After taking the day off to start the week, the Dow and S&P decided that the path of least resistance was higher once again yesterday, and sure enough the usual 2013 pattern exhibited itself, as the Dow started out unchanged, then made a fast rally to a 40 point gain on the back of the November CaseShiller Home Price Index which showed that 2012 was the best year for housing since the top was reached in 2006 before things collapsed in that area. The gains so far for last year have been 5.5%.
When the January Consumer Sentiment Survey declined to its lowest level since November 2011, the Dow fell back to unchanged around 10:15am as the lower paychecks that wage earnings are taking home due to the increased social security deductions from their gross pay have obviously taken a toll on potential consumer spending. But never mind, as the market lately has found any reason to go higher and sure enough the Dow began its renewed upward journey after that low and began to grind to the upside as it reached its best level of the day with an 89 point advance at 3:30pm level before ending 72 points higher.
It was helped in its upside journey by good earnings news from component PFE in addition to follow-through good feelings from other components that had reported in the last couple of days, and this group included CAT, 3M and PG, along with the energy stocks, which got a boost from good reports out of BTU and VLO, And reverting back to form, and through no fault of the stock named after a fruit which decided to rally for the second day in a row after a 270 point decline of 38%, the Nasdaq actually ended lower by 1 point. And this was due to weakness in some of its high-priced leaders such as AMZN, ISRG and PCLN, which all cooled off from strong recent performances. But it was primarily the weak results from non-Nasdaq technology stocks that cast a pall over this group, and those losers who reported badly included VMW, SANM, KLIC, STX, LXK, BMC, NTGR and YHOO (in the Nasdaq), and these stocks are arranged in the order of the magnitude of their losses.
Breadth numbers got better as the day moved on and ended at a 17/12 positive ratio. The VIX started out as if it wanted to continue its recent streak of four higher days despite the fact that the S&P also rose during this time, which is something that was pointed out in yesterday’s daily market notes. It began with a .31 gain all the way up to 13.88 and it took the Dow 40 upside points in the late morning to get the VIX to finally turn lower and it ended with a .26 point loss down to 13.31. So the strength of the VIX has had the effect of helping the market to continue higher, as for instance the last time it closed at this level was on January 11th when it ended at 13.36 and the S&P that day was 1472, so the reluctance of the VIX go break below its 12.30 support level has given stocks room to move higher and if the VIX were to ever get back down to that recent support level once again, the major equity indexes would be really in outer space the way that this relationship has played out recently.
And oh, no, could it be – the Dow Jones Transports actually had the nerve to end one point lower after being higher for 10 consecutive sessions and making new all-time highs in the process. And other markets rose as well, as the Euro reached its highest level since December 2011 on the perception that the F.O.M.C. will announce no changes in its latest asset-buying program at the conclusion of its meeting tomorrow afternoon at 2:15pm. This is what weakened the dollar and naturally when this happens crude oil decides to rally and it has now reached what is starting to become the dangerous level of $97.50 a barrel, getting close to what has always been too much for equities to overcome at the $100 plus level. And even recently beaten-down gold also decided to move higher on the same perception of continued easing policies.
Perhaps one of the best explanations as to why stocks have done so well this month has been that $55 billion has been put into stock mutual funds and ETF’s, the largest monthly inflow on record. But the bond market continued to raise interest rates, as the 10-year Treasury note got as high as 2% for the first time since last April on a poor auction as it reacts to the overall better data on the economy and ongoing switching out of the so-called “safety” of bonds into more risky assets like stocks, leaving those who bought when the yield was at 1.40% last July scratching their heads and saying – “this is safety?”.
And what would another day in the market be without some very late bizarre behavior in a major stock, and this time the “honor” went to AMZN, which was scheduled to report its results after the close. After hitting an all-time high last Friday, the stock sold off both Monday and yesterday and was trading at 268 at 3:59pm, one minute before the close when the results appeared on various wire services around 30 seconds before the close. And sure enough, when the market makers or panicked sellers saw what were ostensibly lower numbers on both the revenue and earnings side, there was this frantic rush to dump the shares even further so that some services have the closing price at 260 while others have 268. In any event, someone had the “honor” of selling out as low as 258.35 right after 4pm before further perusal of the numbers showed that this stock wants to go higher no matter how bad their results are relative to expectations and no matter how far into triple-digits the price/earnings ratio gets. Shortly after that 258.35 low price, the aftermarket trading saw the stock advance by an astounding 30 additional points as high as over 288, so how do you think the person who released his or her shares at 258.35 must have felt, and then people wonder why individual investors have been moving away from stocks and does any regulatory authority say something about this, or is this a beautiful example of the “free market” at its working best?
After the exhilaration of its new highs, where the S&P has now advanced by 5.7%, its best such showing since 1989, things were ready to go further today, but some “inconvenient truths”, as Al Gore would say, got in the way as the first estimate of fourth-quarter G.D.P. came in with a 0.1% decline when a gain of 1.1% was projected by all of the experts.
This was the worst performance since the second-quarter of 2009 as the economy began to recover from the most devastating recession since the Great Depression of the 1930’s. But closer examination of the numbers shows that there were good points as well, as for instance consumer spending, which accounts for 70% of economic growth, rose by 2.2%, which was an improvement over the prior quarter. Business investment increased by a large 8.8% and residential construction also added to the numbers. But there are quirks in the way that the numbers are calculated, and unfortunately declines in inventories subtracted 1.1% from the result. Also hurting was a decline in government spending, which subtracted 1.3% from G.D.P. and this was highlighted by a huge 22% decline in defense spending, the largest on record. Weaker exports also were a negative factor and this was the result of fewer shipments to weaker economies in other parts of the world.
On the other hand, there was some positive news from good old ADP, which came out with a bullish forecast for Friday’s jobs report, with their projection of 192,000 private payroll additions when the consensus is currently for 165,000, so we will see how that plays out. And as a result of all the data plus some important earnings reports, the Dow has been chopping around all over the place, as it began a little lower, then rallied to its best level of the day so far with a 12 point advance at 9:45am as buyers could not wait for a little dip to jump in. Then it decided to go lower and reached its worst level of the day with a 29 point decline at 11:40am, from which it then has regained nominally positive territory as this is being written, ahead by 4 points. The Dow is being helped by a good report from recently maligned BA and the Nasdaq is getting some support from AMZN, after all of the bizarre late trading as described above.
Breadth numbers are decidedly negative at a 12/17 ratio and the VIX is once again having an upside field day with a .60 advance up to 13.81 relative to very small changes in both the Dow and S&P. And the 10-year Treasury note yields continues to push higher, now up to 2.02% on the perception that the weaker G.D.P. number will force the Fed to keep its asset-purchase stimulus program alive and well, and we will hear what they have to say at 2:15pm today. This was the highest yield since last April.
And the Euro keeps rushing ahead, partly on perception of further Fed stimulus here and also on an investor sentiment survey there that came in better than expected, as it reached up to 1.357, its highest since October 2011. And good old crude oil did not want to miss out on the bullish party as it got as high as $98, and between these higher energy prices and the lower take-home pay for wage earnings due to the rise in social security deductions, how is this going to help consumer spending going forward, but never mind.
Of the 197 S&P companies that have been reported so far for the fourth-quarter, 71% of them have beaten the consensus and earnings are now projected to be ahead by 3%, better than the 1.9% projection at the start of the reporting period but well below the 10% that the experts thought would be forthcoming last October. The percentage of companies that has beaten consensus has been 65% over the past four quarters and 62% since 1994.
And if one wants to see a change, the Dow Jones Transports are finally getting blasted to the downside after making a new all-time high yesterday, their 11th straight such gain, perhaps a little unsustainable, and actually reversed intraday to close a bit lower.
This week sees the continuing earnings parade, with – tonight – FB, QCOM and TLAB; Thursday: AET, K and VIAB; Friday: Dow components CVX, MRK and XOM, plus LVS, MAT and SFLY.
This week will also see the January jobs report on Friday, adding to the drama of the earnings season which will be peaking by the end of next week. We also see the results of the latest F.O.M.C. meeting today at 2:15pm and when is the last time that the market rallied on one of those?
We also get: Thursday – weekly jobless claims, December personal income and spending, January NAPM Milwaukee Purchasing Managers Index, January Chicago PMI; Friday, in addition to the jobs report (current estimate is 165,000), we get final January U. of Michigan Consumer Sentiment Survey, December construction spending, January vehicle sales and January ISM Manufacturing Survey.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 3% gains for the fourth-quarter are projected at the present time, in addition to a gain of 3.5% for the first-quarter of 2013.
The S&P trades at 14.6 times the projected 2012 earnings of $102, according to the analysts who follow these companies. 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 had 12 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter this year except for the fourth-quarter, and today’s lower number broke this streak, but the number is still subject to revision. G.D.P. now has risen by 2.2% in 2012, and is projected to increase by 2% next year, according to various surveys.
Donald M. Selkin
