Even though there is no doubt about the fact that the various Fed stimulus programs have been one of the primary factors responsible for the upward trend of stocks these past four years, it is somewhat ironic that the market invariably has a negative reaction to the release of the individual minutes for each F.O.M.C. meeting and testimony from Chairman Bernanke, and as Casey Stengel used to say – “You can look it up!”
And yesterday this pattern continued with some real drama, as the session was the first one since March 16, 2009 that the Dow ended lower after being at least 150 points higher intraday. It opened on the plus side and continued pushing to the upside after the first set of statements from the Chairman during his Congressional testimony. He began by saying that “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.” This seemed to contradict what Fed Presidents in Dallas, Chicago, Philadelphia and San Francisco had argued against in the last few days. He also added that current monetary policy is providing “significant benefits.”
He then hedged his position a bit when he now said in answer to a question that “if we see continued improvement, and we have confidence that it is going to be sustained, we could in the next few meetings take a step down in our pace of purchases”, which was a way of throwing a bone to the aforementioned policy hawks from the regions in the above paragraph. And sure enough, the Dow fell from that 155 point advance but it was still ahead by 100 points at 1pm, from which it began to descend a little more seriously to be up by only 30 at the crucial 2pm release time of those F.O.M.C. minutes.
And as night follows day, the market did what it invariably does after this sort of release, namely decide that the path of least resistance is lower, and sure enough it started to sag. The Dow was now 30 points lower at 3pm when it went into one of those late sickening downside accelerations, and fell to a decline of as much as 122, its worst level of the day at 3:30pm. This meant that it had undergone a 277 point intraday downside reversal from what had been its new all-time intraday high at 15,542 and the S&P also made a dramatic downside reversal after reaching its all-time high intraday of 1687, so for the time being, these seem to be the resistance points that need to be overcome. And after reaching those worst levels as just mentioned, the Dow did manage to come back a bit into the close and finally ended this turbulent session with a closing 80 point decline after all was said and done.
So what did those F.O.M.C. minutes contain that caused that late-day meltdown, and here is the statement that apparently got investors so bent out of shape, and it was the comments that several members of the committee were willing to taper off these bond buying programs as soon as the next meeting on June 17-18th if the newest economic reports show “evidence of sufficiently strong and sustained growth.” The statement added that “Most members observed that the outlook for the labor market had shown progress” since the latest stimulus program began last September but at the same time the minutes said that “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”
Now tell me, doesn’t all of this talk sound exactly like what was going on earlier in the week when the Fed Presidents from Chicago, Dallas, Philadelphia and San Francisco were calling for the same thing while New York and St. Louis were leaning more on the dovish side in favor of continuing these purchases at their current pace. But for some reason, and this is provable over time, the market invariably makes a negative reaction to whatever is said in these minutes, and so be it.
Breadth numbers were awful at a negative 1 to 3.5 ratio and the VIX rose somewhat to end with a gain of .45 to 13.82 after having pulled its 2013 trick of not being lower even when the Dow is showing strong gains, as it was in the morning. Despite the awful day, the Dow was helped by gains in a few components as someone was smart enough to know that its best performer this year, albeit from levels that were 75% below its highest price two years ago, namely HPQ, would report better than expected results last night and the stock is doing very well today, and JPM, which was at new highs, continued to do well.
Of all stocks, AAPL had the nerve to end a bit higher as well after being strongly higher earlier when the entire market was doing great, but in the larger picture it is still just drifting harmlessly in its current trading range and is still 37% below its all-time highs from last September. On the other hand, most of the high-priced technology leaders took a real beating, as BIDU, ISRG, GOOG and PCLN sold off as did old-timers CSCO and ORCL, which sort of give you some hope that their glory days are back and then take the optimism away from you.
And if a person thought that equities put in a bizarre day, how about the outside markets, where Treasuries underwent one of their strangest days ever, with a completely neurotic performance, as after the initial Bernanke comments about extending the easing, the 10-year yield declined to as low as 1.88% but then reversed itself on the second set of comments about potential lessening of stimulus programs and the release of the F.O.M.C. minutes as mentioned above. Also helping to raise yields was the April existing home sales report which rose to the highest level in more than three years. As a result of this combination of events, the yield rose to 2.03%, the highest since March.
And in another completely schizophrenic performance, how about the gold market, which exploded to the upside on the initial comments on continued maintenance of the easing programs, and someone got the booby prize by paying $1,415 for the privilege of owning the precious metal. It then proceeded to plunge on the second set of remarks about a potential lessening of these programs and the release of the minutes, and declined all the way down to $1,367 in a matter of an hour, and this is what you call investing?
The same thing was true of the Euro, which showed the same neurotic behavior, as similar to gold it also rallied on the first set of comments, only to fall back from as high as 1.300 down to the 1.2850 level. The only market that was not affected by the twists and turns of the seemingly conflicting statements was crude oil, as it declined steadily down to under $95 a barrel on a large increase in gasoline supplies for a change, and this will probably last until the energy market traders find the next excuse to push it higher ahead of the summer driving season.
After suffering their worst losses in three weeks, things looked very gloomy in the overnight session as the controversy of all the Fed statements got compounded as a result of bad news from Asia, and it never ceases to amaze that when the market is in an already weakened state, more negative news emerges and why didn’t these stories come out last week when the market could do no wrong or even earlier this week when it also saw no reason to do poorly either.
And the first piece of negative news was that China’ manufacturing contracted in May for the first time in seven months as their Purchasing Managers” Index fell to 49.6 compared to the 50.4 reading last month and anything above 50 shows expansion while readings below it show contraction. Then we got the Japanese stock market plunging by almost 7% in the largest decline since the 2011 tsunami and nuclear disaster and Japanese bond yields rose to 1% for the first time in a year.
These events really did a number on the various stock index futures, which traded as low as around a loss of 160 points and other index futures showed comparative declines as well. And sure enough, the Dow started out lower and reached its worst level of the day with a decline of 127 points at 10am, and then started to chop higher. It was still lower by 80 around 10:45am just at the time that the European markets, with their traditional contingents of nervous nelly sellers, began to close. Things continued to improve and the Dow flew solo to the upside with a gain of as much as is flying solo in the sense that it has now turned positive with a gain of 24, and is currently lower by 3 as this is being written, and its performance obviously is going to twist and turn for the rest of the day.
But the Dow steadiness is not really being reflected in the broader market as breadth numbers are negative at a 1/2 ratio which was much worse when things opened and this ratio was so depressing that I am not going to repeat it. And as is typical on these sort of “solo” days, a few components are exerting an outsize influence on this 30 stock average, as for instance HPQ is contributing 22 positive points, while BA is kicking in with 12 and IBM is accounting for 9.
Meanwhile, the other indexes are lower, but not by much as they also have come off of their worst levels as well. The VIX has also calmed down after a huge upward spike to as high as 15.11 as people scrambled to buy “downside protection’. It is currently ahead by .39 to 14.21 as things have improved.
Outside markets are mostly doing the opposite of yesterday, as bond yields are nominally lower with the 10-year yield having gotten down to 1.96% after the weaker Chinese report, but has since recovered and is now at 2.02% and this is the pattern that we are now going to see, namely that on down days in stocks, yields will decline also on the perception that things are not so great, while on up-days yields are going to rise as investors become more and more convinced that some lessening of Fed stimulus programs is at hand. Today’s April new home sales report, which came in better than expected, is part of that way of thinking and is also being used to “explain” why the major stock averages have improved as well.
And how about gold, which is all of a sudden resuming its “safe-haven” status, at least for a day, as despite all of the bearish sentiment about the precious metal, it has still not broken below that $1,350 support level. Same for the Euro, which is rising strongly on the back of a suddenly resurgent Japanese yen, which is gaining by the most in three months against the dollar on what I could never figure out, as it is considered a “flight to safety” in what has been the worst performing economy and stock market for 25 years already. Perhaps that move to those dynamic 1% yields is what is causing the love affair today. And crude oil is miraculously declining as well, down $1.50 a barrel to below $93, which will be a welcome relief with the start of the summer driving season at hand until the oil traders find new reasons to push it up, as what usually happens at this time of the year.
Until proven otherwise, the S&P has now gone 129 sessions without a 5% decline, and the last one of this magnitude or greater was the 7.7% setback from last September 14th to November15th and this has been the longest such streak since there were 173 such days that ended on February 20, 2007. And if the Dow can close higher, it will still maintain that pattern of not being lower for two consecutive days since April 17-18th, which is astounding.
Economic reports finish with: Friday – April durable goods orders. Earnings season for the first-quarter finishes with retailers and a few interesting technology companies as is always the case: tonight – CRM; Friday –ANF and FL.
As earnings season is winding down and for the first-quarter, with 480 S&P companies that have reported, 70% 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 48% of the companies, and this compares to an average beat rate of 62% in the last year and 52% since 1994. Earnings are projected to gain 5%, which is now above the January estimate of 4.3% and well above the April 1st projection of only 1.5%, which is an obvious reason why stocks have done so well lately.
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% in the first-quarter of 2013.
The S&P trades at 15 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}.