It’s What They Say That Counts

Daily State of the Markets 
Wednesday Morning – March 17, 2010  

In most situations, the phrase “It’s not what they say, it’s what they do that counts” is a solid guide. After all, it is also said that actions speak louder than words. However, in the case of the Federal Reserve and the FOMC, everybody knows that they aren’t going to do much of anything for a while. Thus, it is indeed what they say that counts right now.

Nobody in their right mind expected to see the FOMC make any changes to interest rates on Tuesday. And while most analysts also didn’t expect them to say anything different either, there were some concerns that Bernanke & Co. would change the all-important language referring to interest rates staying low and begin hinting at when monetary policy would change. But instead, the statement accompanying the Fed’s rate announcement continued to include the words “exceptionally low for an extended period” when referencing interest rate expectations. And in short, the lack of anything new in the Fed’s statement was enough for buyers to continue to be emboldened in the stock market.

As has been the case lately, stocks rallied a bit in front of the FOMC announcement. In addition to the reminder that the Fed isn’t straying from its course, the bulls had a fair number of positive inputs on Tuesday. First and foremost, the fact that S&P removed Greece’s sovereign debt from their CreditWatch negative list and reaffirmed their BBB+ rating (which remains two levels into the investment grade category) was a clear positive for the market. And while the “outlook” was moved down a notch to negative from stable, the fact that S&P did not downgrade the credit rating at this time was key.

Next up, the weather continues to give the spin doctors an excuse to wave off any bad economic news. Although Housing Starts fell 5.9% in February, analysts decided to focus on the good stuff in the report (Starts actually came in above expectations and the prior month was revised higher) and wait for next month’s data.

In addition, while Senator Dodd’s bill to reform financial regulations surprisingly included the “Volcker Rule,” the assumption in trading circles is that the proposed legislation will have to be watered down if there is any chance of becoming law.

And finally, the semiconductors helped the NASDAQ continue to take a leadership role yesterday as the SOX (Philadelphia Semiconductor Index) bounced an impressive 2.7%. Some positive commentary on Intel (JMP raised INTC’s estimates for both 2010 and 2011) as well as a pre-announcement on earnings from Microchip (MCHP) were enough to attract buyers back into the tech space.

Perhaps the most encouraging aspect of the session was the fact that the S&P 500 was able to “break on through to the other side” of important resistance as the blue-chip index joined the smallcaps, midcaps and NASDAQ in making new highs for this mini bull market cycle. And while the Dow remains 40 points away from the Promised Land on the charts, the fact that the rest of the indices are already movin’ on up leads us to believe the Dow will eventually find a way to join in on the fun.

Turning to this morning, the Labor Department reported the Producer Price Index for February fell by -0.6%, which was below the consensus estimate for a drop of -0.2% and January’s reading of +1.4%. When you strip out food and energy, the so-called Core PPI came in up +0.1%, which was in line with the consensus for +0.1% and below January’s +0.3%.

Running through the rest of the pre-game indicators, the overseas markets are higher across the board. Crude futures are up $0.86 to $82.56. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.63%. Next, gold is moving up $3.70 to $1126.20 and the dollar is lower against the Yen, Euro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 20 points; the S&P’s are up about 3 points, while the NASDAQ looks to be fractionally above fair value at the moment.

Wall Street Research Summary

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