No Surprises

Daily State of the Markets 
Friday Morning – April 23, 2010  

It has got to be frustrating to be a bear these days. There are certainly enough macro themes to be negative about including sovereign debt, the outlook for the economy going forward, the intrusive hand of Big Brother, increasing taxes, worries about commercial real estate, etc. However, the bottom line is that our furry friends appear to be members of the gang that can’t shoot straight these days.

For the past eleven weeks, the bears have been rebuffed at every turn. Each and every time something bad has come out of the woodwork to give them the ball, the glass-is-half-empty crowd has fumbled it away. And in short, yesterday was another perfect example of the bear camp’s inability to get anything going.

By most counts, Thursday should have been a down day. It should have been a day that tested the bulls’ resolve as sellers pushed the indices through their short-term moving averages and appeared to be well on their way to breaking down through important support zones. Thursday should have been a scary session as our friends in fur had Greece on their side with a fresh downgrade and soaring yields, new sovereign debt problems in Portugal, and big-picture concerns about the debt/GDP ratios in the entire EU. There were disappointments in tech and healthcare. There was worry that the administration might come up with new punishments for the banking industry. And there was the technical picture on the charts, which wasn’t looking very pretty after the open.

But alas, none of that mattered. The bulls were able to once again wrestle the ball away from their opponents and by the end of the day, appeared to back in charge. There were two primary catalysts behind the surprise to the upside. First, and perhaps most important, was the fact that the President’s speech did not contain any new surprises. Traders had been braced for new taxes/penalties/regulations as Obama took to the road to pitch financial regulatory reform. So, since the President’s speech was fairly benign, traders were able to breathe a sigh of relief.

In addition, worries are beginning to fade that a litigation contagion could develop in the investment banking community on the back of the SEC’s charges against Goldman Sachs. New reports show that the SEC’s case, while likely to succeed, is not as damning as had been feared. It appears that the CDO in question was not put together with the intention to fail and the SEC may have some problems with their suit.

Finally, the economic data and the status of the earnings season continue to support an upbeat attitude. For example, Existing Home Sales were stronger than expected, inflation remains tame at the core producer level, and Bespoke reported that the “EPS Beat Rate” remains at the top end of the range seen over the last 10 years.

So, while it was a little surprising to see the bulls pull yet another rabbit out their hat yesterday and the bears give up so quickly, we need to remember that this remains one of those rare and remarkable runs where it pays to stay with the prevailing trend. To be sure, the fun will end at some point. However, until the bears can get their act together for more than a day or two, we’d continue to side with the bulls.

Turning to this morning… Greece made it official by asking the EU/IMF to activate the aid package.

On the economic front, orders for long-lasting goods took a surprising tumble in March. The Commerce Department reported that Durable Goods orders dropped -1.3% during the month, which was well below the consensus expectations for +0.2%. However, February’s reading was revised to +1.1% (up from +0.5%) and when you strip out the volatile orders for transportation, orders in March increased by +2.8% (which was above the consensus for +0.7% and February’s revised reading of +1.7%).

It is also important to recognize that the headline number was dominated by a plunge of 67% in aircraft orders and that the Ex-Transportation numbers continued a strong trend higher – the Orders Ex-Transportation were up for the fourth time in the last five months.

Running through the rest of the pre-game indicators, the major overseas markets are split by region with Asia down and Europe up. Crude futures are down $0.50 to $8320. On the interest rate front, the yield on the 10-yr is currently trading at 3.82%. Next, gold is down $0.70 to $1142.20 and the dollar is lower against the Yen and Euro, but higher against Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a rather flat open. The Dow futures are currently off by about 9 points; the S&P’s are down by about a point, while the NASDAQ looks to be about a point above fair value at the moment.

Finally, enjoy your Friday and have a pleasant weekend…

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

Upgrades: