Well, well, well –Friday’s jump to new all-time highs in the Dow, the S&P, Russell 2000 Index of small stocks and the mid-cap indexes as well is a perfect example of what I have been saying this entire year, namely that the refusal of the VIX to decline as much as it should relative to the gains we have seen has allowed the major averages to keep pushing higher. Here with the Dow and S&P at their best-ever levels, the VIX actually had the nerve to close ABOVE its low for the year, which was 11.30 on March 14th when the S&P was 1563 versus the 1614 all-time high on Friday. And how do you explain that, except for the fact that as the market has gone higher and higher, the skeptical nervous nelly contingent keeps buying these VIX options and ETF’s in their belief that we are in the historically treacherous time of the year when the market has had a strong seasonal tendency to decline, especially after what happened the past three years, when there were downside corrections of between 10-20%, which of course might or might not happen again. But this VIX-buying activity has been the primary factor in allowing the market to keep moving higher as it can advance until the VIX gets down to 10, so in a way those of a bullish persuasion should be thankful for this dynamic and even today we are seeing it in action as well, and more on that later.

Everyone should know by now what the primary upside motivator was and it was none other than the April jobs report, which came in the complete opposite of the March report last month, and which was responsible for the market selloff at that time. And a word about these numbers before the details. Last Wednesday the market underwent a triple-digit Dow selloff after ADP had the nerve to issue their estimate for Friday’s report, which was 119,000 private payrolls against the official number which was 57,000 higher than what came out on Wednesday. And this of course is another one in a long series of misses by this outfit and why anyone pays them any attention is beyond me, as those investors who sold on that number found out to their dismay as the market came back from that selloff on Thursday in addition to Friday as well. And what kind of credibility do the job market experts who lowered their projections from 160,000 down to 145,000 have, for no other reason than the
ADP incorrect estimate, so instead of doing their own homework, so to speak, they just said – “well, if ADP says something, it must be correct” and they lowered their numbers as well. And this could be seen on Friday morning when those television touts came out with numbers that were too low as well, and then sheepishly had to squirm away from their projections also.

The overall number was a good 165,000 (176,000 private payrolls minus 11,000 government jobs that were lost), and more importantly, that awful March number of only 88,000 was revised sharply higher to 138,000, which of course raises the question of why they do not release these numbers with a two-month lag in order not to force some investors to sell out like they did last month when that ostensibly miserable figure was published. And to make matters even better, the February number was revised really sharply higher to show a 332,000 gain which was the largest since May 2010. This was a 64,000 additional revision. On the other hand, the gains were still below the 206,000 jobs that were created monthly in the first quarter on average, which still could be argued shows a slowing trend.

In addition, construction jobs fell for the first time since last May and manufacturing jobs were unchanged. Average hourly earnings rose a bit but the average workweek declined. On the more optimistic hand, the 0.1% decline in the jobless rate down to 7.5% was actually reflective of a gain in employment, rather than what happened last month when people left the workforce.
This jobs gain number is still below the 300,000 or so that is still needed to put a significant dent in the unemployment rate, which currently stands at that 7.5%. The data probably also mean that the Fed is certainly not going to “adjust” its bond buying program higher, although the data was not strong enough to make them adjust it lower either for the time being as well.

Retail jobs led the increase at a 29,300 gain and temporary help, which is often a sign of future hiring, increased by the most since February. Overlooked in all of this were two other reports that were not so great, as March factory orders fell by 4%, but excluding transportation they actually rose by 2%. And the April ISM Non-Manufacturing Survey declined to its lowest level in nine months, and remember that this covers around 90% of the economy, even though it did show expansion.

In a dynamic we have seen before on a good jobs report, the Dow jumped out to a fast 130 point gain and never fell below it, maintaining itself at the higher levels and actually had the nerve to reach another round number with a 178 point advance at 10:40am to over 15,000 at 15,019 but could not hold it and finally ended with a 142 point advance, right in the middle of its elevated range that persisted for the entire day.
Breadth numbers were strong at a 22/8 positive ratio and once again the VIX did not decline as much as it should have relative to the Dow advance as mentioned above as it fell by .74 down to 12.85. As a result of the perception that things are not as weak as some of the more recent economic reports and the erroneous ADP estimate had led investors to believe, the bond market completely re-priced itself as yields jumped on the longer maturities, with the 10-year gaining 11 basis points from 1.64% up to 1.75%, once again reminding the supposed “flight to safety” crowd that there are dangers in buying bonds with yields that are so minuscule for such a long period of time, which basically loses money after taxes and inflation.

And talking about buying bonds where you basically end up with nothing, how about the $17 billion AAPL offering of three-year notes at a walloping .45% yield which actually was oversubscribed by three potential buyers for every note that was issued to the tune of $50 billion potential bidders. And if this isn’t the most ridiculous purchase I have ever seen, then I do not know what is, and guess what – IBM also issued notes at the same ridiculous yield for three years as well, and remember that corporate bonds are fully taxable unlike governments bonds which are just taxable by the entity issuing them, which would be the Federal government in the case of what we refer to as the “bond market.”

And once again, a potential negative lurking in the background was the fact that crude oil prices snuck up right as the summer driving season is upon as despite the fact that crude oil supplies in this country are now at an 82 year high and the U.S. is projected to overtake Saudi Arabia by 2017 as the world’s largest energy producer. But never mind, crude oil at $90 a barrel, which would have given consumers a nice break this summer, were not to be allowed by those whose interest it is to get them higher, as the price shot up to $95.45, which means that in two days, it has advanced from its intraday low on Wednesday by $5.45 a barrel on the perception that now world economies are going to get better after everyone was fretting earlier in the week that they were going to get worse. This line of “reasoning” came about despite the fact that the latest estimate for E.U. economic declines was lowered again, now down to negative 0.4% growth.

The Euro moved up a bit, now at 1.3166 on the still there perception that the Fed will keep its QE stimulus programs in effect, as the job creation level is not really enough to lower the unemployment rate in any significant way as referred to above, which currently stands at that 7.5% level. The data probably also means that the Fed is certainly not going to “adjust” its bond buying program higher, although the data was not strong enough to make them adjust it lower either for the time being as well.
And in a piece on Bloomberg that was distributed this morning, I mentioned that there might be a change underway in terms of sector rotation, as the stocks that did the best Friday on the supposed perception of a stronger economy were the ones that have lagged this year, namely technology, cyclicals and industrials as investors have favored the more defensive groups such as telecom, utilities, healthcare and consumer staples which have advanced by 19%, eight points ahead of the former group. So perhaps we are beginning to see a change in this attitude, as beaten-down AAPL is starting to feel it on the upside once again, GOOG is now at a new all-time high and the worst Dow performer in 2013, CAT, is starting to do better as well.

After Friday’s upside moonshot, things are holding steady to higher today, as the Dow is sort of lagging the other indexes, as it has fluctuated between very nominal gains and more larger losses of as much as 32 points right out of the opening gate and is once again being distorted by a couple of its members as volatile IBM is accounting for 14 downside points just on its own and formerly strong performers JNJ and PG are accounting for 10 lower points, and these are part of those consumer healthcare types of stocks that have done so well this year, and might be part of that rotation which I referred to in the Bloomberg article. The Dow is unchanged as this is being written.

Both the S&P and Nasdaq are higher, the former at a new all-time high and it is being joined at never-before levels by the Dow Transports and the Russell 2000 Index. And once again the VIX is allowing for further upside movement by having the nerve to show a small gain of .04 to 12.89 despite the fact that the S&P is in new record-high territory, and let the good times roll, so to speak.

Bond yields are steady to higher on the perception of a better economy, with the 10-year up to 1.76%. And crude oil is once again doing a potential number on consumers with a further gain, now up to $96 a barrel. The Euro is lower, down to 1.3075 on comments from E.C.B. President Draghi that said monetary policy there will remain accommodative and that policy-makers will act again to spur growth if needed.
The earnings season is mercifully winding down for the first-quarter, as with 407 S&P companies that have reported so far, 69% have beaten the estimates, which compares to the average from the last four quarters at 67% and the average from 1994 of 63%. Revenues have only beaten in 47% of the companies, and this compares to an average beat rate of 62% in the last year and 52% since 1994. Earnings are now projected to gain 5.2%
The calendar for this week includes: Tuesday – Dow component DIS and WFM; Wednesday – CTSH and GMCR; Thursday – NVDA and high flying PCLN.

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 5.2 % in the first-quarter of 2013, which is now even higher than the original projection of 4.3% in January and much higher than the 1.5% estimate on April 1st, which of course is one of the reasons that stocks have done so well lately.
The S&P trades at 14.5 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}.