Daily State of the Markets While I am not a big conspiracy theory guy, I will admit that there may have been more than meets the eye behind yesterday’s quick dive and late-day recovery. As long-time readers know, I am a firm believer that there is a reason behind every big move in the markets. And the fact that stocks opened lower yesterday morning wasn’t exactly a surprise given all the chatter surrounding Greece. However, both the severity and the speed of the initial move down definitely got my attention. The quick dance to the downside was certainly understandable as EU inspectors announced that Greece’s deficit reduction plan wasn’t quite all that it was cracked up to be (the EU says the plan would cut only 1.5% – 2% from the deficit/GDP target and not the 4% that had been reported). This, coupled with the recent reports that some of Wall Street’s biggest names had been busy lending Greece money that was “off the books” caused both Moody’s and Standard & Poors to warn that further rating downgrades for Greek debt may be in the offing. Following the dots on this isn’t too tough as further downgrades in Greece’s sovereign debt ratings could create forced selling from those investors required that their bonds be rated at a certain level or above. And then as we learned during the credit crisis, forced selling in debt tends to create a negative feedback loop that is difficult to stop. Another issue that has been brought up lately in relation to Greece and the rest of the PIGI’S is that the corresponding rise in the dollar is likely to hurt the earnings of the large multinational companies. Thus, we can probably count on hearing a lot of talk about reduced guidance in response to currency fluctuation during the upcoming mid-quarter updates. Now toss in the really crummy economic reports we’ve seen this week and it is easy to see that a certain segment of traders might be starting to worry about the state of the economy and the potential for a double dip. While all of the above makes sense and is by no means positive, much of this was not new. Thus, the dive of 172 points on the Dow in just 5 minutes really didn’t make a lot of sense. In short, the punishment doesn’t seem to fit the crime here. On this subject, we should also note that after taking a timeout for the past week or so, the linkage between stocks and the dollar was back in a big way yesterday. And it is for this reason that we’re of the mind that the program trades tied to this relationship may have exacerbated the selling. In sum, with the intraday volatility picking up lately, we feel it is time to raise the alert level a notch or two. Turning to this morning, the government’s 1st revision of the nation’s fourth quarter GDP shows the economy grew at an annualized rate of 5.9% in the fourth quarter, which was above the preliminary report for a growth rate of 5.7% and the 2.2% growth rate seen in the third quarter. The Personal Consumption component of the report came in with a gain of 1.7%, which was below the estimates for 2.0%. (This helps cement the idea that the consumer may be “doing less” these days.) And on the inflation front, the GDP Price index increased less than expected at 0.4% vs. 0.6% and the Core PCE rose by 1.6% vs. the preliminary report of 1.4%. Running through the rest of the pre-game indicators, the overseas markets are mostly higher. Crude futures are down $0.13 to $78.04. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.63%. Next, gold is moving down by $1.40 to $1107.10 and the dollar is higher against the Yen and the Pound but lower against the Euro. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a flat-to-down open. The Dow futures are currently off by about 2 points; the S&P’s are down about a point, while the NASDAQ looks to be about 3 points below fair value at the moment.
* Report includes items that make comparisons to the consensus estimate questionable Wall Street Research Summary Upgrades: |
Ensco (ESV) – Target increased at Citi China Unicom (CHU) – Deutsche Bank AstraZeneca (AZN) – Goldman GlaxoSmithKline (GSK) – Goldman Lamar Advertising (LAMR) – JPMorgan El Paso (EP) – Target increased at UBS
Downgrades:
Dynegy (DYN) – Citi Palm (PALM) – Target reduced at Citi, Downgraded at UBS Bare Escentuals (BARE) – Citi Dr Pepper Snapple (DPS) – Goldman PetSmart (PETM) – Goldman Monsanto (MON) – Target reduced at JP Morgan Fluor (FLR) – RW Baird Motorola (MOT) – UBS Taubman Centers (TCO) – UBS
Long positions in stocks mentioned: HANS, LAMR, DPS
Enjoy your Friday, have a pleasant weekend, 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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