China reported multiple economic numbers for Q4 that were better than expected and took trader's minds off of Europe.

Market Statistics

China reported its Q4 GDP grew at +8.9% compared to estimates of +8.7%. While that was better than expected it was still the slowest growth in the last ten quarters. Industrial Production grew by +12.8% and that was also better than the expected +12.2% estimate. Retail Sales for December rose by +18.1% and over estimates of +17.2%.

While those numbers were stronger than expected they are all down from the same statistics posted over the last couple years. This gives the government plenty of leeway in restarting its stimulus programs at a moderate pace with an eye on long term growth. There was no sign of the hard landing many analysts have been worried about.

The German ZEW economic sentiment index jumped to -21.6 from -53.8 and the biggest jump on record. The historical average for the ZEW index is +24.5. Sentiment had soured because of the German contributions to bailout the euro zone. ZEW said sentiment over the next six months was likely to stabilize rather than deteriorate further and that was also a change in outlook.

The Chinese and German news was very positive for our markets at the open but before the day ended the indexes had given back much of their gains despite positive economics from the U.S. as well.

The NY Empire Manufacturing Survey spiked to 13.5 and the highest level since April. It was 8.2 in December. This was the third consecutive month of gains. All the internal components were positive with new orders doubling to 13.7 from 6.0 and employment jumping +10 points to 12.1 from 2.3. That was the improvement jump since May. More than 50% of survey respondents said they were planning to hire and one third of respondents said their employees were overworked. Backorders improved significantly to -5.5 from -15.1 but failed to return to positive territory.

Empire Survey Chart

The economic calendar for the rest of the week is pretty crowded with Thursday the most dangerous with new debt auctions for Spain and France, the Philly Fed Survey and earnings from eight high profile big caps.

Economic Calendar

With earnings misses becoming common the odds of a rocky Thursday are pretty good. Big cap tech stocks will be well represented as well as the financial sector. Wednesday's earnings could also be a challenge for the financial sector with BK, GS, PNC, SCHW, SLM, STT and USB.

Goldman earned $4 for 2011 and is expected to earn $11 in 2012. Many analysts are starting to worry those 2012 estimates will not come true and they expect Goldman to begin guiding lower in this report.

Earnings Calendar

Financial companies have not been doing well in the Q4 reports received so far. The financial sector was responsible for a lot of today's afternoon decline. Those inflated earnings estimates are beginning to implode as companies miss their street targets.

JP Morgan missed last week but at least gave a somewhat upbeat outlook for 2012. Citigroup missed estimates today with earnings that declined -11% from the comparison quarter. Citi reported a -7% decline in revenue to $17.17 billion. Earnings of 38 cents were well below estimates of 48 cents. A weak bond market was blamed for some of the decline but CEO Vikram Pandit said "clearly the macro environment has impacted the capital markets."

Citi laid off 5,000 workers late in 2011 and 25% were in the capital markets division. Costs rose +4% in 2011 and CFO John Gerspach said "the period of rising costs was now behind us." They expect to trim costs by as much as $3 billion in 2012. Citi's exposure to troubled European countries rose by +$700 million to $7.8 billion. Gerspach said they "were not walking away from the euro zone even if Europe remained the largest overhang on the market."

Citigroup shares fell -8% on the earnings news.

Citigroup Chart

The opposite of Citi's performance came from Wells Fargo (WFC). Wells Fargo reported a +17.6% rise in profits for Q4 despite a decline in revenues. They posted earnings of 73-cents compared to estimates of 72-cents. Not a big beat but certainly better than the dismal Citi earnings. Mortgage banking income rose +30% to $2.36 billion. The unclosed pipeline of loans for Q1-2012 was $72 billion. Mortgage origination revenues rose by +59% from Q3. After Bank of America quit buying mortgages from other banks late in 2011 that left Wells Fargo in the drivers seat for acquiring mortgage loans. They are able to be selective about what they buy and evidently the business is producing huge profits. WFC shares closed fractionally higher after the sector decline eroded their early gains.

Wells Fargo Chart

TD Ameritrade (AMTD) posted profits that rose +5% but revenue was flat as trading activity slowed late in 2011. AMTD posted earnings of 27 cents compared to estimates of 26 cents. Revenue fell -1% to $653 million and analysts were expecting $671 million. The company said trading volume fell in Q4 as worries over Europe kept traders on the sidelines. Average daily trades fell to 367,479 compared to 415,739 in Q3. CEO Tomczyk said trading volume will likely improve significantly if Europe stabilizes and the market begins to move in a consistent pattern. (Good luck with that!) AMTD net customer assets rose +7% to $406.3 billion. Helping AMTD beat earnings was the purchase of 6.7 million shares of its own stock in Q4. That reduces the shares outstanding and raises the profit per share. AMTD shares fell fractionally on the earnings news.

AMTD Chart

Check Point Software (CHKP) posted earnings of 84 cents, up from 73 cents in the comparison quarter and better than analyst estimates of 82 cents. Revenue rose +12% to a record $356.8 million. The growing aggressiveness of cyber attacks and viruses has been beneficial to companies that publish antivirus software. The company said there was an increasing number of attacks by cyber-bots. Check Point is launching an anti-bot software blade in early 2012. Bots are hard to detect pieces of software that invade networks and then spy on activity and wait for future commands.

The Tel Aviv Stock Exchange, El Al Airlines and three banks were hit by a coordinated bot attack on Monday. Check Point said the attack came from thousands of computers al around the world that had been taken over by the bots. CHKP has $2.9 billion in cash and is buying back shares and looking for acquisitions. Shares rallied +8% on the news.

Check Point Software Chart

After the bell Yahoo (YHOO) spiked to a high of $16.48 from the close at $15.43 after news broke that Jerry Yang had resigned from his position at Yahoo and from his director position. Yang's official title was "Co-Founder and Chief Yahoo." He is also resigning from the boards of Yahoo Japan and Alibaba Holdings Group. He has been widely criticized as trying to orchestrate a leveraged buyout of Yahoo where he would end up as a majority owner at the expense of existing shareholders. Numerous shareholders have lobbied for his exit and threatened shareholder suits.

His abrupt exit effective as of today suggests someone is about to make an offer and one of their conditions was the elimination of Yang. He was seen as a solid opponent to multiple possible transactions that had been discussed in recent months. Without him there it could smooth a future deal and I would expect shares to begin trending higher in anticipation. Various rumored deal discussions valued Yahoo from $19 to $28 per share. Without Yang that premium could rise.

Yahoo Chart

Carnival Corp (CCL) plunged -14% after the Costa Concordia ran aground in Italy and capsized over the weekend. At least 11 people died with 24 still missing. The accident came when the captain altered course temporarily to allow the chief steward to wave to his family and friends on shore. Costa's parent is Carnival Corp. Carnival owns and operates 101 ships under several brands including Cunard, Holland America, Princess and Seabourn. Insurance claims are expected to exceed $500 million and Carnival will be responsible for $40 million in deductibles.

The capsizing of the ship comes at the start of the spring booking season and could cost them additional millions by customers suddenly deciding a cruise may no longer be a vacation option. Cruise lines will respond by slashing prices and making it an even better deal for those who believe another accident is not likely. Since 2005 there have only been 16 deaths in the cruise industry out of more than 100 million passengers. I would say the odds are definitely in the passengers favor.

Carnival Chart

The news from China boosted expectations for crude demand. Traders were worried China could see a hard landing and demand slow. Also helping crude prices was news the EU may try to fast track the embargo on Iranian crude sales with a July 1st start date or even sooner.

Iran's OPEC governor said an oil embargo would be economic suicide by Europe. Iran sells about 20% of its oil to Europe. The governor warned that rising prices would push Europe deeper into recession. He also warned that Saudi Arabia's promise to cover any shortfall was not the official position of the country and only the personal view of its oil minister Ali al-Naimi.

Obviously the Iranian official is trying to instill fear of high prices and shortages in an effort to hold off any action on an embargo.

This embargo threat should support prices through the normal seasonal lows in February and give us a higher launch point for the normal summer rally. Crude gained +2.30 for the day and is continuing to gain overnight.

Crude Oil Chart

The banking sector declined about 1.5% after an early morning rally thanks to the worries over the bank earnings due out on Wednesday. There are fears Goldman will miss earnings and guide lower and Bank America on Thursday could also disappoint. A restart of talks in Greece on the 50-75% haircut of more than 200 billion in outstanding debt is also a problem. There are an increasing number of rumors the hedge funds holding some of that debt have stiffened and will not agree to the deal without a significant sweetener. That is not likely to happen and that is increasing fears of a Greek default.

That is relative to the U.S. financial market because European banks cannot be shorted. That means anyone trying to hedge their holdings in Europe can only do so by shorting American banks, which have tens of billions at risk in Europe. The Banking Index turned down sharply mid afternoon.

Bank Index Chart

The markets have been trending slowly higher in 2012 without any serious conviction. However, a survey of 214 fund managers handling a total of $655 billion in assets showed 27% currently overweight in cash. That was down from 35% in December. Asset allocators were seen the most bullish on U.S. equities since April 2010. America has replaced emerging markets as the location of choice for investments.

Despite the recent earnings misses the official S&P earnings estimates for all of 2012 is currently just over $105. That would be a record with a +9% gain for the year. That survey came from analysis of more than 9,000 analyst projections compiled by Bloomberg. Unless that estimate begins to implode it suggests a positive year for stocks. A PE of 15 would imply a 1,575 value for the S&P.

The S&P spiked to 1,303 at the open but immediately declined to 1,300 where resistance remained rock solid for the next four hours. When the financials began to weaken at 2:PM the index collapsed to nearly 1,290 and back under the 1,295 resistance that has held for the last week.

A move below initial support at 1,280 could signal an end to this early January rally and target 1,250 for an initial pause.

S&P Chart

The Dow continues to respect uptrend resistance but it is also creeping steadily higher. The +60 point gain was far less than the +151 gain at the open but it was still a gain. Initial resistance at 12,500 came back to haunt the index at the close. JP Morgan was the biggest decliner at -1.01.

The melt up continues but there is still no conviction. That does not mean we can't continue higher as traders still overweight cash become frustrated waiting for a dip that never comes. This is going to be a pivotal week for earnings and headlines from Europe and it could change investor sentiment dramatically in either direction.

Dow Chart

The Nasdaq spiked to a dead stop at 2740 resistance at the open and held there for most of the day. At noon there was an attempt to push higher but that garnered only two additional points before sellers appeared and the Nasdaq declined with the rest of the market at 2:PM.

With super Thursday tech earnings a major worry for anyone long tech stocks I would be very surprised to see traders buying techs ahead of those earnings. The risk is huge with GOOG, INTC, IBM and MSFT all reporting on the same day. Google is known for massive swings up or down after their report and that can dramatically drive the tech sector.

Support is 2700 and resistance 2740.

Nasdaq Chart

The Russell managed a temporary spike over resistance at 770 at the open but was immediately hammered back below that level. This resistance has been rock solid and although the Russell continues to edge closer to a breakout there is no volume and no conviction. A break over 770 would be very bullish for sentiment.

Resistance 770, support 760.

Russell Chart

Volume was still mediocre at only 6.6 billion shares despite this being an expiration week and the first day back from a three day weekend with dozens of major headlines. Traders are still nibbling at the edges but there has been no material change in sentiment. They are waiting for a resolution in Europe and for guidance from the next round of earnings reports. The rest of this week will be critical. This could be a pivotal week for the quarter where traders decided to either move to the sidelines because of lower guidance and headlines or bite the bullet and take a chance on the U.S. being the flight to quality destination for the rest of the world.

There is a change in store for us over the next several days and it is anyone's guess as to the direction. A continued move higher will run into major resistance at the October highs and it will probably take far better news from Europe to push us over that level. Conversely we could easily see a flurry of earnings misses and lowered guidance create a market pause until further economic clarity is seen.

I remain cautious but long until proven wrong.

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

Jim Brown

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