Yesterday was an astounding day in the sense that market experts finally gave up using the better revenue numbers from pathetic AA to try to justify the market’s advances for the second day, as its shares continued their decline even after their “good” report came out on Tuesday evening. Remember that despite its initial .20 advance, which I had predicted would first occur, it sold off as Wednesday’s session wore on and on an even stronger day in the market yesterday, it gave up any pretense of rallying and faded to having an 8 front of it.
So if experts finally had to stop using this stock as the reason for the “optimism” about fourth-quarter earnings, another explanation had to be found to justify what turned out to be the best market upside showing this week. So instead of using earnings as a reason for things to go higher, investors turned to overseas reasons and they found one in Asia and one in Europe, as China announced that both its December exports and imports were much stronger than expected, the former rising by 14.1% while the latter gained 6% and these were seven-month highs and as we all know, since China is perceived to be the engine for world economic growth, when news comes out of that country, many markets make a reaction to it. In addition, there was ostensibly good news from Europe as well, as E.C.B. President Draghi pronounced that he sees a “gradual recovery taking place later this year”, and for what that is worth, this also gave investors here reason to buy.
And buy they did, as the Dow began with a 50 point gain by early morning, then made a fast decline to a loss of 8 points at 11:15am, which one financial organization attributed to a huge sale of stock index futures contracts (oh, no – our little mini 2013 flash-crash). But just as fast as things declined, the Dow moved right back up again and by 2:30pm it was ahead by 40, the only problem being that the Nasdaq was lagging once again with only an unchanged reading at the time. This was primarily due to the fact that the stock named after a fruit decided that it could not stand the prosperity of an early 12 point gain on the fact that its C.E.O. had a meeting in China with the head of China Mobile, the world’s largest carrier, obviously in order to make nice to them in order to get them to carry more of the company in question’s products. But in what had to be one of the most discouraging declines in the entire 200 point lower move from the September highs, the stock had the nerve to not only give up that entire early 12 point gain, but also traded lower by 1 ½ points at this time.
But then lo and behold, the stock decided that enough was enough, and it actually had the nerve to rise once again to an advance of 7 points, which all of a sudden turned the Nasdaq/Dow ratio into a good relationship and as a result, all of the major averages got further motivated to the upside as well, with the result that the Dow ended at its best level of the day with an 80 point closing advance while the S&P finished at its highest level since December 2007. Even the Nasdaq ended higher, closing with a 15 point advance as GOOG, NFLX, PCLN and BIDU decided to join the upside party as well.
Breadth numbers ended at a positive 2 to 1 ratio and the dear old VIX declined right down to its support level, with a loss of .32 to 13.49, which basically sets up a real inflection point in the market, that either this level is finally going to be broken on the downside for the first time since 2007, or that we are going to see a downside market correction off of these recent gains.
Leading the upside charge, as they have done lately, were shares in financials and energy, while technology has been relegated to the background to some extent because of the weakness in the stock mentioned above and also in MSFT at a 52-week low.
The Euro underwent its largest one-day rise against the dollar on the Draghi comments as mentioned above, and is now at 1.3265 for a full .0200 advance. And naturally when gold sees the Euro rise like this, it also decides that the path of least resistance is higher and as a result it made its largest gain in two months. And of course crude oil, which has started to get to dangerously high levels, also used the dollar weakness as an excuse to keep going even higher as well, now up to $93.80 a barrel.
So let the battle for VIX 13.50 begin, and if things end around what they are doing so far today we will have to fight the battle another day, as the major averages are very narrowly mixed and the VIX itself is sort of stuck around that level so far. The only economic report released today was not a good one in the sense that the November trade deficit came in much wider than expected due to large imports of cheap foreign goods ahead of the holidays and also as a result of increased demand for foreign automobiles. This wider deficit could subtract from the final reading for fourth-quarter G.D.P.
Then there was a report that inflation in China rose to a seven-month high as a result of the coldest winter in 28 years in that country which has pushed up vegetable prices, heaven forbid, and which investors here are interpreting as a restraining factor on further monetary easing by their central bank. This has caused metals prices, which made strong gains yesterday, to give them all back and even crude oil prices are having the nerve to go lower as well, closer to $93 a barrel.
As this is being written, the Dow is ahead by 2 points, the S&P is lower by 3 and the Nasdaq is down by 2. Breadth numbers are at a 13/16 negative ratio and the VIX is stuck right there at the 13.50 level, and as I previously said, the battle will have to be fought another day. On a narrowly mixed day like this, it is usually a story of stocks doing well or poorly as the case may be. For instance, the Dow is being supported by gains in IBM for whatever reason and CVX on a good earnings pre-announcement. On the other hand, BA is getting sold off once again on its 787 Dreamliner issues.
Financial stocks are a little lower on the poor reaction to the WFC report and since this is a weekly options expiration, there are the usual suspects as well, and it should be mentioned that for the seventh straight Friday, the shares of the stock named after a fruit a lower, and if one thinks that this has nothing to do with the fact that market makers will do their best to make sure that as many weekly calls go out worthless as possible, then that person has rose-colored glasses on. This is an astounding development in the sense that it is so predictable and yet no one has any interest in noting that perhaps something is a bit rotten in the state of Denmark, so speak, but on the other hand, as everyone should know by now, it is my long-held contention that the purpose of an options expiration in any event is to make as many holders of calls to lose their money as possible, so why not do it with one of the most widely participated-in options stocks of all. And to that dynamic even the options of HLF, not usually a stock we talk about in terms of options expirations will see the overwhelming majority of both its puts and calls go out worthless today despite the huge and wild swings in its price because of all the controversy about its finances as large hedge funds battle it out. So investors who thought that they would take advantage of the volatility through the purchase of options will end up with a very sad result after all is said and done and in Monday’s daily market notes we will publish the final damage totals for this one.
Next week should be more interesting for earnings and the lineup features financials, with Monday- MS; Wednesday – EBAY, GS, WEN; Thursday – BAC, C and INTC, all Dow components and Friday – GE, another Dow component.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 2% gains for the fourth-quarter are projected at the present time, in addition to a gain of 6% for the first-quarter of 2013.
The S&P trades at 13.6 times the projected 2012 earnings of $102, according to the analysts who follow these companies, which could still support stocks. Earnings were $85 in 2010 and were $92 in 2011. The estimate for 2013 is $108, a gain of 6%. The average P/E multiple for the S&P going back to 1954 has been 16.4. After four consecutive quarters of negative G.D.P. growth, we now have 12 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010 and every quarter in 2011, and every quarter this year as well. For 2011, G.D.P. rose at 1.7% and it is projected to grow by around 2.2% in 2012, and by 2% next year, according to various surveys.
Donald M. Selkin
