The only two people who were probably upset by yesterday’s upside moonshot, the largest gain since the first trading day of the year on January 2nd were: 1) the comedian out of Genoa, none other than Beppe Grillo, whose gathering of protest votes against the economic difficulties and political corruption in Italy, combined with the votes of disgraced former Prime Minister Silvio Berlusconi’s center-right coalition had sent equity markets reeling on Monday; 2) the supposed market expert who had the nerve to go on Twitter on Tuesday, the day before the annual shareholders meeting for the stock named after a fruit and smugly told his followers that “High above the Alps my (Swiss) gnome is hearing a rumor that they will announce a stock split at tomorrow’s meeting.” This comment was widely picked up the financial media, because, the thinking went, this man is an “expert” whose words of wisdom should be taken into account by investors.
Of course, this comment was completely absurd as there was zero probability that a stock split was in the works, as the more probable outcome to get what has now become a value stock higher, as it has lost its growth properties for the time being, is to either raise the dividend or issue preferred shares with a dividend attached to them as one activist hedge fund manager has proposed. As a result of the supposed wisdom of his Swiss gone, investors piled into the stock on Tuesday, which did hold at what appears to be a good support level between 435 to 440. And those who bought got a good comeuppance for their troubles as the stock took a late tumble and basically gave back yesterday its gain from the Swiss gnome-inspired advance from the day before.
This of course raises the question of whether this expert’s action violated the S.E.C. rule that the purposeful spreading of false information in connection with the purchase or sale of securities is not allowed, and we shall see what if anything happens, but in any event, this person certainly has lost whatever credibility he may have, and I say shame on the financial media for giving his supposed insights such attention and dissemination.
The Dow opened steady and then began a move higher which basically did not stop until it had reached a 204 point advance at 3:30pm, before final closing with a 175 point advance. Breadth numbers were powerful at a 3 to 1 upside ratio and the VIX for the second day in a row declined by more than it should have, in order to get it into a more correct relationship with the major averages. It ended with a loss of 2.14 down to 14.73, but during the bulk of the day it was lower by around a 2 to1 ratio, and it finished at less than this ratio (i.e. 2.14 versus 175). And as further proof that the constant rising of the VIX by more than it should on the down days this year theoretically gives the market more room to advance as these gains push it further away from its ultimate downside support level of 12.30, take note of the following. As an example, on February 4th, the VIX ended at 14.67, just about the same price it was at yesterday at 14.73. But on February 4th the S&P was 1496 as opposed to the 1516 level it was at yesterday. What this means is that for no change in the VIX, the S&P rose by 20 points and if this dynamic in the relationship continues, the market can move even higher, which of course then raises the question of what these VIX buyers are hoping to accomplish in the first place?
So what happened to cause this huge upside explosion? There were a number of reasons put forth and the first one, believe it or not, came from Italy, whose sale of 5 and 10 year notes was fully subscribed to even though the yields were one-half point higher than they were before the election farce. Then the Euro managed to rally off a seven-week low up to 1.3135 on that news and it does appear to be building up a good support level at 1.3000. And even Chairman Bernanke got into the bullish act for a change when he said that the rise in some interest rate levels is a function of signs of “vigor” in the economy. Economic reports also came in on the friendly side, as January durable goods orders excluding the volatile transportation sector rose to their highest level in more than a year, and in particular the industrial machinery, construction equipment and computer sector did very well, and this is the one used in G.D.P. calculations. In addition, January pending home sales rose by much more than expected, and these are the ones for which there is a signed contract but no closing yet.
And as is usually the case on these huge upside moonshot days, it was the more industrial cyclical stocks that did the best, and this would include such Dow issues as BA, CAT, 3M, UTX and energy stocks. In addition, IBM did very well and this stock is actively used as a proxy in various index arbitrage programs and often moves one way or the other for no reason other than that. But the real upside hero was the Dow Transports, which came within a hair of its record high due to strength in FDX and UPS for whatever reasons.
So with all of the controversy over the ridiculous Swiss gnome comments as mentioned above, what actually happened at the annual shareholders meeting of the stock named after a fruit? The C.E.O. said that the company is in “very, very active” talks about what to do with its growing cash pile of only $137 billion, but trading in the stock got as nasty as ever, as it basically collapsed in the final half-hour at the same time that the Dow was falling from its best 204 point level to its closing gain of 175. But never mind, this stock is in a downside world of its own so far this year and shows no signs of improving for the time being.
Outside markets such as gold and energy products sold off once again, with the former continuing to lose its status as a safe-haven item and the latter, particularly gasoline, coming down to earth a bit as the highest ever prices at the pump for this time of the year are obviously eating into consumer demand.
After the Dow put in its fifth triple-point move in the last six days 3 up and 2 down), it is probable that this is not going to happen again today, but after a couple of trips into negative territory with the worst damage being a 25 point loss, the Dow has decided that the path of least resistance is still higher and it is currently ahead by 30 as this is being written. Breadth numbers are at an 18/11 positive ratio and the VIX is lower by .35 to 14.38 still far enough away from the 12.30 support level for the market to be able to advance further, believe it or not.
The fourth-quarter of 2012 G.D.P. was upwardly revised to show a nominal gain of 0.1% after the initial estimate had it at -0.1%, and this was primarily because the narrowest trade deficit in almost three years was able to overcome the largest decline in defense spending since the Vietnam War. In addition, weekly jobless claims declined by 22,000 to 344,000 and the Chicago Purchasing Managers’ Survey rose by more than expected.
It is astounding that investors are ignoring the potentially negative implications of the sequester process that is supposed to begin tonight at midnight, as these budget cuts will absolutely impact economic growth in a negative way as the I.M.F. is about to lower its growth forecast, but perhaps similar to the fiscal cliff, people are hoping for a ninth-inning miracle.
With earnings season now in the home stretch, of the 465 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 6.2%, 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 – 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 – CRM.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 6.2% 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 14.9 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