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Daily State of the Markets |
Good morning. We’ve been yammering on for some time now about the linkage between the U.S. Dollar and the stock market. In case you haven’t noticed, the greenback has led the stock market around by the nose lately. When the dollar falls (which is most of the time) stocks rise and vice versa. So with both the dollar and the major stock market averages rising yesterday, should we assume that the chain has been broken? Well, as they say in those commercials, “not exactly.”
By most accounts, yesterday probably should have been a down day. After all, we had the dollar on the rise, a crummy report on the economic front, and the Fed making their very first move in the category of “exit strategies.” Thus, it is safe to say that our furry friends may have gone home disappointed when the major indices managed to claw their way back above breakeven by the time the closing bell rang.
The dollar continued to be a focal point yesterday. And although stocks and the greenback both managed to finish on the same side of the ledger, after the opening move took the dollar higher, the inverse correlation between the dollar and stocks continued to hold up.
The buck initially moved up on word that the rebound in Industrial Production is beginning to fade and comments from the ECB’s Trichet that some countries in the EuroZone are “very close to losing their credibility.” However, when the key 1.50 level held on the Euro, the fade in the dollar began. And this, in turn, allowed stocks to move steadily higher after mid-morning.
The dollar may have also gotten some support from the Fed’s announcement that it was tightening up the maturities at the discount window. Recall that prior to the credit crisis; discount window borrowings were designed for banks to be able to meet capital requirements on an overnight basis. Then on August 17, 2007, the Fed quietly increased the term to 30 days in order to enhance banks’ access to funds. And then on March 16, 2008, the FOMC opened the window even wider by increasing the maturity to 90 days.
Those critical of the Fed will argue that it has been this generous length of time in which banks can borrow at near-0% that has led to the increasing prominence of the dollar carry trade. But yesterday Bernanke & Co. announced that effective January 14, 2010; the maximum maturity of primary credit loans at the discount window would be limited to 28 days.
After a quick jaunt to the upside for the dollar and a brief move to the lows of the day in the stock market, the impact of the Fed announcement seemed to fade and things slowly returned to normal – meaning that the dollar was sold and stocks were bought.
So, with the S&P having survived the first test of 1100 and the number of days left in this year’s calendar beginning to diminish, it would appear that the path of least resistance is up. Well, as long as the dollar doesn’t rally to any meaningful degree, that is.
Turning to this morning, we’ve got some economic data to review so let’s get to it. The Consumer Price Index (CPI) was reported up +0.3%, which was above the consensus for an increase of +0.2%. When you strip out Food & Energy, the so-called Core Rate increased by +0.2%, which was also a tenth above consensus of 0.1%. Looking back, the September’s CPI was unrevised at 0.2% and the core rate was also unrevised from 0.2%.
Next up, Housing Starts in October were reported at 529K; well below the consensus for 600K. Building Permits were no better in October and also below expectations at 552K vs. 580K. But, September Housing Starts were revised to 592K from 590K while September Building Permits were revised to 575K from 573K.
Running through the rest of the pre-game indicators, the foreign markets are mixed although Europe is up a bit across the board. Crude futures are higher with the latest quote showing oil trading up by $0.69 to $79.83. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.34%, while the yield on the 3-month T-Bill is currently at 0.04%. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly lower open. The Dow futures are currently off by about 16 points; the S&P’s are down by about 2 points, while the NASDAQ looks to be about 8 points below fair value at the moment.
| Yesterday’s Earnings After The Bell | |||
Company |
Symbol |
EPS |
Reuters Estimate |
| Autodesk | ADSK | $0.27 | $0.22 |
| Salesforce.com | CRM | $0.16 | $0.16 |
| Earnings Before The Bell | |||
| BJ’s Wholesale Club | BJ | $0.45 | $0.46 |
| Chico’s FAS | CHS | $0.13 | $0.07 |
Wall Street Research Summary
Upgrades:
RF Micro Devices (RFMD) – Estimates and target increased at Barclays Pulte Home (PHM) – Citi Smith Intl (SII) – Citi Cheesecake Factory (CAKE) – Added Conviction Buy at Goldman Analog Devices (ADI) – Added Conviction Buy at Goldman Arch Coal (ACI) – Initiated overweight at HSBC Peabody Energy (BTU) – Initiated overweight at HSBC Rockwell Automation (ROK) – HSBC CommVault Systems (CVLT) – Initiated Buy at Needham Diageo (DEO) – Societe Generale Dell (DELL) – Mentioned positively at UBS Boston Scientific (BSX) – UBS Zimmer Holdings (ZMH) – UBS Abbott Laboratories (ABT) – Target increased at UBS Baxter Intl (BAX) – Target increased at UBS Johnson & Johnson (JNJ) – Target increased at UBS Medtronic (MDT) – Target increased at UBS Stryker (SYK) – Target increased at UBS St. Jude Medical (STJ) – Target increased at UBS
Seagate Technology (STX) – BofA/Merrill Western Digital (WDC) – BofA/Merrill Research In Motion (RIMM) – BMO Capital Coventry Health Care (CVH) – Added Conviction Sell at Goldman VimpelCom (VIP) – Goldman Target (TGT) – Goldman Baidu (BIDU) – Removed from Conviction Buy at Goldman
Long positions in stocks mentioned: GS, WDC
* Report includes items that make comparisons to the consensus estimate questionable
Wishing you all the best today and until next time, “may the bulls be with you!”
David D. Moenning
Founder TopStockPortfolios.com
For more “top stock” portfolios and research, visit TopStockPortfolios.com
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