What was somewhat astounding about yesterday’s market is that the major averages did almost the same thing for the second day in a row, meaning that the Dow ended nominally lower while the Nasdaq and S&P ended nominally higher, breadth numbers were positive and the averages that have been making new all-time highs continued to do so. This is a very unusual occurrence in the sense that the market rarely ever affords investors the chance to say – oh, wow, I am going to trade on the same basis as the day before, look how easy this is. In any event, this is what did take place, and sure enough the Dow began with a loss of 60 points and after a few attempts to go positive, it finally ended with a closing decline of 10 lower.
At the same time, the S&P and Nasdaq rolled merrily along to the upside and breadth numbers ended at a 15/14.8 positive ratio. And unlike the day before, the financial stocks started lower and then turned around to end higher, which is a classic example of investors waiting to buy on the dips.
In the meantime, the good old VIX declined to 12.66, a loss of .32 and once again this is where the battle is going as it approaches its near-term support level of 12.30. One thing that was a bit different yesterday was the fact that the yield on the 10-year Treasury note actually declined a bit, dropping back to 2%, and its day to day movements become somewhat boring to describe as it is in a very narrow range lately and until it does something better than what it has done lately, why spend inordinate amounts of time analyzing its day to day movements.
One outside market did make a large move and that was the Euro, which fell to a three-week low at 1.3355 because it was reported that the recession in the region 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. This caused almighty gold to sell off, and it has been under pressure in any event for a variety of reasons, and to the detriment of its many fanatical supporters, it has not done very well this year. On the other hand, the weakness in the Euro did not stop crude oil from continuing its merry but completely divorced from reality move higher, despite U.S. supplies being the highest in 20 years and the I.E.A. saying that world oil demand is going to decline significantly this year as well.
And yesterday was the type of day where market experts had their choice of reasons to “explain” why the market did this or that, starting with the negatives of those slower growth statistics out of Europe. Then when things went positive, it was the supportive influence of the lower weekly jobless claims and the more pervasive effect of the unusual amount of merger activity, starting with the Warren Buffet takeover of HNZ, which then gives forth to the old argument that stocks are “reasonably” valued, which leaves them ripe for takeovers. There was also the American Airlines/U.S Air merger as well, along with STX gaining the most in over 20 years after it won full control of a certain beer brand. There has now been $158 billion of merger activity, more than twice the amount at the same time last year.
Today the market is fluctuating around all over the place with the Dow doing better than the rest of the averages, sort of reversing the pattern of the past two days as mentioned above. And once again, whichever way it ultimately closes, the experts will be out there with varying types of analysis to tell everyone the “real” reason after the facts, or course.
And since earnings are not a factor today, there were a few economic reports that were looked at, as for instance the preliminary February U. of Michigan Consumer Sentiment survey rose to its highest level in three months at the same time that the NYState Empire Manufacturing Survey unexpectedly jumped as well, its first gain in seven months. On the other hand, January Industrial Production declined as factories worked at a slower pace after the largest back to back advances in three decades.
At the present time, the Dow is ahead by 8 points while the S&P and Nasdaq are struggling at a slightly negative reading. Breadth numbers are just about even while the big story is the ongoing decline of the VIX relative to what is going on with the major averages. It is currently at 12.33, a decline of .33 and this really gets it to low levels, at which the battle is going to be fought, because if this level holds, the market perhaps will be ripe for some sort of selloff, while if it gives way on the downside, we are going to see additional advances, would you believe it, without any sort of setback.
With the March 1 deadline for trying to agree on a deal to avoid scheduled budget cuts, otherwise known in plain (?) English as sequestration, Senate Democrats unveiled a $110 billion plan to in fact delay those cuts, including tax increases that Republicans say that they will not accept. The plan would delay the March 1 start of more than $1 trillion in cuts until 2014, and would substitute defense spending reductions, a stop to direct farm subsidies and a tax increase on the top wage earners.
With earnings season now in the home stretch, of the 375 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.
And since this is the February options expiration closeout, the most widely participated in one of all, namely the SPY, has 3.8 puts expiring worthless, or an astounding 98% of all puts. Even on the call side, most of them went out worthless as well, which of course raises the question of why does a person get involved with purchasing them from either side, even though this is what the television touts tell you to do. Sixty-six percent of the SPY calls will also expire with no value, which means that the overall percent of options with no worth was 76%, and what else is new?
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