After three straight triple-digit moves in the Dow, things sort of calmed down yesterday, because aside from the droning along of the fourth-quarter reporting period, which is starting to get a little long in the tooth, so to speak, there was very little to motivate the market one way or the other to make a large move in either direction. However, there were forces at work which did set up today’s large down move, and more on that later.
The Dow began with an early decline of 63 points and then decided that the path of least resistance was higher, as it reached its best level of the day with a 12 point advance at 12:30pm, then declined once again to a 40 point loss at 2pm, but then because of the new-found bullishness from individual investors after the S&P has already advanced by 127% since the market lows four years ago, the optimists jumped in again and the Dow made a slow upward chop into the close before finally ending with a 7 point closing gain. It was helped in this endeavor by a good earnings report from DIS and a new all-time high in the shares of 3M.
And once again, as we have seen so often this year, the Nasdaq did not participate in the up move, and this time the blame has to fall on AMZN, which has done nothing but go lower since its ostensibly good earnings report last week and by weakness in ORCL, which has done well lately. Breadth numbers kept improving as the day wore on, and ended at a 17/12 upside ratio. The Dow Transports declined after having set another all-time high record price on Tuesday, and it was primarily due to weakness in component CH after a poor earnings report.
The problem with a further market advance was that the VIX started to decline in that 2-4pm time period when the major averages were making their second upside push as mentioned above, and ended with a larger loss than it should have undergone, a .31 drop to 13.41. We have seen the inability of the VIX to break below its ultimate downside support at 12.30 become a very strong impediment to the market’s ability to break solidly above the Dow 14,000 level, which almost every market expert says is inevitable and also they believe that the S&P is destined to make a new all-time high this year, a view I do not share, as I am neutral on the market from current very high levels.
And the 10-year Treasury Note yield, which has been bouncing around the 2% level, decided that it should go lower, and ended at 1.96% as the Treasury Department asked Congress to pass a longer-term increase to the U.S. debt limit. And the recently beleaguered
Euro declined to a one-week low at 1.352 on the newly discovered political and banking turmoil in that region ahead of today’s meeting of E.U. finance ministers in Brussels and isn’t it interesting that something always comes out of the hat to stall the market’s upward advance just as it gets to important resistance levels such as Dow plus 14,000 and S&P well over 1500.
And sure enough, that more than normal decline in the VIX yesterday has left the market vulnerable to some sort of setback, and it is as if everyone wants to put the blame on Europe, as all of a sudden today what came out of that E.U. finance ministers meeting is being construed as negative. So what did they say to get our stock market so bent out of shape and cause the Euro to decline by the most since last July? And of course this begs the question as to what a currency that represents such a weak part of the world was doing at such high levels in the first place, but never mind. E.C.B. President Draghi mentioned that the recent strength of the Euro creates a concern that inflation will slow, and what is so terrible about that statement? The interpretation is that policy makers there are concerned that the Euro’s strength will interfere with their efforts to pull the economy out of a recession. The gains could frustrate a recovery before it has really gotten underway by limiting exports and pushing inflation too low, according to this way of thinking. The way that the stronger Euro keeps inflation at more modest levels is that it lowers the price of imported goods.
And the primary reason that the Euro has been strengthening up until last week is that their banks have started paying back the E.C.B.’s emergency three-year loans early, which shrinks its balance sheet at the same time that the Federal Reserve and the Bank of Japan have been expanding theirs through asset-buying programs. This then revives talk of some sort of “currency war”, which is an old favorite expression of those who take the gloom and doom path. It is currently down to 1.3385, where it was two weeks ago before its most recent upward spike to the 14 month high of 1.3640.
As a result of this ostensibly terrible news, the Dow opened lower and just kept pushing to the downside, reaching its worst level of the day so far with a 134 point decline at 11:45am, where it has stabilized for the time being and is currently lower by 101 as this is being written. Breadth numbers are at a negative 9/20 ratio and the VIX is once again pushing further away from that 12.30 downside support level and it now appears as if that number is going to hold on the downside, which is one of the reasons why I do not believe that new highs for the S&P are in store, as how can they be at current relationships, which would mean that the VIX will have to stay below 10, which is an impossibility.
Aside from the Euro, which is making a large move lower, the outside markets are sort of quiet, with yields on Treasuries a bit lower at 1.94% for the 10-year and crude oil is lower by $.80 cents to $95.80 a barrel, and I still believe that this is the sickest thing going, namely that crude oil can only decline when the stock market goes lower as well, especially when the fundamentals certainly do not call for a price at this level that has resulted in gasoline prices at the pump being the highest on record for this time of the year, which combined with lower take-home pay for wage earners is certainly not good for consumer spending.
There is a bit of an irony here in that the stock named after a fruit is actually higher today while the major averages undergo the second triple-digit Dow decline this month. This is in sharp contrast to the endless days when this stock had gotten sold off to the downside this year while the rest of the market was rising, which gives it the dubious “honor” of being the worst performer in the S&P for 2013. Yesterday it got an initial boost, which later faded away to a nominal loss by the close, when a washed-up money manager suggested that the shares are undervalued. Today it is getting some support when a prominent hedge fund manager suggested that they also return more of their $137 billion in cash to shareholders, and his proposal is for the distribution of a high-yielding preferred stock that would not cost shareholders as it will not force the company to incur taxes on cash brought to the U.S. from overseas.
Of the 317 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 5%, 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.
This week’s earnings lineup includes: tonight – OPEN and LNKD; 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. .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
