A Dependency Problem

Daily State of the Markets 
Monday Morning – August 2, 2010  

Although the end result of Friday’s session wasn’t much to write home about, the day was, in my humble opinion, important as it looked to be a microcosm of the overall market environment. In short, this market has a dependency problem — with data. When good news shows up, the bulls are emboldened and stocks look like values. But, when the news shows the economy to be slowing, well, it makes you wonder if those early-July lows will hold up during the next round of de-risking.

As one might have expected, the day got started off on the wrong foot after the government reported that the nation’s GDP grew at an annualized rate of just 2.4% during the second quarter. This was not only below the street consensus, which was somewhere in the vicinity of 2.6%, but a far cry from the 3.7% rate seen in the first quarter of the year. Cutting to the chase, the bears are suggesting that if the $787 billion in stimulus could only buy the U.S. that kind of growth, we’re in deep doo-doo (to borrow a phrase from PIMCO’s Bill Gross) going forward.

The quick 120 point dive could have been a lot worse had it not been for the dynamic duo of the Chicago PMI (Purchasing Managers’ Index) and the University of Michigan’s Confidence index. With everyone worried that the economy might be falling off of a cliff, the report from the Windy City was a breath of fresh air. This was an “it’s all good” report as the PMI came in at 62.3 vs. 56.8, New Orders climbed to 64.6 from 59.1, the Prices Paid component (a measure of inflation) fell to 58.1 from 61.9, and the piece de resistance was that the Employment component improved to 56.6 from 54.2. I know, I know, that’s a lot of numbers to digest. But the bottom line is that each and every important component came in above expectations and gave nary a hint of any kind of impending economic doom.

The bears were then treated to another piece of good news from the UofM Wolverines. While most in the bear camp are quite sure that the consumer will simply roll over and die in response to all the bad news out there, the UofM report showed that consumer confidence actually upticked near the end of the month – imagine that.

So, with something for both teams to chew on, the argument was on. But, given that it was a summer Friday at the end of July, well; neither team was really in the mood to put up much of a fight. Or in other words, with it being the last day of the quarter, those traders not at the beach did not feel compelled to take any major positions. Thus, the day ended on a quiet note and the bulls went home to celebrate the best monthly gain of the year.

So, what’s our take away from the session? In short, the market remains dependent on the data and as such, the good news will likely bring cheers and green screens while the bad news will, well, you get the idea.

Turning to this morning… There is some good news and some bad news to deal with in the overseas markets. But, the good news is that the bad news out of China (PMI was below expectations) is being viewed as a positive as evidence of a slowing economy likely means the Chinese will soon ease up on their tightening policies and spend some money to get the economy growing more robustly. Next up, the major European PMI’s were above expectations, which, given the worries over these economies, is indeed good news. As a result, the futures in the U.S. are up nicely in the pre-market.

On the economic front… We don’t have any data to review before the bell, but we will get the all-important ISM numbers as well as data on Construction Spending at 10:00 am eastern.

Finally, don’t forget the first rule of life, medicine, and money management: Do no harm…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.04%
  • Shanghai: +1.33%
  • Hong Kong: +1.82%
  • Japan: +0.35%
  • France: +2.08%
  • Germany: +1.69%
  • London: +1.92%

   

• Crude Oil Futures: + $0.95 to $79.90
• Gold: – $5.70 to $1176.00
• Dollar: lower against Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 2.94%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +13.05
  • Dow Jones Industrial Average: +104
  • NASDAQ Composite: +18.55  

Wall Street Research Summary

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