Wait a minute – I read in the paper yesterday morning that disgraced former Italian Prime Minister Berlusconi had narrowed the gap in the upcoming parliamentary elections despite being a convicted tax felon (only in Italy could something like this happen) to within 3.7% of the lead, and his closing the this gap was offered as the main reason why stocks took their worst beating since last November 14th on Monday. So when I saw that his popularity is climbing even more, I thought – if the stock market was rational all the time, then it should continue to decline yesterday as well. And surprise, surprise, as soon as stocks themselves ended with those large losses on Monday, the various stock index futures were already above fair value by their 4:15pm closing time and then continued moving higher in the overnight session as well.
As a result, instead of getting another Berlusconi-induced selloff, the market opened higher and never looked back, as the Dow began with an 80 point gain right out of the starting gate in a classic Turnaround Tuesday session, and then continued to chop higher to its best level of the day, a 133 point advance at 2:50pm which meant that it had now reached the holy grail level of 14,000 at a price of 14,013 and this compares to last Friday’s intraday high of 14,019, where the air got a little too thin as well. Because of this temporary overbought situation, the Dow did sell off from those highs and finally ended with a 99 point advance, which meant that for the past three sessions we have seen triple-digit( give me a 1 point leeway here) moves, two of which have been higher.
It was interesting that the VIX had gotten as low as 12.72 on Friday’s best level, and yesterday at the top, which was within 6 points of Friday’s high, it was a full point higher at 13.39, and this means that the higher level of the VIX is theoretically now giving the market more room to advance, if we assume that the 12.30 downside support level is going to hold.
What was a relief yesterday was that the Nasdaq/Dow ratio, which has been lagging badly this year due to the awful performance of the stock named after a fruit, actually did extremely well for a change, with a close for the former of 39 points relative to the Dow advance of 99. And this was largely due to the fact that this stock finally decided that it had had enough on the downside and put in a large gain for a change. And helping the Nasdaq as well was another very recent laggard, AMZN, which also decided that the path of least resistance was higher, at least for one day.
Breadth numbers were strong at a 22/8 positive ratio with financial stocks leading the upside charge and the VIX finally ended with a closing loss of .95 to 13.72, exactly in line with the gain in the Dow. And naturally the outside markets did what they are programmed to do on a strong day in equities, as for instance the 10-year Treasury note yield rose back to 2% from below that level on the little bit of a panic supposed flight to safety on Monday, and the Euro rose back up on the same mind-set as well, as did crude oil and isn’t it the sickest thing that the only way that crude oil can decline is if the stock market goes lower as well, and the rise in equities lately has been perhaps the primary reason why gasoline prices are now at their highest level ever for this time of the year and won’t it be fun to see what they will be when the summer driving season begins in a few months and if stocks are even higher than where they are now. Of course helping the up move was that fact that the January ISM Non-Manufacturing Survey was able to maintain itself at 10-month highs.
Some interesting companies were in the news as it was reported that DELL is being taken private at 13.65, a very far cry from its glory days in the late 1990’s when it got as high as 58 at the top of the Nasdaq market all-time high in March 2000. And getting a taste of its own medicine in a way were the shares of MHP, owner of the S&P, which have now declined by more than 20% this week alone on a Justice Department lawsuit against them for $5 billion on their ostensible inflating of mortgage bond ratings and the subsequent understatement of their risks due to their trying to get more business from investment banks at the outset of the financial crisis of 2008. And remember that they were the ones who caused havoc in our markets in August 2011 with their first-ever downgrade of the credit rating of the U.S., and what did that eventually accomplish as yields went to record low levels last year?
Of the 303 S&P companies that have been reported so far for the fourth-quarter, 71% of them have beaten the earnings consensus and 66% have beaten on the revenue side as well. Earnings are now projected to be ahead by 4.7%, 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. It is also interesting to see this number slowly rise as the earnings period is moving along, which has sort of justified the strong upward move that we have seen in stocks this year. The percentage of companies that has beaten consensus has been 65% over the past four quarters and 62% since 1994.
Oh, no – that wily old Silvio Berlusconi did it again, as his ongoing advances in the polls was cited as the reason for the weak start to stock index futures in pre-market trading. There was also some vague negativity about “Europe’s debt crisis”, and what is that supposed to mean at the stage of the game? There is in fact a meeting tomorrow in Brussels of E.U. policy makers so I assume that this is what has captured the latest negativity, such as it were. This resulted in the Dow opening today with a loss of 66 points, which immediately got better as the session has moved on, and this is similar to the pattern that we have seen in the past three months. With no economic reports here, stocks sort of traded on their own momentum or lack of it, along with earnings, as Dow component DIS helped it to erase those worst losses and move to its current best levels of the day with only a 3 point decline as this is being written. A new all-time high in the shares of 3M is helping as well.
The Nasdaq has actually turned nominally positive as the stock named after a fruit did a very fast upside reversal from earlier losses to be ahead on rumors of a share buy-back by the company. The VIX was over 14 once again when the major averages were on their early lows but has come back from those highs as stocks have improved and is currently unchanged at 13.72, obviously taking its direction from equities. Breadth numbers are even and outside markets are sort of quiet with yields on the 10-year note back below 2% once again, which seems to be a new comfort level for the time being.
This week’s earnings lineup includes: tonight – AKAM and GMCR; Thursday – PM, CTSH, S, NYT, OPEN, LNKD and HAS; Friday – AOL, TM and CBOE
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 4.5% 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 14.7 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 in 2012 except for the fourth-quarter, whose first estimate came in at -0.1%, 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
