It’s (Still) The Economy, Stupid!

Daily State of the Markets 
Thursday Morning – January 6, 2010  

I was chatting with a colleague before lunchtime Wednesday and his mood quickly went south as the market began to move to the upside in earnest. In an exasperated tone he cried, “Why on earth is this thing going higher?” Apparently my friend had put on some short positions in anticipation of what he believed to be a “no brainer” move to the downside and was already feeling the pain of the positions.

In an effort to lighten the mood, I conjured up my best James Carville imitation and in what was apparently a very bad southern drawl told him “It’s the economy, stupid!” Unfortunately, this may have hit a little too close to home (perhaps I put just a little too much emphasis on that last word!) and just made matters worse. He proceeded to launch into a five-minute diatribe about all the negatives that were “still out there and bound to come home to roost – and soon!”

I listened patiently (after all, I had probably prompted the outburst with my ill-timed political cliché) and then, as politely as I could, reminded him that “This game is about what it’s about… and right now, it’s about the economic data – so get out of the bitter barn and enjoy the ride!” I told him that the ISM data was well above expectations and that while there may be some quirks in the ADAP data, it was still a good number – even if you cut it in half.

I went on to opine that while stocks could easily embark on a 3% – 5% pullback at some point “just because the bears are due,” it is important to stay in tune with what IS happening instead of what you’d like to see happen. And the bottom line is that right now, people are continuing to put money into stocks.

This brings me to the main point of this morning’s missive. There are any number of Wall Street-isms that work here but three of my absolute favorites seem to be applicable. First, let’s remember that in the stock market, “Things don’t matter until they do, and then they matter a lot.” While there ‘may’ be big negatives lurking out there, none of them seem to matter a whole lot right now (probably because they are so widely known). Therefore, instead of worrying about what ‘should’ happen it is much more profitable to try and identify what IS actually driving the action.

Next up is, “Investors are very good at fighting the last war.” Think about this for a moment. Virtually no one saw the credit crisis coming. Almost no one saw the massive problems in mortgage-backed securities. And even fewer people ‘saw’ the depth of the destruction that occurred when things got out of hand. And these are the same folks that didn’t ‘see’ the tech bubble in 1999. So, why on earth does everyone think they will be able to identify the next problem?

The real problem is that too many investors are busy planning for what they shoulda’, coulda’ or woulda’ done in the past. This despite the fact that the present is nothing like the recent past. Stocks are not overvalued. There is not a massive bubble building. And the banking system is not at risk of crumbling anytime soon.

And finally, it is VERY important to learn that, “The market doesn’t care what you think!” While this is always a humbling thought, managing money is much easier once you come to recognize this truth. So instead of worrying about “being right” or “looking smart” it is much more productive to check your ego at the door, to understand that you WILL be ‘wrong’ in this business, and that the game is about making your account go up – not big market calls or headlines.

So, while I see the overbought condition (I’ve been writing about it for months) and I see that sentiment has become extreme (yep, I’ve mentioned that a time or two as well) it is mission-critical to understand that Ms. Market can do whatever she wants, for as long as she wants. And while I was not exactly enamored with the action yesterday morning, this does not mean I’m ready to step in front of the speeding train. Remember, right now, “It’s the economy…”

Turning to this morning… Stock futures continue to work higher this morning on the back of gains in most of the foreign markets and expectations for a strong Nonfarm Payroll number tomorrow morning.

On the economic front… The Labor Department reported that initial claims for unemployment insurance for the week ending January 1 rose by 18,000 to 409K. The week’s total was just above the consensus for a reading of 406K. Continuing Claims for unemployment for the week ending December 25 were above consensus at 4.103M vs. expectations for 4.057M and last week’s revised (higher) 4.115M.

Thought for the day: Instead of muddling through, make every effort to enjoy your day…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.59%
  • Shanghai: -0.49%
  • Hong Kong: +0.38%
  • Japan: -0.17%
  • France: -1.05%
  • Germany: -1.54%
  • London: -0.54%

   

• Crude Oil Futures: – $0.65 to $88.73
• Gold: – $2.20 to $1376.60
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 3.409%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -2.55
  • Dow Jones Industrial Average: -33
  • NASDAQ Composite: -8.45

Wall Street Research Summary

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