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Macro-Market Tranquility

Larry Shover

Comparable to rolling a boulder up a steep slope, US equities continue to toil upwards. While the broader market (only) rallied about 1% (last week) fundamental performance appeared much stronger than what actual performance perhaps suggests.

With a cluster of earnings the market, once again, saw correlations decline and volatility remain at profoundly depressed levels. Even the Nasdaq (where AAPL is an 8.7% weight) ended the week marginally higher (+0.54%). Buying has been slow and steady and it appears all the "right groups" are leading this tape (i.e., homebuilders, transportation).

Overstating the obvious: A world void of tails – this has been the narrative for months and nonetheless remains the case. In a world (perceived to be) empty of tail risks allows equity multiples to gently expand while correlations fall (as we have been seeing). Starting back in mid-2012 a number of the largest tail events have been favorably resolved (Europe w/ the "bumble address", China's growth bottoming-out, and the US fiscal cliff) and while plenty of issues are still on the horizon, it appears Europe remains the key to everything.

Europe and the development seen in this regions financial markets has to be among the most stunning turnarounds in recent years and doesn't show any sign of losing momentum. Peripheral yields have collapsed from their highs and countries are now having an easier time pricing debt (Spain and Portugal). The storyline has evolved to the point where investors are no longer debating when Spain will need to enter into a liquidity package but rather when Portugal and Ireland will be able to regain market access. The OMT, handcrafted everything for Spain, very well could find Irish bonds being the first purchase if it makes. Absolutely stunning!

Earnings season is young but the results thus far have been promising. As of 1/25/13, 147 S&P500 stocks have dispatched results and 75% are beating on the EPS. More importantly, 66% are exceeding plan on revenue, perhaps signifying higher quality earnings? With that, many have been using 14x on the current top-down estimate ($107) to arrive at a 1500 lumpy target for the S&P500. But, the bottoms-up EPS is higher ($112) and if investors grow more cozy with that figure (which appears to be transpiring given how numbers have been coming in so far) you could justify 1570 (14x112)... If the multiple ticks to 15x well, you can do the arithmetic. Hope springs eternal.....

Week beginning 1/28/13 – Earnings – week three of the CQ4 will bring a slew of reports although we are pretty much done with the most "methodical" companies (i.e. large cap us banks, industrials, tech) and thus results from this point onward will be more company/sector specific.

One-liner comments on various and sundry economic numbers week beginning 1/28/13:

• Pending Home Sales – December (Monday 1/28/13). Street expecting a 1% set-back – market is applauding at/near/around 11% in 2012 – is the housing market healing faster than expected?
• Durable Goods Orders - December (Monday 1/28/13). Pay special attention to shipments data as it may provide clues of business equipment spending ahead of the Q4 GDP release.
• Dallas Fed Manufacturing Index – January (Monday 1/28/13). Could be interesting as business leaders have been optimistic about the near-term demand outlook for the region.
• S&P Case-Shiller Home Price Index – November (Tuesday 1/29/13). Perhaps some cooling in the hottest markets (e.g. Phoenix) with momentum shifting to other regions?
• Conference Board Consumer Confidence Index – January (Tuesday 1/29/13). Personally, not expecting higher income and payroll taxes to lift consumer spirits this time around.
• ADP Employment – January (Wednesday 1/30/13). Following a bust-out 215k gain (December), looking for a report to moderate at/around 165k – proving that the trend is positive and we are slowly healing.
• Real GDP – Q4 (Wednesday 1/30/13). Street looking for GDP growth of 1.5% (annualized) in Q4 as we price in Sandy and decline in exports. Without Sandy it appears the US is still crawling in the right direction.
• Personal Spending – December (Thursday 1/31/13). Decent holiday sales combined with advanced dividend payouts should offset last month's downtrend in auto sales.
• Nonfarm payrolls – January (Friday 02/01/13). Street expecting a slow/steady 160k advance with the unemployment rate unchanged at 7.8%.
• ISM Manufacturing – January (Friday 02/01/13). While last week's Markit PMI measure rose to a 2-year high, expect much less – perhaps steady – from the ISM, perhaps due to higher taxes and the concern over demand.

Will the cautious celebration continue the week beginning Monday January 28, 2013? Will 148 companies reporting earnings, 18 major US economic reports, along with an FOMC meeting provide the right tune to keep the song going? In the early going, it appears the markets have exhibited a collective sigh of relief as the anxieties that weighed on opinion last year (i.e., Euro area, China hard landing, and the US fiscal cliff) have largely evaporated. Although I'm cautiously constructive I've learned that markets can and do move long before the math and headlines say so.