Cover Your Ears If…

Daily State of the Markets 
Thursday Morning – March 24, 2011

Good morning. Although I do my darndest to present a balanced view of the markets each morning (remember, our goal is to identify what is driving the markets on a daily basis and not to justify an opinion of what I think Ms. Market ‘should’ be doing), I have a warning for those finding themselves in the glass-is-half-empty camp this morning: Cover your ears, because what I’m about to say might be construed as being downright positive.

Perhaps the toughest part of being a bear is that your days in the sun, while often very satisfying, tend to be few and far between. If memory serves, the stock market tends to go down something on the order of three times as fast as it goes up. In short, this means that those in the bear camp can be unhappy for long stretches of time in between corrective phases.

Another problem I’ve identified over the years with my furry friends is that it is tough for them to let go of a correction after it has ended. The bears seem to have difficulty understanding the concept that the market discounts the future and as my friend David W. likes to say, “that what does not kill a market makes it stronger.” In other words, once the market comes to grip with a problem and traders quantify the potential damage, stocks tend to move on (and look ahead).

A good example of this concept would be the argument that stocks should be moving lower because the housing market isn’t getting any better. Yes, it is indeed true that housing stinks and we aren’t likely to see much improvement in this arena for several years. I heard a similar argument just yesterday in relation to the jobs market. The complaint was something along the lines of, “how can stocks move higher with the jobs picture so bleak?” Then there is the European debt situation. I’m hearing daily that this issue is going to crash the market any day now.

The problem the bears seem to have is all three of these issues are are OLD NEWS. Stocks “dealt” with these problems long ago and have since moved on to things like unrest in the Middle East, the potential for a nuclear disaster, etc. And speaking of the potential for a nuclear disaster, it is becoming clear that while the situation is tragic, the Dai-ichi plant is not Chernobyl and is not going to have a major economic impact. Thus, unless the situation worsens dramatically, the bears should probably move on.

My apologies if I’ve offended anyone in the bear camp this morning. My primary point is that while we could easily see the market move sideways for a couple more weeks and perhaps even see a retest of the low, it is beginning to look like the opportunity for the bears to really get something going (ala the -16% correction seen last summer) may have come and gone.

Exhibit A in my upbeat analysis is the fact that given the rather dire news flow seen over the last month, the pullback has actually been quite modest. With oil prices surging, wars starting, renewed debt problems with the PIGI’S, signs of inflation starting to surface, and some soft economic data, one might have expected to see a more meaningful correction. But so far at least, the market has taken the news fairly well.

My second point this morning is the fact that yesterday’s action was – wait for it – pretty darn constructive. Again, given the news we were greeted with in the wee hours yesterday, the market’s turnaround has to be considered a modest plus at the very least. Let’s review the headlines from yesterday morning: Radiation found in tap water in Tokyo. Gadhafi forces digging in. Portugal government on verge of collapse. Oil rallies back to highs. Bank of America denied opportunity to pay dividend. New record low for New Home Sales. Hmmm… None of that sounds very good, does it?

Yet, despite some really crummy headlines and an early decline, the tape turned around and the major indices finished in the green. Was it a “key reversal?” Probably not. But as the saying goes, it’s not the news, but how the market reacts to the news that counts. As such, I’m guessing that any bears still with us can be seen with their hands over their ears, eyes closed, saying “na-na-na-na-na” right about now.

Turning to this morning… The headlines once again aren’t so hot as Moody’s downgraded 30 Spanish banks, Portuguese 2-year bonds yields soared to their highest level since 1999 in response to the austerity measures failing and the PM resigning, there is steam coming out of a couple reactor buildings at Dai-ichi, and the mess in the Middle East continues.

On the Economic front… Initial Claims for Unemployment Insurance for the week ending 3/19 fell by 5K to 382K. This was a smidge above the consensus estimate for 380K but below last week’s total of 387K.Continuing Claims for the week ending 3/12 came in at 3.723M vs. 3.700M and last week’s 3.706M.

Next up, the Commerce Department reported that Durable Goods orders declined by -0.9% during the month, which was below the consensus expectations for an increase of +1.1%. When you strip out the volatile orders for transportation, orders fell by -0.6%, which was well below the consensus for +1.7%. The January reading was -3.0%.

Thought for the day: Go ahead and expect good things to happen today, you just might be surprised…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.00%
  • Shanghai: -0.06%
  • Hong Kong: +0.39%
  • Japan: -0.15%
  • France: +1.05%
  • Germany: +1.78%
  • London: +1.04%
• Crude Oil Futures: +$0.35 (May contract) to $106.10
• Gold: -$0.40 to $1433.70
• Dollar: higher against the Yen and Pound, lower vs. Euro
• 10-Year Bond Yield: Currently trading at 3.376%
• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +6.80
  • Dow Jones Industrial Average: +61
  • NASDAQ Composite: +15.3

Wall Street Research Summary

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