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Daily State of the Markets |
The last day of the third quarter turned out to be one of mixed emotions. While the bulls could be happy about closing out the best quarter in more than a decade, some worries cropped up that managed to keep the celebration in check.
Stocks initially got a nice lift from the government’s final attempt at putting a number on the country’s Gross Domestic Product (GDP) for the second quarter, which by now seems like a lifetime ago to most investors. Instead of the economy falling at an annualized rate of -1.2%, the government reported that GDP contracted at a pace of just -0.7% during the quarter.
But the fun didn’t last long as traders were treated to a surprise from the Chicago Purchasing Managers Index. The index, which is designed to indicate economic activity in the region, was expected to come in with an increase of 2.5 points to reading of 52.5. This is important line in the sand for the data series because anything above 50 indicates economic expansion, while readings below 50 indicate contracting economic activity. So, traders were not at all pleased to see the Chicago PMI come in with a reading of 46.1 in September.
Despite the fact that the PMI report mentioned that such setbacks are not at all unusual when recessions end, the number killed the mood and stocks quickly dove 150 points in about 15 minutes. While there may have been some program trading involved, with much of the recent advance being attributed to things looking up in the economy, it will suffice to say that a setback in economic activity is not what the bulls were looking for.
Another worry that has cropped up recently is the idea that the Fed may pull the punchbowl from the party too soon. As you may recall, Fed Governor Kevin Warsh wrote an Op-Ed piece for the Wall Street Journal on Friday in which he talked about the Fed possibly acting “aggressively” to remove the programs put in place to stave off a collapse of the banking system.
So, when it was reported that former Fed Chairman Alan Greenspan had nice things to say about the economy and then FOMC Vice-Chairman Donald Kohn said that the Fed’s withdrawal is likely still a ways off, the mood of the market improved markedly. And before you figure out where to go for lunch, the Dow had pulled a U-turn and was up on the day.
But as is often the case during these manic depressive types of sessions, the bulls couldn’t keep it going and stocks pulled back a bit into the close. So, once again, although there was some movement in both directions, there were no trendlines, important moving averages, or support zones broken. Thus, all remains right with the world – at least from the bulls’ perspective.
Turning to this morning, don’t look now but it’s October and there is a fair amount of trepidation as we enter the month famous for big declines. But to be fair, when you take out the various market crashes from the historical data, October isn’t really a bad month.
On the economic front, Personal Incomes for August rose by +0.2%, which was above the expectations for an increase of +0.1%. Personal Spending increased by +1.3%, which was also above the consensus of1.1%. However, the weekly jobless numbers were not especially encouraging as initial claims rose 17K to 551K, which was above expectations for 535K. Ongoing claims were a bit better at 6.09M vs. 6.17M.
Running through the rest of the pre-game indicators, the foreign markets are lower across the board. Crude futures are moving down with the latest quote showing oil trading off by $0.51 to $70.10. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.28%, while the yield on the 3-month T-Bill is currently at 0.09%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 30 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 9 points below fair value at the moment.
Upgrades/Downgrades/Brokerage Research:
Morgan Stanley (MS) – Estimates reduced at Barclays Allstate (ALL) – Estimates increased at Barclays Chubb (CB) – Estimates increased at Barclays Hanover Insurance (THG) – Estimates increased at Barclays PartnerRe (PRE) – Estimates increased at Barclays Travelers (TRV) – Estimates increased at Barclays Baker Hughes (BHI) – Upgraded at Bernstein Helmerich & Payne (HP) – Initiated outperform at Bernstein Pride Intl (PDE) – Initiated outperform at Bernstein Smith Intl (SII) – Initiated outperform at Bernstein Kelly Services (KELYA) – Upgraded at Citi Martin Marietta Materials (MLM) – Upgraded at Citi Manpower (MAN) – Downgraded at Citi Ultra Petroleum (UPL) – Upgraded at Credit Suisse KB Home (KBH) – Downgraded at Credit Suisse Alcoa (AA) – Upgraded at Deutsche Bank Activision Blizzard (ATVI) – Removed from Conviction Buy list at Goldman Microsoft (MSFT) – Removed from Conviction Buy list at Goldman PMC-Sierra (PMCS) – Downgraded at Goldman, JP Morgan Southern Company (SO) – Upgraded at Jefferies Entergy (ETR) – Downgraded at Jefferies BMC Software (BMC) – Downgraded at JP Morgan NVIDIA (NVDA) – Downgraded at JP Morgan Leap Wireless (LEAP) – Downgraded at JP Morgan MetroPCS Communications (PCS) – Downgraded at JP Morgan Saks (SKS) – Downgraded at JP Morgan Walt Disney (DIS) – Target increased at Morgan Stanley Agilent (A) – Downgraded at Thomas Weisel Bronco Drilling (BRNC) – Upgraded at UBS Pioneer Drilling (PDC) – Upgraded at UBS Patterson-UTI (PTEN) – Upgraded at UBS
Long positions in stocks mentioned: GS, THG, MSFT
Best wishes for a pleasant day 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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