Weak economics offset positive news from Europe but the early morning dip was again bought and all markets closed with minor gains.

Market Statistics

Unbelievable auction results from Italy and Spain over powered weak economics in the USA. Spain sold euro 10 billion in 2015 and 2016 bonds with demand very strong and the amount sold was double the initial target. Italy sold euro 12 billion in a heavily bid auction.

Yields on Italian 12-month bonds fell sharply to 2.735%, down from last month's rate of 5.95%. Four month bond yields declined to 1.644% from 3.251% in the last auction. Spanish yields did not fall as far with the 10-year falling to 5.15% from 5.32%.

The key here was the 489 million euros loaned to 523 European banks for three years at 1% in December. These LTRO loans provided significant liquidity for the banks and they put that to work buying short term sovereign debt. Note that the debt for less than three years in duration fell sharply while the 10-year paper barely dipped at all. European banks don't believe Italy will default over the next 4-12 months so they were eager to put their 1% money to work at 2.7%. That is exactly what the ECB thought would happen when it made the loans. I reported at the time the LTRO loans were an indirect bailout of those weak countries and it appears to be working. The proof of this is in the results for the longer term debt due to be auctioned on Friday. If the yields remain high as I expect it will be a clear signal the LTRO loans were the factor in Thursday's auctions.

The ECB will offer LTRO loans again in February so the liquidity issues in Europe sovereign debt appear to be easing and that removes the headline risk for our markets.

The U.S. economics were headlined by a sharp jump in weekly jobless claims. The headline number rose to 399,000 from an upwardly revised 375,000 last week. The 24,000 increase was reported as "unexpected" by the market reporters. If you have been reading my commentary you know we did expect claims to jump this week and next because of all the seasonal workers filing new claims and those regular workers laid off just before the holidays waiting until January to start looking for new work. The "unexpected" label was only used by the "uninformed." I was surprised the numbers were not worse.

Jobless Claims Chart

Retail sales for December provided an even bigger hit to market sentiment after the headline number showed only a +0.1% gain. That was significantly less than expected at +0.3% and definitely less than the whisper numbers at +0.4% to 0.5%.

Even worse, if you extract auto sales the core rate actually saw sales decline by -0.2%. Year over year sales growth slowed to +6.5% and the worst since August 2010. Electronics sales declined -3.9% and general merchandisers -0.8%. Gasoline stations declined -1.6% but that is actually a good thing since it means less pain at the pump. Analysts blamed the decline in electronics sales on slowing orders for iPhones and iPads ahead of the spring announcements. Can you say "grasping at straws?" I believe the lower sales came from heavy discounting of prices to attract shoppers. Competition was fierce. If you discount prices by -20% then you have to sell a lot more units to achieve the same dollar amount.

Building materials sales rose +1.6%, motor vehicles and parts +1.5% and home furnishings and furniture rose +1.0%.

Moody's Retail Sales Chart

The Manufacturers Alliance Survey saw outlook decline to 66%, a -1% drop from the prior survey. That is still firmly in expansion territory but well below the 81% in Q2-2010. That was the high for the post recession cycle and this month was the low. Manufacturing conditions may still be improving but the pace of the improvement is slowing.

Order backlogs declined from 73% to 67%. Exports shipments declined from 85% to 71% and export orders declined from 80% to 71%. This was not a bullish report but it has very little market significance because of its lagging nature.

Reports due out on Friday include Import & Export Prices, International Trade and Consumer Sentiment. None are really market movers.

The market event for Friday will be the longer term debt auctions for Italy and Spain. Should those not go well the European cloud over our market will darken. Should yields decline on good auction volume that would be market positive.

The JP Morgan ($JPM) earnings on Friday morning will also be a potential market mover. The estimates are all over the board and the stock closed at a two month high today. If earnings and guidance are good it would benefit the entire banking sector. Conversely, disappointing earnings would be negative for all the big banks. JPM is seen as the best managed major bank and therefore it is the bellwether for the bank earnings cycle. The rally in JPM shares over the last four weeks has already built a lot of expectations in the stock. Strong overhead resistance at $37.50.

JPM Chart

Shares of Tractor Supply (TSCO) rallied +10% to a new high after the company raised guidance significantly. Full year earnings are now expected to be in the range of $2.97 to $2.99 compared to prior guidance of $2.85 to $2.89. Analysts were expecting $2.90. TSCO said Q4 revenue rose +20% to $1.24 billion compared to estimates of +$1.2 billion.

TSCO Chart

Williams Sonoma (WSM) was another retail casualty today with a -12% drop after lowering its earnings forecast to $1.10-$1.15 from $1.15-$1.20 "due to the more promotional pricing environment." Analysts were expecting $1.19. WSM even raised its dividend by 7-cents to 29 cents and added a $225 million stock buyback but the stock was still crushed on five times normal volume.

WSM Chart

Wynn Resorts (WYNN) fell -5% in early trading after a large stockholder sued the company saying WYNN was concealing its books and records from him regarding stock based compensation and donations made by Wynn. The company said the suit had no merit and shares rebounded $5 to close down only -$2.

Infosys (INFY) cut its revenue and earnings outlook due to weakening business sentiment and "raging" uncertainty in Europe. New guidance sees full year revenue growth of +16.4% compared to prior estimates of +17.1% to +19.1%. They also said they had to cut their guidance because of the strength in the dollar and weakness in the euro. INFY shares declined -9%.

INFY Chart

The strong dollar, weak euro is going to be a major challenge for many international companies. IBM declined sharply after the INFY warning but recovered to close down only -1%. IBM may have some exposure but they normally manage their currency translation issues fairly well.

Sears Holding ($SHLD) took another hit this morning after lender CIT said it was halting loans to Sears suppliers. CIT is a factor, someone that loans money on invoices from one company to another. When a large company orders hundreds of thousands or even millions of dollars of product using a purchase order the seller/manufacturer can take that PO to a factor like CIT and borrow money to finance the inventory until Sears pays the bill. CIT said it was no longer loaning money on Sears invoices starting immediately.

Sears fired back in the press saying not to worry because other factors were still eager to loan money against their purchase orders. Sears said CIT loans were less than 5% of their payables. If the factoring business dried up for Sears they would have to draw down on their credit line to pay for some merchandise up front and that would limit their liquidity. Data from Thomson Reuters suggests there is a 77% chance Sears will default in the next five years. Shares of SHLD rebounded to close positive after they publicly responded to the CIT news. I personally think Sears is going to pull out of their dive. Lampert owns 59% of the company and continues to buy shares on the market. The Sears real estate is worth more than the $4 billion market cap of the company.

SHLD Chart

The number of U.S. airlines may shrink by one soon according to some analysts. U.S. Airways (LCC), Delta (DAL) and private equity firm TPG Capital are among several interested parties circling the bankrupt carcass of American Airlines. No deal is likely to be done until AMR completes its bankruptcy and that could take a year or longer. Everyone wants the new lean, mean, flying machine that will emerge from the AMR ashes without a lot of debt and free of its older gas guzzling airplanes. Because American is so large it would probably take a multi airline deal with American's routs system and gates being split up to satisfy regulators. I would not hold my breath for this to happen. American's strength is in its large footprint.

AMR Chart

Dow component Chevron (CVX) warned Wednesday night that Q4 profit would be "significantly below" Q3 results because of weaker profit margins on refining and low natural gas prices. While the exploration and production division should report profits in line with Q3 the low margins in refining will drag the earnings lower. Profits at the Q3 level would not be that bad. Profits in Q3 more than doubled the same period in 2010 at $7.83 billion or $3.92 per share.

Chevron said currency translation problems (dollar/euro) would also be a drag on earnings. This is going to be a continuing theme as earnings accelerate next week.

Chevron Chart

Oil prices fell off a cliff intraday after touching nearly $103 in early trading. The contract fell from just over $102 to $98.50 after news broke the EU was likely to phase in its embargo of Iranian oil rather than provide a firm cutoff date. Despite what appears to be general agreement among euro nations ahead of the Jan 23rd meeting to discuss the embargo, there will likely be a phased in enforcement to allow for receipt of cargos already on the water and to give time to contract replacements elsewhere. The embargo will happen. It is just a matter of time. However, for traders expecting a declaration on the 23rd the comments were somewhat of a letdown. Japan said it was willing to cut its imports significantly but needed to do it gradually. Japan imports 10% of its oil from Iran. Crude declined nearly $4 on the news but is recovering in afterhours trading.

The close at $99 was the low for the year.

Crude Oil Chart - 90 Min

Crude Oil Chart - Daily

The S&P continues to creep slowly higher. However, if it were not for the opening spikes on Jan 3rd and 10th there would be no gains for the year. Those spikes added dozens of points only to see the index trade sideways for days after the event. All the gains for the year occurred in less than 30 min on each of those days.

However, the bears have been unsuccessful in selling those spikes despite numerous negative news events from Europe and earnings. The rally is continuing higher on a wall of worry that appears unable to stop the advance.

The red line in the chart below is the long term uptrend resistance from November 2010. This would be the perfect place for a failure but with 1300 or even 1350 acting as the dangling carrot for traders there is always the possibility of a higher move. There is still no conviction by either side and volume remains light.

The big briar patch for the market will be the thicket of major earnings next week and as we have seen recently there are plenty of thorns mixed in with the roses. With Q4 earnings growth now seen as only +6% and possibly lower there is a lot of bad news already priced into the market.

Note the dead stop at 1,295.

S&P Chart - 30 Min

S&P Chart - Daily

The Dow chart is identical to the S&P with major gains coming only on two days in 2012. The uptrend resistance is the same only the Dow has seen support form at prior resistance of 12,400. The weakness in CVX and IBM was offset by gains in CAT and DD.

Dow component JPM will be the major force for the Dow on Friday with earnings before the open.

Dow Chart - 30 Min

Dow Chart - Daily

The Nasdaq continues to lead to the upside with a quick rebound into positive territory after the opening drop on negative economics. It has failed to move over the October highs but it is moving very close.

Google participated today with a +3 gain but AMZN, JDAS, INFY, SFLY and DMND were definite drags. Despite their declines the Nasdaq was not to be stopped. How much longer can this rally last? The Nasdaq has posted six consecutive days of gains. Next week could be a torture test of tech earnings the Nasdaq must pass to move to higher ground.

Nasdaq Chart

The Russell finally overcame resistance to breakout to a new high even if it was a rather lackluster day. The new five month high suggests fund managers may be starting to drink the kool-aid.

Everyone keeps looking for a top in the market but we are getting a constant improvement in the charts and the dips are being bought.

Russell 2000 Chart - Daily

Friday will be dominated by headlines from JPM and auction news from Italy. It remains a headline driven market with serious event risk over a three day weekend. The U.S. market is closed on Monday.

Traders will have to decide early if they want to be long, short or flat over the long weekend.

Tomorrow is Friday the 13th. Will we get a dose of bad luck or will the curse be broken by a strong rebound on JP Morgan earnings? Consult your crystal ball for the answer.

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