A (Few Hundred) Billion Here, And…

Daily State of the Markets 
Thursday Morning – October 28, 2010  

Although there seems to be some question as to whether or not Senator Everett Dirksen ever actually spoke the words, “A billion here, a billion there, and pretty soon you’re talking real money” (official records show there to be no evidence of Dirksen ever uttering this exact phrase), the idea behind the famous quote seemed to get traders riled up in the early going on Wednesday.

For much of the past two months, the stock market has been rallying on the expectations that the Bernanke gang would ride to the rescue with a quantitative easing package totaling somewhere in the vicinity of $1 trillion. After all, since the FOMC had ponied up more than twice that the first time around, analysts assumed that anything less would be a waste of time. However, the WSJ’s Jon Hilsenrath, who apparently can now count “Fed Insider” as one of his monikers, suggested Wednesday morning that the Fed just might take a more measured approach; something on the order of a “few hundred billion.”

The thinking behind Hilsenrath’s comment was that a (few hundred) billion here and a (few hundred) billion there might just do the trick and turn the economy around. And with a handful of Fed officials publically wringing their hands over the potential for “unintended consequences” to rear their ugly heads in response to too much monetary stimuli, it makes sense to think that the FOMC might want to start with a mere “few hundred billion” and see how it goes.

The mere mention of such an idea caused traders to start reversing “the trade” they’ve grown accustomed to playing recently. With the idea floating around that the Fed might play small-ball instead of swinging for the fences on the first pitch, suddenly the pressure came off the dollar, interest rates rose, and those risk assets that have been all the rage recently went up for sale. In English, traders figured that if the Fed wasn’t going to toss around another trillion dollars, then perhaps the recent joyride to the upside in stocks might be a little overdone.

Thus, it was little surprise that the indices took a pretty stiff dive at the open Wednesday morning. But then, as had been the case each and every time stocks have sold off recently, the dip buyers came in – this time after waiting a grand total of three (yes, three) minutes. However, this time around, the “buy the dip” crowd didn’t have the last laugh… well, not right away, anyway. After a period of waffling, the selling resumed and just before the early lunch bell rang, the Dow was down about 150 points. In short, it looked like the bears were finally going to get back in the game.

Just about the time it felt like maybe doing some selling wasn’t a bad idea after all, the talk of something a little more meaningful that a few hundred billion started making the rounds. But before you could figure out if the 25-day moving average had actually been broken, the rebound began. And by the time the closing bell rang, the NASDAQ and the banks were up and the blue chips had erased the majority of those big red numbers.

While the timing doesn’t quite fit in with the start of the rebound, we did find it interesting that Goldman Sachs’ Abby Joseph Cohen could be heard talking bullish Wednesday afternoon. Ms. Cohen used $500 billion as her expected starting point for QE II and went on to raise her target for the S&P 500 due to valuations and earnings.

So, although Wednesday marked the third straight day of heightened volatility, you do have to give the bulls some credit for not buckling.

Turning to this morning… All appears to be right with the world again this morning as “the trade” is working as planned and stocks are pointing to a higher open.

On the economic front… The Labor Department reported that initial claims for unemployment insurance for the week ending October 23 fell by 21,000 to 434K. The week’s total was 19K below the Reuters consensus for a reading of 453K. Continuing Claims for unemployment for the week ending October 16 were below consensus at 4.356M vs. expectations for 4.426M and last week’s revised (higher) 4.478M.

Finally, consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.68%
  • Shanghai: -0.15%
  • Hong Kong: +0.20%
  • Japan: -0.22%
  • France: +0.53%
  • Germany: +0.51%
  • London: +0.60%

   

• Crude Oil Futures: + $0.28 to $82.22
• Gold: + $11.00 to $1336.60
• Dollar: higher against the Yen, lower against Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.711%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +7.05
  • Dow Jones Industrial Average: +50
  • NASDAQ Composite: +8.37  

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

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