Friday Market Update -- Did Google Just Announce A Coming Ad Slowdown?

News:
What you don't want to see in any aging market rally is either an uptick in wage inflation or a slowdown in advertising. Both have near-instant ramifications.

Google's earnings report yesterday may have just announced a looming ad slowdown. Here are some of the red flags I found in their generally upbeat earnings report.

GAAP operating income in the fourth quarter of 2014 decreased vs. GAAP operating income in the fourth quarter of 2013.

Expenses related to SBC (stock based compensation) from continuing operations and the related tax benefits rose sharply vs. the fourth quarter of 2013.

Network paid clicks, which include clicks related to ads served on non-Google properties participating in our AdSense for Search, AdSense for Content, and AdMob businesses, decreased approximately 11% over the fourth quarter of 2013 and decreased approximately 7% over the third quarter of 2014.

Network cost-per-click increased approximately 6% over the fourth quarter of 2013 and increased approximately 10% over the third quarter of 2014.

Traffic Acquisition Costs - Traffic acquisition costs (TAC), the portion of revenues shared with Google's partners, increased to $3.62 billion in the fourth quarter of 2014, compared to $3.31 billion in the fourth quarter of 2013.

Summary: income down, expenses up, network paid clicks down as network cost-per-click rose, while costs to acquire traffic rose. Not a good mix. Not the end of the world, but not good.

It appears the core is doing well, while the periphery is starting to buckle (think Europe). Or perhaps The Facebook is beginning to cannibalize them. Too soon to tell.

I actually like the chart of GOOGL, so this earnings report could simply be the first bit of negative divergence as the stock goes higher.

Speaking of Europe, the last thing you want to hear is a large Italian bank having trouble (Italy is the world's third largest bond market). Well, Monte Paschi fell over 6% this morning after announcing it required a larger capital increase than previously thought.

ES Futures:
Down hard in an impulsive-looking decline.

FX:
Yesterday it was noted here to watch for a break above 95.01 in the US dollar index. The DXY got to...95.01. Ha.

Russia just announced a rate cut after jacking rates up to 17%. USD now buys more than 70 rubles.

Bonds:
ES futures finally gave 10-year note futures some overnight volume competition, but the 10-year still managed to reign supreme.

Treasuries look primed for more gains, with yields perhaps catching down with Europe where deflation continues to dig in.

Energy:
Crude is up 1% while NG is down 2%, however both look like they are forming bullish falling wedges.

Metals:
Gold is holding steady but if below 1239 for any reason, the rally would suddenly look suspect to me.

S&P Outlook:
Yesterday's decline into 1989.18 gave an incredible risk/reward against a stop at the prior 1988.12 swing point. Adding calls felt especially dicey, but the 30+ point rally helped.

There are now four overlaps since the 2064.62 high. That's slightly bullish structure, but I'm still not certain the market is out of the woods.

I could see a bounce into the 2040s just as easy as I could see a decline below 1988.12 into the 1924 or 1880 area. I hedged the calls with puts yesterday afternoon.