nearly $1 billion for shipping services in 2019. XPO is being forced to close three facilities where Amazon was the largest customer. Two of the facilities each occupied more than 500,000 square feet so this is not a minor event. Amazon recently announced a one million square foot facility to handle heavy/bulky items, similar to what XPO handled for Amazon.

Amazon has boosted its Prime Air fleet to 50 Boeing 767 freighters and currently operates nearly 7,500 semi-trucks/trailers. They are implementing a "last mile" delivery service where they are funding small business startups in major cities with up to 20 delivery vehicles each. Amazon has a commitment from Mercedes for 20,000 Sprinter vans for these startup companies. The concept is to have a bunch of independent delivery companies serving specific areas in and around big cities. When coupled with their planes, trucks and 185 distribution centers, they will be cutting out FedEx, UPS and the USPS on many of their deliveries.

They are renting/buying/building airport facilities all around the country and are expected to ramp up to 100 planes over the next couple of years. Currently, analysts believe they have reduced revenue by 2% at Fedex and UPS and that will rise to 10% by 2021. XPO is feeling this impact already because of their less than truckload shipments related to the spoke/hub delivery system.

In Amazon's most recent SEC filings, they listed for the first time "logistics and transportation companies" as competitors. That is a clue they are rapidly expanding into that area.

On Friday Amazon announced a $700 million investment into electric truck startup Rivian Automotive. Amazon was the lead participant on the investment. Amazon is hoping the electric trucks will bolster its logistics network. GM was also mentioned as a possible contributor. The company would have a $3 billion valuation. Bezos personally reached out to the company to see if Amazon could provide funding.

While on the topic of Amazon, the company pulled the plug on its proposed $5 billion investment and 50,000 jobs in NYC. A few misinformed and uneducated protestors and politicians caused enough of a stink that Amazon bailed on the HQ2 project in NYC.

New York City is in one of the top five highest tax states, highest cost of living, most congested, etc. NYC is expected to run a $3 billion budget deficit in 2019 and will pay $7 billion in interest on their debt. They needed the $5 billion in investment and the 50,000 high paying jobs that would produce billions in taxes over the coming years. Amazon was planning to hire 25,000 and analysts believe the support services around the HQ would have created another 25,000. Restaurants, shopping, entertainment facilities, etc, would have been built and staffed. Over the next 25 years there would have been tens of billions in taxes paid by those businesses and workers. Personally, I could not believe Amazon wanted to go there and pay those high wages, taxes and the higher cost of living. There are so many places in the country that would have welcomed them at 25-40% of the cost.

Apple (AAPL) shares were under pressure on Friday after multiple SEC filings showed that big investors were trimming their positions. Berkshire Hathaway sold roughly 3 million shares, but they still had 249.5 million as of December 31st. However, since this notice covered Q4 investors did not know if they continued selling in January. Given Berkshire's paper loss of $22 billion from the October high to the January 3rd low, or 40% of their investment, they could have continued their sales of Apple shares in January.

However, Berkshire assistant Debbie Bosanek, said Warren did not sell the Apple shares. The shares that were sold were managed by one of Buffett's two portfolio managers. She also clarified that none of the Apple shares purchased by Buffett himself have ever been sold. You know Berkshire had to put out that note in order to avoid a costly run on Apple shares if individual investors thought Buffett had lost confidence in the company. With 249 million shares, every $1 of decline is a $249 million loss.

Tiger Capital announced the sale of one million shares. David Tepper and George Soros both announced they had closed their positions. Shares were only down fractionally on Friday.

Apple announced it would resume selling iPhones in Germany that include Qualcomm chips. Qualcomm had won a patent case there and the court allowed an injunction preventing sales of some iPhone models. This was a major blow to Apple, and they had no choice but to revert back to Qualcomm chips in order to avoid losing sales on a large number of units.

FANG stocks had a bad day on Friday despite the big market gains. The FANG trade has fallen out of favor as we near the potential for a resolution of the China trade problem. Industrials are in favor on the expectations for a rebound in overseas sales. Some 50% of profits earned by international companies are made overseas. FactSet projects 2019 earnings by domestic companies like small caps to rise by 8.0% while profits from international companies will rise only 1.7%. If we achieve a meaningful trade agreement with China, those international profits will soar. This is fueling the transition from tech growth to industrial stocks.

Facebook and Google are under a privacy cloud and how private information is used. Hardly a day goes by without some headline about an inquiry or action proposed by an overseas country. The UK is preparing to release a report calling for them to be regulated. Major fines, expected to be record amounts, are being negotiated in the US for past privacy breaches.

Netflix is the only one of the four that is maintaining forward momentum. This could also be related to post earnings depression in the tech sector. The Nasdaq Composite only gained .61% and the $NDX +.46% when the Dow was up 1.74% on Friday.

How much do you make in your regular job? According to SV Business Journal, if you work for Facebook the median salary is $240,000 per year plus free catered meals, generous paid vacations, on-campus gyms, nap rooms, laundry facilities, free rides to work, stock options, etc. That is three times what a typical worker at Paypal makes and $40,000 a year above what a Google employee makes. In fact, Facebook employees make about four times the lowest paid tech employee at major companies. Facebook has 36,000 employees.

Median Salaries:
Yelp $59,298
Micron $56,540
Bio-Rad $62,450
Coherent $64,707
Hewlett Packard Ent $65,652
Agilent Tech $68,579
PayPal $70,228
Dell $83,139
Qualcomm $85,592
Oracle $89,887
AMD $89,909
EA $96,336
Intel $102,100
Symantec $102,869
Illumina $102,920
Netgear $105,318
Cadence $110,038
AMAT $113,999
Ebay $122,891
Cisco $132,764

Crude prices rebounded again after Saudi Arabia said they were going to cut another 500,000 bpd starting March 1st. They are doing this because Russia has not cut their production as promised. There was also an outage of 300,000 bpd when a ship's anchor cut a power cable to the Safaniyah offshore field in Saudi Arabia.

Also helping lift prices was the sanctions on Venezuelan oil exports. Those sanctions have put a serious crimp in the sale of oil from Venezuela. Tankers continue to be stuck in a holding pattern while Venezuela tries to find willing buyers. Opposition president elect Gauido named a new board to Citgo in a move intended to seize control of the US-based subsidiary of PDVSA and restart oil sales with the proceeds going to the new Venezuelan government. China has also begun talks with the new opposition government in order to reinforce their claims on more than $20 billion remaining on $50 billion in loans they made to Venezuela. China has been taking oil in payment on the loans.

The progression of trade talks with China also lifted oil prices. A resumption of trade would increase demand. China's imports and exports also rose faster than expected in January, reducing fears of a dramatic slowdown and improving the outlook for oil demand.

The EIA revised its production forecasts for 2020 to 13.2 million bpd, up from last month's estimate of 12.9 mmbpd. They now expect 12.4 mmbpd in 2019 and that is a 300,000 bpd jump in the estimate just since last month.

The IEA warned that the loss of heavy oil production from Venezuela, Iran and Mexico was causing problems for refiners. WTI production is soaring but heavy oil production is declining for various reasons. The IEA said it could cause a significant price hike for heavy oil as refiners put a premium on those barrels. Refiners setup to process heavy oil could be challenged to find enough supply and that would boost prices on oil and on refined products. Analysts believe a lack of resolution on the Venezuelan heavy oil exports would prevent the US from ending the waiver program on Iran when it is scheduled to end in May. The world may need the heavy oil from Iran if it cannot get it from Venezuela.

Note that the refinery utilization declined significantly last week from 90.7% to 85.9% as refiners move into the maintenance season to prepare for the production of summer blend fuels. Also note the sharp drop in imports of roughly one million barrels per day. OPEC has urged their members to restrict shipments to the US in order to influence the price of WTI, which is governed by US inventory levels. This decline in imports is also the result of refiners going offline for maintenance. If they cannot refine oil over the next 60 days, there is no reason for them to continue accepting deliveries over that period.


On Thursday the S&P futures dropped -30 points to 2,730 over an hour ahead of the open. After struggling back to 2,758 at 3:PM they crashed again at the close. This was the third consecutive day the markets sold off at the close. By 2:45 Friday morning the futures were down -14 points when a China headline broke and the short squeeze began. The futures rebounded to gain 47 points by the close.

The market went from ugly with the futures at a 3-day low at 2:30 am to closing at a two-month high at 4:PM on Friday. When I wrote the Option Writer newsletter late Thursday evening, the outlook was grim. Friday's performance is solid proof of how much headlines control the market as shorts are squeezed.

Analysts are puzzled as to why the market keeps rising. The Dow, Nasdaq and Russell have been up for 8 consecutive weeks. Another streak that is not getting as much attention is the 11 consecutive weeks of outflows from equity funds. Bank of America said $83 billion has flowed out of equities over the last 11 weeks. These two facts seem to contradict each other. How can the markets rally for 8 weeks if there have been outflows for 11 weeks?

The market cap of the US equity market is $34 trillion. The $83 billion in outflows is only 0.00237% of the total market cap. This is the proverbial drop in the bucket. This does not mean $83 billion is not material because the vast majority of the US market cap never changes hands. Those stocks sit in investor accounts for years or even decades at a time without being traded. Average daily trading volume is about $350 billion. The $83 billion in outflows over the last 11 weeks equates to about $1.5 billion a day. Compared to the $350 billion average daily volume, it is insignificant. This is another example of people worrying about a headline that is immaterial in the bigger picture. It sounds like a big number, but it isn't once you do the math.

What is important is the resistance at 2,815 on the S&P. This level repelled rallies three times since October and we are getting close again. The S&P has rallied 429 points since the December 26th low at 2,346. There have been three periods of decent retracement along the way, but this rebound is very overbought given the length of the rebound and the weak fundamentals in economics and earnings. Nobody will be more excited if we break through that 2,815 level but I remain skeptical until it happens.

We do know that these high-profile resistance targets act like tractor beams when the index gets close so the odds are good, we will test it. It is the results after the test that are important. Do we push through or fail again? Also, since this level is such a high-profile event the bears are likely to be setting up their shorts once we pass 2,800.

The Dow benefitted from the rotation into industrial stocks and stocks that will benefit from a Chinese trade agreement. Boeing continues to be a leader whenever the China talk turns positive. The index closed over the first line resistance at 25,817 with the next target at 26,191. The giant round number in our future is 27,000. If we get through that resistance from November, the 27,000 level is going to be the instant target.

The Nasdaq Composite closed just barely over the 200-day at 7,465 and a move over 7,500 should set up a sprint to 8,000 and the highs from October. The decline in the FANG stocks held the index back on Friday.

The Russell 2000 closed 3 points over correction territory with the second-best percentage gain at 1.56% of all the major indexes. The small caps reacted much stronger than expected on the positive news from China. They should not be impacted as much from the tariffs other than cost of goods and raw materials. The small caps are mostly domestically focused companies and do very little business in Asia.

With the government shutdown out of the way and Chinese negotiators coming to Washington to play nice once again, there is nothing in the headlines to roil the market. That is almost scary. The market does best when it is climbing a wall of worry and we seem to be entering a calm period. However, the last two weeks of February are normally the weakest as post earnings depression weighs on the market. With the major indexes nearing their prior highs on weak earnings projections ahead of a weak period on the calendar, what could possibly go wrong? Obviously, quite a bit but investors are drunk on the potential for a trade agreement.

Enter passively and exit aggressively!

Jim Brown

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