After a week of low volume gains and losses the S&P and Nasdaq managed to close at record highs.

Weekly Statistics

Friday Statistics

Most of the gains came on Tuesday and the next three days were sideways to down until 2:PM on Friday. A low volume uptick in buying, possibly short covering ahead of the weekend, lifted the indexes back into record territory. The +105 point gain on the Nasdaq on Tuesday and the +27 point gain on Friday, was the majority of the gains for the week. The other three days only added a total of 16 points.

The S&P clawed its way to a new high by 3 points on Tuesday and then added another 6 points to that record on Friday after a 15-point rebound from the morning lows.

The Nasdaq rebounded 85 points from the morning low to close at a record high.



Powering the market rally was the first look at the Q1 GDP. The headline number showed a 3.2% rise in Q1 and that was the equivalent of a blowout. The average of the prior eight Q1 readings before the tax cut was 0.87%. The first quarter GDP is always low due to factors nobody understands. It has been studied and there is no accepted answer other than they blame it on the weather and post-holiday depression. In Q1-2018 the GDP rose 2.2% as a result of the surge in activity following the tax cut.

To illustrate how much of a blowout this quarter actually was, the entire month of January was lost because of the government shutdown. For the entire quarter international trade was handicapped by tariffs and trade battles. The fear of a hard Brexit in April pressured businesses doing business in Europe in Q1. Without those problems the GDP could have been significantly higher. This is setting the stage for a very strong year if the China trade agreement happens in May as expected. The president said on Friday he also expects a major trade agreement with Japan in May. Prime Minister Abe met with Trump at the White House on Friday.

There are so many pieces of the puzzle coming together that investors may soon become bullish again.

The components of the GDP were negative. Consumption (consumer spending) declined from 1.66% in Q4 to contribute only 0.82% in Q1. Analysts blamed that on the shutdown delay in getting tax refunds mailed. Fixed investment declined from 0.54% to 0.27%. On the positive side inventories rose from 0.11% to 0.65%, which will come back to bite us in future quarters when inventories decline. Exports surged from a -0.08% drag in Q4 to a +1.03% contribution in Q1. Given all the tariff worries, analysts were wondering where those exports went. The contribution from government rose from a -0.07% drag to a +0.41% contribution.

The naysayers were out in force claiming the spike in GDP was just a fluke and we will have to wait another six months for the revisions to know if they were right.


The Atlanta Fed Q1 forecast had improved from just a 0.2% rise in early March to 2.7% and was much closer than the analyst consensus of 1.5%. Normally the Atlanta GDPNow forecast is hotter than the actual number but this quarter it lagged. They continue to hone the forecast methods to get as close as possible.


The last reading of Consumer Sentiment for April rose only slightly from the initial reading of 96.9 to 97.2. That was down from the 98.4 in March. The present conditions component declined from 113.3 to 112.3 and he expectations component declined from 88.8 to 87.4. With the Q4 stock market dip and the January government shutdown behind us we should see sentiment begin to rise. The Mueller report is also behind us, but lawmakers seem obsessed with keeping it alive and this is also a weight on sentiment. The spike in GDP should help. If oil prices and fuel prices begin to decline that would be a big plus.


We have a huge calendar for next week with the two jobs reports, two ISM reports and the FOMC meeting announcement and press conference on Wednesday. Jobs are expected to be in the 180,000 range but the potential is good for a higher than expected number. With weekly jobless claims at a 50-year low two weeks ago, new jobs should be strong.


We have another busy week for earnings, but it is front loaded with the big names. After this coming week, 75% of the S&P will have reported. Of the 229 companies that have reported 77% have beaten earnings estimates and 58% have beaten revenue estimates. The current Q1 earnings projection is for a -0.3% decline and much better than the -1.8% to -2.1% projections several weeks ago depending on who you were following. A year ago, the forecast was for a 10.6% rise. Revenue projections are for a +5.0% rise. There have been 85 earnings warnings and 32 guidance upgrades.

Sectors with negative earnings are consumer staples -1.2%, technology -3.3%, communication services -8.8%, materials -14.8% and energy -29.4%.

The big dogs for the week are Google, Amgen and Mastercard along with the four Dow components on Tuesday including Apple, McDonalds, Merck and Pfizer. After Tuesday there are hundreds of reporters, but you probably would not recognize 90% of the symbols.


Last week was very active with a lot of big names. I am not going to review them all for obvious space reasons. However, there were some critical events.

Dow component Exxon (XOM) fell -2% after reporting an earnings drop from $1.09 to 55 cents that missed the estimates for 70 cents. Revenue declined from $68.2 billion to $63.6 billion. You may remember that oil prices hit $42 back on Dec 26th and despite the rebound it was a slow process.

They blamed the refining and chemical business for the earnings miss. They said a heavier than normal maintenance cycle caused the first quarterly loss in refining for more than ten years.

Production in the Permian rose 140% to 226,000 Boepd. Exxon said they were on track to increase that to one million Boepd by 2024. Overall upstream liquids production rose by 5%. Production rose to 4.0 million Boepd, up 3% excluding divestments.

We should not worry about Exxon since they produced $2.4 billion in earnings for the quarter. I doubt any paychecks are going to bounce.

Shares fell 2% to support at $80.


The biggest earnings surprise came from Intel (INTC) after they reported earnings of 89 cents that missed estimates for $1.01. Revenue of $15.6 billion missed estimates for $16.86 billion. The company guided for the full year for earnings of $4.35 on revenue of $69 billion. Analysts were expecting $4.50 on $71.04 billion.

The CEO warned that the decline in memory pricing had intensified. The consolidation of a large capital expenditure spending spree for computer equipment over the last year has not run its course. Enterprise environments still have unused hardware that they bought in 2018 as a result of the new changes to the tax law. The CEO said this consolidation was more pronounced than they expected. He said we were headed into a more cautious IT spending environment. However, conversations with customers suggest demand will return in the second half of 2019.

As a result of these headwinds datacenter revenue declined -6% to $4.9 billion. Analysts were expecting a -2.5% decline to $5.1 billion. Traditional PC revenue rose 4% to $8.6 billion and analysts were expecting 1.9% and $8.38 billion. Memory revenue declined 12% to $915 million and more than the 9.4% decline analysts expected.

The CEO said they had decided over the "last couple weeks" to exit the 5G smartphone business because they did not see a path to profits. They do plan on being a leader in 5G for the networking sector and for IoT devices. They are planning on selling their 5G phone business and estimates are $2 billion. There are rumors that Apple could buy it. However, there are also rumors that talks have already ended. This could have been a big factor in the settlement with Qualcomm.

Intel shares fell -9% on Friday and erased 34 points off the Dow. The rest of the chip sector declined on Intel's commentary about weak IT spending.


Amazon (AMZN) reported blowout earnings of $7.09 per share compared to $4.61 analysts expected. That more than doubled the $3.27 they earned in the year ago quarter. Amazon Web services (AWS) saw revenue rise 41% despite the rise of the me-too cloud services companies. Advertising revenue in the "other" category rose 34%. They guided for current quarter revenue of $59.5-$63.5 billion and analysts were expecting $62.53 billion.

The earnings were not the big news. Amazon said it was going to spend $800 million to shake up delivery times for Prime members. Instead of 2-days, they are going to 1-day delivery on 100 million items. They did not give a date but said they had been growing their warehouses and distribution network in order to make it happen. They said the company would spend $800 million on this project in 2019.

This is a major competitive advantage for Amazon. Shares of Target and Walmart crashed on the news. Knowing that an item you buy today will be here tomorrow is a major sales tool. Target and Walmart have free shipping if you order a certain dollar amount, but it is not two day. You can get in your car and drive to a store and pick it up but why would you want to do that. Next day is going to be an ecommerce killer for the other retailers.

Amazon sells more than 606 million different products in the USA and more than 3 billion skus worldwide in 11 different marketplaces. How can Target and Walmart compete with this monster? All they can attempt to do is deal with several thousand common products in the USA and try to make a few pennies using their referral marketing on the website. If you need a T-shirt maybe you need socks too. They are never going to be able to compete heads up with Amazon.

Can you imagine the tone of the meetings at Target headquarters when this was announced? Amazon is approaching $1 trillion in market cap again and nearly four times that of Walmart and 25 times that of Target.

Netflix and Disney had better not underestimate Amazon's streaming platform. It is not mentioned in the press, but every Prime member has access to the Amazon Prime streaming video service for free. With more than 100 million Prime members in the USA that is a lot of eyeballs that will not be looking to sign up for paid subscriptions elsewhere.



On Thursday 3M (MMM) crashed the Dow at the open after falling $29 on a major earnings miss. That is the equivalent of about 200 Dow points. Earnings declined from $2.50 to $2.23 and missed estimates for $2.49. Revenue declined -5% to $7.86 billion and missed estimates for $8.03 billion. Industrial sales declined -6.6%, graphics sales fell -4.2% and healthcare sales rose only 0.3%. The company said it was slashing 2,000 workers in an effort to save $225-$250 million a year. They guided for the full year for earnings of $9.25-$9.75, down from prior guidance of $10.45-$10.90. They warned of slowing conditions in key end markets that impacted both organic growth and margins. The $29 drop was the biggest one-day decline since the 1987 market crash.

My question here is why did sales decline. 3M operates in a full spectrum of retail and industrial businesses and a 5% decline in revenue in an economy growing at 3.2% suggests there were some serious internal problems. Clearly, everyone else felt the same and that is why the stock was trashed.


United Parcel Service (UPS) reported earnings of $1.39 that missed estimates for $1.42. Revenue of $17.16 billion was flat and missed estimated for $17.77 billion. The company said weather reduced earnings by 7 cents per share. They guided for the full year for earnings of $7.45-$7.75 and analysts were expecting $7.52. UPS shares fell $10 on the results.


The UPS earnings led UBS to cut competitor FedEx (FDX) to a sell with a $161 price target. UBS said the slowing global economy is weighing on results and will result in several quarters of growth below expectations. FedEx lowered its own guidance in March citing "weaker global growth trends" leading to a decline in revenue. The CEO specifically cited "significant deceleration in airfreight activity in Asia over the last six months and a sharp decline in German manufacturing." They are also having problems digesting the TNT acquisition in Europe.


Caterpillar (CAT) reported earnings of $3.25 that beat estimates for $2.83 but the CAT number had a 31-cent tax windfall, which translates into real earnings of $2.94 and still a beat. Revenue rose from $12.9 billion to $13.5 billion and beat estimates for $13.3 billion. Construction equipment sales rose 3% to $5.677 billion. Resource sales rose 18% to $2.309 billion. Energy and transportation sales were flat. The company raised full year guidance from $11.75-$12.75 to $12.06-$13.06.

Shares fell 4% on worries about the sales slowdown in China with a 4% decline in construction equipment. If you read the details sales were actually flat after accounting for the strong dollar but that was still a disappointment since Asia-Pacific and China is normally their fastest growing region. The good news was a 7% rise in revenue in North America.


Facebook (FB) dodged another bullet with better than expected earnings that led investors to ignore the various regulatory issues they are facing. They set aside $3 billion as a potential loss in their feud with the FTC and said the loss could be as much as $5 billion for violations relating to a 2011 consent decree. Legal costs of the FTC investigation declined to 85 cents per share. Since Facebook has $45 billion in cash, even a $5 billion fine would be painful but not detrimental. Investors ignored it because of the earnings metrics.

They reported revenue of $15.1 billion that beat estimates for $14.7 billion. They reported earnings of $1.89 that beat estimates for $1.62. Their monthly active user count rose to 2.7 billion with 1.56 billion daily active users. Shares spiked $16 on the earnings but faded to only a $9 gain by Friday's close.

UBS upgraded from neutral to buy with a $240 price target and Monness Crespi & Hardt raised the price target from $225 to $250. Ten analysts upgraded their targets after the earnings.


What we learned from all those earnings above is that domestic focused businesses did ok in Q1, but international companies of all types did poorly. The slowdown in the global economy is real and is not yet improving. China implemented 72 different stimulus changes in Q1, but the economy has not yet recovered. Stimulus takes months to filter through the system and it will eventually be beneficial.

Germany continues to post weak economics and that is weighing on Europe. Kicking the Brexit can down the road until October has eliminated any current economic event but done nothing about solving the problem. Companies doing business in Europe are in a holding pattern. They do not want to commit large amounts of capital to any expansion if the final Brexit deal is going to be a disaster. The longer they wait the worse the European economy will be.

The China trade agreement is starting to be a problem again. Talks will restart next week with Lighthizer and Mnuchin traveling to China and a Chinese trade group will return to the USA the following week. For a deal that had reportedly been agreed several weeks ago, the new negotiations suggest there are still problems. The expectations for a deal helped lift the markets over the last three months. Now we have a never-ending negotiation with no details.

My view is that the longer it takes to conclude a deal the more likely the deal will be weak. Chinese leaders know the 2020 election cycle has begun and President Trump needs a deal as a campaign point. The longer they can drag their feet the more likely US negotiators will be to relax their demands. The Chinese government plays the long game as in years to decades. They are willing to endure some pain now rather than endure long term pain later.

If we get a weak deal, it will be picked apart unmercifully within hours of the release and the market could collapse. Any decline could be short-lived since the uncertainty will be over, but expectations are currently high and the Pied piper must be paid if those expectations are not met.

Tesla CEO, Elon Musk, settled his current battle with the SEC on Friday afternoon. The new agreement contains a list of things Musk cannot tweet about without approval from a securities lawyer. This list includes things like production targets, acquisitions, delivery timeframes, new products, nonpublic filings, earnings or losses, etc.

Musk and his attorneys succeeded in escaping the wrath of the SEC by arguing that the original agreement was unclear as to what things Musk had to avoid in his tweeting. In theory future tweets will be far less entertaining. The deal was announced about 6:30 on Friday evening.

Tesla shares fell -14% for the week to a two year low on worries they will have to raise capital with another public offering very soon. Musk has repeatedly said there would not be a capital raise, but the company needs money to build Gigafactory 3 in China and start an entirely new production facility. They also need money to build a new production line at the existing Gigafactory 1 in Nevada for the new SUV and eventually they must build big trucks since they have taken hundreds of deposits from corporations.

On Wednesday Tesla posted a quarterly loss of $702 million. Musk said the company would return to a profit in Q3 and there was "some merit" to raising capital. That immediately negated his prior statements about no capital raise. The company ended the quarter with $2.2 billion in cash, down from $3.7 billion in Q4. Short seller, Andrew Left, had previously switched positions from short to long, has now gone flat again saying, "I believe Tesla needs to raise money" and "I am disappointed with the way the company is communicating with shareholders." We could be very close to a new short position by Left given the collapse in the stock.

If Tesla is going to do a capital raise, they need to do it soon before the stock is in complete free fall. Even now, it would be difficult to manage without a big drop on the announcement.


On a side note, Musk went to China in early January for the groundbreaking of Gigafactory 3. Today, only four months later there is a massive factory taking shape thanks to the 24/7 pace of construction. There are estimates for the first car to be produced by the end of September, only five months from now. Managers claim this will be the fastest plant build ever done in China. In America this would be a three-year project. In China they are going from dirt to producing cars in nine months.


The backlog of crude deliveries through the Houston Ship Channel appears to be easing. Imports rose 1.16 million bpd last week and that boosted inventories by 5.5 million barrels. We saw refining utilization rise over 90% for the first time this year and it should move up to 95% in the weeks ahead. That will force inventories lower.

Crude prices fell 4% intraday on Friday after President Trump said he had asked OPEC to produce more oil and reduce fuel prices in order to stimulate the global economy. The mainstream media immediately rebutted that with calls to various officials in OPEC and Saudi Arabia. None reported talking to the president. The White House had to follow up with the list of Saudi energy officials and OPEC members that had visited the White House in the prior week to discuss increasing production to offset the loss of Iran's oil when sanctions waivers were removed.

Despite oil prices trading over $66 during the week, there was a huge decline of -21 active rigs. There was a drop of 20 oil rigs and 1 gas rig. With more than 8,000 drilled but uncompleted wells, there is no reason to continue spending money to drill new wells.





Markets

The S&P has succeeded in climbing the wall of worry and has dodged quite a few potholes during the earnings parade. For every ugly earnings report there has been someone reporting a blowout and the index has refused to decline materially. The majority of the gains came on Tuesday and Friday but the intraday declines on the other days were also bought and prevented any material losses.

On the surface it would seem that the indexes should continue higher. However, in that prior paragraph I pointed out that somebody was reporting blowout earnings to offset the decliners. As the frequency of earnings declines, starting late next week, we are not going to have those big positive surprises. If the beats and misses level out and fade in number at the same time, we could see investors lose their enthusiasm again.

Sentiment remains lackluster despite the new highs on the S&P and Nasdaq. Volume on Friday was only 6.4 billion shares and definitely not what you would expect with new highs. On the positive side 5,392 advancers more than doubled the 2,202 decliners. Out of those 7,600 stocks only 360 made new highs.

The S&P closed just slightly over the 2,933 high close on Tuesday and there was no breakout. This is what I would call solid meltup buying. The opening dips on Thursday and Friday were immediately bought. Not later that day but immediately after the initial dip ended.

It would be great if we had another positive catalyst to catapult us higher and force the shorts to cover. Tuesday before a FOMC meeting is normally positive. There are also four Dow components reporting but Apple does not report until after the close. Worry over Apple's earnings could restrain anxious buyers of other stocks during the day on Tuesday.

We are close to an inflection point for the market. If we do move up sharply from here, there is a lot of money on the sidelines that could immediately jump in on a fear of missing out rally (FOMO). Conversely, this decision point is where long term investors must decide if they are going to continue holding or move to cash. We have reached the "Sell in May and go away, come back again on Labor Day" period on the calendar. While that strategy has not worked well in the last several years, it does tend to work after the market has had a big gain. The S&P is up 18% for the year, Dow 14%, Nasdaq 23% and Russell 18%. For most years that would be a killer gain for the entire year. Portfolio managers could go to cash now and still collect their end of year bonuses.

Support is now 2,895 but that would be a 45-point decline. At this stage in the market investors would be in a panic with that large of a drop.


The Dow has been hammered with multiple large losses from individual components. UNH, BA, MMM, HD, XOM and INTC to name a few. Without these large individual losses, the Dow would be more than 600 points higher today and possibly over 27,000. That is the problem with a 30-stock index. One rotten apple can ruin the entire basket.

I sincerely hope that Apple does not do that on Wednesday. With every smartphone manufacturer and contributor warning of slowing sales, a positive surprise by Apple would be a major market mover. Shares have declined $4 over the last week on worries over a potential earnings challenge. Many analysts believe Apple will try to cover over any lowered guidance with a larger dividend and bigger stock buyback in hopes of limiting any stock drop.

If the Dow can avoid any large losses from earnings reporters this week, we could see it retest the 26,828 high. Whether it can break out with some many damaged components is another question.



The Nasdaq big caps have been leading the market higher. The Nasdaq 100 broke out to a new high on Wednesday the 17th and has continued to make new highs. Amazon, Facebook and Google have led the FANG stocks with Netflix a laggard due to the Disney streaming announcement.

FYI, a survey last week showed that Netflix was in danger of losing 8.7 million subscribers as they switch to the Disney $6.99 plan. CEO Reed Hastings said he was not worried because Netflix had so much more current content and breadth of offerings that Disney+ subscribers would probably remain Netflix subscribers. "I doubt Disney will be material because there's already so many competitors for entertainment time."

The good thing about the Nasdaq is its breadth. With it so positive (2,029 advancers to 971 decliners) on Friday, the other stocks are erasing the losses from the few that are not performing.

With the big caps leading and the troops following, the tech sector could continue to lead the markets higher.




The Russell 2000 is on the verge of a breakout over critical resistance. The 1,600 level is crucial and a break out there could power short covering to 1,707 and the last resistance before a new high. The A/D ratio on the small cap sector was a whopping 4:1 in favor of advancers on Friday. On Tuesday it was 7:1 in favor of advancers. If the small caps continue this performance, we could have a real broad market rally on our hands.


For the last couple weeks, I have warned about the potential for a sell the news top when the major indexes made new highs on weak earnings ahead of the sell in May period and the eventual summer doldrums. While I was concerned about that possibility, I reiterated that I was not predicting it. My job is to warn about the potential pitfalls in the road ahead, so everyone is aware and not be blindsided if they occur. After seeing the S&P and the Nasdaq Composite finally move to new highs on strong market breadth, I am not as concerned about an imminent failure at the highs. Remember, Blackrock's Larry Fink, said there was record amounts of cash on the sidelines that would come into the market once new highs were made.

My only concern is the low volume. We have not yet seen the typical breakout volume from the FOMO buyers chasing prices. Investors are still cautious, but sentiment is improving. If volume were to pick up, I believe it would be the final confirming indicator.

Enter passively and exit aggressively!

Jim Brown

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