An Equity Positive?

Daily State of the Markets 
Wednesday Morning – December 22, 2010  

Don’t you love this time of year? No, I’m not referring to the joyous time with family, the shopping, the decorations, or the holiday celebrations. No, I’m talking about the generalizations toward the market offered up by the talking heads on T.V. when referencing the upcoming calendar change.

On that note, I’ve noticed that there is a new phrase that seems to have caught fire with the commentators. While the term “equity positive” is not really a new Wall Street-ism, I must admit that it’s been awhile since I’ve heard this one being bandied about with such regularity. In short, after hearing nothing but fear and loathing for months about the outlook for the stock market, all of a sudden EVERYTHING is “equity positive.”

It’s as if somebody finally figured out that stocks are up nicely from the March 2009 lows and that they aren’t going back to revisit those lows anytime soon. It’s as if the analysts being put on the T.V. sets are telling people that after an 85% rise in the stock market, it’s time to get back in. And what’s surprising is that everyone, everywhere seems to be buying it.

For example, just this week, we’ve been told that an increase in inflation is an equity positive right now (Yes, I get it; this is what the Fed is after. But say that sentence out loud and see if it doesn’t sound just a little strange.). The rise in interest rates? Yep, an equity positive as it shows the economy is improving. The new highs in commodity prices? No worries – that’s an equity positive too!

The point this morning is that with stocks up +12% on the year and +85% off of the bottom, suddenly everybody is exuding confidence and telling us how wonderful 2011 is going to be. Where were these guys back in the summer when double-dip was the phrase of the day? Where were they when just about everyone was sure that the European debt mess was going to bring down the global recovery?

As a point of reference, the average gain seen from the bull markets since 1900 has been something on the order of 81%. And those bull markets labeled as a “cyclical bull within a secular bear” have seen gains that are a bit less than that. So, while I DO believe that stocks CAN CERTAINLY go higher from here based on valuations, earnings, etc., I think the goal of the stock market game is to be most bullish at the bottom and most bearish at the top.

However, given that just about everything under the sun is now an “equity positive” and the sentiment readings are quickly reaching extreme levels, it would appear that just the opposite is occurring. So, while the trend is your friend and it is important to never ever pick a fight with the Fed when they are on a mission, I’m going to suggest that this may not be the best time to fire up that margin account again in order to buy those triple-long ETF’s in 2011.

Turning to this morning… Things are fairly quiet in the early going as the news flow is limited and foreign markets are mixed-to-slightly lower. Stock futures in the U.S. are pointing to a flat(ish) open.

On the economic front… The government’s second revision of the nation’s third quarter GDP shows the economy grew at an annualized rate of 2.6% in the quarter. This was below the consensus expectations for a growth rate of 2.8% but above the first revision of 2.5%. (Recall that the final Q2 rate was +1.7% and Q1 was +3.7%). Looking at the all-important consumer activity, the Personal Consumption component of the report came in slightly below expectations with a gain of 2.4% vs. the consensus for 2.5% and the first revision’s +2.8%. (Last quarter was 2.2%)

Thought for the day: Laughter is great execrise – it’s like jogging for the soul…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.15%
  • Shanghai: -0.90%
  • Hong Kong: +0.22%
  • Japan: -0.23%
  • France: -0.02%
  • Germany: +0.01%
  • London: +0.37%

   

• Crude Oil Futures: + $0.37 to $90.19
• Gold: + $0.60 to $1389.40
• Dollar: higher against the Yen and Pound, lower vs. Euro
• 10-Year Bond Yield: Currently trading lower at 3.311%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +1.30
  • Dow Jones Industrial Average: +3
  • NASDAQ Composite: -0.30

Wall Street Research Summary

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