LYV Flirts with Breakout at 52-Week High

Live Nation Entertainment (NYSE: LYV) spent the last two trading days of the week teasing traders with the potential for a breakout above the 52-week high after spending over two months in a horizontal corrective pattern.  That pattern appears to be a Wave-4 in the longer term cycle that started at the end of 2012.  While a 5th wave has the potential to run 20 points or more, there's sufficient reason to watch for a head-fake before jumping in.

LYV Daily Chart

Friday's doji just barely topped the prior day's close.  While the high did briefly pierce the resistance line marking the top of the channel, it was short-lived and the stock settled for just a three cent gain on the day.  The 5-day run up from the bottom of the channel was impressive (from a candle-pattern perspective) but the volume signature for that entire week was extremely lackluster.  It's not a pattern we'd want to see in anticipation of a breakout.

A similar issue appears in the RSI(9).  That hook at the end of the RSI is a warning sign, and we've yet to see any sign that the RSI is signalling strength.  When we look at the JDK RS-Ratio and Momentum indicators, it's the same story.  RS-Ratio is rising but RS Momentum is weakening.  That's a major cautionary tale in itself.

Notice that the start of the week resulted in a bullish crossover on the MACD(5,34,5) and that crossover was preceded by a resistance breakout of relative strength vs the S&P.  Both of those are positive signals, but they outweigh neither the volume pattern nor the RSI(9) warning.

Longer term, we expect LYV to breakout and produce a nice Wave-5 bullish run.  The short term, however, may be more of a head-fake.  LYV is scheduled to report earnings after the close on Tuesday, 27 February - just over a week away - and the forecasts are not good at all:

LYV Earnings Forecast from NASDAQ

Volume is the key in this week before earnings.  A breakout on week volume is a nice bull trap.  It would be a potential short play, but we'll avoid any long positions one week volume.  The same is true for a downward move on week volume.  If there's no conviction to the move, we'll stay away from it.  What I'll be watching for in the run-up to 27 February is a volume confirmed move that shows which way the major players are trading.

We'll be keeping an eye on the options action as well.  Right now, there's a tremendous amount of open interest in the at-the-money March 16 47 Calls and the out-of-the-money March 16 44 Puts.  We'll be watching closely for a surge in options activity surrounding any volume-confirmed move.

Also be cognizant of the overall market direction.  Following the correction we experienced two weeks ago, we've seen a rebound back to the 61.8% Fibonacci level between the highs and lows of the corrective pattern.  It's likely that the corrective wave is not yet over, so watch for potential weakness over the next week.  I still expect this to be at least a Zig-Zag corrective wave, and if that's true, we'll again retest the bottom of that first corrective drop.  Avoid taking a long position if the market indicates it's again marching towards that corrective low.

As to LYV, add it to your watch-list and be sure volume confirms any move that prompts you to open a position.  It should be a volatile week in the run-up to their earnings announcement.

Happy Trading.

GPN Posts Strong Earnings, Surges on Possible Breakaway Gap

Following a solid two-year 50-point impulse wave that drove Global Payments, Inc. (NYSE: GPN) to what was then its all-time high, the stock entered a lengthy period of consolidation that encompassed all of 2016.  At its deepest point, the correction retraced over 40% of the total impulse wave, however subsequent price action in the corrective wave pulled price back to the top of the impulse that ended in December, 2015.

The weekly chart shows the overall price action best, so we'll start our analysis there.

GPN Weekly Chart

What started to develop as an A-B-C flat correction quickly turned complex, and the corrective wave essentially traveled sideways for the entire year. Our first indication that something had changed came in the strong bullish candle drawn last week on higher volume.  This morning's earnings announcement told us why the stock was suddenly starting to move.

GPN posted $0.89 EPS, beating consensus estimates by $0.04, and they posted $817.2 million in revenue, beating consensus estimates by $13.65 million.  That revenue represented a 57.7% year over year gain.  Most importantly, GPN increased forward guidance, setting revenue expectations for 2017 in the $3.35-$3.45 billion range, and full-year EPS to $3.70 to $3.90.  In addition, they raised their stock buyback target to $300 million.

The news to open the week was very well received, and GPN gapped up $5.34 at the open.  The rest of the day traded strong as well, with the close finishing in the upper 50% of the daily range.  That's not bad on an earnings day when it's common for early exuberance to be pulled back as the session runs its course.

Today's gap appears to be a breakaway gap that may signal the start of Wave-3 in the overall impulse pattern.  We're looking at a weekly chart, however, and that candle is only 20% complete at this point, so let's not count the gap a done deal just yet.  Instead, let's zoom into the daily chart and see what potential plays may develop.

GPN Daily Chart

Sure enough, that gap looks impressive on the daily chart as well.  There's some indication that insiders started to move this stock as early as 3 January, and you can see that two significant resistance levels were pierced in last week's trading. 

This was an earnings day, so volume was expected to be higher than average, and indeed, it was.  Notice where the stock finally closed, however.  We're in the middle of a resistance zone that defines the all-time highs for the stock.  Long term traders - i.e., those that are willing to play in time horizons greater than a year - may be willing to enter if price tops today's candle.  After all, if this is indeed the start of Wave-3, there's a potential 50-point run or more in play. Those of us that play in shorter time-frames, however, would prefer a bit of a pullback from here before entering a long position. 

After that long a horizontal consolidation, we can anticipate at least one retest of what should turn into a support line before the next impulse gets underway in earnest.  You can see the various areas of support on the daily chart.  The green zone we show starting at the middle of today's candle is the area where we would consider an entry following a pullback.

Sure, it's entirely possible that we'll miss the entire move by waiting for the pullback.  It's more likely, however, that we'll avoid being caught in a bull trap.  Channel players would have entered short around $79.04, and based on today's action, the weaker hands will be looking to cover their positions, escaping with a small loss.  Similarly, breakout players would have entered long as price approached $80.  There are likely more buy stops in place now just above today's candle, so there's short-term pressure building to push the stock ever so slightly higher.  That's the type of pressure that market specialists prey upon, and they may very well attempt to shake out those weaker hands by pulling the stock back far enough to trigger sell stops.  That would be our cue to enter since we want to go long when the market specialists are going long, not when the retail traders are entering prematurely.

One thing we'll watch is volume on the pullback.  If this is a legitimate upward move, then volume will be relatively light on the downward swing.  The final true breakout should be on high volume.  Today's volume was high, however it was an earnings day, so even without a breakout it should be high. We'll watch for a sign that the insiders are stepping into this stock and join them at that point.  Watch for a pullback into the green zone and then a strong move up on convincing volume.  That will be our signal to enter.

Happy Trading.

Trading Outlook for the Week of August 15-19

Markets are still showing strength as we head into mid-August.  The Nasdaq shows amazing strength, riding its 7-day moving average as a very strong support line.  The Nasdaq composite has not closed below it's 7-day since June 28th, and has only dipped below it intraday four times in that period.

Surprisingly, given the strength of the Nasdaq, the Technology sector has rotated into neutral territory.  The leaders last week were Energy, Consumer Staples, and Consumer Discretionary.  Utilities rotated up to neutral, and that coincides with a slight drop in the 10-year Treasury yield. 

The probability of an interest rate hike on September 21 has declined to just 9%.  A December 14 rate hike, however, is still at 40.6%.  With the CPI being announced Tuesday, however, those probabilities could change dramatically.  The current consensus is for CPI to be unchanged for July.  That would be the weakest result in 3-years, and it's the primary reason expectations for a September hike are near zero.  Excluding food and energy, the index is expected to rise 0.2%, which is a healthy rate, however it's likely not enough to move the Fed.

All market capitalizations are still indicating long positions, so that's the way we'll play it this week.  Earnings season is winding down, and we only have Home Depot and Deere on our watch list for this week.  We'll also be paying attention to Wednesday's release of the FOMC minutes.  That release does have a tendency to move the market, however please keep in mind that it's month old data.  Market reactions to the minutes tend to be short lived.  Still, for those of us that swing trade, it's important to be aware of the potential for movement Wednesday afternoon.

Finally, this is Options Expiration week, so watch for some volatility on high volume this Friday.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long

Sectors

Showing strength
XLE - Energy
XLP - Consumer Staples
XLY - Consumer Discretionary

Showing weakness
XLB - Materials
XLF - Financials
XLV - Health Care

Neutral
XLK - Technology
XLU - Utilities
XLI -  Industrials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/15/16

• 08:30 - Empire State Manufacturing Survey
• 10:00 - Housing Market Index
• 16:00 - Treasury International Capital
  

Tuesday, 8/16/16

• 08:30 - Consumer Price Index
• 08:30 - Housing Starts
• 09:15 - Industrial Production

Wednesday, 8/17/16

• 10:30 - EIA Petroleum Status Report
• 14:00 - FOMC Minutes

Thursday, 8/18/16

• 08:30 - Jobless Claims
• 08:30 - Philadelphia Fed Business Outlook

Friday, 8/19/16

• 16:00  - August Monthly Options Expiration

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/16/16

• Before Market Open - Home Depot (NYSE:HD)

Friday, 8/19/16

•  Before Market Open - Deer (NYSE:DE)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks.  I'm still wary of Energy, however if there's a promising setup with a short-term (1-3 day) projected move, I'll take it.  Given the volatility of that sector over the last 18-months, though, I'm reluctant to play anything with a longer forecast.  Watch for continued signs of consolidation in the Tech sector, and watch sector rotation carefully for some hidden gems that may be on the upswing.  Sectors across the board are staying firmly above their 7-day moving averages, and the Slow Stochastic indicator remains above 50 in all capitalizations, so we are only considering long positions at this time.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Trading Outlook for the Week of August 8-12

A jobs report that far exceeded expectations saved what had promised to be a down week in all indexes.  Instead, all sectors except Utilities finished higher, with technology leading an extremely robust surge.  The flight from utilities matched a similar flight from the 10-Year Treasury which saw a 5.3% increase in yield on Friday.  Both of these moves signal a renewed confidence in the health of the US economy, although it's prudent to remember that nothing is more whimsical than the confidence level of the average equities trader.

The Technologies sector - and with it, the Nasdaq - continues to shine.  A note of caution is in order there, since it is now trading well above its 20-day moving average.  Be aware that a consolidation will likely follow such a strong upward charge that is now over 6-weeks running.

We're seeing some healthy sector rotation playing out with Financials joining Technology at the head of the class while Health Care and Industrials have slid into neutral territory.  We'll keep an eye on Consumer Staples late in the week since the all-important Retail Sales number will be released on Friday.  Energy, of course, continues to show weakness in the face of continued depressed oil prices.

Thursday and Friday are the big days when it comes to economic news.  We'll be especially interested in the Import/Export numbers in light of the growing strength of the dollar against the British Pound and the Euro.  The Retail Sales and Consumer Confidence numbers will shape our strategy heading into the weekend.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long

Sectors

Showing strength
XLK - Technology
XLF - Financials

Showing weakness
XLE - Energy
XLP - Consumer Staples
XLU - Utilities

Neutral

XLV - Health Care
XLI -  Industrials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/8/16

• No reports of market significance
  

Tuesday, 8/9/16

• 08:30 - Productivity and Costs

Wednesday, 8/10/16

• 10:00 - JOLTS
• 10:30 - EIA Petroleum Status Report
• 14:00 - Treasury Budget

Thursday, 8/11/16

• 08:30 - Jobless Claims
• 08:30 - Import and Export Prices

Friday, 8/12/16

• 08:30 - Retail Sales
• 08:30 - PPI-FD
• 10:00 - Business Inventories 
• 10:00 - Consumer Sentiment

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/9/16

• After Market Close - Disney (NYSE:DIS)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks and Financial stocks.  With the sector strengthening, there may be some good dividend plays that also show short-term growth.  Watch for signs of consolidation in the Tech sector, and watch sector rotation carefully for some hidden gems that may be on the upswing.  Sectors across the board are staying firmly above their 7-day moving averages, and the Slow Stochastic indicator remains above 50 in all capitalizations, so we are only considering long positions at this time.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Trading Outlook for the Week of August 1-5

The last week of trading in July saw continued strength in the Technology sector, and that carried through to the Nasdaq as a whole.  There's some signs of life coming back into the mid-cap stocks, however across the board the S&P large cap, mid cap, and small cap indexes continue to be flat.  A bit of demand came into the markets on Thursday and Friday, following the dovish Fed announcement that suggests interest rates will remain at their current level well into 2017.

We are still maintaining a long bias into the week ahead, however with the extremely tight range being experienced in all market capitalizations for the last two weeks, be aware that a breakout in either direction is possible.  Only the higher volume on the last two up-days suggests that the breakout could be to the upside.  In the meantime, we'll be keeping our stops close.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long

Sectors

Showing strength
XLK - Technology
XLV - Health Care

Showing weakness
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples
XLU - Utilities

Neutral
XLF - Financials
XLY - Consumer Discretionary
XLB - Materials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/1/16

• 09:45 - PMI Manufacturing Index
• 10:00 - ISM Manufacturing Index
• 10:00 - Construction Spending

Tuesday, 8/2/16

• 08:30 - Personal Income & Outlays

Wednesday, 8/3/16

• 08:15 - ADP Employment Report
• 10:00 - ISM Non-Manufacturing Index
• 10:30 - EIA Petroleum Status Report

Thursday, 8/4/16

• 08:30 - Jobless Claims
• 10:00 - Factory Orders

Friday, 8/5/16

• 08:30 - Employment Situation
• 08:30 - International Trade

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/2/16

• Before Market Open - Proctor & Gambel (NYSE:PG)

Wednesday, 8/3/16

•  Before Market Open - Avnet (NYSE:AVT)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks and Health Care stocks.  We'll keep our stops very close for several reasons:

• All three market capitalizations continue to show an extremely tight trading range.  Until we see the direction of the breakout, we'll need to remain cautious for a move to the downside.
• The 10-year yield is still trending down, indicating a continued flight to safety.  Weakness in the Utilities sector suggests this flight may be ending however we'd like to see confirmation in the treasury yield before reaching that conclusion.
• This is Employment Situation week, and that adds a measure of uncertainty to Friday's behavior. 
• The Bank of England has their announcement on August 4th, and there will be uncertainty leading into Thursday based on the view they will take regarding Brexit risks.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Apple Beats on Earnings and Revenue, But Is It Enough?

Apple (Nasdaq: AAPL) posted their 3rd quarter earnings after the bell this afternoon, and on the surface, at least, the news sounded good.  They beat earnings by $0.04, and they also beat on revenue by $310 million.  In after-hours trading, shares of AAPL surged as high as 8% before settling back to $103.60.  They also held their quarterly dividend steady at $0.57 per share.

The underlying picture, though, is not quite so rosy.  Their sales were down 14.5% year over year, and their gross margin dropped to 38%.  In fact, their forward guidance for the next quarter includes a gross margin range of only 37.5% to 38%, and their forecast for revenue is up slightly from this quarter, but still well below last year.

International sales contributed to 63% of their revenue this quarter, but sales in China were down 33% from last year.  The Apple troubles in China continue, in fact, not only due to the slowing economy in Asia but also resulting from difficulties with Chinese regulators.  The iBooks and iTunes services were shut down by regulators last April, and in June the Chinese government ordered a halt to iPhone 6 sales due to a patent dispute.  (We'll skip the editorial about the hypocrisy of China arguing about a patent infringement.)  The point is, China was once seen as the major growth market for Apple, but at least for now that market has run dry.

The Services business, including iTunes and Apple Pay, were up 19% year over year, however on a quarter-to-quarter basis, it was essentially flat.  Despite Credit Suisse's forecast of the services business providing over 30% of Apple's revenue by 2020, the reality is that the current growth trends are not supporting that prediction.  With Google and Samsung both entering the payment market with comparable products, the competition faced by Apple Pay is becoming formidable. 

Demand for iPhones, iPads, and Macs appears to have peaked.  The iPhone market is already saturated, and the tablet and personal computer markets are crumbling, at least as far as the average consumer is concerned.  The iPad is still doing fairly well in certain business applications, but when it comes to the average consumer, the phablet is rapidly replacing them.  To that end, with the extremely popular Samsung Galaxy S7 and S7 edge out for 6 months, now, the iPhone 7 (with an expected larger screen offering) is a bit late to the dance.

The question that Apple must seriously entertain is whether or not a change at the top is in order.  CEO Tim Cook has yet to prove that he's capable of driving the innovation needed to keep Apple at the top of the industry.  I've seen an increasing number of analysts state that, in their view, Apple's best days are behind them, and thus far I've seen nothing to contradict that opinion.  There has certainly been no innovation coming from the company since the passing of Steve Jobs.  It may well be that the "next new thing" to come out of Apple will be a new CEO.

GE Offers Promising Outlook for Aviation

General Electric (NYSE:GE) released earnings on Friday, beating EPS forecasts by $0.05 and revenue by $1.74 Billion.  That didn't prevent their stock from taking a 1.8% hit pre-market, however, due primarily to a 2% decline in orders and what they described as a "volatile and slow-growth economy."

The news, however, appears rather bright for the Aviation industries.  GE reported a strong first half of the year in that industry, and is forecasting the remainder of 2016 to remain strong as well.  There were a couple of items that bode well for the airlines, at least according to GE.  They saw commercial traffic growth of over 6% this year, down a bit from last year, but still experiencing a healthy growth pattern.  Additionally, the airplane load factor remains at 80% for the second year in a row, and GE reports over 2 million departures added in the past year.

GE reports, not surprisingly, that jet fuel continues to be deflationary, and is down over 50% over a three-year period.  When you combine the lower fuel costs, increased passenger demand, and a very strong load factor, it's reasonable to expect a healthy year for what has been an oddly depressed airline industry that has been in an Elliott Wave zig-zag and flat pair of corrective patterns for the past 18-months.  (Do keep in mind the Schlumberger warnings of an impending oil supply deficit, however.  If that manifests, it will put an end to depressed jet fuel costs.)

You can see the overall pattern for the airline index in this weekly chart:

Airline Index Weekly Chart

We can see on the chart that the index started a steep uptrend in October, 2011.  It then traced out a very distinctive 5-wave impulse pattern that completed in January, 2015.  Since then, however, it completed a classic A-B-C Zig-Zag pattern, retracing almost 50% of the prior impulse pattern, and it looks like it's starting a possible flat correction now.  This overall pattern appears to be Wave 2 of a larger overall 5-wave Impulse, so once this corrective pattern completes, we can look forward to a very healthy third wave impulse.  Long-term traders should enjoy a very nice 3 or 4 year bull trend in airlines once that wave kicks off.  The way this pattern is trending, though, that may not happen until 2017.

Returning to GE, there were some additional interesting comments related to defense spending.  They forecast it to be flat in 2017 here in the US.  Given the number of industries here dependent upon defense spending, that's a cautionary note that we'll have to carefully watch.  Now, this flat projection may well be due to the number of sizeable contracts that were awarded in 2015 and early '16, so a pause in new contracts is to be expected, but it will be important to watch other companies in the industry to see how this matches their own forecasts and revenue plans.

Interestingly, GE forecasts international defense spending to be up 4% globally (excluding the US.)  That comes at a time when Europe is teetering on recession and facing the unknown threat of Brexit, so that 4% value is likely depressed due to the state of the global economy.  Should the economy heat up, it's reasonable to expect a similar increase in global defense spending, especially at a time when the terror threat appears to be spreading to parts of Western Europe.

With US defense spending flat but international defense spending up, we'll need to watch for companies that have a strong global stake.  These would include Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), and Raytheon (NYSE:RTN).  Fire Support, a defense marketing website includes an excellent list of the top 100 global defense companies for 2015.  While the list is a year old, the major players in this space have not changed.  If you're looking for companies that will benefit from growth in international defense spending, this is an excellent place to start.

From a trading perspective, it looks like there will be some short-term potential plays in the airlines, but be aware that there should be at least one more downward wave in the correction.  Longer term players can look forward to growth of a bit over 200% in the airline index from 2017 to 2021 if the Elliott Wave pattern holds true. For defense contractors, look more for trades in companies servicing overseas orders.  Just be aware of the impact the strong US dollar will have on their exchange rate and earnings forecasts. 

Happy Trading.

Trading Outlook for the Week of July 25-29

We close out the month of July in the coming week, following four solid weeks of strong performance.  The week ahead sees the July FOMC meeting, the GDP report, and another week of key earnings reports.

We're starting to see a bit of a pause in the upward movement across all capitalizations, and from an Elliott Wave perspective, all but the Nasdaq Composite appear to be in a fourth-wave consolidation.  The strongest plays for the week appear to be in either the Nasdaq or in the Large Cap stocks.  Both Mid and Small Cap stocks remained in a horizontal consolidation pattern, so we'll avoid those until their trends resume.

The three strongest sectors closing out the week are Technology, Utilities, and Health Care, so for long trades we'll be looking primarily in those sectors.  That the Utilities sector surged on Thursday and Friday is an area of concern since that indicates a renewed flight to safety.  The 10-Year Treasury Yield declined 1.87% this week after a large spike up last week.  We'll keep an eye on this throughout the week as well, since a decline in yield will further support the concept of a flight to safety.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - No Trades
Small Caps - No Trades
Nasdaq - Long

Sectors

Showing strength
XLK - Technology

XLU - Utilities
XLV - Health Care

Showing weakness
XLB - Materials
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples

Neutral
XLF - FinancialsXLY - Consumer Discretionary

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/25/16

• 10:30 - Dallas Fed Manufacturing Survey

Tuesday, 7/26/16

• 09:00 - S&P Case-Shiller HPI
• 10:00 - New Home Sales
• 10:00 - Consumer Confidence

Wednesday, 7/27/16

• 08:30 - Durable Goods Orders
• 10:00 - Pending Home Sales Index
• 10:30 - EIA Petroleum Status Report
• 14:00 - FOMC Meeting Announcement

Thursday, 7/28/16

• 08:30 - International Trade in Goods
• 08:30 - Jobless Claims

Friday, 7/29/16

• 08:30 - GDP
• 08:30 - Employment Cost Index
• 09:45 - Chicago PMI
• 10:00 - Consumer Sentiment

Earnings Reports Watched for Sector or Market Significance

Tuesday, 7/26/16

• Before Market Open - Caterpillar (NYSE:CAT)
• Before Market Open - 3M (NYSE:MMM)
• Before Market Open - United Technologies (NYSE:UTX)

Wednesday, 7/27/16

•  Before Market Open - Boeing (NYSE:BA)

Thursday, 7/28/16

•  Before Market Open - Ford (NYSE:F)

Friday, 7/29/16

• Before Market Open - UPS (NYSE:UPS)

Summary

Our long positions this week will be limited to large caps and Nasdaq stocks, primarily in Technology, Utilities, and Health Care.  We'll keep our stops very close for several reasons:

• Both UNP and SLB provided strong evidence of potential problems in several key industries.  This may take the wind out of the strong bullish sails we've experienced for four weeks.
• Strength in the Utilities sector and a slight decline in the 10-year yield are showing signs of a renewed flight to safety.
• There are major companies reporting earnings throughout the week.  This will add a measure of unpredictability to the markets.
• FOMC reports on Wednesday.  While we don't anticipate any major announcements, just the tone and language of the announcement can generate unforeseen shifts in market behavior.
• Mid-caps and Small-caps are experiencing consolidation, and both Large-caps and Nasdaq are showing signs that they, too, will enter a similar phase.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Schlumberger Warns of Impending Severe Oil Supply Deficit

Schlumberger (NYSE:SLB) announced earnings after the bell yesterday, beating EPS estimates by $0.02 and revenue by $70 million.  That's the good news.  Everything else about the release points to a serious energy crisis looming in the not-too-distant future. 

Demand in the oil industry continues to grow at a steady and aggressive pace.  As the economies in the US, Europe, and China recover, that demand will increase.  The supply side, however, has taken a horrendous hit over the past two years.  CEO Paal Kibsgaard summed it up, "We are heading towards a significant global supply deficit as the E&P [exploration and production] spend rate now is down by more than 50%."

There has been a significant cost efficiency problem within the industry for some time, and that inefficiency in cash flow has been exacerbated by the dramatic plunge in oil prices worldwide over the past seven quarters.  Rig operators have reacted to this price crisis with a massive reduction in oil field activity.  Active rigs are now down to 25% of their original level, and the appetite to start new wells has reached a critical low.  This has caused a ripple effect through the entire oil supply-chain industry, and it's about to reach critical mass.

Non-OPEC production is set to drop an additional 900,000 barrels per day.  Similar weakness is being forecast in the non-Gulf OPEC nations, and as short-term high production activities run their course, the expectation is for an accelerated decline in overall oil production worldwide.

Kibsgaard went on to say, "The market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open as the downturn has deepened and extended into uncharted territory."

Cash flow from the rig operators is becoming strained, and they are delaying payments to creditors in an attempt to improve that flow.  This, too, has a ripple effect through the supply-chain industry.  What the entire environment demonstrates, though, is that as the service industry pricing inevitably improves - supply and demand will naturally force it - much of the capital that would normally be spent on exploration and production will instead be spent on debt reduction.  That will put added pressure on the oil supply deficit, extending the duration of the pending crisis.

What all this means is that there will be continued negative pressure on the various industries that support all aspects of the oil business.  Expect the metals industries to take a hit as both repairs to existing rigs and the development of new rigs are put on hold or canceled outright.  Expect shipping to take a hit as the flow of supplies, raw materials, and energy resources to and from suppliers and operators continues to decline.  Expect the chemicals industries to take a hit as there is less demand for the materials that are used in drilling and refining.

This is not good news for the consumer, either.  We currently still have an oil glut, which, coupled with an uncharacteristically strong US dollar,  is holding prices down for the moment.  As that glut transitions to a supply shortfall over the coming year, however, we can anticipate a rapid rise in oil prices world-wide.  That will dramatically impact the price at the pump, likely forcing gas prices to record highs around the world. 

It will take some time for all of this to play out, but it does appear that the piper that played the tune of ridiculously low oil prices is poised to deliver the bill.  Paying that bill will be painful at best. 

Happy Trading.

UNP Reports Negative Economic Impact Due to Low Oil Prices and Strong US Dollar

One of the companies we closely follow for their insight into the overall health of several sectors is Union Pacific Corporation (NYSE:UNP), headquartered in Omaha, Nebraska.  As one of the larger transportation companies in the US, their revenue is directly dependent up the health of other industries, and they provide extensive candid detail into each of those areas in their quarterly earnings calls. 

UNP reported earnings before the open on July 21, and their ensuing earnings call painted a less than optimistic picture of the overall health in a variety of sectors.  There are two driving factors associated with declines and pressures they are reporting: low oil prices and the strong US dollar.  Said CEO Lance Fritz, "A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year."

For UNP, the only area of growth experienced this year was in Agriculture shipments (up 2%), however that growth was primarily driven by severe harvest delays in South America and by a high demand for corn in Mexico.  Had South America not experienced agriculture problems, even grain shipments would have been down for the year.

The remaining segments were all doom and gloom.

• Total volume was down 11%.
• Carload volume declined by double digits in coal, intermodal, and industrial products.  (Intermodal refers to shipments of the large containers typically carried by rail but then transferred to ship or truck.)
• Automotive was down with finished vehicle shipments declining 10%.

The strong US dollar continued to hurt exports with chemicals, plastics, and fertilizer all down for the year.  With inflation at or near zero in Europe and with the US likely to raise interest rates either at the end of 2016 and most certainly several times in 2017 and 2018, there is little likelihood of any weakening of the dollar for the foreseeable future.

Low oil prices continue to have a significant negative impact.  Rail shipments in that industry were down 23% due to low natural gas prices coupled with high inventory levels.  Lower international coal prices (due to the strong dollar) also contributed to that decline.

The other impact low oil prices continues to have is in the chemical and metals industries.  Mineral volume declined 32% and Frac Sand declined 43%.  Metal (aluminum, steel, etc.) declined 11% due to reduced shale drilling.  Expect to see this ripple through other industries as earnings continue to report through the quarter.

The flooding in Texas had a severe impact on construction shipments, down 4%.  Intermodal shipments (also impacted by that flooding) were down 16%.  We can expect to see that ripple through the trucking and shipping industries as well. 

The forecast for the remainder of the year was not very encouraging, either.  UNP forecasts agriculture to remain strong since there are expectations for a strong US crop harvest and there is continued weakness in South America.  Automotive shipments should also see a boost as the 2017 models come out, and the industry is currently trending well below the projected 17.5 million vehicles for the year.  There are also expectations of a boost in construction and in the housing market as the year progresses. The rest of the industries, however, are still expected to experience headwinds.

• UNP still expects the pressures due to low oil prices and low natural gas prices to continue. 
•  They expect drilling to continue to decline, and with it the demand for metals and chemicals will also decline.
• Intermodal shipment is also expected to experience pressure due to the impact the strong dollar is having on US exports.
• The economy in Europe and China remains weak, adding to global pressures on prices and demand for goods.

This is the first major earnings transcript we've seen this quarter that paints such a gloomy picture of the first half of 2016, however UNP is typically right on the mark in their assessment.  Consider the impacts they are citing in related industries when reading their report, since the effects will be readily apparent as other prominent names report earnings over the next two quarters.

Happy Trading

Trading Outlook for the Week of July 18-22

Before we get into the week ahead, let me provide a brief overview of how my preparation progresses over each weekend.

1. I start with an overview of the major indices.  These charts contain a 7-period Simple Moving Average, a 30-period Exponential Moving Average, and the 14-period Slow Stochastic %K line.  That's it.  The trading bias is based on this:
• Long Only if SMA(7) > EMA(30) AND %K > 50.
• Short Only if SMA(7) < EMA(30) AND %K < 50.
• Any other combination, I'll either stay out of the market or stick to one or two day duration trades based on the direction the SMA(7) is headed.
2. I maintain a chart in Excel that shows the weekly percentage change for the S&P 500 and each of the S&P sectors.  That chart is updated Saturday morning, and if my trading bias is long, I'll pick the 3 best performing sectors for the week.  If the trading bias is short, I'll pick the 3 worst performing sectors for the week.
3. I will then run my various trading setup scans focusing on the sectors found in #2.  My scans primarily look for pullbacks of stocks that have been trending, or they look for stocks that are range-bound and nearing one of the range extremes.
4. I then annotate the charts found in #3 and save them in my watch list.  The stocks I'll trade on Monday are selected Sunday night, although the actual orders will be placed before I leave for work on Monday after I've seen the movement of stocks in Asia and Europe and have also seen the direction US Market Futures are taking.  Since all of my trading is short-term, I want to be trading with the trend, and I want the market setting up to move in that same direction for the day. 
5. #3 and #4 is repeated nightly, searching for the stocks to trade the following day.

 So with that in mind, let's take a look at the trading outlook for the week of July 18 to July 22.

Trading Bias

Dow Jones Industrial Average - LONG.
S&P 500 - LONG.
Russell 2000 - LONG.
NYSE All Issues - LONG.

In all four cases, however, the %K is at an extreme high position and as of Friday began trending down.  While the bias is long, due to the risk being called out by the %K, we'll keep our stops very tight.  Risk of a pullback in all four indices this week is near extreme.

Strongest Sectors

The three strongest sectors beating the S&P 500 for the week were:

1. Materials Sector (XLB)
2. Financial Sector (XLF)
3. Industrial Sector (XLI)

Two other sectors beat the S&P 500 and we'd consider a trade there if the setup is strong.  Those are the Energy (XLE) and Technology (XLK) sectors.

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/18

• 10:00 - Housing Market Index
• 16:00 - Treasury International Capital

Tuesday, 7/19

• 8:30 - Housing Starts

Wednesday, 7/20

• 10:30 - EIA Petroleum Status Report

Thursday, 7/21

• 8:30 - Jobless Claims
• 8:30 - Philadelphia Fed Business Outlook Survey
• 10:00 - Existing Home Sales

Friday, 7/22

• 9:45 - PMI Manufacturing Index Flash
• 13:00 - Baker Hughes Rig Count

Earnings Reports Watched for Sector or Market Significance

Thursday, 7/21

• Before Market Open - Union Pacific (NYSE:UNP)
• After Market Close - Schlumberger (NYSE:SLB)

Friday, 7/22

• Before Market Open - General Electric (NYSE:GE)
• Before Market Open - Honeywell (NYSE:HON)
• Before Market Open - VF Corp (NYSE:VFC)

Summary

We'll start the week with a long bias, trading stocks in the Materials, Financial, and Industrial sectors primarily.  We'll keep our stops tight due to the extreme level of the Slow Stochastic indicator and will shift to a very short-term (one or two day) strategy if it drops below 50.  While there's interesting economic news at the beginning of the week, we'll be especially focused on Thursday and Friday with major market indicators being released and earnings releases from five of the key companies we follow for overall market and sector analysis.

Alcoa Kicks Off Earnings Season After the Bell on Monday

The Brexit vote is behind us, the UK's selection of a new Prime Minister is still two months away, the US election is still four months away, the Italian banking crisis is simmering, but not boiling over (yet,) and yesterday's jobs report has put both the specter of recession and of interest rate hikes on the back burner, at least for now.  So what's next?  Why, earnings season, of course, and right on queue, Alcoa (NYSE: AA) is poised to kick it off after the close on Monday, July 11th.

Alcoa is one of the companies we closely follow, not just to understand the commodity landscape, but because their earnings calls typically provide an outstanding view of most industries in the industrial sector.  They are heavily dependent, not just on commodity prices, but on the performance of major players in Aerospace, Transportation, Mining, Automotive, and a score of other industries that all contribute to orders of aluminum or aluminum based products.  Getting a bead on Alcoa's outlook on the first day of earnings season provides a tremendous amount of insight into how the remainder of the season will go for most other industries. 

This quarter's earnings call will be even more interesting, however, due to the impending split of Alcoa into two companies.  We expect to hear more regarding the timing of the split and additional details as to the quarterly and annual outlook for the new company, named Arconic and trading under the symbol ARNC. 

Since Arconic will be focused on the Aerospace and Automotive industries, ARNC will be added to our short list of quarterly earnings calls to study.  Remember, there are a handful of key earnings calls that you should follow to give a broad overview of each sector and the market as a whole, and AA (as well as ARNC when they go public) are in that category.

So, what can we expect on Monday?  Well, AA is traditionally pessimistic in their outlook, however this quarter they appear to have good reason to be.  In the first quarter of 2016, AA experienced a significant drop in after tax operating income both in alumina (40% y/y drop) and primary metals (26% y/y drop.)  Revenue year over year was down 15%, and you can expect those struggles to continue.

What's worse for AA, however, is that China - the world's leading supplier of aluminum - is gearing up to increase year-over-year production by 4%, and that increase is expected to begin in the second half of this year.  According to Goldman Sachs, that will drive the overall commodity price of aluminum down from $1692 per metric ton as of yesterday's settlement price to as low as $1350 over the next twelve months.

The value-added business, however, is expected to see a boost, and it's that area in which we'll focus our attention since it will tell us the health of other industries. Sales to aerospace and automotives have been growing at a healthy pace and that is expected to continue with some reports looking at 5% to 8% growth in that division.

Overseas, expect the strength of the US Dollar - especially following the post-Brexit surge against the Euro and the British Pound - to produce negative headwinds for the remainder of the year.  The strong dollar hurts exports and also hurts earnings exchanges as goods and services flow globally.  Expect the impact of the strong dollar to be referenced in the reports of most companies in the S&P 500, as most have significant exposure overseas.

Towards the end of the week, we'll gain insight into the Financial sector when J.P. Morgan Chase (NYSE: JPM) reports before the bell on Thursday, however that's a topic for another post.  Stay tuned.

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.

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.

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.

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.

Netflix Posts Strong Results, But For How Long?

Netflix (NASDAQ: NFLX) posted better than expected earnings, revenue, and subscription growth after the close yesterday, propelling the stock to a 17.3% gain today.  Of note are their projections for a consistent year over year gain of 5 million subscribers, coupled with their entry into international markets.  At first glance, it's no wonder that the stock soared today.

It's prudent to question, however, just what the long term prospects are for this style of low-cost subscription based streaming.  Challenges in this space are not limited to Netflix, so there's no provider of this service available today with an edge, and when it comes to availability and content Netflix is the clear winner. Today.  They are available on more devices - especially in the older Blu Ray player market - and they are the hands-down winner when it comes to the number of shows or movies available. Today.

The fundamental problem facing Netflix is that we live in an instant gratification society, but for streaming content, the wait may be well over a year before it becomes available.  Before a streaming license is granted, all other revenue streams are exhausted.  The extremely popular HBO series "Game of Thrones," for example, is still not available for streaming on Netflix even though the series enters its fifth season this April.  They offer it in their DVD subscription, but not their streaming subscription.

Another challenge facing these providers is the ability to maintain the licensing for existing content.  Recently, for example, Netflix announced that their license with the BBC expires at the end of the month, and - except for a handful of popular shows - it is not being renewed.  It's not uncommon for a viewer to be midway through watching a series when the license is pulled and the remainder of the series becomes unavailable.  (This happened to me with the Highlander series in which the license was pulled when I had only the last episode - the second half of a cliff-hanger - to watch in the entire series!)

While Netflix must deal with the frustrations of its current user base, the number of competitors in that space continue to grow stronger.  Amazon Prime and HuluPlus are two with a similar model, and both are adding content at a very rapid pace.  They are all competitively priced.  While they, too, suffer from the same licensing issues, they are all competing for the same customer demographic.

In their Letter to Shareholders that accompanied the earnings announcement, Netflix admitted that they have serious competition from piracy, and a graphic they used to accompany the release showed BitTorrent styled client "Popcorn Time" surging into the Netflix market share space in September 2014, and keeping pace with Netflix ever since.  There are plenty of other pirate streaming sites out there that are equally popular, and that popularity is growing.  Piracy would be far less of an issue of Netflix were able to secure the licensing for current shows.

One pay-as-you-go site that is a real threat to Netflix is Vudu.  This site allows you to buy or rent movies and TV shows almost immediately, and for a very competitive price.  The most current episode of a TV show is available immediately, even before it appears in an On Demand menu at your cable provider.  When it comes to legal - not pirated - instant gratification, this service fulfills every need.

Original content is the way subscription services are getting around the instant gratification issue, however the competition in that space is growing rapidly.  Amazon Prime and Netflix are adding original content at a rapid pace, so there's really no edge to Netflix here.

For the moment, I understand Netflix' soaring stock price, and I understand the enthusiasm around the subscription rates.  What I don't believe, however, is that it is sustainable.  As other providers enter the game, as the popularity of current-show services (like Vudu) grows, and as major players like HBO begin to offer their own streaming for shows, I expect the decline in Netflix' subscriptions to be rapid.  Time will tell, but I don't think time is on the side of Netflix.

Keeping an Eye on Southwest Airlines

Southwest Airlines (NYSE: LUV) reports earnings at 6:30 AM EST this Thursday.  The conditions are ripe for this low-budget airline to continue to their steady upward climb.  In their October announcement, they talked a bit about their entry into the international market, and with fuel costs driving downward and the strength of the US Dollar driving upward, there couldn't be a better time for them to branch out beyond our borders.

They plan to offer flights to Costa Rica starting in March, which is a perfect time weather-wise to vacation in that beautiful Central American tourist spot.  It will be interesting to see if there's any mention of ticket sales to that destination in Thursday's conference call.  International travel currently accounts for only 1% of Southwest's business, so the potential global upside is tremendous.  They describe their international plans for 2015 as "modest" and that suits me just fine.  Slow and steady, gaining reputation and market share, provides opportunity for long-term continuous growth.

Throughout the last quarter, Southwest continued to add destinations.  They added seven new non-stop destinations in October, and eight more in November.  As a reminder, they acquired a number of slots at Ronald Reagan National Airport (DCA) from American Airlines, and that has allowed them to add 44 new daily departures to seven new destinations. 

International flights from Houston won't be coming online until later in 2015, so you won't see that reflected in Thursdays numbers, but it's something to consider as you look at LUV's growth potential in the out-years.  The cities they are targeting, though, are impressive.  They already fly to Cancun, Mexico City, and Los Cabos from other cities in the US.  Add Puerto Vallarta and San Jose, Costa Rica and Belize City, Belize to the list for 2015, along with a major US tourist spot: Aruba.

Their expansion in Love Field, Dallas has been highly successful, where they added 16 new destinations.  Load capacity as of October was topping 90%, and as tourist travel increases in the US, demand for seats will be highly competitive.  What makes Southwest even more attractive in this regard is that, in addition to very competitive ticket prices, they still permit travelers to carry two bags free on international flights.  That's a sure-fire market share winner on competitive routes, although it will be interesting to see where they pick up that revenue stream that other airlines are currently grabbing.

Read more here: http://www.star-telegram.com/news/business/aviation/sky-talk-blog/article4427670.html#storylink=cpy

Thursday's earnings announcement will be interesting.  I believe Southwest has excellent growth potential, especially with their low-cost international travel, but some strong numbers and strong forward guidance will be necessary this week for Southwest to overcome their currently high valuation compared to earnings.  In the meantime, stay tuned to Delta Airlines' earnings announcement tomorrow for some clues as to where this industry is headed in 2015.