The Month of Janus


“Now by two-headed Janus, nature hath framed strange fellows in her time.” – William Shakespeare, The Merchant of Venice

Last week was a bit of a head-scratcher, at least on the surface. Sterling results were posted by such icons as Apple (AAPL), IBM, Google (GOOG) and General Electric (GE), yet both the S&P and Nasdaq finished down on the week, with the Russell 2000 being hit particularly hard.

Ah, but Janus, for whom the month is named, is the two-faced god. Our eponymous patron looks both forward and backwards, and it seems some of the forward view is fogging up.

Take Apple, for example. News of another medical leave of absence on the part of CEO, co-founder and product-genius extraordinaire Steve Jobs had Apple’s stock price on the ropes first thing Tuesday morning. Apple makes up over 20% of the Nasdaq 100 ETF, the QQQ, so a drag on Apple is a drag on tech-land.

The company’s quarter was ridiculously good and went well past whisper estimates, but traders had been quick to correctly surmise that the company wouldn’t have put out the Jobs announcement just before its earnings results unless it had a bang-up quarter waiting in its back pocket. Some of the surprise factor was lost.

Apple has enjoyed an awfully good run in the stock market as well, singlehandedly pulling along much of the tech industry with it. Traders added about $100 billion in market cap to the stock over the last four months; that’s a lot of iPhones. Although CNBC quickly and dutifully trotted out a row of speakers to piously assure us of the depth of Apple’s management team, the circumstances nevertheless seemed right for some profit-taking.

That goes to the main part of last week’s problem: so much good news already built in. IBM and GE stock were able to hold onto their gains because they hadn’t soared so much during the recent rally. The bar was lower for them.

It didn’t help the market much either that a couple of the leading financial stocks, notably Citigroup (C) and Goldman Sachs (GS) turned in quarters that were lackluster, in particular Citi. Traders have been trying hard to rally the financials in order to extend the recent bull run, but the two giants failed to get with the program. Their outlooks were noticeably lacking in verve and élan. Oh, for the arrogance and insouciance of yore.

Another break in the narrative developed with cloud-computing darling F5 Networks (FFIV) delivering a quarter that disappointed in results and outlook. Cloud computing has been one of those rare double plays of late that hearken back to the days of the tech bubble: big, trader-endearing momentum, with a catchy concept easy to understand and for brokers to pitch (“this is IT, I’m telling you, everything is moving to the cloud. Everything!”).

F5’s 25% drop rattled the cages of many of the other cloud momentum stocks, helping to undercut the Russell 2000 (down about 3%) much more than its larger-cap brethren. If other ridiculously overvalued cloud stocks such as VMware (VMW) (disclosure: we are short the stock) disappoint next week – VMW reports after the close on Monday – there will likely be further spillover effect as momentum investors decide to favor profits over risks.

Some see last week as the beginning of a correction of 3-5%, perhaps more. The most common scenario is after the market swoons a bit – fairly typical in late January, especially after such an extended run – the market will then resume its upward climb into March and perhaps April. It would surely have topped 1300 on Tuesday but for the news on Jobs; it could go either way now. It’s a fickle time of year.

We will see a deceleration in the recovery rate at some point. The bulls posit next year, the bears (not many remain) next week and the prudent in the second half. All will be anxiously reading the tea leaves for signs that a slowdown is or isn’t coming. The odds favor only a pause, but when it happens it will still rattle the markets. Valuations in the favored sectors allow for little to no bad news.

Our best guess on the current situation is that we may be in store for some hesitation on the part of investors, but clear evidence of a slowdown is probably still a ways off. There was little sign of dip-buying last week for the first time since the fall, but some serious zigzag action could lie ahead, so be wary of sudden moves and media drama.

The Economic Beat

The week’s main releases contained few surprises, but some of the weekly data was a little disconcerting. Mortgage-purchase applications declined for the fourth week in a row and have returned to levels near the post-credit-expiration lows of last year. Retail sales were down again last week, dropping the year-on-year rate to its lowest since May.

Earnings were the focus of the week, though, and the fact that the housing and manufacturing data came in on target certainly did nothing to distract from them. The homebuilder sentiment index, doing business as the Housing Market Index, stayed unchanged at its basement level of 16 (neutral is fifty, and we probably won’t see numbers like the current crisis again in our lifetime).

The December building data justifies the homebuilder gloom. Starts were miserable, falling to levels of mid-2009 and completing 2010 as the second-worst year on record for homebuilding.

Permits did have a big rise, though, and true to the promotional nature of the Street, many tried to highlight it as a sign of recovery. However, the increase was due to changing building codes in key states such as California, where builders rushed to get paperwork in under less restrictive current codes.

Existing home sales did rise 12% in December, but we would hold off the champagne corks for a bit. Sales have slowly rebounded from the ultra-depressed levels of the credit-expiration aftermath, but are still down year-on-year; distressed sales rose to 36% of the total. Most importantly, purchase applications are tailing off again, as noted above, indicating that the increase was transitory.

The Philadelphia and New York Fed manufacturing posted decent results but – perhaps in the spirit of earnings season – not a big enough surprise to move the excitement needle. The New York result was about 12 versus expectations for 14, while Philadelphia reported 19.3 versus consensus of 20. New orders were up significantly in both regions. However, backlogs are still down and employment restrained. The surveys aren’t the most precise data around and prone to headline bias, but it’s clear manufacturers are feeling pretty good about themselves right now.

Leading indicators rose sharply, by 1.0%, but much of it is due to reverse and the Conference Board itself was skeptical of the strength. The bump in building permits is very likely to reverse, consumer confidence seems to be weakening this month (the Conference Board version is out next week) and should the stock market continue to take profits from its long run-up, we would have three big negatives heading into the following month.

Weekly claims fell to an unadjusted level of 550,000, a rate that compares favorably with the recession years of 2008-09 and 2001-02, but unfavorably with the rest of the decade. However, it looks about normal set against levels of the 1990s. That’s a little hopeful, but keep in mind that the unemployment rate is much higher now than in those years, and the nineties were the decade of the great outsourcing.

Next week continues the earnings barrage, with a pickup in market-weighted economic releases. The rest of the month’s installment of housing data arrives with Case-Shiller price data on Tuesday, new home sales on Wednesday and pending home sales on Thursday.

The two announcements with the biggest potential impact come Wednesday afternoon with the Fed’s latest assessment of economic conditions, the FOMC statement, and Friday morning with the first read on fourth quarter 2010 gross domestic product (GDP).

No change is expected from the Fed, but hopeful bulls will scrutinize the wording for any hints of more positive language. The consensus estimate for Q4 GDP is 3.5%, but the whisper number is 4% or better. A hint will come from the durable goods estimate for December, due on Thursday along with revisions for October and November.

The earnings calendar is quite heavy, with many prominent names and Dow members, but we’ll flag two high-fliers to be of particular interest: Caterpillar (CAT) and Amazon (AMZN) on Thursday. The bar is set high for both companies. The Dow may also benefit from a heavy slate of energy companies reporting, given the speculative run-up in oil prices during the quarter. However, as last week showed, a lot of good news may already be priced in.

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