Now For Some Good News

Daily State of the Markets
Tuesday, December 18, 2012

Good Morning. Now I ask you, is there any better way to start off a week than with some good news? This is especially so when that week is the last full week of the year and a week that has had a tendency to lead into what investors affectionately refer to as the “year-end rally.” And after last week’s disappointing showing, I’m guessing I wasn’t the only one that enjoyed seeing some green on the screens yesterday.

The question of whether or not Monday’s joyride to the upside will stick around for any length of time is, of course, subject to debate. However, it is always encouraging when the big green bars are accompanied by some good news. And some good news is exactly what we got yesterday.

If you don’t spend your days studying the wiggles and giggles on the charts or watching news tickers and twitter feeds, you may not have been aware of the good stuff that hit the tape on Monday. For there was no real breakthrough on the fiscal cliff front, there weren’t any groundbreaking headlines, and the economic data that was released wasn’t exactly encouraging. However, trust me when I tell you that investors were treated to couple of upbeat surprises.

Japan, Really?

For starters, the LDP party in Japan won big in Sunday’s elections. I know, this headline probably didn’t warrant much of your attention – if you even saw it. But here’s the deal – the election gave Shinzo Abe a mandate to push for more stimulus from the Bank of Japan. According to reports, Abe has stated that he wants a revision to the law that guarantees the central bank’s independence and that he wants the central bank to take “unlimited” action to fight deflation. Can you say QEinfinity and beyond?

All Cliff, All the Time

Next up was the weekend happenings on the fiscal cliff. While the idea of Republicans proposing a tax increase on the wealthy may not sound like good news, when considered within the context of the cliff negotiations, it certainly was. In short, the fact that Speaker Boehner put a tax rate increase for the wealthiest Americans on the table meant that although the two sides remain at odds on just about everything, there does appear to be actual negotiation going on. And this is clearly good news.

Tepper Trade II?

Then came the headlines from CNBC’s interview with hedge fund manager David Tepper. As you may recall, Mr. Tepper made headlines back in 2010 when he said the market was a winner regardless of what happened to the economy. The head honcho at Appaloosa Management, who doesn’t spend a lot of time with the press, suggested that if the economy weakened stocks would advance due to the likelihood that the Fed would embark on QE2. And then if the economy improved, stocks would advance due to the fact that profits tend to be linked to economic growth. Tepper’s “call,” which got a lot of attention and wound up being referred to as the “Tepper Trade,” was spot on as stocks went on an impressive run into early 2011.

So, when Tepper talks, people listen. Therefore, I for one had pen in hand during the CNBC interview. It appears that I wasn’t the only one scribbling down Tepper’s comments as the segment wound up goosing the futures in the pre-market and providing some water cooler discussion for the rest of the session.

Although the interview was relatively brief, there were a handful of sound bites that garnered a lot of attention. Some of the key takeaways from the interview included:

• Stocks are cheap relative to bonds. When asked how cheap, Tepper said, “It [the market] is really, really interesting. I hate to say how cheap it is.”
• Tepper believes bonds are “richly” valued, but not in a bubble – not yet anyway.
• He says stocks have “a lot” (insert long pause for emphasis here) of room to the upside
• When asked about risk, Tepper replied, “I don’t see much downside in the market right now”
• Tepper also said the economy has some tailwinds currently and will grow faster if we get past the current logjam (i.e. the cliff)
• Tepper obviously doesn’t like to fight the Fed, saying “At 12 times next year’s earnings and this Fed – of course the market is cheap”
• Backing up his view on valuations, Tepper said that while stocks have advanced since his 2010 call, P/E’s really haven’t expanded much at all.

Time will tell whether or not Tepper’s comments will produce another pop of 20% the way they did last time (well, to be fair, Ben Bernanke may have had some say in those market gains). However, based on the market’s almost instantaneous response, it did appear that Tepper’s comments were viewed as being good news for equity investors.

And We’re Back…

And finally, we should return to the subject of the fiscal cliff. As the day progressed, we learned that Obama and Boehner had met for 45 minutes. There were no press briefings and WH Press Secretary Carney really didn’t have much to say. However, later in the day it was reported that the President is considering a concession on using a “chained CPI” for calculating Social Security benefits.

To be sure, the President hasn’t been big on making any kind of “concessions” up to this point. As such, traders took the President’s “baby step” as another piece of good news and set their programs to buy ’em into the close.

So, while one day does not a trend make and the S&P has not broken into the open field yet, it was pleasing to see that there was indeed some good news to be had yesterday.

Turning to this morning… Although there is still no deal, word that both sides are now moving on the fiscal cliff is giving the market hope that there is light at the end of the tunnel. Stock futures continue to point to a higher open on Wall Street.

On the Economic front… We’ll get the Current Account Balance and NAHB Housing Market Index this morning.

Thought for the day… Worry often gives a small thing a great shadow. -Swedish Proverb

Pre-Game Indicators

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

Major Foreign Markets:
– Shanghai: +0.08%
– Hong Kong: -0.08%
– Japan: +0.96%
– France: +0.02%
– Germany: +0.41%
– Italy: +0.36%
– Spain: +0.80%
– London: +0.40%

Crude Oil Futures:

+$0.50 to $87.90 !========>!========>