Preparing For The Worst?

Daily State of the Markets 
Monday Morning – June 28, 2010  

From mid-February until the latter part of April, investors could be accused of hoping for the best as they bid stock prices higher on a daily basis. There wasn’t much to complain about as earnings were stronger than expected, the economy was improving, houses were selling, and the economy was starting to create jobs. However, with the macro outlook having suddenly changed to something on the order of cloudy-with-a-chance-of-showers, traders now appear to be preparing for the worst.

However, after four straight days of selling, during which time the Dow had given up nearly 300 points on a closing basis and the S&P had fallen almost 4%, traders took a break from all the gloom-and-doom talk and did a little (and we do mean a little) buying on Friday. Maybe it was the fact that it was a summer Friday that put traders in a better mood. Maybe it was short-covering. Maybe it was the fact that the market has become fairly oversold in a short period of time. Maybe it was the Russell rebalancing. Maybe it was the deal on FinReg. But in any event, it was refreshing to see the market not get tagged for big losses for a change.

Speaking of losses, it looked like Friday was going to be filled with them again after the GDP report came in light. The government reported that the nation’s GDP grew by an uninspired 2.7% in the first quarter, which was below expectations, below the last guesstimate, less than half the rate seen in the fourth quarter (5.6%), and well below the typical growth rate seen at this stage of an economic recovery. Couple this with the record low in New Home Sales seen during the week and it is hard to get terribly excited about the future outlook for the economy right now.

Although the week had been dominated by the nattering nabobs of negativity, the bulls were finally able to find something to cheer about on Friday. While the new Financial Regulatory Reform bill has been a political football and doesn’t really address the root cause of the credit crisis, the fact that there was finally a bill on paper helped removed some of the uncertainty in the market. As a result, banks enjoyed a strong outing with the BKX (KBW Bank Index) popping up 2.9% on the session.

But with talk of the season’s first named storm possibly into the Gulf, the upbeat attitude didn’t really catch on outside of the small caps and energy names. So, with the upcoming July 4th weekend and the start of a brand new earnings parade not too far off, it will be interesting to see if Friday’s modest enthusiasm can catch on or if traders continue to prepare for the worst.

Turning to this morning… traders are modestly upbeat after the weekend G-20 meeting in Toronto where pledges were made to work on deficits in a growth friendly fashion. However this morning’s economic data was mildly disappointing.

Speaking of economic data, Personal Incomes were rose by +0.4% in May, which was a tenth below the consensus expectations for an increase of +0.5%. April’s reading was revised lower to +0.4% from +0.5%. Personal Spending for the month rose by +0.2, which a tenth ahead of the expectations of +0.1%. On the inflation front, the PCE Core rose by +1.9 over the past year while the PCE Deflator was up +0.2 in April.

Next, the Chicago Fed reported that their National Activity Index came in at +0.21 in May, which was below the estimates for a reading of +0.32 and the revised April reading of +0.25.

Finally, be sure to take time to breathe…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: -0.67%
  • Shanghai: -0.69%
  • Hong Kong: +0.17%
  • Japan: -0.45%
  • France: +1.17%
  • Germany: +1.17%
  • London: +0.31%

   

• Crude Oil Futures: – $0.51 to $78.35
• Gold: – $1.00 to $1255.20
• Dollar: Lower against Yen, higher vs Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 3.09%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +1
  • Dow Jones Industrial Average: +8
  • NASDAQ Composite: +5.83  

Wall Street Research Summary

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