After yesterday’s classic “Turnaround Tuesday” market advance in a corrective reaction to the handwringing that resulted from not only the comedian out of Genoa, none other than Beppe Grillo, whose gathering of protest votes against the economic difficulties and political corruption, combined with those of disgraced former Prime Minister Silvio Berlusconi’s center-right coalition sent equity markets reeling. And if one takes those strong gains combined with a very good start so far today, one can ask the age-old question of the late sellers on Monday – “So, nu – what did you accomplish?”
I had pointed out that on Monday afternoon, the Dow was lower by “only” 60 points with 45 minutes to go and with the deadlocked election results from Italy already known. So then the question has to become – why did the Dow then proceed to plunge by an additional 156 points and what was that about? Did any of the fundamentals change or was it just a bad example of high-frequency traders trying and other interested parties to maneuver the market in a certain direction for their own benefit? And the fact that there are many stocks that are higher today than where they were when the selling began is further testament to that observation.
The Dow right off of the opening bell made a very strong upward reaction to what the Italian comedian had wrought late Monday. It then declined to its low of the day in its usual negative reaction to what Fed Chairman Bernanke has to say and it bottomed out with a 39 point gain at 11:45am in the early part of his testimony. He defended the Fed’s unprecedented asset purchases as he pointed out that they are helping support the economic expansion while not allowing inflation to get out of hand or producing asset-price bubbles in other items, and what does he have to say about the fact that gasoline prices at the pump are the highest ever for this time of the year when crude oil supplies in this country are at their highest level in 20 years? I would imagine that what got the markets spooked a bit was his comment that if the March 1 sequestration process of $85 billion in automatic budget cuts goes through, it will put a “significant” burden on the economy.
After the initial negative reaction, things turned back once again to the upside and the Dow pushed to a new intraday high with a 134 point advance by 3:45pm, before ending with a closing gain of 116. By the way, after a very benign period for the major averages, evidenced by the low level of the VIX at 12.30 early last week, the Dow has now closed with triple-digit changes in four out of the past five days, and if today’s gains hold, this would make it five out of the past six, with three advances and two declines.
Breadth numbers were at a strong 20/9 upside ratio and they got better as the day moved along, and it was finally an 80 point advance in the Dow that got the Nasdaq into positive territory and it did end with a closing gain of 13, less than it should have relative to the Dow advance and it was helped by a large upside reversal in the shares of the stock named after a fruit, which once again appears to be building a strong base between 435 to 440, and this late gain apparently came about as the result of remarks from a prominent money manager who said that “High above the Alps my (Swiss) gnome is hearing a rumor that they will announce a stock split at tomorrow’s (i.e. today’s) meeting.” These words must have felt like a breadth of fresh air to shareholders who have watched this stock lose no less than 270 points in the past five months and are obviously desperate for anything to motivate the stock higher, although whether this reality actually comes about today is questionable with some observers thinking that some sort of dividend increase or issuance of preferred shares as another hedge fund manager has been demanding, is the more likely outcome.
Most importantly, the VIX came back down to earth after that very bizarre gain on Monday, its largest percentage increase since August 2011 with a 34% rise, which was twice as much as it should have gained relative to the Dow decline. Continuing its recent pattern of moving twice as much as it should have relative to the point changes in the Dow, it ended lower by 2.12 to 16.87 in a partial correction to that Monday panic, and the correction is continuing today with another decline of twice as much as it should be, getting it back to a more normal level.
The Dow was helped by a strong gain in component HD after a good earnings report and dividend increase and its gain alone accounted for 28 upside Dow points.
The best aspect of the outside markets was that crude oil continued its recent decline to an eight-week low at $92.63 as inventories were projected to rise to a seven-week high based on today’s Energy Department report. Gold continued its recent rally off of that $1,560 support level and the yield on the 10-year note rose a bit up to 1.87% after the large decline during Monday’s ostensible “flight to safety” buying.
Is the Dow about to put in its fifth triple-point move in the last six days, as after a hesitant opening, it has climbed steadily to the upside and is currently showing a 117 point advance, not too far from its best level of the day. Breadth numbers are very strong at a 3 to 1 upside ratio and the VIX once again is declining by about twice as much as it should be in order to correct that bizarre 5 point gain on Monday on what was reported to be record options volume, obviously for those who bought calls to supposedly “protect” themselves from a further market decline, which has not happened in the past two days so far. It is lower by 2.02 to 14.85, once again getting it back to a more normal relationship with the major averages.
Equities were helped by better economic reports, as January durable goods orders rose by the highest level in a year if one excludes the always volatile transportation equipment component and January pending home sales rose by much more than expected as well. These are homes for which there are signed contracts but not officially closed on. In addition, Chairman Bernanke repeated his assertion that the Fed has the “tools” necessary to pull back from its current record stimulus programs while at the same time avoiding a rise in inflation expectations, and good luck with that.
The market even got some help from Italy, of all places, as there was apparently an auction of five and 10 year notes that was fully subscribed to even though the yields were about one-half point higher than they were before this week’s elections, but I would imagine that any news out of that country that is not a complete disaster can be interpreted as market-friendly.
And then we will have the drama of the annual shareholders meeting of the stock named after a fruit, and the expectations for what the company is going to say were mentioned above. The stock has been all over the place today, with both gains and losses and it is currently lower by two points and won’t that cocky investment expert who used the Swiss gnome analogy in a sort of self- assured manner look foolish if his prediction of a stock split does not materialize and those who bought at the highs end up with losses, at least for today.
The real hero today is the Dow Jones Transportation Average, which is getting closer to its recent record high with its largest gain since last July, spurred upward by strong gains in FDX and UPS for whatever reasons as the bullish mood has certainly returned with a vengeance today, Genoese comedians take note.
With earnings season now in the home stretch, of the 460 S&P companies that have reported so far for the fourth-quarter, 72% of them have beaten the earnings consensus and 67% have beaten on the revenue side as well. Earnings are now projected to be ahead by 6%, better than the 1.9% projection at the start of the reporting period. 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.
Economic reports this week will be plentiful, but the February jobs report will not be this Friday, the first day of the new month, but will instead be released next Friday, March 8. The lineup is as follows – Thursday – next estimate of 4th quarter G.D.P., weekly jobless claims, February Milwaukee NAPM Index, Kansas City February Manufacturing activity Index, Chicago Purchasing Managers’ Survey; Friday – January personal income and spending, February final U. of Michigan Consumer Sentiment Survey, January construction spending, February vehicle sales, February ISM Non-Manufacturing Survey.
Earnings are basically coming to an end for the fourth-quarter and next week will be dominated by retailers as the season finishes up. Tonight – GRPN; Thursday – GPS, KSS and technology CRM.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 6% 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 14.9 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