It Takes a Tanker, And Inflation, And…

Daily State of the Markets 
Thursday Morning – February 10, 2011

Recall that on Tuesday, with the markets stepping lively to new bull market highs, I had been asked the same question several times: What’s it gonna take to get a down day around here? While the venerable DJIA managed to pull a rabbit out of the hat and finish higher for an eighth straight session yesterday, the rest of the market indices finished in the red, albeit by varying degrees. So, what did it take for the bears to finally come away with a win? Well, it looks like it took a tanker, a lot of talk about inflation, some selling of the leaders and then looking ahead, perhaps a little company called Cisco.

Although stocks opened modestly lower, it wasn’t long before the dip buyers were back at it again on Wednesday. Apparently Ben Bernanke’s upbeat commentary relating to the state of the economy (the Fed Chairman used the words “self sustaining recovery” and said he expects a “more rapid pace of economic recovery in 2011”) helped put traders back in a buying mode. Thus, it wasn’t terribly surprising to see red turn to green and the indices back at new highs.

However, just before 11:00 am eastern time, traders reacquainted themselves with a little something called a sell program. More accurately, the headlines stated that a tanker, which, as you might suspect, was full of oil at the time, had been hijacked. And if you know anything about the way the new computer programs interpret headlines, it was little wonder that the Dow lost about 50 points in about 15 minutes.

What was interesting during this time was the fact that although the hijacking headlines had been credited with the dive in the Dow, oil was also falling, along with gold. And the yield on the 10-year, which you might expect to fall during such an event, was actually going the other way. So, it became very clear, very quickly that something was amiss.

Upon further review, it turns out that while the tanker talk may have triggered the sell programs, it was the ongoing discussion of inflation and monetary tightening in the emerging markets that was causing the fast money types to sell the leaders such as copper, aluminum, steel, machinery, all the oil sectors, and the coal names. In short, with most of these areas having ‘gone parabolic’ recently, traders likely decided to lock in some profits – just in case places like China, India, etc. do actually start to contract in response to higher interest rates.

And for those favoring the glass-is-half-empty point of view, the earnings report from the nearly always upbeat Mr. John Chambers may provide a reason to be hopeful coming into today’s session. While the gang sporting the rose colored Revo’s will argue that the issues related to Cisco (CSCO) were company-specific, our furry friend aren’t likely to let go of some of the key phrases from the conference call such as growth being “severely challenged for the next several quarters,” or that the company is seeing “pricing pressures on its established portfolio,” or that orders for set-top boxes were down 15% and that the consumer business “was more challenging.”

While the days of a single tech company moving the entire market (well, except for Apple, that is) may be long gone, it doesn’t take much in the way of mental gymnastics to see that if a company like Cisco is running into some difficulty, maybe the blue skies ahead that the market has been pricing in may not be such a sure thing after all.

But then again, unless another tanker gets hijacked or inflation continues to rear its ugly head, there is a decent chance that the buyers may simply keep on keepin’ on after a day or two of rest. After all, the U.S. stock market is THE place to be in 2011, right? So, with all of that money coming out of the emerging markets, the only logical place for it to go is… (Just out of curiosity, am I the only one beginning to feel that this argument is getting a little tired?)

Turning to this morning… Commentary from Cicso’s earnings report and conference call plus concerns about CDS spreads in Portugal have put a definite damper on the mood in the early going with European markets down and the U.S. futures pointing to a solidly negative open.

On the Economic front… The Labor Department reported that initial claims for unemployment insurance for the week ending February 4 fell by 36,000 to 383K. The week’s total was below the consensus for a reading of 410K. Continuing Claims for unemployment for the week ending January 29 were below consensus at 3.888M vs. expectations for 3.900M and were below last week’s revised (higher) 3.935M.

It is interesting to note that the futures have not improved much at all on what would be considered “good news” from the weekly claims. As such, it appears that the bears may try to get back in the game today.

Thought for the day: Resist the temptation to tell people only what they want to hear…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.13%
  • Shanghai: +1.62%
  • Hong Kong: -1.97%
  • Japan: -0.11%
  • France: -0.77%
  • Germany: -0.33%
  • London: -0.75%

   

• Crude Oil Futures: -$0.44 to $86.27
• Gold: -$9.00 to $1356.50
• Dollar: lower against the Yen, higher vs Euro and Pound
• 10-Year Bond Yield: Currently trading at 3.6762%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -5.38
  • Dow Jones Industrial Average: -38
  • NASDAQ Composite: -15.80

Wall Street Research Summary

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