The market once again proved its resilience yesterday, as earlier in the session it was in danger of undergoing its second triple-digit Dow decline of the week, heaven forbid. And sure enough, it looked like that was going to be the case as the Dow opened lower and declined to a loss of 134 points at its worst level of the session at 11:45am. However, as we have seen lately on more occasions than not, it turned right back around and regained more than 100 points of those losses before finally ending 42 points on the negative side.
The Nasdaq ended only nominally to the downside, but the Nasdaq 100, which consists of the largest number of non-financial issues in this index (i.e. technology and pharmaceuticals) actually had the nerve to end with a fractional gain due to a tremendous late advance in the shares of the stock named after a fruit, and more on the reasons for that later.
Breadth numbers were at a 13/17 negative ratio and the VIX ended only nominally higher by .09 to 13.50 after having been up as much as 1.00 to 14.41 when the major averages were on their lows as mentioned above. This means that it is stuck for the near-term in a range of 12.30 on the downside support area to the mid to high 14’s.
Adding some pressure to the Dow was the performance of the energy stocks, which have done well this year but sort of took the day off yesterday.
The big whoop yesterday was the news out of Europe and what the head of the E.C.B. had to say, and E.C.B. President Mario Draghi mentioned that the recent strength of the Euro has created 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 for some reason the market initially took this news to be very bearish, and taking the rally off of yesterday’s low plus today’s better market, we can ask the universal question to those early sellers – “So nu, what did you accomplish?”
The other big event was the very strong late rally in the shares of the stock named after a fruit, which had come down a mere 38% from its September all-time high, and of course all of the television touts who were cheerleading the stock at 700 with strong buy recommendations were now quaking in their boots at 450 as to whether they would recommend it, and of course this raises the question of – what do you need them for, to tell you to buy high and sell low? In any event, it made that late upward push when a prominent hedge fund manager suggested that the company 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. And this upward momentum is continuing today as well, and if it continues on its recent upside path, then you can be sure that the buy recommendations will pour in once again.
And sure enough, after yesterday’s bent out of shape idea that the market was going to go lower because of what E.C.B. President Draghi said, those sellers on that opening now look a bit foolish, because things started out higher and have remained higher for the most part all session today despite the fact that the Euro is even lower today than it was yesterday.
The Dow started out with a 20 point gain, jumped to its best level of the day with a 78 point advance at its 10:45am high and is currently ahead by 44 as this is being written. Breadth numbers are good at an 18/10 upside ratio and the VIX is lower by about what it should be with a decline of .52 down to 12.99, where it is starting to get close to its near-term support at 12.30, so we will see what happens to that support level if the market were to keep advancing.
The December trade deficit showed a much larger narrowing than expected due to record exports of petroleum products by this country, and this will most likely get the next fourth-quarter GD.P. estimate back into positive territory from the original 0.1% decline that was first reported. This was the lowest deficit in more than three years, at $38.5 billion. This is obviously a factor in making the market do better today, and if you want to stretch for further “explanations”, then how about the fact that E.U. leaders agreed to a seven-year budget that actually reduced spending for the first time in a very long time. And let’s throw in the fact that Chinese exports were better than expected as well, so you have a nice little positive combination of factors.
Otherwise, some market experts are attributing the advance to “better” earnings, while at the same time they attributed yesterday’s decline to “worse” earnings (i.e., AKAM), so what is this about?. On the other hand, once again the Nasdaq/Dow ratio is very strong, with the former at a 29 point advance relative to the Dow gain mentioned previously. And this is due to further advances in the shares of the stock named after a fruit, another new all-time high in GOOG, gains in ISRG and earnings-related advances in such issues as LNKD at a new all-time high in addition to gains in MCHP after their report.
Of the 341 S&P companies that have been reported so far for the fourth-quarter, 72% 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 5.2%, 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.
Wednesday – Dow component CSCO; Thursday – CBS, GM and PEP.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 5.2% 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