It appears investors have shifted to rick on mode as worries over Europe are easing and U.S. economic numbers continue to improve.

Market Statistics

Successful debt sales in various European countries and possible progress on the Greece haircut talks combined with positive U.S. economics and earnings to push equity markets to six month highs. Pinch me, I must be dreaming.

For months there was always a daily stream of negative headlines from every direction that weighed on the markets. Volatility remained high and bearish analysts predicted years of muddle through economy ahead. Europe was going to sink below the ocean in a recession/depression that would send their economies back to WWII levels.

Suddenly the headlines have turned "less bad" and equity markets are starting to gain momentum. Studies are starting to appear that throw cold water on the European economic disaster scenario. A Reuters poll of 600 economists predicts global economic growth for 2012 will decline to +3.3% from an estimated +3.7% in 2011.

That is more optimistic than the World Bank estimates for +2.5% growth. Almost all analysts now believe China dodged the hard landing someone were worried about. Estimates for China's 2012 growth have declined to +8.4% but that is still more than enough to produce jobs for the fast growing population. India is expected to grow at +7.0% and slightly less than the last two years but still robust. Brazil is expected to grow by +3.3% in 2012 and +4.5% in 2013.

The U.S. is the laggard with an expected +2.2% growth rate for 2012 but there are signs we could be accelerating faster than analysts expected. Economic reports are beginning to post improvements that would have been unexpected just 90 days ago.

The weekly Jobless Claims fell -50,000 to 352,000 for last week. That was a real shock since that is the lowest level since April 2008 and the largest drop in more than six years. However, the Labor Department said it had to estimate claims for several states including California and Virginia because of delays in processing due to the holiday. This low number was even more surprising since it covers the week ended on Jan 14th and the second week of the year. Historically that week shows a high rate of claims as laggards who put off looking for a job over the holidays begin to start their search by filing for unemployment.

If the revisions from the estimated states don't spike the numbers and the current declining trend in claims continues this could be indicating a major change in the employment picture. Normally claims under 350,000 a week indicate a stronger pace of hiring.

Jobless Claims Chart

The Consumer Price Index (CPI) for December came in at zero once again showing no increase in inflation for the third consecutive month. The core rate, which excludes food and energy, rose only +0.1%. Considering oil prices over $100 I am very surprised consumer inflation has gone dormant.

Year over year the headline inflation is just under +3.0% and the core rate is +2.2%. Those are very tame numbers and well within the Fed's inflation targets. This means there are no inflation reasons why the Fed can't implement a further expansion in monetary policy when it meets next week. I doubt they will do it but it won't be due to worries about inflation.

CPI Chart

New Residential Construction slowed slightly in December to a pace of 657,000 units compared to 685,000 in November. However, the declines were in the multifamily units and single family homes actually increased by 20,000. December is normally a slow month for starts and permits because of the weather and the holidays. The difference in the headline number of 28,000 units only represents a decline of slightly over 2,000 units a month. The headline number is an annualized number. The pace of building has been moving steadily higher since February and the minor decline in December is probably just seasonal noise.

Distressed homes are declining as the foreclosure cycle winds down. Record low mortgage rates are helping to keep a steady stream of buyers touring new home projects. The NAHB Housing Market Index on Wednesday rose by +4 points to 25 and is now at the highest level in four years. Traffic of potential buyers rose to 21 from a low of 11 in September. That is very encouraging for builders.

New Residential Construction Chart

NAHB Housing Index Chart

The Philly Fed Manufacturing Survey for January rose to 7.3 from a downwardly revised 6.8 in December. Any positive number represents an expansion in activity. The new orders component declined slightly from 10.7 to 6.9. Back orders fell to -4.1 from +5.1 for the biggest change in the manufacturing part of the survey. Employment was flat at 11.6. On the positive side capital expenditure plans spiked to 22.9 from 10.8. This indicates companies are positive about the future and they are spending money to increase capacity. The expectations component rose +9 to 49 and has nearly doubled since September.

Philly Fed Manufacturing Survey Chart

On Friday we get another look at the housing sector with existing home sales. The next pothole in the rally road could be the FOMC meeting which starts on Tuesday. It is a two day meeting. The Fed is not officially expected make any changes in policy but there is an optimistic whisper in the market suggesting investors are hoping for some new program. With economics improving and Europe pulling back from the abyss I would expect the Fed to keep any additional policy programs in reserve for future use only if needed.

Economic Calendar

This was super Thursday for tech earnings. Unfortunately it was not super for everyone. One of the winners was Microsoft ($MSFT). The company struggled to overcome weak PC sales with gains on things like Xbox and Office software. Microsoft posted profits of $6.62 billion, just slightly below the $6.63 billion in the comparison quarter. Considering the headwinds from the Thailand floods it was a good showing. Earnings were 78-cents compared to estimates of 76-cents. Earnings were helped by a strong share buyback program that reduced the number of outstanding shares. Shares of MSFT rose +2% in afterhours trading. The whisper numbers were for an earnings miss.

Microsoft is very excited about Windows 8 due out in beta next month. This version will operate on PCs and mobile devices and should be a big winner for Microsoft. CEO Ballmer said the Windows 8 launch should accelerate revenue in many of the key products and services.

Microsoft Chart

Intel rallied to a new four year high in after hours trading after posting earnings of 64-cents compared to estimates of 61-cents. Revenue rose an amazing +21% to $13.72 billion. Intel guided to revenue of $12.8 billion for the current quarter and in line with analyst estimates. Margins are expected to decline t 63% from 64.5% in Q4.

Intel had pre-warned that results would be weaker for Q4 due to the Thailand floods limiting hard drive availability and sales of new PCs. Intel said the impact would continue to be felt in Q1 and probably through the first half of 2012. Intel capex for 2012 will be in the range of $12.5 billion and in line with estimates. Intel is expecting strong sales of ultrabooks to boost processor sales. Those lightweight, high speed notebooks will feature Intel's new Ivy Bridge chips. At CES Intel announced that Lenovo and Motorola had selected its new mobile chip for their smart phones.

Intel Chart

IBM posted earnings of $4.71 per share and higher than analyst estimates of $4.62 per share. IBM guided analysts for a +10.5% earnings growth for the full year to $14.85 per share. IBM said strong growth in its software and services business helped it to overcome the global economic slowdown. Revenue rose to $29.5 billion, just missing estimates of $29.7 billion but nobody seemed to care thanks to the strong guidance.

IBM said it order backlog rose to a whopping $141 billion with $20.4 billion in contracts signed in Q4. The company said it was well on track for $15 per share in earnings by 2015. IBM shares rose +3% to $185 after the earnings release. Whisper numbers were lower than official estimates and there were fears the dollar/euro conversion would be a challenge as well as the slowdown in activity in Europe. IBM shares had declined from their $195 level in December.

IBM Chart

The loser in the group was Google. The company reported earnings of $9.50 per share and analysts were expecting $10.49. Revenue was also light at $8.13 billion compared to estimates of $8.41 billion. Google had exceeded revenue estimates for the last eight quarters so the miss was surprising.

Google said the number of pay per click adds increased sharply in Q4 but the amount of money Google received for those click declined -8%. Google expenses rose to 32% of revenue compared to 30% in the year ago quarter. Google said its Google+ project now had 90 million users. Google said more than 250 million devices powered by Android have been activated.

Some analysts are worried that Google's pending acquisition of Motorola Mobility (MMI) will hurt sales of Android because of competitive concerns from companies like Samsung and other companies that make Android compatible equipment. How will Google's ownership of Motorola change the way it markets Android? They could win the battle with a strong suite of Motorola phones but lose the war if the other phone makers start moving away from the Android platform. Google has yet to explain why it bought Motorola and how it expects to manage the company other than "it will be a separate company."

Google shares imploded on the earnings miss and several analysts were making negative comments about the rapid growth of Google expenses compared to slowing revenue growth. Maybe Google should invest in fewer wind and solar farms and races to the moon and more into its Internet products.

Google Chart

In the financial sector Bank America ($BAC) posted earnings of $2 billion or 15-cents per share. That was in line with analyst expectations. New credit card accounts rose by +53% and added $1 billion to profits. The real estate division lost $1.5 billion after a -74% decline in new home loans. BAC has ceased accepting new originations from other banks until it resolves existing problems with the Countrywide Financial portfolio it acquired several years ago. Overall revenue rose +11% to $25.1 billion and well over estimates of $23.7 billion. CEO Moynihan was fairly bullish about 2012 saying they were leaner and stronger after two years of restructuring.

I am bullish on BAC and once they get their mortgage problems resolved they are going to be a major force to be reckoned with in the banking sector. I believe $6 a share is a gift for long term investors. The rebound over long term resistance at the 50-day average is a buy signal.

BAC Chart

Morgan Stanley ($MS) posted a loss of $275 million and its first since early 2009. The loss was due to a charge over mortgage securities sold to MBIA. The settlement produced a 59 cent hit to MS earnings. Morgan Stanley reported a loss of 15 cents. Adding back in the 59 cent hit gives MS 45 cents in operating earnings and +2 cents over analyst estimates. The CEO said for the first time in two years their "do list was not their problem list" meaning they were going back to business as usual and getting out of the fire drill activity from the last three years.

Shares of Morgan Stanley rallied +5% on the news.

Morgan Stanley Chart

American Express ($AXP) posted earnings that rose +12% to $1.01 per share compared to estimates of 97 cents. AXP said U.S. based spending rose to $4,091 per cardholder in Q4 compared to $3,537 for card holders outside the USA. Defaults declined to 2.3% from 4.3% in Q4-2010. Those more than 30-days behind on payments fell to 1.5% from 2.1%. American Express said it bought back 3% of its shares for the quarter and that boosted the earnings per outstanding share. For the full year AXP posted earnings of $4.94 billion. The company maintained its long term revenue growth targets of +8% and earnings per share growth of 12% to 15%.

AXP shares declined to $49.80 after the report.

AXP Chart

Capita One ($COF) was the opposite of AXP. COF reported earnings of 88-cents compared to estimates of $1.55. That compares to $1.52 in Q4-2010. The sharp decline in earnings was due to a rise in expenses of $321 million. That included a big increase in marketing, $90 million in litigation expenses and $40 million in asset write downs from "acquired businesses." COF also increased expenditures in infrastructure in order to be ready for attractive acquisition opportunities.

COF Chart

There were too many earnings announcements to touch on all of them. So far in this cycle only 53% of those reporting have beaten estimates, 20% reported in line and 27% missed estimates. That is well below normal with those beating in the mid 60% range.

The markets don't seem to care and appear to be attributing the misses to the prior economic problems and looking at the guidance as a better indicator than prior results. That is exactly what we want to happen but we need to see a better pattern of positive guidance. Revenue guidance has been particularly weak but given the problems in Europe I guess that is to be expected from international companies.

You may have noticed there is a common thread in many of the earnings reports so far this cycle. Share buybacks have been strong and they have reduced the number of outstanding shares by a large enough percentage to increase the earnings pre remaining outstanding share. This is a technique IBM has used for decades thanks to their high cash flow. In this environment where companies are cash rich they are turning to that tactic to enable their earnings to appear stronger. In the long run it will equalize. Once earnings begin to accelerate the numbers will be even that much better thanks to the reduced number of shares. When the economy begins to accelerate the earnings will explode.

Earnings will not be exploding any time soon for natural gas producers. Natural gas futures hit a new 10-year low today and the outlook is not good. A warm winter, low demand and a glut of gas is killing gas prices and the shares of companies primarily producing dry gas. Gas closed today at $2.29 per Mcf and analysts are starting to talk about prices under $2.

Natural Gas Chart

The equity markets appear to be celebrating the improvement in economic outlook around the world. I should say the "less bad" outlook since estimates are simply improving from what was seen as bleak just a couple months ago. Compared to bleak any growth is an improvement.

The various indexes are all breaking out to new six month highs but there is no sense of urgency or conviction. Volume increased from two weeks of mid six billion share days to 7.1 billion on Wednesday and 7.5 billion today. Up volume was 5:2 over down volume and advancers 4:2 over decliners.

Those are decent numbers and I am sure the lack of conviction came from the worry over the four big tech reports due out after the bell. Had the results from all four of the tech giants been more like Google's results the outlook for Friday would be a lot different.

Because of the drop in Google the Nasdaq and S&P futures are slightly negative tonight but only by a couple of points. That alone is amazing given the -60 point drop in Google.

The positive results from the other after hours announcements appears to be providing support. Let's hope that continues.

The S&P has posted two consecutive days of decent gains and closed at 1,314 and well over the prior resistance at 1,300. That makes the new resistance target 1,350 and the high for the year according to estimates from quite a few analysts. A breakout there would be positively explosive but I suspect it will not be easily won. Current support should now be 1,300 and 1,295.

Friday is option expiration but I don't expect a lot of option related volatility. The headline that could torpedo the rally could come from Greece. The deadline to resolve the private sector haircut of 100 billion euros is rapidly approaching and some Greek officials are hoping they can get an agreement on Friday. Another failure of the talks would be market negative.

S&P Chart

The Dow is only 125 points from MAJOR resistance at 12,750. I can't emphasize enough how a breakout over that level would energize the market. A break through the high close at 12,810 from April would put the Dow at a new three year, post recession, high.

Dow components IBM, MSFT, AXP and GE, which reports earnings on Friday, should be major influences on tomorrow's market. AXP was the only one of tonight's Dow component earnings to see shares decline but IBM is much heavier weighted and made a $5 gain in late trading. That is worth more than 40 Dow points.

Resistance 12,750-12,800 and support 12,500.

Dow Chart

The Nasdag Composite broke out to a new six month high on Wednesday and then added to those gains today. This is a strongly bullish event when you consider the potential trouble that could have appeared after the close. Resistance 2,875 and support at 2,700.

However, the real market event was the ten year high on the Nasdaq 100.

Nasdaq Chart

The Nasdaq 100 closed at 2,441 and the highest close since 2001. Were it not for Google's drop tonight this would be a major market event. Now we will have to regroup and retake this level for it to count.

Breaking out to a new ten year high was a major event. Let's hope it was not a climax that signals the start of a new bout of profit taking.

Nasdaq 100 Chart

If we can avoid a breakdown in the overnight talks in Greece we have a decent chance of another gain on Friday. The Google loss is going to be painful but hopefully the positive gains in the other tech leaders will offset that negativity.

I hate to use the term "good news is breaking out all over" but that is what it feels like. I realize it is really "less bad news" but I will take anything that keeps the market moving higher in January. We are on track to overcome the seasonal late January weakness that produced declines in 12 of the last 15 Januarys. Hopefully I did not jinx it by mentioning it again.

This is not a three day weekend and the only lingering cloud is Greece. Keep your fingers crossed!

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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