Enbridge Energy (EEP) In Ascending Triangle Pattern

Enbridge Energy Partners (NYSE: EEP) is deep into a classic Ascending Triangle chart pattern.  The company reported mixed earnings on Wednesday, missing analyst earnings estimates by a penny, but beating analyst revenue estimates by $320 Million.  What moved the stock, though, was some very positive forward guidance.  They expect adjusted operating income to increase by 12% over 2014, and they expect their distributable cash flow to increase by 15%.  EEP's stock gained 1.5% in Thursday's trading, bouncing off the triangle's support line on very high volume.  With only 45% institutional ownership and with a 5.9% dividend yield, the stock does have some room to run.

For today's discussion, though, let's take a look at the stock pattern itself - an Ascending Triangle.  There are several very popular stock patterns that are watched by chartists, and this is one of the more reliable patterns that can be very profitable.

The ascending triangle stock pattern is considered a continuation pattern.  So in an uptrend, as EEP has been in for the past year, the pattern is considered bullish.  What forms the pattern is a very strong area of resistance - the top horizontal line on this chart - and a support line that has a distinct upward slope - the bottom line on this chart.

For a pattern like this, we want to see at least three touches of each trend line, and in this case, we have five of each.  Remember, a chart pattern is intended to give us insight into the behavior of traders.  The five touches of the resistance line indicate points where buying pressure has been exhausted, whereas the five touches on the support line indicate the points where selling pressure is exhausted and buyers are again interested in picking up the stock.  The entry point for that buying pressure continues to increase, hence the ascending pattern.

There are two ways to play a bullish entry on an ascending triangle.  For very aggressive traders, you can enter a long position when price bounces off the support line.  This gives the greatest profit potential, but it's also carries much higher risk since there's a well-defined price ceiling in the pattern.  An entry point for more conservative traders is to wait until price closes above the resistance line, providing an entry following the breakout.

According to Thomas Bulkowski, the well-regarded guru of stock pattern analysis, breakout is upward 70% of the time on a bullish pattern, and of those that do breakout, 75% of them reach their price targets.  That's not a bad average at all!  Be aware, though, that there is a pullback to just below the resistance line 57% of the time.  That, in fact, provides a third entry possibility since, if you miss the initial breakout, 57% of the time you'll have another chance to get in when the price breaks resistance a second time.

Setting a price target for this type of pattern is relatively straightforward.  Subtract the lowest valley in the pattern from the resistance line, and - for a conservative target - multiply that by 75%.  Add the result to the resistance line and you have the price target.  So using EEP as the example, it would be (40.50-35.00)*0.75 = 4.12.  Add that to the resistance line: 40.50 + 4.12 for a price target of 44.62.

For added confidence, we'd really like to see the breakout occur on high volume.  Now, the very high volume we saw yesterday was an excellent sign, but remember, that volume was driven primarily by EEP's earnings announcement.  I'd like to see volume above its 20-day moving average on the day of the breakout above resistance, as well.  Assuming, of course, this is one of the 70% that break upward.

As always, when discussing technical analysis, it's important to remember that the charts are telling us something about the behavior of traders.  This analysis alone does not replace the due diligence we still should do before entering a position.

Slight Decline in Housing Market Index Attributed to Weather

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) was released this morning, and showed a slight decline from last month's release.  Builder confidence for newly built single family homes dropped to 55, measuring a two-point decline.  The drop, however, is being attributed to the unusually high amount of snow that has blanketed much of the nation for the past month.

Despite the decline, expectations remain very optimistic for a robust building market in the US, once the weather situation improves.  Sales expectations for the next six months remained steady at 60, and it has been hovering in that range for some time.

Interestingly, the Home Construction sector has apparently reached that same plateau.  Take a look at the weekly chart of the sector:

Notice that it formed a wedge with a very slight upward bias starting in the spring of 2013.  The Sector is currently trading at its highs, at least through this decade, but it's showing no signs of attempting to penetrate that channel pattern.

I don't share the optimism being expressed in the Index.  Interest rates are currently low, but they will be increasing this year.  Home Construction appears flat to me, not increasing, and it's not showing any signs that it's ready to do so.  The question is what will drive those projected sales for new home constructions, since current behavior does not support the optimism.  The share of new homes being purchased by first-time buyers is at its lowest level since 1987.  Given the job market, lack of salary increases, and tight capital constraints being imposed on banks, don't expect this behavior to change anytime soon.

What is growing is the construction of rental apartments and condos, and its to those that first-time buyers are going and it's also where the aging home owner is going.  When you look at the number of homes for sale, and in this area the number of For Sale signs in each neighborhood is astonishing, it's quite apparent that there's a significant migration within the current housing market.

Now, that's not all bad news for the housing sector, nor is it bad news for the home suppliers and construction companies.  Whether or not a home is new, a buyer moving in immediately wants to put their touch on it. That's great news for companies like Home Depot and Loews that do well whenever homes change ownership.

The point is, don't rely on New Home Sales numbers to gauge the health of the construction business.  There was a time prior to the housing bubble when that was a significant measure of the sector, but the behavior of the consumer has changed and we, as traders, must therefore adapt.  A better measure would be New and Existing Home Sales, published monthly by the National Association of Home Builders (NAHB).  I also really like the Remodeling Market Index, which is also produced Monthly. This report is a great indicator of how the consumer is behaving, and it drives the performance of a number of industrial and cyclical corporations.

We are in a new post-housing bubble market, and the metrics we used prior to the bubble bursting no longer apply.  As traders, we need to adapt to the behavior of the consumer, and at present, that consumer is moving into condos or rental apartments, not necessarily new homes.  There's profit to be had here if we're willing to adapt to the new metric.

Greek Stalemate Continues

Despite the optimism expressed late last week, talks between Greece and the other EU Finance Ministers broke off after only four hours today.  The talks had been expected to run well into the evening, but were deemed pointless after Greece flatly rejected the EU proposal of a six-month extension to the bailout.  The effect on the markets tomorrow is uncertain, and we'll be watching the Asian markets overnight for some indication as to how US equities and bond markets will react.  (US markets were closed today for Washington's Birthday, known popularly as Presidents' Day.)

The next major milestone in the sage will come on Wednesday.  That's when the European Central Bank (ECB) will decide whether or not to continue their emergency lending program to Greek banks.  Without that program, Greek banks have less than 14-weeks of solvency remaining.  They are hemorrhaging deposits at the rate of over €2 Billion  ($2.27 Billion) per week. In just three months, the banks will not have the collateral needed to obtain loans from the Central Bank, although the real crunch will come in late March when Greece faces some heavy loan repayment requirements.

Part of the problem appears to be a question of semantics.  Greece is willing to accept "six months of credit" however they will not accept a six-month extension of the bailout.  Economics Commissioner Pierre Moscovici expressed his frustrations, saying "We need more logic and less ideology."  The EU officials were dismayed last week by what they portrayed as a total lack of preparation on the part of the Greek finance ministers, and they question whether or not the young government understands the seriousness of the situation.  For now, the EU feeling is that Greece is putting political concerns ahead of the dire economic needs facing the nation.

The ball appears to be in Greece's court since several ministers were quoted as saying that further talks would require Greece to request a bailout.  A separate but equally contentious issue remains over the austerity programs that were tied to the original bailout.  Greece is on record as proposing a halt to those austerity programs as part of any new agreement, however the EU - especially Germany, their largest creditor - wants none of that.  According to German Finance Minister Wolfgang Schaeuble, Greece has "lived beyond its means" for a long time.  Neither Germany nor the rest of the EU are willing to continue to provide bailout funds without proof that Greece has learned to manage its debt.

Polls in Greece appear to put some pressure on the young leftist government to reach a compromise.  68% of Greeks seek a fair compromise, while only 30% advocate standing firm against the EU.  An astonishing 81% want Greece to stay on the Euro.

There is growing fear that the failure of the debt talks will lead to the imposition of strict capital controls.  There's precedent for that.  In 2013, Cyprus was forced to close the banks for two weeks while capital controls could be introduced.  With the Greek banks closed next Monday for the first day of Lent in the Orthodox Church, there's fear that the ECB could impose such restrictions as early as next week.

For now, it's back to the game of brinkmanship.  With an inverted yield curve and the yield on short-term Greek bonds now in the upper teens, time is not on Greece's side.  They are facing the total collapse of their banking system in a matter of weeks, and the only bargaining chip left in their arsenal is an agreement to remain in the Eurozone.  The further this goes, however, the less valuable that chip will become.  With the Greek banks losing close to €300 Million per day, the prospect of terms favorable to Greece are diminishing by the hour.  

The Slow Stochastic and the Dow Industrials

One of the technical indicators that I really like to use when charting stocks is the 14-period Slow Stochastic, developed by George Lane in the 1950s.  The concept behind this indicator is the theory that prices tend to close near their period highs during an upward trending market, and conversely, they tend to close near their lows during a downward trending market.  The Slow Stochastic will oscillate between 0 and 100.  Generally, chartists consider a security to be oversold - potentially giving buy indications - when the value is below 20, and they consider it overbought - potentially giving sell indications - when the value is above 80. 

The indicator provides two values, and thus two lines, on the chart.  The first line, the %K line, charts the closing price of a security as a percentage of its relationship to the high and low of (in my case) the 14-day period of he stock.  The second line, the %D line, is a 3-day Simple Moving Average of the %K line.  There are several ways to interpret the Slow Stochastic, and I tend to use all of them in conjunction with several other indicators and chart patterns.

Please note!  The indicators (like the Slow Stochastic) do not drive stock price.  They are merely tools by which we are able to understand the actions of traders, and therefore assess if those traders are pumping money into a stock or taking money out of a stock.  The indicators tell us something about the sentiment of the traders, not the health of a company.  In using these indicators, we attempt to determine if - based on trader activity - a price is likely to rise or fall over a given time period.  Indicators are a starting point, but not an end in themselves, and no indicator's buy or sell signals alone will replace the due diligence needed on the overall fundamentals of the security you are seeking to trade.

Here are the signals we can interpret from the Slow Stochastic indicator:

%K / %D Crossovers

Visually, these will jump out at you with a quick glance at the chart.  When %K crosses above %D it's a bullish signal, and conversely, when %D crosses above %K it's bearish.  Like most oscillators, though, you can't rely on just this one signal for buy and sell orders.

%K Crosses above 20 or below 80

This is one of my favorite signals since it has a higher tendency to produce winning trades.  When the %K line crosses from below 20 to above 20, it generates a buy signal.  When it crosses from above 80 to below 80, it generates a sell signal.  Now, be careful here.  As a general rule, I will only take signals in the direction of the prevailing trend, and for that I like to use the slope of the 50-day closing price's Moving Average.  If that slope is increasing, I only take buy signals.  If it is decreasing, I only take sell signals.  Note:  Many traders don't wait for %K to cross back above 20 or below 80.  I do, because I've found that it increases the chances of success despite getting you into the trade one or two periods later.

%K Divergence

This doesn't generate buy or sell signals, per se, but it's a very good early warning signal that a trend may be reversing.  A bullish divergence would be indicated if prices for the security are reaching lower lows, but the %K line is reaching higher highs.  It's an indication that price action is about to reverse and warns us to be alert for a good buy signal.  On the other hand, a bearish divergence would be indicated if price is achieving higher highs, yet the %K line is dropping to lower lows.  It's a warning that a bullish trend may be exhausted and a decline in price is imminent.  In this case, we watch for a good sell signal to either close a position or to open a short position.

So what does all this have to do with the Dow Industrials? Well, let's take a look at both the daily and the weekly charts for the Dow.

Dow Industrials Daily Chart

Look at the time period starting around October 27th.  Closing prices for the Dow were on a very steady upward slope.  The Slow Stochastic, however, was on a downward slope in overbought - above 80 - territory.  The warning signs should be blaring since that's a classic bearish divergence.  Sure enough, the second week of December, the market took a nose dive.  Did you notice that, just before it dove, we had a bearish %K/%D crossover?  You can see the red line - %D - crossing above %K just as the price started to plummet.  That's warning sign number 2.  The final warning came when %K crossed below 80 and, well, you can see what the price action did after that.

So where are we are right now?  The Slow Stochastic is solidly in overbought territory.  %K is above %D and still trending up, but since this is a bound indicator, we know that can't continue much longer.  We don't have any divergence yet, though, so other than being in overbought territory there's nothing else in the Stochastic that would have us concerned.  (A glance at the actual chart also looks pretty good, although we're trading in the upper 20% of the Bollinger Band which is where I start looking for sell indicators.)

But now let's take a look at the Weekly Chart:

Dow Industrials Weekly Chart

As I've noted in the past, the Dow's been trading in a very nice upward channel, bound by the blue resistance line you see on the chart and the 50-period moving average (in red) as support. Let's look at the Slow Stochastic using the 14-period indicator.  The recent down weeks in the market pulled the indicator out of overbought territory and you can see the subsequent (temporary) drop in price.  (Remember, the slope of the 50-period moving average is up, so I'd ignore any sell signals here.  Tighten stops, or wait for a good long entry, but there's no way I'd go short on any security showing that strong an upward slope.)  The Dow bounced very nicely off support again, and we have a very nice bullish crossover following the close at the end of this week.  Looking at the lows of the Stochastic, they are forming a nice upward trend line as well, matching the price action of the lows, so there's no divergence, either.

The only warning signs on this chart, in fact, is that we are approaching the resistance line once again, and we're trading in the upper 10% of the Bollinger Band.  Whether or not we bounce off resistance and head back down or whether we break through resistance and surge upward will depend on the geopolitical situation as well as the economic indicators released in the coming weeks.  Earnings season is essentially over until late March and April, so we won't have earnings announcements pushing the market for the next couple of months.

One last item to note, though, is about the use of any indicator to analyze a market index.  Remember that the index - in this case the Dow - is based on the price action of the stocks that comprise that index.  In today's age of computerized trading, however, the technical analysis of the index itself is used by traders to gauge whether or not they should take some profits in the stocks that comprise the index or whether or not to enter new positions within that index.  Never forget that it's the price action of the underlying securities that drives the index - and thus drive the indicators that we use to analyze that index. 

Greek / EU Agreement in Principle - Almost, Sort of, Maybe

According to the various financial news wires, sources in Brussels have reported that Greece and the EU have reached an "agreement in principle" related to the outstanding debt issues that have dominated the news for the past month.  These sources state that the details are still being worked out, but are expected to be finalized and signed on Monday following an agreement that Greece would remain under the terms of the EU bailout program.

You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news.  Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.

Is the market setting itself up for disappointment and the significant drop that always follows?  Quite possibly.  Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow.  The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.

Such a failure is very possible.  Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle.  Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended.  It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession.  The likelihood of Greece accepting it, however, is very slim.

It's important to remember the results of the recent Greek election.  There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform.  In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter. 

So how optimistic should we be regarding the "agreement in principle" news?  Without any details surfacing, I'd be very cautious.  As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement.  Remember, Monday is a holiday in the US and the equities markets are closed.  I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend.  The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table.  Be sure to factor in that volatility when you line up your trades tomorrow.

Greek Market Action Impact is Slowing

Several conflicting news reports came out in the overnight hours and during the morning trading session, and both reports created some minor fluctuations in the US market.  Of interest, though, is that the fluctuations truly were minor.  The first report provided some hope of compromise on the Greek Debt situation, and indeed the US market was up a solid 100+ points in early trading.  Reports had surfaced that Greece would get a six-month extension to pay off its debt, and that provided a bit of market optimism given the looming February 28th deadline for compliance.

Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false.  The market reacted by pulling back all of its gains since the open, and briefly traded flat.  Very briefly.  Almost immediately, in fact, the market started to trend back towards its early highs.

As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning.  To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil.  What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.

Specific to Greece, there will almost certainly be a compromise brokered at the last minute.  With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact.  Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone.  Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion.  Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.

Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan.  According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere.  "It could the United States at best, it could be Russia, it could be China or other countries," he said.  The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.

It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone.  Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties.  China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal?  China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.

Wednesday is the day where it should get interesting.  European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting. 
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement.  (The new government was elected on a platform that included the elimination of the current austerity measures.)  He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal.  So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.

It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement.  It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely.  Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance.  In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone.  Anything short of that benefits neither Greece nor the Eurozone.

LMCI Comes in Weak at 4.9

The Fed released the January Labor Market Conditions Index this morning.  The LMCI, as we discussed yesterday, is comprised of 19 separate economic indicators that provide insight into the health of the job market.  With Unemployment continuing to fall and with optimism in last month's non-farm payroll index, expectations were high that today's LMCI number would continue to show improvement.  In yesterday's post, I said that I was looking for a value of 6.8 or higher to demonstrate strength in the labor market.  Well, we fell far short of that value.

The LMCI for January dropped to 4.9, a decline of 1.2 points off December's 6.1 value.  That drop confirms what we've been saying for some time, that the labor market is not as healthy as the unemployment number would lead us to believe.  In fact, the decline in January confirms the falling Participation Rate which is now at its worst level since the late 1970s.

What the low values in the LMCI are telling us is that, despite a drop in the Unemployment Rate - which I've already categorized in previous posts as a meaningless number - the other aspects of the job market are in terrible shape.  Hours worked per week continue to drop.  Wages continue to drop and annual merit increases are barely keeping pace with inflation.  Benefits, especially health care benefits, continue to skyrocket in costs to the worker.  The number of workers that are leaving the workforce prior to age 65 continues to increase.

Now, it's doubtful that the LMCI is having much of an impact on today's market decline.  As of this writing, we're trading near the lows of the day, but the entire day has been down due almost entirely to the standoff between the Eurozone and Greece coupled with the extremely poor trade numbers released by China last night.  Those two global constraints are having a far greater impact than the little known LMCI is likely to cause.

What we as traders need to take from this, though, is the warning that the labor market is not at all healthy.  We need to keep a very close eye on Average Weekly Hours, Average Hourly Earnings, Hiring Rate and Quit Rate, and Hiring Plans.  These will give us a much clearer view as to the conditions of the average worker in the US.  I'm expecting all of them to continue to worsen in the short term.

An Economic Look Ahead to the Week of February 9

As we near the end of this quarter's earnings season, focus will once again turn to geopolitical news and the numerous economic releases that are spread throughout the month.  Here's what we're following for the week of February 9th.  As a reminder, the following Monday is a holiday in the US and markets will be closed.

Greece vs the Eurozone

On the geopolitical front, the big news continues to be the standoff between Greece and the Eurozone.  No progress was cited this weekend in settling the issue of Greek debt, and one official noted that it truly was a case of 1 versus 18 in the negotiations.  The two sides remain extremely far apart in their positions, indicating that the crisis will continue for the foreseeable future.  The current bailout expires February 28th, and there is nothing to suggest that the standoff won't continue through to the 11th hour.

Essentially, Greece is requesting authority to issue additional short-term debt and to receive profits from the ECB and other central banks that were gained by holding Greek debt.  Greece is, in effect, requesting a bridge agreement to keep the government running while they detail a new debt and reform program.  The Eurozone is having none of it, however, with even leftist France and Italy taking a hard-line stance against any concessions to Greece.

While a compromise by the end of February is likely, the interim will see continued volatility due to the uncertainty surrounding Greece's financial future as well as its future in the Eurozone.  Now, its not in anyone's best interests to see Greece leave the Eurozone, so some compromise is extremely likely before push comes to shove later this month.  Don't expect logic to prevent wild market swings in the meantime, however.

China

Switching continents from Europe to Asia, the economic news coming out of China continues to worsen.  This evening, China released their import and export numbers, and both were extremely below the market consensus estimates.  Chinese exports in January came in at -3.3% versus a projected 6.3%.  Imports were just as bad, coming in at -19.9% versus a projected -3%.  These two dismal numbers will fuel fears that the Chinese economy is slowing at an even greater rate than anticipated.  The import number is especially troubling since it suggests a slow-down in the Chinese industrial sector.  The government is expected to reduce their GDP forecast for 2015 to 7%, however given the new data, it's possible the forecast will be even lower.  The translation for us, of course, is increased market volatility.

Ukraine vs Russia

Finally, news out of the on-going Ukraine and Russia squabble continues to degrade.  I'm skeptical, however, that this will drive much market action, however, since the effects of the conflict appear to already be factored in.  More likely, news of an agreement would spur some positive market action, however, continued conflict appears now to be the accepted status quo.  I'm keeping an eye on reports that the US is considering arms shipments to Ukraine since that may produce short-term trading opportunities, but beyond that I don't see this situation adding much to the economic picture in the near future.

With the geopolitical backdrop now in focus, let's take a look at what economic releases are coming this week.

Monday, February 9.

12:00 EST 15:00 GMT - US Labor Market Conditions Index.  I'm looking for a value in excess of 6.8 to indicate continued growth in the job market.  The Participation Rate is hovering in the 62.7 range, and unemployment is in the 5.6% range, so I'm looking to this number (currently at 6.1) to paint a broader picture of the overall health of the labor market.

20:30 EST  01:30 GMT - China's Consumer Price Index and Producer Price Index.  These two numbers are a good measure of inflation in the Chinese economy.  The CPI is forecast to be 1.0 (down from1.5) and the PPI is forecast to be -3.8, down from -3.3.  If that holds, they will confirm the continuing belief of an economic slowdown in China.

Tuesday, February 10.

01:45 EST 06:45 GMT - Swiss Unemployment. 

03:15 EST 08:15 GMT - Swiss CPI.   Normally we wouldn't pay much attention to the Swiss Unemployment or CPI numbers, however in light of recent action by the Swiss Bank and the resulting market volatility here in the States, we'll watch these numbers and pay attention to any reaction here as a result.  Unemployment is forecast to hold steady at 3.2% and the CPI is expected to drop to -0.6%, down from -0.3%. 

08:20 EST 13:20 GMT - Jeffery M. Lacker Speech.  The President of the Richmond Fed is the featured speaker at the 30th Annual Emerging Issues Forum, Innovation Reconstructed in Raleigh, North Carolina.  His speech is entitled "Education, Innovation, and Economic Growth." His comments are being watched as a signal for volatility in the strength of the US Dollar.

12:00 EST 15:00 GMT - US Wholesale Inventories.  This number is expected to drop to 0.1% down from 0.8%.  Wholesale Inventories are used as a means of predicting the GDP for the quarter and the year.  In effect, a lower number signals a growing economy and a higher number signals a weakening economy.  This one will move the markets if it does not come in at the consensus value.

Wednesday, February 11.

08:00 EST 13:00 GMT - Richard Fisher Speech.  The President of the Dallas Fed is the featured speaker at a breakfast being held at the Economic Club of New York.  He is expected to discuss how the Fed currently views the US economy and the value of the US Dollar.  Fed watchers will be dissecting his comments to ascertain when the Fed will begin interest rate hikes.

Thursday, February 12.

02:00 EST 07:00 GMT - Eurozone Harmonized Consumer Price Index.  Germany will release their CPI at the same time.  The German number will show the rate of inflation in Germany, and the Harmonized number will show the rate of inflation using a methodology incorporated across the entire Eurozone.  The German CPI is expected to drop to -0.3% and the Harmonized CPI is expected to drop to -0.5%.  Both demonstrate a deflationary trend that further confirms the weakness in the European economy.

05:00 EST 10:00 GMT - European Industrial Production.  This number shows the volume of production of industries such as factories and manufacturing.  Increased production is indicative of a growing economy whereas decreased production is indicative of a slowing economy.  Interestingly, the number is forecast to increase to .3%, up from -0.4% last month.

08:30 EST 13:30 GMT - US Jobless Claims.  This is a weekly number and reflects the number of new unemployment claims.  There's no consensus number published, however the previous week's number was 278K.  In general, a larger number indicates weakness in the economy and a smaller number indicates strength.

08:30 EST 13:30 GMT - US Retail Sales.  Here's the big release in the US for the week.  This number is widely used as an indicator for consumer spending.  The consensus is for the number to improve to -0.5%, up from -0.9%.  Any deviation from the consensus will drive the markets accordingly. 

Friday, February 13.

01:30 EST 06:30 GMT - France and Germany's GDP.  Of the two, the German number is the one that's expected to move the market.  The Quarter-over-Quarter number is forecast to grow to 0.3%, up from 0.1%. 

05:00 EST 10:00 GMT - Eurozone GDP.  The Year-over-Year GDP for the Eurozone is the number being closely watched, and is expected to hold steady at 0.8%.  Weakness in this number will have an adverse effect on the US markets heading into the long weekend.  The Quarter-over-Quarter number is also expected to hold steady at 0.2%.  Something to watch will be divergence between the two numbers with the QoQ value being treated as an indicator for the year ahead.

09:55 EST 14:55 GMT - US Reuters/Michigan Consumer Sentiment. This is a measure of how likely consumers are to spend money, based on their feelings about the overall economy.  The forecast is for the number to hold steady at 98.1.

Labor Market Conditions Index (LMCI) - A One Size Fits All View of the Labor Market

A quick glance at the economic calendar for any month makes it clear that there are numerous data elements that detail aspects of the labor market.  Frequently, these elements directly contradict each other, which increases the difficulty in truly assessing the overall health and the overall trends that impact the workforce.  Take, for example, the two most popular measures of the health of the job market, the Unemployment Rate (currently 5.6%) and the Participation Index (currently 62.7%.)  The former has been trending downward for the past couple of years and is an indication of a healthy and growing workforce.  The latter, however, has also been trending downward since 2010, and is an indication of a large number of eligible workers leaving the workforce.  Both statistics are accurate to what they are intended to indicate, but neither accurately depict the health of the labor market in totality.

In an attempt to reconcile all the various economic indicators that touch some aspect of the labor market - and there are 19 such indicators - the Federal Reserve Board implemented a new index in mid-2014 that incorporates all of them.  The Labor Market Conditions Index (LMCI) provides a single at-a-glance number that factors in such diverse measures as the number of hours worked, wages, hiring rates, hiring plans, jobs that are hard to fill, and the rate at which workers transition between unemployed to employed.  There is a heavy weight placed on indicators that correlate well to each other, while those that diverge from other indicators are given less of a weight in the calculation of LMCI. Therefore, the jury is still out as to the effectiveness of this single Indicator of Indicators.

Indicators Included in LMCI

The LMCI for December - reported in January, 2015 - sits at 6.1, and it has been trending upward since August.  As you can see from the following chart, however, the health of the labor market is not accurately portrayed by the Unemployment Rate, which has been improving steadily for two years.  Neither is it accurately portrayed by the Participation Index which has been degrading steadily for four years.  Rather, the correlation of the wide range of indicators gives a much more meaningful view of the overall health of the labor market.  At least, that's the message it seems to portray looking at the graph of the last two years.  To put the current graph in perspective, LMCI reached a maximum value of 28.6 in September, 1983.  Its worst value was -43.3 in May, 1980.

LIMC - January 2013 to December 2014

The Labor Market Conditions Index for January, 2015 will be released on Monday, February 9 at 12:00 EST (15:00 GMT).  While the data that comprise the indicator go back to the early 1970s, the indicator itself is still in its infancy.  It remains to be seen how much of an influence LMCI will have on the overall market.  With this being the only economic indicator of significance being announced on Monday, however, expect it to have some influence over afternoon trading, barring any geopolitical developments coming out of Greece, Germany, Ukraine, or Russia.  While no consensus estimate has been released, I'm looking for a value of 6.9 or higher to indicate healthy growth in the labor market.  A lesser value would indicate that factors other than the Unemployment Rate are taking a heavier toll on the job market than is currently factored into the economic outlook.

End of an Era for One-Time Electronics Giant Radio Shack

Once the "go to" company for innovators, engineers, and electronics enthusiasts, Radio Shack executed its final trade on the New York Stock Exchange on Monday, February 2, 2015.  How far has this giant fallen?  In 1999 at the height of the Dotcom boom, Radio Shack soared to $79.50 per share.  Their final closing price yesterday was 24 cents per share. 

The New York Stock Exchange has delisted the stock for failure to submit a plan to return to a $50 Million market cap as required for membership in the exchange.  Radio Shack is expected to default on its debt this month, and a bankruptcy filing is seen as imminent.  Reports have surfaced that both Amazon and Sprint are interested in purchasing a few of their stores,  however the bulk of their tangible assets will likely be liquidated at auction.

How could a 94-year giant like Radio Shack crumble so quickly?  In just 15-years they went from an electronics giant to extinction.  The answer can be summed up in two words: Quality and Delivery.  From the 1980s forward, the quality of products sold under the Realistic and Tandy brands were increasingly called into question and, in many circles, openly ridiculed.  The TRS-80, Radio Shack's popular personal computer line was nicknamed the "Trash-80" and not without justification.  Realistic branded items become noted for extremely low quality and a much higher price tag than the company could justify.

While the Dotcom boom pushed Radio Shack's stock to record heights, the company never truly adapted to the online landscape.  While online retailers emerged in the electronics and technology space, Radio Shack was either unable or unwilling to shift their model away from an old-style brick and mortar strip-mall occupant.  They simply couldn't compete with the online giants, and in such a niche market, their business model was doomed to failure in the age of the highly versatile online superstore that also had a local physical presence.

The same failure to adapt to the online retail world is what doomed Borders, once a giant book retailer just as computer retailers like CompUSA fell victim to the same emerging online trends.  Radio Shack's failure should come as no surprise to anyone, but it should serve as a warning to any franchise that relies primarily on a local brick and mortar presence.  As companies like Amazon improve their delivery models, offering same-day service in many localities and next-day service in others, the traditional strip-mall franchises must either adapt or face extinction.  Any chain that is not growing their online presence at a rapid rate must take a hard look at their business model since the retail world may well be passing them by.  Just ask Radio Shack.

Staples and Office Depot Rumors - But What's Changed?

Office supply giant Staples (Nasdaq: SPLS) was up almost 2.5% pre-market on reports of advanced talks to merge with rival Office Depot (Nasdaq: ODP).  The latter was also up about 1.5%  on the rumor.  There are no details available regarding the proposed deal, so it's hard to say whether the current pricing is accurate. 

This is not the first time Staples and Office Depot have appeared at the merger altar.  The last time, however, was 1997 and federal regulars squashed that deal citing anti-trust concerns.  They had no such concerns in 2013, however, when they permitted the merger of Office Depot and Office Max.  Neither were required to divest any stores, and the FTC acknowledged then that the competition in that space had increased considerably.

There is never any assurance that deals of this nature will proceed, even without regulatory anti-trust concerns.  Trading on rumor of merger is always speculative, and unless you play in the after-hours market, you're typically looking at the taillights of that price movement.  That's likely the case today, although there may be more room in the Office Depot price as details are revealed.

The question, though, is what's changed since 1997 that would allow such a merger?  The answer is simple: the entire industry has changed.  In 1997, Staples was primarily a stationary store.  Today, stationary is still a large part of their business, but they are also a major technology store, selling laptops, desktops, and virtually every component imaginable for a device in that space.  They are into the tablet space, the cell phone space, the office furniture space, and the software space.  Staples is no longer your neighborhood stationary superstore.  Neither, for that matter, is Office Depot.

As Staples' focus has adjusted to the changing times, so, too, has their competition.  In addition to similar box stores (like Office Depot,) Staples is also in the same market as technology giant Best Buy.  Wal*Mart and Target also offer a similar array of products at equally competitive prices.  Staples and Office Depot are both, however, dwarfed by Amazon, especially when you consider the wide spider web of Amazon marketplace partners. 

With the stunning growth of online sales in that industry, and with Amazon emerging as a global retail force, fears of anti-trust in a deal between Staples and Office Depot are greatly diminished.  Of course, you can never truly predict what the FTC will do in these situations, but thinking globally, it is safe to say that the prospects of this merger being approved are significantly greater today than at any time in the past. 

Trading on this type of rumor remains speculative, at least if your objective is quick price action profit, but longer term it's likely that Staples will emerge as a much stronger, more profitable company once the efficiencies arising from the merger are realized.  That's the way I'm looking to play this.  I like the wide range of products offered by Staples, and I like the convenience of having their brick and mortar presence for those "emergency" purchases.  I also like the efficiencies that would be gained by merging these two companies, and the potential benefits that will bring into their online sales space.  So this will be one to watch, but outside of short term trades, I'd like to see the details emerge before determining a good entry and longer-term price target.

Why I Am So Critical of Those That Sing Our National Anthem

The Napoleonic Wars had taken their toll on British resources.  In the early 1800s they started to empress US citizens into the British Navy on the pretense that people of Irish or Scottish decent could not renounce being subjects of the King despite their US citizenship.  In 1812, the US had had enough, and war with Great Britain ensued.  It was not going well.  The War of 1812 was a naval war, and the British were the kings of the seas.  Despite some US victories in the Great Lakes, by 1814 the survival of the fledgeling nation was in serious doubt.  Washington had been sacked and burned.  The US Capitol and the White House had been torched.  Alexandria, VA had been sacked.  The British fleet set their sights on Baltimore and had only to overcome Fort McHenry, which guarded the mouth of the river.  On September 3rd, 1814, President Madison sent two emissaries under a flag of truce to the HMS Tonnant.  Their objective was a prisoner exchange, to which the British agreed.  Since an attack on the Fort was imminent, however, the two emissaries - Francis Scott Key and John Stuart Skinner - were forced to remain on the Tonnant until the battle was over. 

The British engaged Fort McHenry on the evening of September 13, 1814.  At stake in that battle was American Independence.  Key watched the battle unfold from the deck of the Tonnant.  Inspired by what he saw that night, Key wrote a four stanza poem on the back of a letter he had in his pocket.  That poem - The Defense of Fort McHenry - became what we know today as our national anthem.  The first stanza is what we hear sung before every sporting event today. 

Read the words.  Understand what Key is describing.  Understand what was at stake on that fateful night in 1814.  And before you ever presume to sing this song in front of an audience, understand full well that you are paying tribute to the defense of a nation.  It is not a song to honor you, the singer.  It is a song sung to honor a victory, pulled from the jaws of defeat,  a victory that secured a nation.  Do not perform it.  Honor it.

The Defense of Fort McHenry:

O say can you see by the dawn's early light,
What so proudly we hailed at the twilight's last gleaming,
Whose broad stripes and bright stars through the perilous fight,
O'er the ramparts we watched, were so gallantly streaming?
And the rockets' red glare, the bombs bursting in air,
Gave proof through the night that our flag was still there;
O say does that star-spangled banner yet wave,
O'er the land of the free and the home of the brave?

On the shore dimly seen through the mists of the deep,
Where the foe's haughty host in dread silence reposes,
What is that which the breeze, o'er the towering steep,
As it fitfully blows, half conceals, half discloses?
Now it catches the gleam of the morning's first beam,
In full glory reflected now shines in the stream:
'Tis the star-spangled banner, O! long may it wave
O'er the land of the free and the home of the brave.

And where is that band who so vauntingly swore
That the havoc of war and the battle's confusion,
A home and a country, should leave us no more?
Their blood has washed out their foul footsteps' pollution.
No refuge could save the hireling and slave
From the terror of flight, or the gloom of the grave:
And the star-spangled banner in triumph doth wave,
O'er the land of the free and the home of the brave.

O thus be it ever, when freemen shall stand
Between their loved homes and the war's desolation.
Blest with vict'ry and peace, may the Heav'n rescued land
Praise the Power that hath made and preserved us a nation!
Then conquer we must, when our cause it is just,
And this be our motto: "In God is our trust."
And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave![ 

Proctor & Gamble Highlights Currency Exchange Impact With Rising Dollar

The economic conditions across the globe have driven the value of the US dollar to some of the highest levels we've seen in years as compared to virtually all other major currencies in Europe, Asia, and Latin America.  It's well known that this new-found strength in the dollar has a negative impact on US exports.  This week, however, Proctor & Gamble (NYSE: PG) provided an impromptu lesson on the full impact of foreign exchange on global corporations.  For anyone interested in the details, their Q4 2014 Earnings Call Transcript is a must-read. 

What is important to understand is that the exchange rate between the US and the Euro only impacts one aspect of a global business.  Right now, the impact on the bottom line is a negative one, for sure, since the translation back into US dollars is not favorable on the balance sheet, but across Europe as a whole, the problem gets significantly worse.

Goods or product components that are exported to Europe, for instance, are in turn exported to other countries on the continent that are not necessarily in the Eurozone.  This leads to yet another foreign exchange transaction that, depending on the value of that currency versus the Euro, may translate into another negative bottom line impact.  This is especially true if the destination is Russia, Ukraine, or one of the other Eastern European nations with similarly depressed currencies.

Using P&G as the example, they experienced a negative foreign exchange impact to the tune of $1.4 Billion after tax.  Six currencies contributed to 71% of that total, and they represent countries from around the globe: Venezuela, Russia, Japan, Ukraine, Argentina, and Switzerland.  It's common for global companies to import components - P&G used plastic bottles as their example - into a destination hub for subsequent packaging.  In the case of the bottles, you're looking at a Euro to Rubles conversion that is a bottom line negative impact, followed by a Euro to Dollar conversion on the balance sheet that is yet another bottom line negative impact.  The more components imported from around the globe, the greater the impact, especially when the final destination is a country with a very low-valued currency.

Between the actions taken by the ECB to introduce Quantitative Easing, the actions taken by the Swiss recently, and the impact of geopolitical tensions between Russia, Ukraine, and the west, global companies will face this FX headwind through 2015 and likely beyond.  While Proctor & Gamble did a fantastic job of detailing the impact in their conference call last week, the lesson they provided applies to all companies that have a global reach. 

There is no evidence that the US Dollar will weaken in 2015.  In fact, there's suggestion now that it may test its all-time strength against the Euro before the year is out.  We can expect this to put a significant amount of financial pressure on companies with a large exposure to Europe.  Be sure to factor this into your analysis of companies when planning a long-term trade or an investment.  It's a factor with which we have not had to deal throughout the run of this bull market.  Now that it's here, at least for the next year or so, we need to factor it into our thinking.

Market Volatility Is No Cause for Panic

"Volatility" has been the daily buzzword in the market for at least the last six weeks.  Certainly we've seen some wild and wooly daily swings, as traders on both sides of the pond react to seemingly random bits of news.  If we take a step back to look at the Dow Industrial's weekly chart, though, we can plainly see that there's no real panic in the market, nor is there any real sense of troubled times ahead for 2015.  Take a look at this chart:

Dow Industrial Average Weekly Chart

A few things should pop right out as us:

1. The Dow is trading well above its 250-period moving average (Green line).
2. The Dow is trading above its 50-period exponential moving average (Red line.)
3. The slope of both the 50-period and the 250 period averages is at a consistent upward (bullish) angle.
4. The 50-period line has been acting as support since late 2011.
5. Resistance - the green line - is proceeding upward at a very healthy slope and - since January 2014 - has been running parallel to the 50-period line.
6. Volume has been relatively stable since late 2013 and is not showing any of the wild increases that would signal a trend change.
7. We're trading at a support level right now (top dashed blue line) and there is a very strong support level around 16,500, coinciding with a 23.6% Fibonacci retracement line.
8. The weekly chart is still experiencing higher highs and higher lows.  That is the textbook definition of an uptrend.

Will there be more downward movement in the next week or so?  Sure.  There are plenty of global pressures out there pushing us downward, and I expect us to at least test the 50-period average around 16,900.  That point, however will be a fantastic buying opportunity. If the resistance trend line continues, the next test of that resistance may be above 18,500.

Now, there's certainly plenty of headwind in the global market.

• Greece is in a staring contest with the ECB and with Germany over what to do with their debt.
• Russia's economy is in meltdown.
• Europe's economy has slowed to a point hovering just above a recession.
• China's GDP, while still a very healthy 6.7%, has slowed considerably.
• The Middle East, Africa, and Latin America are all stalled.
• The US Dollar continues to strengthen against other key currencies.
• A labor dispute at the ports on the US west coast is hampering imports that should otherwise be soaring.
• The collapse of oil prices is starting to put pressure on numerous industries, threatening the growth in the otherwise healthy US economy.

Despite all that headwind, where else would investors put their money?  The US Treasury is always a safe haven, but with interest rates still near zero and not likely to increase until late 3Q15 there's no real profit to be made there.  The European treasuries aren't paying anything either.  Russia's bonds are paying double digits right now, but it's anyone's guess if you'll ever see your investment again.  European stocks are in turmoil as is the Japanese market. Where else will that money go?  As global conditions worsen, expect the US equities market to become the safe haven. 

Take advantage of these downturns in the Dow, the S&P, and the Nasdaq.  They represent the best buying opportunities we've had in a while.  Don't fear this growing volatility; embrace it.  Every dip in prices in the coming weeks is your opportunity to enter this still healthy and still growing bull market without paying too high a premium.  This bull has not yet run its course, nor do I expect it to end in 2015.

Caterpillar Is a Pure Energy Play in 2015

Following last Tuesday's earnings announcement, Caterpillar (NYSE: CAT) was crushed, falling $7 per share from $86 down to $79 overnight.  It's stayed in that $79 range for the rest of the week, based entirely on it's gloomy outlook for 2015. 

The exposure CAT has in the energy sectors is significant, and with no foreseeable end to low oil prices, it's no wonder that the stock of this well-run company has been pummeled.  The good news for traders and investors alike, however, is that we now have oil as a leading indicator for this company's eventual rebound.  Take a look at a chart of CAT (red line) compared with the Energy iShares ETF (blue line.)

CAT (red) vs IYE (blue)

The correlation between the two makes sense when you consider the company's outlook for 2015.  CAT is forecasting a 9% decline in revenue compared to 2014, primarily as a result of depressed oil and gas prices.  Consider what CAT sells relative to that industry:

• Engines for drilling;
• Engines, transmissions, and pressure pumps for well servicing; 
• Engines for compression sets for gas gathering;
• Engines and turbines for pipelines;
• Turbines for offshore production pipelines.

In 2014, $22 Billion in sales came from this industry alone.  With depressed oil prices, however, there is an anticipated significant reduction in CapEx expenditures on the part of oil exploration and production companies in 2015.  Lower CapEx in that industry translates directly into lower revenue for Caterpillar.

If the price remains low for the better part of 2015 - and at present, there's not much to suggest it won't - then the turbine business is expected to decline well into 2016.  Without a dramatic price move in oil in the short term, it's reasonable to expect CAT's stock price to remain depressed at least through their next earning period.  It's for that reason that I'm using oil prices as the leading indicator CAT's future growth.

In their January 27th conference call, CAT offered some insight into several other industries of note. 

• Agriculture is expected to be weak in 2015.  This will lead to lower sales of industrial engines, and you can translate that into lower sales of other farm equipment.  It may, however, be good news for the parts industries, since there will be a greater desire for maintenance as opposed to new purchases.
• The rail business is expected to be down, at least according to CAT.  Now, this runs contrary to what we're hearing from others that have exposure to that industry, so it remains to be seen if CAT is being overly pessimistic or if this is a reflection of their more global position as opposed to a pure domestic play.
• Construction is expected to be up in the US.  This coincides with the view from others in that industry, and given the pessimistic outlook portrayed by CAT as a whole, this adds a measure of weight to the strength of the construction industry domestically.
• Construction everywhere else is expected to be down.  That's a recurring theme, with Europe leading the charge into recession.  China's growth is slowing, and construction is forecast to decline there as well.
• Mining is very weak, with commodity prices - especially for copper, iron ore, and coal - trading well below normal.  Interestingly, CAT does not foresee this improving in 2015.  If they're right, the various mining industries will face serious headwinds throughout the coming year.

As is typical in earnings calls this week, the strength of the US dollar was raised as a major headwind to global profits.  Now, this makes sense from two aspects.  First, any company that relies heavily on US exports is going to face headwind since foreign currency now buys less in terms of US goods and services.  Second, sales overseas in foreign currency faces unfavorable US dollar terms, so those sales now result in less revenue expressed in the dollar.

The good news for the strong dollar, however, is in terms of overseas manufacturing.  Companies based in the US, like CAT, that have extensive overseas manufacturing facilities are expected to see much lower costs thanks to the favorable exchange rates.  In fact, CAT anticipates this artificial cost reduction as offsetting the impact to revenue in the overseas markets.  It's a factor to consider when looking at opportunities in other companies with a strong overseas manufacturing presence.

So there you have 2015 in a nutshell, at least as it pertains to companies with heavy exposure in the oil and gas industries.  As to CAT, watch the oil ETFs for signs of strength once the price of oil stabilizes and begins to recover.  I'm expecting the oil ETFs to be a leading indicator that will signal a great entry point for CAT, and one that may provide an excellent cross-earnings announcement play in the quarter in which we see oil rebound.

A Neutral Fed Announcement Spooks Markets

The Federal Open Markets Committee (FOMC) issued a statement today that sent the US markets into a nose-dive.  With earnings across most sectors disappointing the markets throughout January, and with economic data being a further disappointment, speculation on the street was pushing estimates of interest rate hikes out into the September time-frame.  The Fed dispelled those notions this afternoon, and the Dow tumbled 190 points in response.

In today's release, FOMC stated, "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy."  This is being interpreted as indicating a rate increase announcement no earlier than June, however it's not the dovish indicator the markets were hoping for.

It doesn't help that the FOMC's assessment of current economic conditions appears to be a bit rosier than those being seen by investors and traders.  Consider the following statements:

FOMC stated, "Labor market conditions have improved further, with strong job gains and a lower unemployment rate."  While it's true that unemployment has declined to about the 5.6% level, the Participation Index - a much more accurate measure of the workforce - has declined to its lowest level (62.7%) since 1978 and it continues to decline.  This would indicate that the number of eligible workers that are unemployed is increasing, not decreasing.  As to job gains, if you take Texas, Washington DC, Arkansas, and Utah out of the mix, the nation is actually shedding jobs at a rapid rate.  Almost all of the net national gains are coming just from the state of Texas.

Job Gains vs Unemployment

Here's the raw data just for Texas: Joint Economic Committee - Texas Economic Data

Next, the FOMC stated, "Household spending is rising moderately."  That's an interesting view, considering the Retail Sales number recently released was the largest decline experienced in 11 months.  If household spending is rising, one must question where they are spending it since it clearly wasn't in retail stores last month. 

They stated, "Recent declines in energy prices have boosted household purchasing power."  There's certainly more money in the consumer's pockets resulting from a decline in gas prices, however, as has been discussed several times over the past couple of weeks, there is no evidence that the consumer is spending that money.  In fact, there's evidence mounting that the decline in energy prices is about to have an extreme negative impact in the oil producing states that have driven the overall job growth since the recession.  With oil rigs closing, and oil companies starting massive layoffs, the conditions in states like Texas, Oklahoma, California, and North Dakota, among others, will quickly deteriorate.

Finally, FOMC stated, "Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.  Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable."  The problem with this statement is that both CPI and Core CPI are down.  This means that, even excluding food and energy, inflation is down. It makes sense, since wages are not increasing.  (Average in the latest release was a mere 1.7%.)  In other words, inflation is dropping, not because of energy prices, but because of a gradual softening of the economy as a whole.

What may have spooked the market the most is this phrase in their press release: "In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation." It's that "and expected" part that is disturbing.  Since their assessment of inflation to date is not accurate, the thought that they will react based on what they expect to happen implies a rate hike that will be premature in an economy that cannot tolerate it.

The only truly encouraging statement in the release is in the very last sentence: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."  This is, from what we can determine, the only acknowledgement that there are global economic forces that are providing extreme headwinds to US economic growth.  The strength of the dollar, a crumbling European economy, the renewed threat of a Greek Crisis, and the evaporation of Russia's economy are enough to give even the most bullish investor pause.  Add to that a reduction in the rate of growth in China and India, and there's the prospect of a US economy barely able to sustain forward momentum.

We're nearing the end of this quarter's earnings season.  There are definitely very strong sectors that will provide excellent trading opportunities in this uncertain market.  Aerospace, Auto Parts, and Utilities are all looking pretty good right now.  Keep an eye on the remaining announcements, and trade into strength (or short into weakness, if that's to your liking.)  For now, though, expect volatility to remain high given the uncertainty around when the Fed will decide to move on rates.

Directionless Microsoft is Out of Touch With Consumer Demand

What do you do when a product launch is so horrendous that it's not only completely rejected by the consumer, it also drives down the sales of other companies' hardware that would potentially use that product?  Well, if you're Microsoft (Nasdaq: MSFT) you repeat the error on an even bigger scale.

Windows 8, a complete makeover of Microsoft's operating system, was a complete failure in the PC market.  (Windows XP and Windows 7 were highly successful.  To capitalize on that success, Microsoft threw the entire OS out and redesigned it into something the consumer loathed.  You'd think they'd have learned from Windows/ME, wouldn't you?) While it had some success in the company's tiny portions of the phone and tablet worlds, PC users rejected the entire concept in droves.  Even in the laptop space, where you could argue that there was some chance of success, I continue to be stunned by the number of people that ask me how they could replace the Windows 8 that came with the box with Windows 7.  The message was loud and clear, or at least it should have been.  Not, apparently, for Microsoft.

Enter Windows 10.  Yet another new look for the OS, Windows 10 seeks to continue down the same path as Windows 8 by providing a single interface between the phone, the tablet, the laptop, and the PC.  At some point, we can only hope that someone in Redmond realizes that the demands of a user looking at a 5 inch screen are dramatically different from the user looking at two 29 inch screens.  Interaction with a screen 8 inches from my nose is dramatically different from my interaction with a screen 2 feet away.  On a phone, I'm looking for a simple interface with lettering large enough to read with rapidly aging eyes.  On a PC, I'm looking to maximize real estate on screens larger than the TV set I had in my living room as a kid.  The needs are different, the user behavior is different, the way you interact with the devices is different.  The concept of a one-sized-fits-all operating system is, and always will be, a failure.

Next we have the one component virtually every user touches almost constantly: the web browser.  Now, everyone has their favorite browser, for a variety of reasons, and the defense of their favorite browser frequently turns into a Holy War.  At present, there are really only four choices in the browser world - Internet Explorer, Firefox, Chrome, and Safari.  None of them are perfect, but with the exception of IE, the others are at least stable, and offer a bit of backward compatibility.  I'd be doing cartwheels over Firefox, in fact, if they'd only fix the memory issue that's plagued that browser for close to a decade.

Enter Cortana.  This is yet another attempt by Microsoft to prove they cannot distinguish between a phone and a desktop.  Basically, Microsoft is attempting to bring Apple's Siri to the desktop.  There's only one problem.  I don't need Siri on my desktop.  I don't need a hands-free desktop experience; in fact, I don't want a hands-free desktop experience.  There's nothing I've seen in any of the Cortana demos to date that leads me to conclude that this is the browser solution of the future.  Certainly, it's not about to make me run out and install Windows 10 - an operating system I intend to avoid with even more gusto than I avoided Windows 8.  A point Microsoft seems to be forgetting is that there is no revenue generated just from the browser.  Certainly, there's potential revenue from Bing - their search engine - however the competition with Google is fierce, and given the amount of data Google collects, they have the distinct advantage (except in China.)  Cortana isn't about to increase revenue for Microsoft, and after the Windows 8 and now Windows 10 fiascoes, that's precisely what Microsoft needs.

Finally, have you looked at the bundles attached to new laptops, lately?  Office 365, complete with a "free" one-year subscription, now seems to be the standard offering.  Office 365 is a subscription based software service, forcing users to make extensive use of Microsoft's cloud offering just to use basic functions like word processing, spreadsheets, etc.  While connectivity isn't necessarily an issue in the desktop space (although it's a bit presumptuous to assume that everyone using a spreadsheet has Internet connectivity all the time) it's definitely an issue in the laptop space.  The concept of a laptop is portability, and there are plenty of times I find myself with my laptop outside of a WiFi zone.  Not, mind you, that I'm willing to use a public WiFi for anything confidential, anyway.

Now, there may be plenty of people willing to enter into a subscription contract for software.  Adobe's had a bit of success with that in the photo editing space, but that's more of a function of the outrageous price of Photoshop, for anyone other than a student.  I'm not one of those people.  There may also be plenty of people willing to store their documents "in the cloud" - meaning, on servers in a data center over which you have zero control.  Sure, I'll let you store my grocery list in the cloud.  Financial and personal data?  Not a chance.  Google "Identity Theft" if you're curious as to why.

Microsoft has clearly lost their vision with regards to consumer requirements.  The only reason I now have to run a Windows based PC is for online gaming.  Everything else I do on a PC can be done for far less cost running a Linux OS, and using open source solutions like Open Office to do everything Microsoft Office can do without the high cost or a subscription charge for the latter.  (In fact, I have Ubuntu on a laptop that dates to 2004, is a single core processor running 1 GB of memory, and it outperforms this quad-core desktop with 6 GB of memory running Windows 7.)  With the exception of playing an online MMO, there's nothing I do today on a Windows box that cannot be done under Linux for a fraction of the cost and a fraction of the CPU and Memory requirements.

Microsoft's stock was absolutely crushed following their latest earnings announcement and their conference call.  Their earnings were in-line with expectations, and their revenue beat by $140 million.  So why were they crushed?  (They're down over 10% from their pre-announcement price.)  They were - and still are - getting crushed because they have lost sight of what the consumer wants.  The products they are delivering in 2015 are not products in demand by the consumer.  In fact, it's fair to say that the consumer is demanding the exact opposite of what's being delivered.  This is a company in turmoil, and until there are fundamental changes at the top of the house, it will be a stock to avoid.

Greece's Leftist Syriza Just Shy of Absolute Majority

Greek elections were held today, and the leftist Syriza party emerged the clear victors, taking 149 seats in the 300 seat Parliament.  Despite the solid win, they fell just short of an outright majority.  Party leader Alexis Tsipras hailed his victory as an end to the "vicious cycle of austerity," although Tsipras significantly toned down the anti-austerity rhetoric as the election drew near.

Tsipras now finds himself in a precarious position, balanced between his anti-euro political base, and the reality of Greek creditors trying to fend off a default on their massive debt.  Whether or not Greece remains in the Eurozone is now a matter of debate, although in recent weeks, both Tsipras and German Chancellor Merkel have insisted that Greece should remain.  A Greek exit would be destabilizing at best, not only for Greece, but for the Eurozone as a whole.  To be sure, Italy and Spain will be keeping a close eye on Greece's decision.

Uncertainty in Greece has left financial markets unsettled several times in the past few years, and with the shift in the balance of power today, there's definitely an element of uncertainty heading into tomorrow's open. The outcome of today's election has been heralded in the polls for several months, but the moderation of Tsipras' anti-euro public sentiments can be seen as an indication that he is transitioning away from the political rhetoric needed to win and towards the reality of what it will take to lead.  That may help impose a measure of stability as we wait and see how the new government takes shape.

What also remains to be seen is how the political landscape, and not just the economic landscape, develops with Syriza in power.  They have publicly supported a Greek exit from NATO, and - not surprisingly - have criticized economic sanctions against Russia.  As is the case with their anti-eurozone rhetoric, however, Tsipras has backed away from the extreme anti-NATO views in recent weeks.  As Bloomberg stated, "Syriza is sacrificing its more revolutionary ambitions to the overriding goal of getting better terms for Greece’s economic aid package."

It will now be interesting to watch the market dynamics.  Last week, we had a huge adrenaline boost on Thursday with the ECB's announcement of Quantitative Easing measures that far surpassed expectations.  The adrenaline high wore off on Friday, though, as earnings reports in the US were mostly lackluster.  Now we have the Greek elections upon which to focus tomorrow.  Between the Greek elections and several important economic announcements in Europe tomorrow, including the Eurogroup Meeting, three IFO announcements, and December's Retail Sales report, Monday should be an interesting - and possibly quite volatile - trading day overseas.  It will be interesting to see how this spills over into the US market, heading into some key domestic releases mid-week.

Union Pacific Sees US Economic Growth; Cites Several Uncertainties

The overall theme of strong US economic growth in 2015 continues with Union Pacific (NYSE: UNP) forecasting strength in several key domestic arenas.  With 31,838 route miles providing rail access to and from both the Pacific Coast and the Gulf Coast shipping ports, this 150 year old railroad corporation has the inside track on a wide range of industrial and consumer goods being transported around the nation.  What they are forecasting for 2015 is very promising on the domestic front.

Agricultural demand looks strong in the US, although there's oversupply internationally so demand for US agricultural products overseas looks weak.  There is also some short-term weakness evident in demand for ethanol - which will impact demand for corn - however with plunging gas prices in the US, demand for ethanol is forecast to increase as we head towards higher demand for gasoline through the first half of this year.

For those interested in the automotive sector, the news on that front continues to be positive.  UNP saw continued strength in consumer demand for both finished products (i.e. new cars) as well as increased demand for automotive parts.  They see this trend as continuing into the 2015.  Seasonally adjusted, shipments of new cars in the 4th quarter increased by over one million vehicles.  Shipments of parts also saw a 2% increase in the 4th quarter. 

On the energy front, strong demand for coal continues to be forecast.  Inventories are currently low, and UNP expects strong demand to replenish those supplies.  The price of natural gas, however, could put pressure on demand for coal since a lower natural gas price will decrease the demand for coal across the nation.  While UNP has yet to see this impact in their shipment orders, they have called this out as a concern for their coal segment in 2015.

The price of crude oil is already having an impact on shipments, and that's expected to continue into 2015.  Volumes in the Bakken fields are down significantly already, and as long as crude prices stay below $75 to $80 per barrel, declines there will escalate.  The Uinta Basin and Niobrara Basin have increased shipment volumes, however I'd be concerned about Niobrara maintaining that trend.  The Uinta Basin produces traditional natural gas and oil, and is increasing overall production while decreasing the number of rigs, primarily through horizontal drilling.  The increased volume per rig is currently able to offset the impact of decreased margins, although if prices remain low, that will not be enough to sustain profitability.  The Niobrara Basin, however, has a very high exposure to margin risks associated with shale extraction - the most expensive of the oil production methods in use today.  Low oil prices will cripple production in this basin.  This will also have an impact on UNP's shipment of frac sand which accounted for 35% of their 28% increase in non-metallic minerals volume in 2014.

Switching to the construction industry, UNP is seeing sustained growth in the shipment of construction materials and they expect that to continue into 2015.  This growth is in both residential and non-residential building materials, and it's also being seen in lumber shipments. 

Intermodal shipments continue to grow domestically as well.  This is of interest since intermodal shipments transcend the various transport providers including trucking, rail, and shipping.  There's weakness being felt in imports, however, due to the long-running labor dispute in the west coast ports.  A much-hoped-for deal in mid-2014 didn't manifest, and the impact is being felt along the coast.

UNP reported strong demand for imported beer in 2014, and they forecast increased demand in 2015.  I'm not sure if there's a trading opportunity here, but in the interest of full disclosure, I will state that I'm doing my part to ensure demand remains high.


UNP did cite several uncertainties in their 2015 forecast, but by now they are uncertainties of which we are all aware:

• Crude oil prices will impact multiple industries, especially if they remain this low for any length of time.
• Global economies are softening, primarily in Europe, Japan, and Russia.  China's growth has slowed, (although it's projected to be close to 7% in 2015, so that's still a significant amount of demand.)
• The west coast labor dispute will continue to add import pressures.

Based on UNP's assessment of shipment volume projections in 2015, keeping an eye on the automotive industry and the construction industry should provide some interesting trading opportunities.  On the speculative side, it's worth keeping an eye on the interaction between coal and natural gas demand as the energy price dynamic plays out through the first half of the year.

GE Sees Strong Regional Growth, Large Impact From Oil

General Electric (NYSE: GE) released earnings yesterday, and provided a detailed sector by sector view of how 2015 should develop around the globe.  Confirming the outlook provided by other key global companies, they see strong growth in the US continuing through the next year.  Reading through their transcript, the forecast for India and China appears to be a bit more subdued, and the major drags on the world economy will be Russia, Europe, and Japan.

The two major forces dragging on profits continue to be the strength of the US dollar and the extremely low price of oil.  While the latter is helping a few sectors - primarily aviation and transportation - it is having a much more significant negative impact elsewhere.  In fact, GE is already implementing job reductions, restructuring in certain areas, and the execution of simplification projects all in an attempt to reduce cost structures.  The longer oil prices remain this low, the greater will be the impact.

The impact of oil prices can be felt in other areas as well.  Subsea orders dropped 38%, and orders for drilling equipment dropped 72%.  The decline makes sense, since oil is now trading below the break-even point for most types of extraction.  Expect this area to continue to be depressed well into 2015, and expect to see regional economic pressures in areas dependent upon oil exploration and production.

The one energy area experiencing tremendous growth, however, is natural gas.  Orders for turbo machinery related to natural gas were up 60%, primarily in North America, the Middle East, and Russia.  That's not much of a surprise given the amount of natural gas produced in those three regions.  It's a good indication that there are some plays out there in the exploration and production sector, since those companies were beaten to a pulp in the last quarter.  Scouring that list for companies with a strong natural gas presence should provide an excellent entry opportunity. 

As to the US dollar, there is no indication of weakening on the horizon.  With the ECB's QE announcement on Thursday, in fact, there's further strength being forecast, coupled with a significant weakening of the Euro.  This effect, however, is projected to be manageable.  GE, for example, is forecasting only a $0.01 per share impact in 2015 based on currency exchange.

Aviation continues to be a major success story in the US and around the globe. Passenger Kilometers revenue was up 6.1% internationally and 5.3% in the US.  If the price of fuel remains low, this revenue stream will continue to grow.  Airlines should be a strong play at least through the first half of 2015.  GE confirms what Alcoa told us a couple of weeks ago.  Demand is extremely high, and GE experienced aviation orders up 15%.  Equipment orders are up 8%, primarily from commercial engines.  Again, that confirms what Alcoa was seeing for new aircraft orders, and it has me considering a play on B/E Aerospace before they report this week.

Healthcare is another growing segment in the US, up 9%.  There is significant growth in diagnostic equipment orders for CT, Ultrasound, and MR.  Globally, however, the sector is extremely depressed. There were sharp declines in Japan, Russia, and the Middle East.  China is only expected to see modest growth in this sector for 2015.  It looks like the healthcare plays for 2015 are primarily domestic.

Transportation experienced its strongest growth ever in 2014, driven primarily by a surge of locomotive orders in the US.  That has to be great news for the freight industry, so we'll be taking a hard look at Union Pacific's forecast.  (They released earnings on Thursday, so their transcript is available now.)

An interesting item that came out of their lighting department is the report of 72% growth in their LED business.  LED comprised 27% of their revenues in that department, at a time when they saw a sharp decline in demand for traditional lighting products.  This warrants a closer inspection since LEDs are now being used in a wide variety of consumer products.  A surge in demand for LEDs implies very strong demand in consumer discretionaries as well as in technology, at least in the US.

Overall, the outlook from GE is similar to what we're hearing from other global companies.  The US is strong, China moderate, but Europe, Russia, and Japan are economic millstones.  Look to aviation, transportation, and healthcare for some strong growth.  Consumer discretionary may also provide an opportunity based on hints from the lighting market, but that's going to require a closer inspection.

IBM - a Once and Future Giant or Is It a Has Been?

For a company founded in 1911, you would think that 2015 would be a bit late for a mid-life crisis.  That, however, is what appears to be happening with IBM (NYSE: IBM) since they no longer appear to know what they want to be when they grow up. That's assuming, of course, that IBM is able to recover from some extremely poor strategic decisions, coupled with an inability to deliver what the market truly requires.

Consider that, since the 1960s, IBM was the computer hardware company, driving the business technology world through the information revolution and into a world where computing technology is a given in our everyday lives.  The phrase, "Nobody ever got fired for buying IBM" was inevitably heard in any management discussion regarding a decision on acquiring new technologies.  Computer hardware and software was IBM's domain, and it was IBM's to lose.  And lose it, they did.

After driving their competition out of business, IBM emerged as the sole provider of Mainframe hardware (including the current z/12 mainframe family and the just-announced z13 mainframe family.)  They are also the sole provider of the mainframe operating systems as well as the only mainframe transaction processors (CICS, IMS, or Websphere for z/OS.)  There's only one problem.  IBM is not increasing their mainframe footprint, and existing mainframe customers are gradually migrating new applications into the non-mainframe space.  The mainframe market is shrinking rapidly, and you can thank IBM's own internal marketing competition for that shrinkage.

IBM managed, though the early part of the 21st century, to undercut and cannibalize their own advantage.  They introduced the P/Series hardware technology as a direct competitor, encouraging mainframe customers to migrate to the faster (at the time) mid-range technologies running their AIX operating system.  The amount of Level 2 cache on the the P/Series boxes was a fraction of what was on the mainframe, though, so multi-tasking was not a forte in the mid-range space.  Websphere Application Server (WAS) is the transaction processor of choice off the mainframe, however it's a major resource hog and can't compete with CICS when it comes to scalability, performance, or stability.  (Ask any WAS specialist how often they hear "A JVM is looping."  Stability and WAS are mutually exclusive.)  Yet, the number of WAS licenses dwarfs the number of CICS licenses, thanks to IBM's efforts to increase P/Series and x86 based sales.

The industry trend now, is to migrate off the mid-range P/Series that IBM sold by the bushels a decade ago.  AIX as an operating system was deemed too expensive and is rapidly losing to Linux as the Unix-based operating system of choice.  Linux can run on all platforms - including the mainframe - and the application code running under Linux is highly portable.  This is where scalability is factoring into the demise of IBM.

Unlike the monopoly IBM was able to develop in the mainframe space, the non-mainframe server space is highly competitive.  HP is emerging as the market leader in that space.  IBM was #2, but in a move that still mystifies me, IBM sold that advantage to Lenovo.  The x86 server space is growing rapidly, and IBM gave it away.  Dell is also in the top 3 in that space, giving customers plenty of options for the lower cost but highly scalable non-mainframe servers.  When you look at the hardware filling all of those expanding data centers, you'll find endless racks of x86 based servers.  Why would a major hardware company even think of abandoning that huge growth market?

In the database space, there are two main competitors and a bunch of also-rans.  You're looking at either Oracle or DB2.  On the mainframe, running under z/OS, DB2 is the only option (although there are still plenty of mainframe shops storing data primarily in VSAM, which comes with the operating system.)  In the non-mainframe space, however, Oracle is a huge factor.  In 2014, the two were neck-and-neck for market share with a very slight edge to IBM's DB2.  Oracle, however, is gaining rapidly.  With some of the acquisitions Oracle - the company, not the database - made over the past few years, they are now a force to be reckoned with in both the hardware and software spaces.

So what are IBM's plans for the future?  Well, we know they've abandoned the chip market and they've abandoned the x86 market.  They are hanging their hat on remaking themselves as a "Cloud Services" provider, a Software company, and, of course, they are touting the just-announced z13.  It's not enough.

To be a viable cloud provider, they should never have abandoned their x86 business.  The competition in that space is huge, and by selling the x86 to Lenovo, they have relinquished a huge cost advantage in that space.  Let an HP or a Dell partner with either Oracle or EMC, and you'll have a stake driven through IBM's cloud-based heart.  IBM's Global Services division - their technology outsourcing business - is hemorrhaging market share to the India based outsourcers.  Let an Infosys, or a Wipro, or a TCS partner with one of those combinations I mention above and IBM's cloud dreams are down for the count.

On the z13 front, IBM mentioned all of the major buzz-words that make senior executives salivate.  They mentioned "Cloud" and "Mobile" in the same breath, and that always makes the non-technical executives swoon.  Under the covers, though, you merely have the next release in their standard mainframe offering with some improved performance, improved throughput in their FICON channels and their zIIP specialty engines.  They've made some nice improvements in the zBX blade-bolt on to the mainframe.  But, at the end of the day, it's still a mainframe, and you're not going to see anyone flock to the z13 to satisfy a cloud or mobile requirement.  For existing mainframe customers, it may delay a migration to the distributed world, but it's not likely to attract new mainframe customers, and as companies world-wide continue to squeeze their expense budgets, new customers is precisely what IBM requires.  They're not able to squeeze more revenue from their existing customer base. 

The direction IBM is taking at the moment does not lead me to believe they are on the right course.  Rather, I see them heading in the exact opposite direction from where they need to go.  For now, the only thing IBM has going for it is its name.  Of course, there was a time when one might have said the same for Sperry Rand.