“In any investment, you expect to have fun and make money”. – Michael Jordan

Even though the market had healthy gains for 2014 – Dow was up 7.5%,S&P 500 was up 11.4%, NASDAQ was up 13.4% and Russell was up 3.5% – the volatility was markedly down. For the year, Dow Jones Industrial Average had 84 days with a daily change of more than 100 points, on close basis. This works out to 7 days per month. In percentage terms, Dow varied 36 times plus-or-minus 1%, on close basis, from the previous day. This gives a monthly average of 5 days. So far this year, Dow has already gone 8 days with 100+ points and 3 days with plus-or-minus 1% change in only 12 trading days. The comparative statistics are similar for other major U.S. indices.

Compared to recent years’ start, this year’s start seems to be a lot more volatile. In the first 12 trading days of 2014, Dow had 5 100+ points days and one 1% day. The corresponding number for 2013 and 2012 are two and one; for 2011 two and zero; for 2010 nine and five; and for 2009 five and one. Dow’s gain for these years have been good too. It was up 26.5% in 2013, 7.3% in 2012, 5.5% in 2011, 11.0% in 2010, and 18.8% in 2009.

Last time Dow’s start was so volatile was in 2010 and even then for that year it had 76 days with 100+ point change and 69 days with 1% daily change on close basis. So there is no need to panic

Week In A Nut Shell

• The U.S. indices started the week from where they left-off on previous Friday, i.e. with a down Monday. However, they closed this week with an up Friday. After finishing the last year with two up weeks, the major U.S. indices have started the year with three down weeks. Unlike last week, $VIX or the fear-gauge rose
• Bourses in major European Nations were sharply up. Coupled with Swiss National Bank’s removal of euro floor, this gives more credence to the argument that ECB will surprise on the upside rather than downside regarding the size of the almost certain forthcoming QE. Logically the Swiss market fell.

• Treasury yields were still under pressure during the week. Long term yields were down for the week, 3-month and 1-year period. So, naturally the bonds rose.

• Commodities have been under pressure for some time and the trend continued. Goldman Sachs Commodity Index (GSCI) fell for the week, though energy and metals rose. Gold and silver were up for 3-month period and gold was up from last year too. Agricultural commodities were generally down.

• Forex market was volatile thanks to SNB. Dollar index gained for another week. Since mid-July 2014, it has had only three down weeks. The Petro-currencies did better this week but the resource currencies did not. BRICS and emerging market currencies were mixed. The fallout of SNB’s euro-peg removal was that the Swiss franc appreciated a lot against all currencies and the euro fell.

Earnings Insight

Earnings season is in full bloom. Factset reports that so far 84% of companies (37 or 7% of S&P 500 companies by January 16th) have reported Q4 20014 earnings above the mean estimate and 60% have reported sales above the mean estimate. But the combined total earnings and revenue are below expectations. Therefor the net surprise factor is negative. The blended earnings growth rate is 0.6%, which is the lowest earnings growth since Q3 2012, when it was -1.0%.

• Telecom (+25.1%) and Healthcare (+16.6%) sectors are expected to have highest year-over-year earnings growth, whereas Energy is expected to have biggest decline
• Healthcare is expected to have highest year-over-year revenue growth and Energy sector the biggest decline
• Technology, Materials, Consumer Staples and Energy have the highest percentages of companies reporting earnings above estimates, whereas Industrials has the lowest percentage
• So far, the market has punished (-4.0% lower price) downside earnings surprises more than the 5-year average of -2.3%; but the upside surprises have been rewarded at typical levels with an average of +1.1% so far
• Financial sector companies have reported the biggest downside surprise at -5.8%
• Material sector companies have reported the biggest surprise at +17.9%; Materials and Energy sectors have also had biggest upside revenue surprise

Looking Ahead

So far the Q1 20015 earnings guidance is in line – negative guidance 67% – but the sample size is very small. The forward P/E ratio is 15.9 compared to 10-year average of 14.1 and 5-year average of 13.6. However, this is below the forward estimate of 16.2 recorded at the start of first quarter (December 31). Since then the price of index has declined by -3.2% and the EPS estimates by -1.4%. The forward 12-month EPS estimate for S&P 500 is $125.11.

• Eight of ten sectors have above 10-year average forward P/E estimates. The highest are for Consumer Staples (19.4) and Energy (18.8 vs. 11.9); whereas the lowest estimates are for Financials (12.8) and Telecom Services (13.5 v

Next week 54 S&P 500 companies are schedule to announce earnings. The FactSet estimates that seven companies including American Express, Delta and Rockwell will have upside positive surprise; where Southwest is forecasted to have a downside surprise. For the quarter, FactSet has 65 companies targeted for earnings surprise – 49 for upside and 16 for downside. Industrial sector has maximum number of companies estimated for upside surprise include Rockwell Collins, Raytheon, Northrop Grumman and General Dynamics. Energy has highest number slated for downside surprise that include Williams Companies, ConocoPhillips and Apache.

Economic Report Card

The biggest economic event happened on Thursday but other days also had their share of excitement.

• United States – A very mixed picture for the economic growth and the Fed’s inflation target
  • JOTS Jobs Openings – 4.97M – was better than the expectations of 4.86M; but the 316K Unemployment Claims were worse than forecast of 299K
  • PPI m/m came in line at -0.3% but the Core PPI reading of 0.3% was higher than anticipated 0.2%
  • The retail sales m/m disappointed at -0.9% versus forecast of +0.2%; the Core was also lower at -1.0% versus +0.1% expectations; Import prices were up at -2.5% compared to the forecast of -2.7%
  • Empire State Manufacturing Index reading of 10.0 was better than forecast of 5.3 but Philly Fed Manufacturing Index disappointed at 6.3 versus 20.3 expected
  • CPI readings did not give comfort for Fed’s inflation targeting. Headline number of -0.4% month-over-month change was below the forecast of -0.3% and the Core CPI was unchanged compared to anticipated rise of +0.1%
  • University of Michigan’s Consumer Sentiment was robust at 98.2 when 94.2 was expected
• Great Britain – no sign of reaching inflation targets
  • UK’s CPI year-over-year reading was 0.5%, below the expectations of 0.7%; Core CPI was 1.3% compared to 1.4% anticipated
  • At 1.6%, the RPI – change in prices of goods and services by consumers – year-over-year was also below forecast of 1.7%
  • HPI – housing prices – almost inline at 10.0% year-over-year
  • PPI Input m/m reading of -2.4% was close to expectations of -2.5% but PPI Output m/m disappointed at -0.3% versus forecast of =0.1%
• Euro Zone
  • European Court of Justice ruled that ECB has constitutional authority for Outright Monetary Transactions policy, which means a go ahead signal for QE
  • Industrial production m/m was 0.2% better than forecast of 0.0%
  • Final CPI y/y was inline at -0.2% but core CPI was worse at 0.7% versus the expectation of 0.8%
• Switzerland
  • The biggest blast was from SNB when it removed the 1.20 floor with euro resulting in more than 13% appreciation for Swiss franc.
• In between meetings the Reserve Bank of India unexpectedly cut the rate by 0.25% to 7.75%

Next Week’s Economic Reports

Some major economic news scheduled for next week are:

• China
  • Monday will see GDP (7.2%); Industrial Production y/y (7.4%); Retail sales y/y (11.7%); Fixed Asset Investment y/y (15.7%)
  • HSBC Flash Manufacturing PMI (49.5) will come out on Thursday
• On Sunday Australia will announce Inflation Gauge and New Motor Vehicle Sales m/m; The Westpac Consumer Sentiment will come out on Tuesday and the Inflation Expectations and New Home Sales on Wednesday
• Canada
  • Manufacturing Sale m/m (-0.5%) on Tuesday
  • Wednesday – Wholesale Sales m/m (0.2%); BOC Overnight Rate
  • Friday – CPI m/m (-0.5%); Core CPI m/m (-0.3%); Retail Sales m/m (0.1%); Core Retail Sales m/m (0.5%)
  • Great Britain
    • Wednesday – Average Earnings Index 3m/y (1.7%); Claimant Count Change (-24.2k); Unemployment Rate (5.9%)
    • Friday is Retail Sales m/m (-0.6%) day
• Bank of Japan will come out with Monetary Policy Statement and will hold Press Conference mid-week
• Euro Zone
  • Tuesday will see German ZEW Economic Sentiment
  • The major event is on Thursday, we will see Minimum Bid Rate and ECB Press Conference
  • Friday – French Flash Manufacturing PMI (48.1); German Flash Manufacturing PMI (51.8)