For the fourth straight day this week, if a person bought on the opening, they came out looking like a genius, as the market finished well above the levels at which it started out, as the Dow this time did not bother to open lower and then close higher, as yesterday it started out 30 points to the good and ended with a closing 85 point advance. It even had the nerve to be as high as 122 points at its best 2:20pm intraday level before cooling off a bit into the final bell.
Breadth numbers were extremely strong at a 3 to 1 positive ratio, and the 10-year Treasury note decided that the economy was doing better after all and rose the yields up to 1.88% and this was due to the fact that December housing starts reached their highest level since June 2008 and were the best since 2008 on an overall basis. Other good economic news was the fact that weekly jobless claims also declined, and got down to their lowest level since January 2008 at 355,000. On the other hand, the market decided to run with the positive news and ignored the fact that the January Philadelphia Fed Survey of Manufacturing in the mid-Atlantic region showed a decline, but never mind, the market is in this bullish phase for the time being and looks at the glass as half-full rather than half-empty.
The VIX acted sort of strange in the sense that when the major averages were at their best levels of the session as mentioned above, the VIX was only lower by .14 down to 13.28, a bit weird in the sense that the Dow at the time was up by more than 100 points, and when things eased off from their best levels but still ended with strong gains, the VIX actually had the nerve to end higher by .15 up to 13.57, still hovering around that 13.50 level but a somewhat bizarre close nevertheless.
The Euro decided once again that the path of least resistance was higher and rallied back up to 1.3380, which is an 11-month high and naturally when commodities like crude oil and gold and silver saw a real “risk-on” day unfold, they also decided to get in on the act and the former actually got as high as $95.50, its highest level in four months, and how is that supposed to be beneficial for consumers?
And there were good performers and poor ones as well, as for instance the homebuilders reached their highest level since 2007 and the energy stocks did well also. On the other hand, the financials did poorly on weak reports from Dow component BAC after it had made a very strong move higher lately, and also a weak report from C, also after a nice move from the lows lately as well. And how about the stock named after a fruit, which got to nominally positive territory when the Dow was up by those 122 points, but could not stand the “prosperity” and finally ended with a closing loss of 3 points after having had the nerve to rally nicely on Wednesday. Obviously everyone is waiting around for its earnings report this Wednesday to see whether or not the price collapse in this stock over the past few months is justified or not.
Today the market appears to be reversing the pattern of the previous four days this week, as a 15 point initial Dow advance could not hold but the decline has not rally been severe either, as it is now 18 points lower as this is being written, just above its lows for the session. There were some negative inputs to put a slight end to the bullish party that had developed this week for the third straight week in a row, as the preliminary January U. of Michigan Consumer Sentiment Survey declined to its lowest level in 13 months, and the negativity was primarily the result of the higher payroll (social security) taxes that wage-earners have been faced with in 2013, and which will continue for the first $113,700 worth of salary. In addition, there was a negative reaction in the shares of one of the oldest has-beens in that 1990’s group, otherwise known as Dow component INTC, which is applying some downside pressure, although Dow component GE is doing better after its report, along with other financials such as MS and SST, while AXP and COF do poorly after their results, so the picture is certainly mixed on this front.
Bond yields are lower once again on pessimism over the potentially adverse effects of the debt ceiling situation with the 10-year yield down to 1.84%, and stocks did stabilize on a Republican proposal to consider a “very short-term” debt limit increase to keep the government funded through April 15th. This appears to be an attempt to try to force the Senate to adopt some sort of budget agreement. Those 10-year yields seem to be hanging around in a very narrow range in the 1.80’s area.
Things had initially started out a bit higher as mentioned above on a report that China’s fourth-quarter G.D.P. rose by a slightly better than expected 7.9%, but this was still the slowest year of economic growth in the world’s second-largest economy since 1999.
The Euro is getting a downward comeuppance once again, coming off of an 11 month high on the latest perception that interest rates in that region are not going to rise, and as a result it is coming down to a more realistic 1.3300 level or so. This is helping crude oil prices to go lower as well, down to a still very high $95 a barrel.
And talk about a strange move in the VIX, which is now lower on a down day after having been higher on an up-day, which of course goes contrary to what it is supposed to do, and I believe the reason for these strange types of non-traditional movements has been the proliferation of all of these various ETF type of VIX- related items along with VIX futures, so today we have a sharp decline down to 13.05, a loss of .52, a new low for this move and in a sense it really should have been at this level after the sharp gains from earlier in the week for equities, particularly yesterday. So now the question is – are we headed closer to the ultimate downside support of 10, because I do not believe it can go below this level and stay there for long?
Today is also major options expiration, and on Monday we will add up the damage done to call and put buyers in representative heavily participated in options stocks, in addition the most heavily traded one of all, namely the SPY, and it will not be a pretty picture for them.
Next week should be a real barnburner for earnings, with a condensed lineup in a holiday-shortened week: Tuesday – Dow components DD, JNJ and VZ, and GOOG, JBLU, PETS, RMBS, RHI, ABT, MO, CTXS, TER, TZOO, CREE, CSX, DAL, IGT, USRG, WSC, RFMD, TXN, FCX and ELX; Wednesday – the big one, AAPL, plus Dow component MCD and UTX, plus DGX, RJF, SNDK, NFLX, DTJ, ALTR, BHI, FFIV, JEC, LRCX, LSI, VAR and WLP; Thursday – Dow components MSFT, 3M and T, plus AMGN, JBHT, JNPR, KLAC, QLGC, XRX, LUV, BMY, BVSN, CELG, CRUS, EFII, CY, FLEX and UNP; Friday – Dow component PG plus COV, HAL, HON, KMB and WY. And the week after that gets even better, so this will really determine where the fourth-quarter earnings period has gone.
Economic reports include: Tuesday – January Richmond Fed Manufacturing Index, December existing home sales; Thursday – weekly jobless claims, December L.E.I, January Kansas City Fed Manufacturing Index; Friday – December new home sales.
After years of taking money out of stocks, which has been well-documented through various mutual fund statistics, people have decided that “stocks are finally expensive enough for retail investors to find them attractive”, as per one of the great comments ever that I saw last week. And as a result of the second straight week of gains to start 2013, $22 billion went into the market, with $13 billion going into ETF’s and $9 billion into traditional equity mutual funds. Of course, this is after years of investors pulling money out of equity mutual funds to the tune of $380 billion over the past few years as the S&P has made a more than 100% recovery from its March 2009 low, but ETF’s have attracted $200 billion while at the same time bond funds have brought in $1 trillion as investors have sought the “safety” of this type of investment. This is only the second time since the November 1973 to March 1975 recovery that investors sold stocks at the same time that the market was rising. Also, this was the largest amount put into mutual funds since the third week of September 2007, about a month before the S&P made its all-time high. But it was no surprise that money was overall pulled out of stock mutual funds as 65 % of them have trailed their benchmark indexes.
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
