The market had something for everyone yesterday, and at the end of the day, the overall picture was more positive than negative, as despite the Dow ending lower by 36 points, most other measures were positive, with the S&P eking out a nominal gain after trading on either side of unchanged for most of the session and the Nasdaq did better with a 10 point advance thanks to strength in AMZN, a new all-time high in CMCSA after earnings and continued gains in NFLX and GOOG. To make the day even a better one for the bulls, the Russell 2000 Index of small stocks closed at another new all-time high, as did the Dow Transports as well as the mid-cap indexes ending at their best-ever levels as well.
Breadth numbers were also on the positive side at an 18/11 upside ratio and the VIX followed the Dow perfectly as it ended with a .34 advance to 12.98 even though it is really based on the S&P.
Since most market measures were positive, there had to be a reason why the Dow was sort of flying solo on the downside and once again, because it consists of only 30 stocks, large moves in either direction by one or two members can have an outsize influence and yesterday the negative booby prize went to MCD and also WMT, and this was because the President, in his State of the Union speech on Tuesday night, had the nerve to propose that the minimum wage be raised from $7.50 an hour to $9, and apparently the former company must have large numbers of workers at this salary level while the latter is often accused of having many employees at below this rate, so apparently that is why its decline was much smaller than that of the former one because what does the minimum wage mean to them? And other restaurant stocks where the help apparently does not earn hedge fund manager compensation also sold off as well, and this group included EAT and DRI, among others.
And while we are on the subject of the President’s speech, he also spoke about expanding trade with Europe and also spending $50 billion on urgent infrastructure projects. Interestingly, he congratulated three companies for their bringing manufacturing jobs back to the U.S. and the First Lady had the nerve to invite the C.E.O. of the stock named after a fruit, whose comments on Tuesday reduced the value of his company by $9.4 billion, which is a nice day’s work and which I am sure resulted in negative adulation being heaped on him by his shareholders as he basked in the glow of such an important seating location. The Daily Market Notes for the past two days had mentioned his comments that knocked the stock down by 11 points so they do not have to be repeated here. And ironically, the two other companies that the President congratulated for bringing those jobs back to the U.S., namely CAT and F, also ended lower on the day as well.
Because the market was primarily to the upside, the bond market continued its pattern of going in the opposite direction, namely lower, which has pushed yields up a bit, and as a result, the 10-year note ended at 2.02%, back up against the higher end of its recent range.
With earnings season now in the home stretch, of the 364 S&P companies that have 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 5.3%, 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. 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.
After yesterday’s mostly positive session, the various stock index futures traded sharply lower in the overnight session, and as a result the Dow accommodated those who felt the need to sell at the opening lows with a 61 point loss to begin, which then turned into a 5 point gain at the 10:50am high before it set back nominally and hung around with a 20 point loss or so, which is about where we are as this is being written. But similar to yesterday, the Dow is not the whole ballgame, as both the S&P and Nasdaq are a little higher, and the Russell 2000 index of small stocks, the mid-cap indexes and the Dow Jones Transports are once again, ho-hum, at new all-time highs once again, and what else is new?
And the cause of the little mini-panic in the overnight session and on the opening was that the Euro fell to a three-week low as that part of the world’s recession deepened more than forecast. G.D.P. declined in the fourth-quarter of 2012 by 0.6%, which was the worst performance since the first-quarter of 2009. And to compound the overseas difficulties, it was reported that Japanese G.D.P. declined for the third straight quarter as well, but as seen from the action in the U.S. stock market, we still have investors willing to buy on dips of any sort and so far a larger correction has not been evident, although with the VIX currently at 12.77, a decline of .21 the question can also be asked – how far is the market supposed to go from current levels with this indicator so low?
The Nasdaq is being supported by a hard-to-believe gain in the stock named after a fruit, which currently has the nerve to be ahead by a few points but it did not come easy as traded lower earlier and who knows if these nominal gains can be sustained by the close. In addition, the two most recent strong members of this group, namely GOOG and NFLX, continue on their merry upside journeys.
Tomorrow is the monthly options closeout for the February series, and as usual we will highlight the items that will leave most of its buyers hung out to dry, and the leading candidate is obviously the SPY, which because of its unrelenting recent move higher to more than five-year best levels, has resulted in the number of puts going our worthless to be humungous in the order of around 3.7 million and we will have more accurate figures tomorrow.
Perhaps the reason that the market was able to come off of its worst early levels as mentioned above is that weekly jobless claims declined by more than the experts had forecast, lower by 27,000 to 341,000, and this is important because today’s statistics are the week that will be used for the February jobs report that will be released in early March.
This week’s earnings lineup concludes with – Friday – KFT. Economic reports will finish with – Friday – February NYState Empire Manufacturing Survey, January industrial production and capacity utilization and February preliminary U. of Michigan Consumer Sentiment Survey.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 5.3% 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 14.7 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