That unemployed Italian comedian Beppe Grillo must have been shaking his head in despair yesterday as the S&P closed at its best level ever and one of the reasons put forward for the strong market gains yesterday was that a new coalition government was formed in that country over the weekend, which resulted in Italian bond yields declining to a 2 ½ year low. Remember that it was his emergence as a strong third-party candidate back in February that caused our market here to take a tumble because the election results which did not produce a clear-cut winner were taken as another sign of “troubles” in the E.U., whatever that was supposed to mean.
And another factor that is going to allow the market to move higher is that the VIX put in one of its strangest performances of the year yesterday as well, as for instance when the Dow was on its high of the session with a 132 point gain, the VIX was lower by only .25 points to 13.36,and when the Dow had the nerve to come off of those best intraday levels and end with a “only” a 106 point close, the VIX actually ended with a gain of .10 to 13.71, and what was that about? So on a day when the S&P closed at a nominal new all-time high of 1593.61 versus its 1593.37 price on April11th, the VIX was at 13.36 versus its close of 12.24 on that day. This means that if the VIX were to get down to that 12.24 level again, can you imagine where the S&P would be? This strange trading of the VIX is obviously due to the buying of so-called “downside protection” as we move into the seasonally weak time of the year, so in a sense one cannot blame the nervous nelly crowd from trying to “hedge” their portfolios, but on the other hand, it does give the market theoretical room to keep pushing ahead.
The averages started out strongly and basically never looked back, as in addition to the friendly news from Italy, two economic reports here were construed as positive, as March pending home sales rose to their highest level since April, 2010 and March personal income and spending came in together better than expected as well. Breadth numbers were very good at a 22/9 positive ratio and the 10-year yield inched up a bit to 1.67%, slightly above its
low for the year at 1.64% reached last week. The Euro was the big surprise as despite a number of reports that showed that their economics are mired in recession and that there is a good possibility that the E.C.B. will cut rates on Thursday to a record low 0.5%, it gained against the dollar up to 1.3100 after having found good support in the 1.300 area. This is probably due to the belief that the Fed will keep its QE stimulus programs in effect with no end in sight as a result of the generally weaker economic reports seen this past month, and they started with that awful March jobs report and continued with lower retail sales, a weaker than expected growth rate for the first quarter of 2013 and negative P.P.I. and C.P.I., which shows the complete lack of inflationary pressures, which was one of the big fears about these stimulus programs, namely that they would weaken the value of the dollar and raise asset prices.
Yesterday’s strong showing means that the major averages will now have advanced for the sixth straight month, their longest such streak since September 2009 and they have risen in 6 out of the past 7 sessions. The Nasdaq joined in the upside party with a good showing for a change relative to the Dow and reached its best level in 12 ½ years, thanks to newly-rejuvenated AAPL starting to act a little more frisky to the upside after a long move down to the tune of 45% and GOOG also did well, along with suddenly rejuvenated MSFT, which helped the Dow as well. And talking about helping the Dow, IBM, which got blasted to the downside for its worst daily performance in eight years last week after its poor earnings report, is now on the comeback trail and is 13 points higher than where it was after the worst of that selling and accounted for 37 points of Dow gains just by itself, and once again we can ask the question to those who panicked and sold at the lows – “so what did you accomplish?”
Today has a little something for everyone, as April Consumer Confidence rose to its highest level in five months and the February CaseShiller Home Price Index gained 9.3%, its best monthly showing since its rush to the top in May, 2006. On the other hand, the April Chicago Purchasing Managers’ report was a
disaster, as it declined below 50, down to 49 which shows contraction, from 52.4 last month, and this is the first negative reading for this report since September 2009. And of course whichever way the market finally closes today, experts will “explain” the day by pointing to the influence of either the positive or negative reports as just mentioned.
The Dow began with a loss and reached its worst level of the session at 84 points lower at 10:30am after the release of the poor Chicago PM report as mentioned above. But from that low, once again the buying on the dip mentality took place, as it began a steady but irregular chop higher motivated by the old dynamic of the Nasdaq going positive first, which it did at 10:40am while the Dow was still down by 55 points. This is what happened in the old days when a higher Nasdaq would motivate the Dow higher, and perhaps with AAPL starting to show some signs of life and GOOG doing well, in addition to MSFT, perhaps we will once again go back to that dynamic .
As this is being written, the Dow is now on its best level of the day with a 10 point advance while the Nasdaq is ahead by 19. Breadth numbers have been steadily improving and are now at an 18/11 upside ratio. The VIX is finally giving in after pushing higher on the initial decline in the Dow as mentioned above as it is finally down, but only by .09 to 13.62 despite the fact that the S&P could close at a new all-time record high for the second straight day, but never mind, as these VIX buyers seem to be obsessed with the fact that we are now entering the seasonal “sell in May and go away” period, but the fact that it still remains above its various support levels still gives the market theoretical room to keep advancing.
The Dow is being restrained by a poor reaction to the earnings report from PFE, which has done well this year but it is being helped by another good gain in IBM after it announced a dividend increase and a stock buyback. The Nasdaq is flexing its muscles as AAPL continues its recovery on the sale of its first bonds in almost 20 years in the largest U.S. corporate offering of all time.
The Euro is rallying once again, to two-month high from a four-month low on the perception that the F.O.M.C. will extend its stimulus programs ad infinitum despite the awful performance of the E.U. economies and the fact that the E.C.B. might lower its own rates down to a record 0.5% on Thursday, but this is something that they rarely do just in order to accommodate all of the experts who are so sure it is going to happen. This is perhaps the main reason why the Euro is defying reality in a sense as it moves up to 1.316. And crude oil is doing everyone a favor today as it declines back to around $93 a barrel ahead of tomorrow’s inventory reports which are expected to confirm that U.S. supplies rose to a 22-year high.
The more dramatic earnings reports are sort of finished so this week will most likely concentrate more on economic issues, as for instance the Fed will release the minutes of its meeting on Wednesday afternoon and let us remember that their statement will have to take into account the many weak reports that have surfaced since their last meeting, starting with last month’s jobs report, in addition to weaker retail sales and the lower first estimate of 1Q G.D.P. and the market will probably take comfort in knowing that the QE stimulus programs are not going to be ending anytime soon. Then of course we get Friday’s April jobs report, and more on that below.
The earnings scorecard is a little boring this week, with the following lineup: Wednesday – VIAB, CMCSA plus Dow component MRK; Thursday – KFT, IP, EL, AIG, GILD, K; Friday – DUK, ADP.
Economic reports include: Wednesday – March construction spending, April ISM Manufacturing Survey, ADP jobs report estimate, April vehicle sales and the F.O.M.C. interest rate statement; Thursday – March trade deficit, weekly jobless claims; Friday – April jobs report for which the current prediction is for 160,000, March factory orders and April ISM Non-Manufacturing Survey, so this will be a dynamic day for reports, to say the least.
I would like to repeat what I said recently about the stock named after a fruit, which finally appears to be stabilizing after a very long trip down from 705 to its recent low at 385, a 45% historic decline. It reported the first earnings decline in 10 years, which the market had anticipated through the punishment that the shares have received. It now appears that some sort of bottom might be in below that 400 mark down to the recent lows as the stock now yields almost 3%, putting it in line with other technology shooting stars of the past who also flamed out and in the case of CSCO, INTC and MSFT will probably never achieve the prices that their 1990’s buying frenzy allowed them to attain. Of course, the jury is still out on AAPL, but with the company now committing itself to the largest share buyback program ever, to the tune of an additional $50 billion, and its still very low price/earnings ratio, the stock should now stabilize and it has now joined its aforementioned brethren in having become a “value stock”, which is sort of a slap in the face to what these innovative technology companies are supposed to be, namely stocks that are bought for their fantastic growth prospects and dividends be dammed. And isn’t it strange how the market action of the stocks, namely declining precipitously from what ultimately had been unsustainable levels changes their category from growth to value, and so be it. This is now probably going to mean that the price movements will now see net lower changes in both directions on a daily basis until some sort of new upside catalyst arrives, and it already has rallied by 60 points from its recent intraday low the day after the release of its earnings.
They are going to be issuing debt for the first-time ever in order to fund the share buybacks, as of their $145 billion cash hoard, only $45 billion is in the U.S. They will probably be able to issue this debt at 50 basis points over Treasury rates, and the fact that they are doing this in the first place is another sign of a “maturing” company that is becoming more of a value rather than a growth stock.
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 3.6% in the first-quarter of 2013, down from the original projection of 4.3% in January but higher than the 1.5% estimate on April 1st.
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 15 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 2.5% 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}.