Let us review what has transpired since the last issue of the daily market notes was distributed on Wednesday. On that day, the market got a boost with help from technology issues as Taiwan Semiconductor predicted a rebound in sales this year and also from the Bank of Japan saying that their “bold monetary easing” will reverse the persistent deflation that their country has been faced with all these years. And adding to the upside was that even before the minutes of the F.O.M.C. meeting were inadvertently leaked that morning ahead of their usual 2pm release time, the various stock index futures were pointing to a higher opening of around 50 points based on news from China that their imports in March rose by a much larger than expected amount, which suggests that their manufacturers and consumers might be spending more. Then when the F.O.M.C. minutes came out, it was an accelerated takeoff to the upside.
So what did the Fed say that got everyone so bullish, and the answer is that they actually had the nerve to say that they were nearing a decision to start winding down their unprecedented stimulus program. The only problem with these observations is that they were from the meeting on March 19-20th, which was two weeks before the disastrous jobs report a week ago Friday. A few members of the committee wanted to slow down the pace by mid-year and end the program altogether at the end of the year while others danced around this and were not sure as to when the program should be wound down.
Recently whenever the Fed has suggested ending its QE3 program, the market does not like it and tends to sell off a bit, so it was basically because of that weak jobs report that investors believe that the stimulus party will go on, and that for want of anything else is as good a reason that there was for the huge upside move that took place on that day, which was quite astounding.
As a result of these bullish inputs, things exploded to the upside as the Dow ended at another new all-time record high with a closing gain of 129, at 14,802. But the main feature of the day was that we saw the second revenge of the nerds day in a row as those three technology Dow has-been components from the 1980’s and 1990’s, otherwise known as CSCO, INTC and MSFT, which did really well on Tuesday, continue the upside party once again. And even another stock that could join them in the sense of perhaps having its best days behind it (although the jury is still out on this one) is the stock named after a fruit that made one of its best gains in weeks, and how long was that supposed to last?
As a result of this rare day in the sense of the technology stocks doing so well, the Nasdaq/Dow ratio was very strong with additional upside help from AMZN and GOOG as well, and the former index finished with a 59 point gain, its best showing since the first trading day of 2013 on January 2nd.
And helping once again was the fact that the VIX declined by only .48 down to 12.36, much less than it should have, which provided the market room to move higher on Thursday as well. And in a premonition of what was to come on Friday and today, crude oil and gold began what would become an avalanche of declines.
On Thursday, weekly jobless claims declined by 42,000 to 346,000, which was their largest weekly decline since July 2008 but the party for those has-been stocks ended after their brief place in the sun, as the Nasdaq ended with only a 3 point gain relative to the Dow final close of 63, to another new all-time high at 14,865. The VIX once again declined by less than it should have with a closing loss of .12 to 12.24.
Friday was an astounding day in the sense that despite a slew of poor reports, the Dow managed to turn an early loss of as much as 75 points into an astounding closing decline of less than a point, with a .08 loss despite the fact that breadth numbers were at a negative 12/18 ratio and both the S&P and Nasdaq finished with larger losses as a result. And once again, due to the peculiar makeup of the Dow, it was three components that accounted for 22 Dow upside points alone, and they were HD, MCD and WMT, three stocks that have made new all-time highs in the current Dow move to records as well, and these are the type of defensive issues that have done so well this year.
The poor economic reports included the March P.P.I. number coming in with a 0.6% decline, its lowest showing in 10 months as food and energy prices were lower, March retail sales also showed a decline, to the tune of 0.4%, February business inventories rose at the smallest pace since last June, which is usually a sign that companies expect lower spending from consumers and businesses and the preliminary April U. of Michigan Consumer Sentiment Survey fell to a 9 month low. And now after getting such good reports earlier in the week, the technology stocks took their usual beating on a report that PC shipments were undergoing a large decline of 14% from last year, no surprise here. These weak reports raise the question of whether or not the stock market is somewhat disconnected from the real world, so to speak.
The VIX declined once again, with a loss of .18 down to 12.06, its lowest close since those strange series of closes in the 11’s back in mid-March. Bond yields came down from the 1.80% that the 10-year had reached during that very strong Wednesday rally when they got up to 1.80% and fell back down to 1.72%, still within the long-standing range.
Of course the big story on Friday, which is continuing today, is the fact that both crude oil and gold really got sold off, and it was more dramatic for the latter, with the (not so) precious metal officially entering into a bear market with a 20% decline from its all-time high over $1,900 back in September 2011. Crude oil also underwent a large decline down to the $91 area, but this was only the lowest in a month.
Well, as the old saying goes, the chickens are finally coming home to roost for stocks, as the S&P today is undergoing its worst two-day decline since early March. And the “explanation”, aside from the fact that the Dow is sort of at ridiculously high levels, is that the Chinese economy had the nerve to rise by “only” 7.7% in the first-quarter, heaven forbid, when the forecast was closer to 8% and what difference does this small 0.3% difference make among friends, and this compares to a 7.9% growth rate in the fourth-quarter of 2012, so now all of the market experts can say that their economy is “slowing”. Then we had the April NY State Empire Manufacturing Survey decline down to 3 from 9 last month, and this will be another reason for the large selloff in equities today. Finally, the April NAHB Housing Market sentiment indicator fell for the third month in a row.
The Dow began with a loss of around 85 points and then reached its “best” level of the day with a decline of “only” 65 at 11am, from which point the roof sort of caved in and it reached its worst level of the session so far with a 206 point shellacking at 2:20PM, from which level it has dug in its heels and is lower by 182 as this is being written. Breadth numbers are horrendous at a negative 1 to 7 downside ratio and the VIX is having an upside field day with a large gain of 2.98 to 15.04. Bond yields are declining a bit with the 10-year down to 1.70% on the now “slower” growth scenario.
Of course the big story is the complete decimation of the gold market, down to its lowest level in more than two years, but it did find support today so far at $1,355, and these declines are historic in the sense that they are the largest since 1980 when gold was also coming off of its record highs. And other metals are also getting whacked on the downside, ostensibly because of the Chinese situation as well. And then crude oil is thankfully selling off, down to the $88 area, its lowest level of the year and finally in line with the weakening supply/demand fundamentals in this country with the largest supplies in 22 years, and I have gone over the reasons for its rise to levels that were next Monday’s bi-weekly commodity report.
And naturally the cyclical industrial types of stocks are getting sold off the most, and they have lagged the more defensive ones all year in any event, as PG and WMT still have the nerve to be higher and the largest declines in the Dow are from the already weak CAT in addition to the energy components. CVX, which reached its own record high this year, and XOM, which has been a laggard relative to the Dow are selling off sharply. The resource and mining stocks are getting hit as well as gold miners, all poor performers this year, are also getting sold off heavily as are the technology stocks, which have done poorly on their own accord even before today’s downside disaster.
This week will be a big one for earnings as C has already done well on its report this morning; Tuesday – Dow components INTC, JNJ and KO, plus GS, NT, USB, CSX and YHOO; Wednesday – Dow components AXP and BAC; Thursday – Dow components IBM, MSFT, UNH and VZ, plus MS, PEP, PM, NOK, COF and high-fliers CMG and GOOG; Friday – Dow components GE and MCD, plus BH, HON and SLB. There are 74 S&P members reporting this week and next week will really be the big one for earnings.
Economic reports include: Tuesday – March C.P.I., March housing starts and building permits, March industrial production and capacity utilization; Wednesday – Fed beige book; Thursday – weekly jobless claims, April Philadelphia Fed Manufacturing Index, March L.E.I.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 6.3% higher in the fourth-quarter. The current projection is now for a gain of only 1.1% in the first-quarter of 2013, down from the original projection of 4.3% in January.
The S&P trades at 14.2 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. The average P/E multiple for the S&P going back to 1954 has been 16.4 and it has been 14.4 for the last 10 year’s average.
After four consecutive quarters of negative G.D.P. growth, we have had 14 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. G.D.P. rose by 2.2% in 2012, and is projected to increase by 2% in 2013, according to various surveys, with 3% in the first-quarter and then in the low 1’s for the second and third-quarters before a fourth-quarter acceleration to over 4%.

Donald M. Selkin

Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.