The new market trend is for the morning dips to be bought with the high of the day coming at the close. No complaints here!

Market Statistics

Thank goodness for earnings because they rescued the market from a negative day. The morning economics were mixed with housing the positive report but regional Fed reports turning negative.

The best economic news of the day was Existing Home Sales for December. The annualized rate of sales declined slightly from 4.99 million to 4.94 million but that was still decent. Analysts had expected a gain to 5.09 million but Sandy and weather patterns conspired to reduce sales.

Even at 4.94 million the pace of home sales is growing at the fastest pace since 2007. The final December number allowed the sales for all of 2012 to rise by +9%. That is the best increase since 2003.

Prices are rising as well as a result of lower inventories. The number of homes for sale has fallen to a 12 year low at 1.82 million. Months of supply have fallen to only 4.4 months and the lowest amount since May 2005. There is a new wave of foreclosures scheduled to hit in the spring and about 10 million homeowners are now equity positive after the rise in prices in 2012. That means a few of those people will be pulling the rip cord now that they can.

Existing Home Sales Chart

The Richmond Fed Manufacturing Survey fell from +5.0 in December to -12.0 in January. This was a very negative report. The survey had been in positive territory in Nov/Dec but activity crashed after the holidays. New orders plunged from +10.0 to -17.0 and backorders worsened from -11.0 to -19.0. The production component fell from -2 to -40. Inventories rose from 12.0 to 23.0 as products remained unsold.

Some analysts believe the sharp decline in orders was the result of hesitancy by managers to place orders ahead of the fiscal cliff resolution. If that is the case we should see a rebound in February but that remains to be seen.

Richmond Survey Chart

The Chicago Fed National Activity Index declined sharply from 0.27 to 0.02 but at least it remained in positive territory. This was another confirmation that activity across the nation declined ahead of the fiscal cliff in December. If congress succeeds in kicking the debt ceiling can into May as expected the first quarter economics could turn out to be better than expected as corporations begin to implement their 2013 growth plans. Without an imminent political event many will opt for no further delays in their business plans.

Chicago Fed Chart

These Fed reports duplicate what we saw in the Philly Fed Survey last Thursday. The Philly Fed headline number fell from +4.6 to -5.8 and back into contraction territory. Note that the Richmond Fed chart is similar to the Philly Fed with a negative long term trend.

Philly Fed Chart

The economic calendar for Wednesday is limited with no releases of a material nature. The Kansas Fed Manufacturing Survey on Thursday will be watch for confirmations of what we saw in the Philly Fed, Richmond Fed, Chicago Fed, etc.

Economic Calendar

Today was the first really big earnings day of this cycle with dozens of companies reporting. Overall it was highly positive. The really big names came after the close but there were plenty of headlines all day and that kept the market in rebound mode.

Google (GOOG) reported earnings of $10.59 that beat the street estimate of $10.52 and shares of Google rallied +$35 in afterhours trading. A surge in Q4 advertising helped to raise Google's revenue +19% to $12.1 billion. A complicated set of changes to Google's structure made analyzing the revenue a problem for analysts. Google did not own Motorola in 2011. So Motorola revenues had to be subtracted from the current quarter to compare apples and apples. However, Google has already sold the set top box portion of Motorola for $2.35 billion so that portion of the revenue is segregated out as income from discontinued operations even though the transaction has not yet closed. The confusion in the various numbers was causing market reporters to scramble for the right combination.

Traders must have gotten it right for the stock to rally +$35 after the report to close at $738 after trading as low as $695 intraday. Part of that spike was short covering because some analysts had expected Google to miss estimates as a result of lower clicks on the mobile platforms. This spike "should" help push the Nasdaq higher on Wednesday.

Google Chart

IBM shares exploded +$8 higher after they beat estimates of $5.25 with earnings of $5.39. IBM also raised guidance for the full year to $16.70 and higher than analyst expectations at $16.57. They said they were on track for $20 in earnings in 2015. The company's earnings appeared to be specific to IBM's business model rather than a boom in tech spending. The company also bought back shares in the quarter and that raised the earnings per share. IBM was strong in data analytics, cloud computing, process control systems like traffic flow, manufacturing improvements and sales in emerging markets.

Revenue rose +11% to $29.3 billion because of growth in Brazil, Russia, India and China. Software revenues were up +3%. For the full year IBM earned $16.6 billion on revenues of $104.5 billion.

IBM Chart

Texas Instruments reported adjusted earnings of 36 cents on revenue of $2.98 billion. Estimates were for 34 cents and $2.95 billion. The slight beat did not help the company in afterhours trading and the shares closed down slightly. The problem was guidance. The CEO said "TI continued to operate in a weak demand environment. Our visibility into future demand remains limited as our lead times are short and our customers are reluctant to commit to extend backlog." He said the company continues to operate well despite increased costs from underutilization. He guided to 24-32 cents for the current quarter and analysts were expecting 34 cents. Revenue guidance was $2.69-$2.91 billion compared to estimates of $2.89 billion. Shares were down fractionally after the earnings report.

TXN Chart

Ameritrade (AMTD) reported earnings of 27 cents compared to estimates of 24 cents. The better than expected results came from a decline in operating expenses 0f -3.5%. Net income was $147 million. Revenue was flat at $651 million and that beat estimates of $635 million. Average daily trades declined -9.1% to 334,035. Net new client assets were $15.6 billion, a 53% increase over Q4-2011. Ameritrade said total client assets rose 18.3% to $480.8 billion. The CEO said cash balances in client trading accounts had risen to more than $90 billion despite every day in January being a net buy day for customers. That means there were more buyers than sellers every day in January but there is still $90 billion in cash that remains uninvested.

AMTD Chart

Rather than drone on about the individual earnings reports I prepared the following table for today. Those in green beat the estimates and those in red missed estimates. The right column shows whether their shares rose or fell after the report. While only two companies missed estimates there were eight companies where their shares fell after the report.

Earnings Scorecard

Earnings up on Wednesday include Apple, McDonalds and United Technology. Of course Apple will be the driver for techs and estimates are all over the map.

Earnings Calendar

Hedgefund manager David Tepper, who runs appaloosa Management, a $15 billion fund, said in a Bloomberg interview "This country is on the verge of an explosion of greatness. The key is to be long equities this year." He said he is bullish on U.S. stocks because the economy should grow in the 3% range, stocks are historically inexpensive, companies have little debt, interest rates are low, credit is fully valued and the major risks to the economy like a debt crisis in Europe have diminished. Corporations took advantage of the low interest rates to borrow $1.47 trillion in 2012. That is cheap capital that will increase profits. While not everyone is as bullish as Tepper there are quite a few bulls thanks to better than expected earnings so far this cycle.

So far this cycle 72 of the 76 S&P companies that have reported have beaten estimates according to Bloomberg. That is an amazing statistic but it is only half the puzzle. They may have beaten on earnings estimates but there have been quite a few revenue misses and numerous instances of lowered guidance. Remember, if analysts lower estimates too far going into the earnings cycle then almost everyone can beat the lowered estimates.

A Bloomberg survey showed an average prediction for +3.8% earnings growth in Q4. However, S&P IQ is calling for a -1.4% decline in Q4 earnings. They can't both be right and Thomson Reuters was showing an actual growth rate of +2.4% as of Friday on those already reported. The better companies always report early in the cycle and the average declines as we get farther into the season.

Another Bloomberg survey said international investors are the most bullish they have been in 3.5 years with nearly two-thirds planning on raising their equity holdings over the next six months. Laszlo Birinyi is so bullish he said he bought options on the S&P that will only pay off if the S&P gains 8% for the year. He believes equities have risen so far that investors who have shunned the markets will be forced to capitulate and buy stocks. Laszlo said, "This is where the fireworks begin. The last phase of a bull market is very strong." Based on S&P earnings estimates at $110 for the year that implies a S&P rise to 1,630 with a PE of 14.8. In 2014 S&P earnings are expected to exceed $120.

The key to this puzzle is economic growth. Companies have been increasing earnings as a result of cost cutting and they can't cut their way to prosperity. If economic growth does not appear and top line revenues increase this bullish prediction by analysts like Birinyi will not come to pass. The pump is primed but until growth appears the profits produced will continue to lag.

Despite the negatives from the regional Fed reports the outlook for the global economy and the U.S. economy continue to rise. The XEW Index, a measure of German economic activity six months into the future, rose the most in 11 months. This suggests Europe would also improve over that period.

Those improving expectations and the increase in the security premium as a result of the Algeria attack have push oil prices to four month highs. WTI crude rose to $96.80 on Tuesday and shows no signs of slowing. Resistance at $100 should be strong.

The recent talks between Iran and the IAEA broke down after two days with nothing accomplished. There are additional meetings scheduled in February but nothing is expected to be accomplished. Therefore the sanctions on Iran should remain in place for the rest of the year.

The attack in Algeria suggests oil and gas installations all over the Middle East and Northern Africa are no longer safe from terrorists. I am sure the after action analysis being done by the various terrorist groups have focused on actually attacking the installations with an intent to destroy rather than capture hostages. It would be much easier to cause damage and escape to do it again than get bogged down with hostages. The terrorists in Nigeria figured that out years ago and concentrated on hit and run attacks rather than pitched battles against an army.

Since the Libyan war the terror groups all over the MENA area are much better armed as a result of the weapons obtained during that war.

Expect oil prices to remain firm as long as there is civil unrest and terrorists in the MENA region.

Netanyahu and his Likud party apparently won 31 seats in the parliamentary elections in Israel today. This will ensure he remains prime minister but he will be forced to form a coalition in order to gain the 61 seats necessary to rule. This should not be a problem for him and the coalition should be strongly hard line right wing. This means the Israel/Iran tensions will continue to fester as the year progresses. This will help keep that security premium in oil prices.

Ironically the demand for crude is declining. There are 22% more VLCC tankers for hire over the next 30 days than there are cargoes to ship. That is the highest amount of over capacity in four months. A VLCC (Very Large Crude Carrier) can transport two million barrels of oil. The price to ship 2.0 MB from Saudi Arabia to Japan declined to $8,994 per day according to the London Baltic Exchange. Since those large tankers cost $21,000 per day to operate they are being forced to take the low rates just to keep the cash flowing.

WTI Crude Oil Chart

Gold prices rose to $1693 and a five week high but the gains were muted. Silver climbed to $32.95 and a four week high. Silver is attracting some serious investor interest.

Back in December the U.S. Mint had to halt sales of silver eagles because they ran out of coins. 2011 was a record year for sales of the silver eagles and 2012 was on track to beat it until the mint ran out of coins. Once in January the 2013 coin sales kicked off with a record 3.9 million coins sold in the first week. By the end of the second week dealers had bought more than six-million coins. This forced the mint to again announce they had suspended sales of the coins until production could catch up with demand.

Last week the silver ETF reported a one day deposit of 18.3 million ounces. It was the biggest one day deposit in more than two years. When investors buy shares of the SLV ETF the managers have to buy silver to cover those shares. To put this into perspective the fund only added 20 million ounces for the prior 12 months. The SLV ETF had cash inflows of $600 million for the week.

Silver holdings across all silver ETFs rose +59.4 million ounces over the last 12 months and that jumped 20 million ounces last week. The total silver in funds is now more than 630 million ounces.

Silver Chart

The latest Washington antics have the House preparing to offer a bill to postpone the debt ceiling debate until May 18th. The bill will not raise the ceiling but suspend it temporarily. That will allow the government to continue borrowing money. The republicans want to force the democrats to produce a budget. Once a budget is passed the debt ceiling raises automatically and that prevents any conservative from having to vote on raising the ceiling.

The senate has said they will pass the can kicking bill to push the ceiling debate into May. The White House said Obama would sign it. That effectively clears the legislative calendar until March 1st and the sequestration deadline. Quite a few house members are saying they may just let the sequestration take place rather than try and fix it in the current environment. That means across the board cuts with defense taking a major hit.

This sudden easing of the manufactured debt crisis in Washington means the market will be free to focus on earnings and economics rather than the next volley of sound bites from lawmakers. I will believe it when I see it.

The S&P rose to a new five-year high at 1,492 and is not within shouting distance of resistance at 1497-1500. It has been nearly four weeks since a material decline and the S&P has gained almost 100 points or roughly 7%. There was a long period of consolidation after the Jan 2nd spike so even with the approaching resistance there should still be fuel in the tank.

The earnings today were mostly positive even with the various guidance warnings. The gains in IBM and Google after the close should send the indexes higher at the open on Wednesday. Should is the operative word because the S&P futures are negative as I type this and the Dow futures are only up +1. Since IBM is a Dow component this is troubling. This would suggest the market might dip at the open again so dip buyers may get another entry point.

If I were to pick the perfect spot for a bout of profit taking it would be 1500. That is a big round number and also just above decent resistance at 1497. Initial support from the morning dip is 1480.

S&P Chart

The Dow closed at the high for the day at 13,712 with the next critical resistance level at 13,727 and the closing high from December 2007. Each of these resistance points is just a stepping stone towards the all time closing high of 14,164 from October 9th, 2007.

I was hoping IBM would power the Dow over that 13,727 level but apparently Boeing is dragging the futures lower on additional news about the 787 battery failures. It could be weeks or even months before they are flying again.

Support is well below at 13,500.

Dow Chart

The Nasdaq futures are up +5 but that is not a very big gains compared to the +35 point gain in Google. Apple has earnings after the bell on Wednesday and traders have no clue what they are going to report. There are wild swings in the estimates and guidance is even worse. This could put a cloud on techs once again and prevent the Google gains from pushing the index higher.

Support is 3120 and initial resistance 3150. The Nasdaq needs to power over 3185 to get the tech investors motivated.

Nasdaq Chart

The Russell 2000 climbed to another historic high and is currently in blue sky territory. However, 900 could be significant round number resistance. This would be an ideal place for some profit taking given the major gains over the last month.

Russell 2000 Chart

Speaking of major gains the Dow Transports are a prime example. The Transports have been moving higher without any pause. It is time for a profit break. The prior historic high was 5627.

Dow Transport Chart

While I think the S&P and Dow could tack on a few more points I believe the Russell and the Dow Transports are overdue for a rest. That could translate into a broader market sell off for some overdue profit taking.

However, markets making new highs tend to continue making new highs. Shorts have found out repeatedly that shorting new highs is bad for your financial health.

I would continue to buy the dips but I would probably be a little slower on the trigger. There are a lot of profits that need to be captured before we move significantly higher. (Famous last words)

Kicking the debt ceiling can farther down the road relieves a significant cloud from the market.

I remain in buy the dip mode until proven wrong.

Enter passively, exit aggressively!

Jim Brown

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