The Dow rallied at the open to 12,841 and above the 52-week high close at 12,810 but immediately lost traction and declined to close near the lows for the day.

Market Statistics

The Dow rallied on good news from Caterpillar and 3M but collapsed on a massive $6.7 billion loss by AT&T. Banks and techs weighed on the index as well as the broader market. Have we finally reached the point where mediocre earnings and major misses have sapped the market's strength?

At the high of the day the Dow had rallied more than 14% since Thanksgiving on the hopes for the three Es of Earnings, Economy and Europe. This week each of those Es developed a bad case of acne that took them out of contention for the best looking support fundamental.

Economics

On the economic ledger the New Home Sales for December declined to 307,000 from 321,000 and well under estimates for a rise to 331,000. That was a decline of -2.2% from November and -7.3% from December 2010. Sales for all of 2012 declined by -6.2%. Months of supply remained low at 6.1 months. Average selling prices decreased -13%. This was an unexpected pimple on the face of U.S. economics

The decline in home sales was a shock to the market since all the recent data suggested the sector was improving. For all of 2011 sales declined -7.3% and that was a record low dating back to 1963. Q4 sales did improve from Q3 thanks to the record low mortgage rates. Sales are poised to improve in 2012 as pent up demand is released in the spring buying season.

New Home Sales Chart

Weekly Jobless Claims rose more than 20,000 to 377,000 from 356,000 the prior week. Nobody wants to see claims rising and even more so as the number moves closer to 400,000. Personally I think we are still seeing the impact of the seasonal confusion. Last week's decline of nearly 50,000 was way out of line so this rebound by 20K could be just another smoothing of the numbers as the volatility from the holidays slowly dissipates. This was still one more point of concern for today's market.

Jobless Claims Chart

Coming in on the positive side of the economic picture was a rise in the Kansas Fed Manufacturing Survey to +7.0 in January from -4.0 in December. Manufacturing rebounded from the contraction dip in December and back into the expansion range it has been treading since July. The average reading for the prior five months not counting December was +6.0. The production component rose to 12 from -6 and new orders rose to 8 from -2. Backorders rose to +7 from -11 and employment improved significantly to +9 from -5.

Kansas Fed Chart

The Chicago Fed National Activity Survey (CFNAI) for December rose to +0.17 from -0.46. That is the highest level since July. Relatively speaking that was a really big improvement. Think of it as rebounding from -46 to +17. I think they need to multiply their index by 100 to get away from those two digit decimal numbers.

While this rebound is significant it suggests a possible data problem in November that knocked all the components deep into negative territory and contrary to its recent trend. Then to have December rebound strongly suggests that was a blip in the data. However, industrial production, manufacturing output and capacity utilization did dive significantly in November because of the impact of the Thailand floods. This could have also been the problem with the CFNAI and the reason for the November decline. On the positive side it is now at the highest level since July and that suggests the manufacturing sector is improving.

CFNAI Chart

Durable Goods orders rose +3.0% for December compared to +4.3% in November. However, that headline number was buoyed by a huge +18.9% gain in aircraft orders. The headline number was market positive but this is a lagging report and more of a confirmation of what we already knew rather than significant new data.

For Friday the major report is the GDP with a consensus estimate of +3.0% but there are whisper numbers from 1.4% to nearly 4.0%. To say there was confusion over the economic activity in Q4 would be an understatement. This could be a market mover if it is significantly different than the official 3% consensus.

Economic Calendar

Europe

The second E with market negative news was Europe. The battle over the private debt haircut in Greece is heating up again and officials all over Europe are weighing in on the need for a quick solution. Sentiment is strongly against the private investors whose 190 billion euros are at risk of being cut. It is easy to claim it is in the best interest of Europe for them to take a 75% haircut when it is not your money. If these officials actually had skin in the game I think the outcry would be significantly different.

Greek officials claim they will have a settlement by the weekend. Unfortunately they said this last weekend as well and that did not happen. There are growing concerns the private creditors will not settle and force Greece to default. If that happens then other Greek debt may also be at risk. There is growing pressure for the ECB to also take a haircut on its loans to Greece and that would undermine the credit of the ECB. Never a dull moment.

Italy sold five billion euros of two year debt on Thursday and at a yield of 3.76%. That is the lowest since August and more than a full point below what it was forced to pay a month ago. The reason for the falling yields is the LTRO loans by the ECB that liquefied the European banking system. Banks can borrow from the ECB at 1% for three years and then buy this short term debt at 3.76% and have a reasonably safe short term investment.

Italy plans to sell another eight billion of 6-month bills and three billion of 12-month bills on Friday. They are taking advantage of the current market for short term debt created by the LTRO loans. Italy has 26 billion in BTP bonds and 10 billion of coupon payments due on Feb 1st.

Citi warned that moving all of its debt to short term obligations would put Italy at risk of another downgrade because the shorter term debt is more volatile. Italy's current average duration is 7 years. They noted that another two notch downgrade by Moody's would make their bonds no longer acceptable for the European inflation index and cause automatic selling by funds that track the composition of the index. Being kicked out of that index and automatic selling by funds could dramatically lower the bond values in the marketplace and raise yields. S&P also warned about shortening the duration and the possibility of a resulting credit downgrade.

Portugal's 10-year bonds yields rose to more than 15% and the credit default swaps rose to a record high of 1350 bpd. This is the same rate as Greek bonds back in August that brought Greece into sharp focus and increased their chances of a default. This suggests Portugal could be the next default candidate and quite a bit of its debt is protected by default swaps where private sector Greek debt only has about four billion in guarantees. This means a default in Portugal would reverberate throughout the European banking system.

Things are heating up in Europe again with the possibility of a Greek default growing. Since most analysts already believe Greece will default the news is probably already prices into the market. JP Morgan CEO Jamie Dimon said today that a Greek default will have a zero impact on U.S. banks. However, we would be exposed to the impact on Europe from that default. If Greece defaults then Portugal, Ireland, Spain and Italy would be more likely to default using the excuse "why should Greece be able to cancel its debt and become more competitive and we can't cancel ours?"

Europe does not have just one pimple but a full blown case of acne that is ready to erupt.

Earnings

Today was actually a pretty good day for earnings. There were some minor eruptions and more major event but overall today's events were mostly good news. The major event came from Carbo Ceramics (CRR). This company makes ceramic proppants for fracturing horizontal wells. The company reported earnings of $1.43 compared to estimates of $1.70. Revenues were $158 million versus estimates of $179 million. Shares dropped -21% or a whopping -$27 to $104.

A $27 drop is newsworthy when it happens to Google because Google's stock price is $600. For a $130 stock to drop -27 is a disaster. The reason for the decline was a sudden drop in the number of natural gas wells being drilled thanks to the multiyear low in nat gas prices. Carbo said there was a -70% decline in proppant volume in the Haynesville Shale in Q4. That is a monster decline. The company said it expects volume to return because the major drillers are in the middle of a massive move of rigs from gas fields to oil fields and once they get up to speed in their new locations the number of wells being drilled and fracked would return to prior levels.

However, the move is causing some logistical problems for drillers and for service companies. Moving the infrastructure already in place in the gas fields half a continent away to the oil fields is a major expense and time consuming affair. Equipment, supplies, people, etc all need to be moved but at the same time they have to leave enough crews behind to continue to service the gas drilling at a much lower activity level. I thought Carbo was an acquisition candidate before today's drop so I really believe it is a target today. It was slightly more than a $3 billion market cap company on Wednesday and today that is slightly more than $2 billion. It is a 30% off sale!

AT&T (T) activated 7.6 million iPhones in the quarter but the company still took a major $6.7 billion loss thanks to some monster charges for the aborted T-Mobile bid. For comparison Verizon only activated 4.3 million iPhones. Unfortunately AT&T loses money on every iPhone it sells. They discount the phones to several hundred dollars under cost in order to get the monthly airtime fees. AT&T reported a loss of $1.22 per share thanks to the large number of activations and the $4.2 billion charge for the breakup fee it had to pay to T-Mobile. Whoever agreed to a $4 billion breakup fee should be fired and then banished to a remote third world country. Why anyone in management would believe the No 2 carrier buying the No 4 carrier would not reduce competition and not be blocked by regulators is a puzzle to me.

AT&T was the second largest loser on the Dow. Fortunately it is not a high dollar stock so the weighting impact was minimal.

AT&T Chart

Under Armour (UA) fell -5% after reporting a 2-cent beat, revenues in line and then guiding lower thanks to excess inventory and a weak consumer thanks to warmer than normal winter weather.

Sandisk (SNDK) shares fell -11% or -$6 after beating earnings estimates but then guiding lower for Q1 and beyond. The company reported earnings of $1.29 compared to estimates of $1.26. However, its revenue forecast of $1.30-$1.35 billion was significantly below the $1.46 billion analysts expected. Full year 2012 revenue guidance was $6.4 billion compared to estimates of $6.64 billion. The company said the strong yen, weak dollar was delaying projects in China.

SanDisk Chart

Juniper (JNPR) reported earnings after the bell of 28 cents that was in line with estimates but they also guided lower for 2012. Revenue guidance for Q1 was $960-$990 million and analysts were expecting $1.1 billion. The CEO said Q4 revenues were light due to softer demand from service providers. Juniper shares declined -8% in after hours.

Also declining after hours was Riverbed Technology (RVBD). Shares fell -14% after the bell after the company beat estimates but guided to earnings of 19-20 cents when analysts were expecting 25-cents.

Cirrus Logic was down -7% after releasing earnings that were in line with its prior guidance. The company preannounced it would beat earnings and everyone raised guidance. When it only reported in line with the raised guidance the stock was sold. If you preannounce you are going to beat you better beat big.

Starbucks (SBUX) shares traded lower after the bell after reporting earnings that increased +10% to 50-cents per share but guiding to $1.78-$1.82 for the full year with analyst estimates at $1.83.

On the positive side of the earnings ledger Time Warner Cable (TWC) rallied +8% after beating estimates, raising guidance and announcing a $4 billion stock buyback. Earnings were $1.39, a +40% rise and beat estimates of $1.20. Revenue rose by +4% to $4.99 billion. Believe it or not a decline in political ads in Q4 caused a drop in advertising revenue. Political ads declined? Who knew?

TWC added 117,000 broadband Internet customers and well over the 87,000 analysts expected. However, it lost 129,000 residential video on demand customers. You can thank NetFlix, Hulu and Amazon for that loss. NetFlix said yesterday it added 610,000 new subscribers in Q4.

TWC Chart

Dow component Caterpillar (CAT) posted earnings of $2.32 that rose +58% on revenue for all of 2011 that rose +41%. They raised their outlook from $68 billion to $72 billion for all of 2012. Shares rallied strongly at the open and CAT was the primary reason the Dow spiked over 12,800. CAT has been responsible for 150 of the last 500 points in the Dow rally. CAT rallied exactly to resistance before losing traction. With the positive guidance I expect that resistance to eventually be retested. A move over $114 would be bullish but given the strength of the rally since $90 I would expect some profit taking first.

CAT Chart

If you were betting the farm on the three Es the problems described above may have been a disappointment. Apparently there were a lot of disappointed investors because volume increased to nearly eight billion shares from an average for January of just over six billion. Down volume was 2:1 over up volume. When the Dow's opening spike to a new 52-week high was immediately sold the market sentiment soured quickly. However, despite the day long slide the pace of selling was slow and orderly. There was no rush for the exits.

Tonight traders have to decide if they are comfortable remaining long at this level or decide it is time to take some chips off the table. The Dow move over 12,800 could have been the signal the bears were waiting for only they did not show up in force. The month of dip buying on bad news has apparently made them a bit cautious.

The S&P saw a monster spike to close at 1325 on Wednesday thanks to the Fed saying low rates would continue into late 2014 and they would consider QE3 if economic conditions did not improve soon. That was a veiled suggestion that the March meeting could provide some fireworks. Of course it would not be the first time Bernanke attempted to talk the market up by suggesting there was further accommodation ahead. The comments are keeping a floor under gold, silver, copper and crude.

Unfortunately it did not keep a floor under equities or at least not at the new high levels. The S&P did find late day support well above the 1310 level that has been support for the last five days. I would have expected 1310 to be bought but the low for the day was just under 1314 with a close at 1318.

Fortunately that 1310 level will provide us with a clear indication that the trend has changed. It was pierced intraday twice this week but was immediately bought. If it is broken again and buyers don't rush in then the trend has changed and I would look at 1280 as the next support point.

S&P Chart - 30 Min

S&P Chart - Daily

The Dow slammed to a dead stop at the resistance highs and fell back below 12,750 that held it in check the prior four days. However, the uptrend resistance should not be support. The intraday dip to 12,700 was too neat for me and I suspect that level will be tested again and will probably break. The real support I expect to hold would be 12,600. That gives the Dow some breathing room and time for another temporary solution in Europe.

Dow Chart

The Nasdaq lost traction well below major resistance at 2875 so that target could be several days or even weeks in our future. Short term support is 2780 and a break there could signal the end of the recent tech run. Today's decline was just noise. A break below 2780 would be real profit taking. The Nasdaq is very extended and Google has been on a steady decline after their earnings. It is time for a rest for techs.

A break of 2780 should test 2700.

Nasdaq Chart - 30 Min

Nasdaq Chart - Daily

Like the Dow the OEX is a big cap index. The OEX skidded to a stop at solid resistance at 600 but the decline to 596 was minimal. If you are looking for a reason to sell the market this is not it. For the big caps to hold at this level it means there is still a lot of confidence among institutional holders. A break over 600 would be strongly positive since it takes a lot of money to move the needle on the OEX.

S&P Big Cap Index $OEX

Likewise the lack of a meaningful decline in the Russell suggests fund managers are not ready to be ringing the register. The Russell is WELL below the same relative resistance as the OEX. This suggests we will eventually see a rotation out of large caps and into small caps but for now fund managers are still interested in the safety of liquidity of the large caps. With Europe on a day to day suicide watch basis they can't afford to move from highly liquid to barely liquid positions. This may continue until Europe is resolved or until we do get a serious bout of profit taking that reduces small cap risk.

Russell Chart

I was cautious on the market in my Tuesday night commentary with a qualification that the Fed could move the needle if they wanted. Their surprise move to a late 2014 date for raising interest rates did just that. The dollar collapsed and equities and commodities rallied. Today's earnings only solidified what we already knew. Some companies are in the sweet spot but quite a few others are seeing a completely different picture as evidenced by the constant decline in 2012 guidance.

This "should" make it harder for the markets to move higher but there appears to be a lot of pent up demand for equities. With bond yields in the sub 2% range and below the rate of inflation there is no future in bonds or money market accounts. After three years of hoarding cash we may be seeing some of that money flow into the market in a desperate attempt to capture some appreciation. The European problem has not gone away and may get worse but the ECB seems to have found a way to buy some more time. If they can keep kicking the can down the road there may be an eventual resolution but I doubt it. The U.S. investor has a need for instant gratification and they are not getting it from watching the daily can kicking. They have a need for speed and they are not getting it from bonds or European headlines. Unfortunately the U.S. earnings headlines are not setting a blistering pace. We will be lucky if we don't fall below the 50% mark for those companies beating estimates.

Due investors bite the proverbial bullet and start putting more money to work in the market after a +15% rally since Thanksgiving or do they wait for another round of economics and give Europe a chance to work out its problems? I am betting they are not going to rush into the market. Dip buying will probably remain a viable strategy until it fails. Then we will start looking for the next resting place while we bide our time ahead of Q1 earnings.

The EOY special is over but we have a few packets (seven) left. First come, first served. When they are gone they are gone. 2011 Special

Jim Brown

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