The markets closed at the highs once again as sentiment spiked on the payroll numbers.

Weekly Statistics

Friday Statistics

It was a rough week for the major indexes with multiple triple digit declines on the Dow. They did manage to overcome the early week negativity and rebound back to the highs. The S&P came within a quarter of a point of a record close. The Nasdaq closed at a record by only three points. The Dow has been a victim of multiple earnings disappointments and remains -324 points from its prior record high.

The strong payroll numbers triggered short covering on the Russell, which had been the laggard index for weeks. After spending time over long-term resistance at 1,600 on Monday the index fell back below 1,570 on Thursday. The payroll numbers triggered a sharp 31-point gain of 2% that outperformed the other indexes and closed well above 1,600.

Meanwhile the Dow remains stuck in a head and shoulders pattern with no material progress over the last three weeks. Since the small caps are supposed to lead the market, traders are hoping the Russell rebound continues and lifts the Dow out of its doldrums.

The boost to small cap sentiment with 10:1 advancers to decliners came after the nonfarm employment showed a gain of 263,000 jobs for April. This was well above the 180,000 analysts expected. This should not have been a surprise after the ADP report on Wednesday showed a gain of 275,000 jobs with estimates at 180,000.

The unemployment rate fell to 3.6% and the lowest level since 1969. Black, Hispanic, Asian and female unemployment are at record lows. The March payrolls were revised down from 196,000 to 189,000 but the February number was revised up from 33,000 to 56,000 for a net gain from the revisions of 16,000 jobs.

Healthcare added 53,000 jobs, professional/business services 76,000, leisure and hospitality 34,000 and construction 33,000. Retailers continue to lag with a decline of 12,000 jobs.

Earnings rose 0.2% for the month and up 3.2% for the trailing 12 months. It may have been higher, but the survey week did not include the 15th and the semimonthly pay period.

Household employment declined for the second month and the labor force contracted by 490,000. The labor force participation rate dropped to 62.8% and the employment to population ratio was unchanged at 60.6%.

Analysts credited the lack of any extraneous events like storms, floods or shutdowns for strong headline number. There was nothing to impact the data during the survey week. There were some soft spots in the survey. More people took part time jobs instead of full time for economic reasons. That means they had to pay the bills while they are looking for full time work.

The nonmanufacturing ISM Index for April posted another decline with the lack of available workers given as the primary excuse. The headline number declined from 56.1 to 55.5 and missed expectations for 57. A reading above 50 indicates continued expansion but is well below the cycle peak reading of nearly 61 back in September.

New orders declined from 59.0 to 58.1 and backorders fell from 56.5 to 55.0. New export orders picked up from 52.5 to 57.0. Business activity rose from 57.4 to 59.5.

The Atlanta Fed real time GDPNow forecast for Q2 is just getting started with the current estimates at 1.7%. It should be noted that the Q1 GDP result of 3.2% started out with a GDPNow projection of only +0.3%. Anything is possible and we have two months for this projection to firm.

The FOMC meeting squashed hopes for a Fed rate cut in the near future but the long-term outlook is still for the next Fed move to be a cut. This is a chart of the FedWatch Tool at the CME and there is only a 47.7% chance that the rate will remain at the current level through next January. That means there is a 52.3% chance the next move will be a cut. The difference in projections is minimal and January is a long way off. If Q2 GDP were to come in at the 3.0% level, the Fed's anxiety level would rise even if inflation remained stable. The Fed is always worried that they will wait too long to hike rates and inflation will spike. It takes about six months for a Fed rate hike to be felt in the financial system, so they are always trying to project conditions 6-9 months into the future.

We have a skinny calendar for next week. The two price indexes are the main points on the schedule. If these indexes remain stable and show no signs of inflation the Fed will remain on hold. At least that is the theory.

Fed Chairman Powell will speak next Thursday but this soon after the FOMC press conference he is not likely to say anything different.

Some 388 S&P companies have reported Q1 earnings. Of those, 76% have beaten estimates and 18% have disappointed. Current earnings projections for Q1 have risen to +0.8% growth with a 5.1% rise in revenue. The guidance warnings have pushed the forecast for Q2 down to +1.6% growth and +1.9% for Q3. The Q4 projection rebounds to +8.2% due to lower comps from 2018. For Q2 there have been 36 guidance warnings compared to 9 guidance upgrades. That is the worst ratio in several years. In Q2 2018 the ratio was 30 negative to 25 positive. When 70.6% of Q2 guidance is negative, it does not build a lot of investor confidence.

The number of high-profile companies reporting next week has diminished significantly. I included Lyft as a highlight since it will be their first quarterly earnings as a public company and Uber is expected to price this week.

There were some high-profile events last week and none higher than Apple's earnings on Tuesday after the bell. The company reported $2.42 compared to estimates for $2.36. Revenue of $58.02 billion beat estimates for $57.37 billion. iPhone revenue of $31.05 billion missed estimates slightly of $31.10 billion. Services revenue of $11.45 billion beat estimates for $11.37 billion. They guided for the current quarter for revenue of $52.5-$54.5 billion compared to estimates for $51.94 billion.

iPhone revenue was down -17.33% year over year. As a percentage of total revenue at 53.4% it was a record low. Tim Cook said the drop in iPhone sales in China was abating and they saw some strength returning at the end of the quarter. The company had $10.22 billion in revenue in the Greater China category.

The company authorized a $75 billion stock buyback and approved a 77-cent dividend. The buyback was less than the $100 billion authorized in the same period in 2018. Apple returned $27.5 billion to shareholders in Q1. By the end of 2019, Apple will have revenue from Apple Arcade, Apple TV+ and the Apple Card. Cook said Apple had a record installed base across all categories but did not elaborate. Previously they had said they had 1.4 billion users. Saying a record base across all categories suggests that an iPhone user with a Mac, a watch and iPod could be considered 4 users rather than one user with four devices. Apple has always played games with semantics.

Shares spiked $10 on the earnings and have held those gains for three days. Bank America reiterated a buy and raised the price target from $220 to $230. Maxim Group reiterated a hold but raised the target from $197 to $217.

Former Apple foe, Qualcomm (QCOM), reported earnings of 77 cents that beat estimates for 71 cents. Revenue of $4.98 billion beat estimates for $4.8 billion. The company guided for the current quarter for earnings of 70-80 cents and revenue of $4.7-$5.5 billion. Analysts were expecting $5.08 billion. They guided for revenue from patent licensing in the current quarter from $1.23-$1.33 billion and analysts were expecting $1.01 billion.

The company said it expects to receive $4.5-$4.7 billion in revenue from Apple in the current quarter as a resolution of the various legal issues. Qualcomm gave some cautionary guidance about the weak smartphone market but suggested it was just a pause before the flood of 5G phones begin hitting the market later in the year. They predicted chip set sales of only 50 million units for the rest of 2019 due to smartphone weakness. Shares closed at a new high on Friday.

Canaccord raised their target from $89 to $105. Cowen raised from $91 to $100. Bank of America upgraded from neutral to buy. Raymond James upgraded from outperform to strong buy and raised the price target from $85 to $115.

Arista Networks (ANET) had a bad day on Friday. The company reported earnings of $2.31 that beat estimates for $2.07. Revenue of $595.4 million rose a whopping 26% but narrowly beat estimates for $595.0 million. The challenge came from the guidance. They guided for $600-$610 million in revenue and analysts were expecting $640 million.

The stock was crushed after they said a "cloud titan" had paused spending. Analysts believe that customer was Microsoft since Arista had recent disclosed Microsoft was 10% of their total business. An analyst asked on the call if they expected the same 10% from Microsoft and the CEO said they would know more in the second half of the year, which was clearly a "NO we don't" answer. Later an investor relations spokesperson said they intentionally did not disclose the customer's name. When he got continued pressure from analysts he said, "We are not commenting on which customer saw softness in Q2." A Piper Jaffray analyst said orders slowed in Q1 and specifically from Microsoft. The Arista CEO said the sudden halt in orders came in mid-March and other large cloud companies also slowed orders in March. As the CEO pressure continued, she said two providers slowed orders, two were doing well and one particular cloud titan put most of their orders on hold. The term "cloud titan" was repeated nearly 20 times on the call as they tried to deflect their order weakness towards this mystery titan.

Arista said the early 2019 build in inventory by cloud providers had slowed demand as they digested those purchases. Arista is only one of several hardware providers that warned of slowing demand by cloud providers. If the cloud boom is fading that would be a major problem for the hardware companies that have ramped up production to accommodate the rapid growth. Arista predicted a "speed bump" in Q2. That bump turned into a $32 drop or -10%.

Activision Blizzard (ATVI) reported earnings of 78 cents compared to estimates for 23 cents. There were numerous charges and additions even though this was the adjusted number. The comparison is not apples to apples. Revenue declined from $1.97 billion to $1.83 billion but beat estimates for $1.22 billion. The company guided for current quarter earnings of 35 cents and revenue of $1.32 billion. Analysts were expecting 37 cents and $1.27 billion.

The company said it had sold the first five franchises in the Call of Duty esports league. They did not give a price, but analysts said they were shopping them at $25 million each several weeks ago. The cities that won a franchise already had an existing franchise for the Overwatch league. Shares fell 5% post earnings.

Shoe maker Adidas (ADDYY) reported a 17% rise in profits to $638 million. Revenue rose 4% to $6.57 billion. Analysts were expecting $5.8 billion and $567 million. They warned that supply chain issues would curb growth in North America where it has doubled business in the last three years. The company is taking market share from Nike in all geographies. The CEO said investors should get used to high single-digit growth rates because 4% was only a temporary position while they worked on the supply chain. He said their biggest challenge was lack of supply. They could sell far more shoes than they can make.

They just announced a marketing deal with Beyonce. On the day of the announcement they saw more than one billion clicks on the news. That could turn into one of the best marketing deals ever if they can produce enough shoes to fill that billion-fan demand. Shares spiked $12 to a new high.

Monster Beverage (MNST) reported earnings of 48 cents that rose 26.7% and beat estimates for 42 cents. Revenue rose 11% to $946 million and easily beat estimates for $914 million. Gross profit was 60.6%. International sales rose 17.4% to $284.1 million. During the quarter they bought back $139 million in shares. There is $520.6 million in outstanding buyback authorizations. Shares spiked 9% on the news.

Dentsply Sirona (XRAY) reported earnings of 49 cents that beat estimates for 38 cents. Revenue of $946.2 million beat estimates for $917.1 million. They raised 2019 earnings guidance from $2.25-$2.40 to $2.30-$2.40 and revenues of $3.95-$4.05 billion. Shares spiked 7%. XRAY was a position in Option Investor a couple weeks ago but was stopped on that big red candle only to see the shares rebound sharply.

Latin American internet retailer MercadoLibre (MELI) reported a 48% jump in revenue to $473.8 million. The dollar was a problem. On a currency neutral basis that would have been a 93% spike in revenue. The Argentine peso subtracted $3.7 million from earnings. Earnings of 13 cents easily beat estimates for a 13-cent loss.

The sharp jump in fortunes came from their payment service MercadoPago. Total payment volume rose 35% in dollar terms and 82% in local currency terms to a record $5.6 billion. Total payment transactions rose 94% to 143.9 million. Payments outside the MercadoLibre platform totaled 88.2 million and more than $2.5 billion in dollar volume. The number of items sold rose 3% to 82.8 million. Unique buyers rose 11% and listings are now over 200 million, a 58% increase. Items shipped rose 19% to 62.9 million. Shares spiked $96 on the news.

Berkshire Hathaway (BRK.B) reported earnings on Saturday of $21.66 billion. That is a monster amount of money for a single quarter. The company is sitting on $114 billion in cash. Buffett said he has been unsuccessful in his "elephant" hunt and will hold the cash until an opportunity arises. Warren bought back $1.7 billion in Berkshire shares when the price declined in Q1.

Operating earnings rose 5% to $5.56 billion or $3,388 per Class A share. That is up from $3,215 in the year ago quarter. Analysts were expecting $3,399. However, results did not include Kraft Heinz because the company has not released audited Q1 results. He said there is something going on at Kraft, so their earnings were not included. That would have easily lifted Berkshire earnings over estimates. Berkshire took a $3 billion write-down on Kraft Heinz in Q4 saying we paid too much.

Geico profits rose 14% as rising rates easily offset higher accident claims. BNSF saw profits rise 9% to $1.25 billion.

Berkshire committed $10 billion to Occidental Petroleum (OXY) to help with their hostile offer for Anadarko Petroleum (APC). The deal is contingent on OXY completing the APC purchase. Reportedly he was willing to invest $20 billion in the transaction if needed. For the $10 billion Berkshire will receive warrants for 80 million shares of Occidental at $62.50 each plus some preferred stock that will accrue dividends at 8% per year. OXY shareholders are against the deal because the loan is expensive and it will dilute their positions. Occidental will have to increase total debt by $40 billion to complete the deal.

Warren Buffett said Berkshire finally bought shares of Amazon (AMZN). He stressed that he personally did not buy the shares for Berkshire but one of his investment managers made the purchase. He is famous for not buying technology. He has developed a 5% stake in Apple but was killed when he took a big position in IBM several years ago. He does not understand technology.

Jefferies said it was a good purchase because the stock is going a lot higher. They have a $2,300 short term price target and $3,000 sum of the parts target for 2022.

Shares of Amazon soared on the Buffett comments.

The best IPO performer of the year goes to Beyond Meat (BYND). Shares rocketed 135% above its IPO price on Thursday to close at $66. Shares spiked to $74 on Friday but fell back to $67 at the close. The company is not trying to take market share from other meat substitutes but is taking on meat products directly. That is a $1.4 trillion dollar market. The products have no soy, no gluten an no GMO. Products are flying off grocery shelves and based on the demand for the shares in the IPO, it has a good future ahead.

Crude prices took a dive for the week after inventories rose by 9.9 million barrels in Wednesday's EIA report. Refiners are still struggling with some unplanned outages and utilization fell under 90% last week when it should be rising to 95% ahead of Memorial Day.

Prices should rise next week on news that Russia will have to curtail one million bpd because oil for export through the Transneft pipeline was contaminated with corrosive organic chloride. The contamination was on purpose. A week ago, the Druzhba pipeline was also contaminated and had to be shutdown. Belarus said it could take months to fix the Druzhba pipeline. It should take a couple weeks to eliminate the contaminated oil in the Transneft pipeline and repair damaged refineries. Poland, the Czech Republic and Hungary were forced to release 8 million barrels of reserves to offset the decline in exports.

The chloride is used to enhance production but must be removed from the oil before shipment because it is extremely corrosive. About 36.7 million barrels of oil have been contaminated. Russian oil sellers claim there are no buyers for the contaminated oil because they do not know what would be required to cover purification costs. The contaminated oil is clogging up export terminals and preventing clean oil from being exported. Some 15 tankers with contaminated oil had already sailed before the problem was discovered. Refiners taking delivery of the oil will be forced to down blend it with millions of barrels of clean oil in order to limit the corrosion when it is processed. That requirement means that those who took delivery now have bad oil clogging up their facilities while they decide how to handle the problem.

Oil prices tend to peak around Memorial Day and then linger at those levels until after July 4th before beginning a decline into fall.

There was no material change in rigs last week with a decline of only 1 rig compared to a drop of 21 rigs the prior week. With oil prices weak, there is even less interest in drilling new wells.

Thought for the week: There are more than three million people over the age of 60 with student loan debt of more than $86 billion.


I went into this weekend with a cautious outlook until I saw the 10:1 advancers over decliners in the small cap stocks. Most investors do not realize but we are very close to a record in small cap earnings and not a good record. We are very close to a record number of small cap companies with no earnings. The positive internals mean investors are ignoring the lack of earnings in hopes of a brighter future in the months ahead. The 3.2% GDP growth in Q1 must have been the encouragement they needed to buy small cap stocks in anticipation of further economic growth.

Don't get me wrong. I am very happy to see the Russell breakout over 1,600. We should buy stocks when others are fearful, and the Russell has been a laggard for weeks. I just hope the unexpected breakout continues and lifts the broader market.

The S&P is fighting a two week long battle to breakout to new highs. The index has closed over prior resistance multiple times but immediately pulled back again. Friday's move was a fight to close a quarter of a point below a new high. The morning move was a short squeeze on the payroll numbers and the big decline on Thursday, which setup the shorts for pain. The squeeze ended at 1:PM and the index limped into the close.

We need a convincing breakout to trigger the bigger short squeeze at 2,950. That is where the rally stalled on Wednesday. A 20-point breakout would do wonders for market sentiment.

The Dow continues to struggle as individual components post large losses. Friday was a good day for the Dow with only two decliners, but it was only one day. The index is still fighting right shoulder resistance at 26,616 with support at 26,191. There is one Dow component reporting this week and given its gains from the streaming announcement the odds are not good that Disney will shoot up another $5 on the earnings. Comments about the record $1.2 billion weekend for Avengers Endgame could be support but they are also going to talk about losing money in streaming for the next 3-5 years. That could kill the streaming bubble.

Both Nasdaq indexes closed at new highs but only barely. The Nasdaq Composite squeezed out a record by 3 points and the Nasdaq 100 by 6 points. We will take whatever the market gives us, but I would like it to be a little more convincing. The A/D on the Nasdaq Composite was 2,361 to 633 or almost 4:1 advancers to decliners. That is a good ratio, but it did have a lot to do with the morning short squeeze. I would love to see a 4:1 ratio on a day when there was no news powering it higher.

Both indexes are poised for a breakout with the potential for a new leg higher. I really hope it comes soon before the smoke cloud increases from the China negotiations.

Last week the president said the Chinese trade talks would be over "either way" within two weeks. That suggests there could still be a disaster. Then White House chief of staff Mick Mulvaney said the administration would know if there was going to be a trade deal within two weeks. The keyword there was "if." He said at some point, if you are not making any progress, you have to just quit."

Both of those statements were meant to send a message to China. Time is growing short. We are done negotiating. Make a decision or we are going to start playing hardball again. This is also a warning for investors. The long-awaited trade deal may not happen, and it could turn ugly again. While I have no clue which way this will evolve, we should not be overly long until it is resolved. Even if an agreement is reached the press is going to dissect it immediately and point out all the bad parts. I have said for weeks there is always the potential for a sell the news event in the days after a trade announcement.

I want to believe the strong internals on the Russell are suggesting a real breakout to new highs is just ahead. I just suggest we be careful until we see how the trade deal plays out. The Q1 earnings cycle will be over this week and that sets us up for the sell in May and go away cycle if it is going to happen this year. The trend happens more frequently when the first four months of the year have been bullish.

Volume was 5.8 billion shares on Monday and rose to 7.3 billion (avg) on Tue/Wed/Thr before shrinking back to 6.4 billion shares on Friday as the market closed at new highs. Be concerned when volume increases on down days.

Enter passively and exit aggressively!

Jim Brown

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