Questioning The Timing

Daily State of the Markets 
Wednesday Morning – December 1, 2010  

I could probably craft another football related analogy to describe Tuesday’s action and I’m fairly confident that some of the guys out there might enjoy my rendition of the replay of fourth down, which was then followed by a replay challenge etc. However, my guess is the gals probably get enough of the football stuff each weekend and frankly, I’m a little too annoyed to be overly cute in the creative department at the moment.

As long-time readers are likely aware, I’m a fairly even keeled type of guy as my job depends on me being able to objectively identify the key drivers to the market action on a daily basis. And although I am admittedly a card-carrying member of the glass-is-half-full club, I also try my darndest to keep my emotions in check when playing Ms. Market’s game. But after the shenanigans that occurred near the close yesterday, I’m seeing a little too much red – and it isn’t because I’ve got my rose-colored Revo’s on!

Over the weekend, I was out and about and saw an article in a Sunday newspaper (yes, I too was surprised that they still printed those things) and the teaser for the business section caught my eye. The title of the article was “Sitting Out The Stock Market” and the first line read, “An insider-trading investigation is just the latest scandal leading small investors to the conclusion that the game is rigged.”

My first reaction to the piece was something along the lines of, “This is news? No wonder nobody reads the newspaper anymore!” But for some reason the story stuck with me and I was reminded of it immediately after S&P’s announcement that they were putting Portugal on “Watch Negative.”

Frankly, you can’t blame the rating agencies for trying to keep up with their downgrades. After all, the way things are going it looks like Portugal will be the next in line to ask for some help from the EU/IMF. As such, it isn’t exactly surprising that S&P, Moody’s, Fitch, et al would want to get ahead of the curve. Therefore the first step is to say “hey, we’re probably gonna downgrade these guys real soon” via something along the lines of a “Watch Negative” announcement.

My problem is this. The bulls had been battling all day to try and keep the Dow and S&P above the all-important lines in the sand, which, if crossed to the downside would undoubtedly usher in a host of technical- and computer-based selling. And with about 20 minutes left in the day, it looked like the bulls had once again stuffed their opponents on a fourth-down scoring attempt (sorry, I couldn’t help myself).

But then at 15:47 hours on the last day of the month, I saw the S&P headline on Portugal. My immediate reaction was “Well, not exactly breaking news… but the timing is very interesting… I’ll bet these guys have some shorts on!” This immediately brought me back to that little article in the Sunday paper and the reality that this type of “stuff” is what makes the game difficult for most individuals these days.

Remember, there are all kinds of computer programs out there searching the news wires every millisecond for combinations of words designed to set off the program-trades. And while the idea that the Dow lost a quick 50 points isn’t anything to get riled up about (hey, it happens just about every other day anyway), the fact that a company like S&P would release such a headline with so little time left in the day left me wondering what might have happened if everybody and their grandmother didn’t already know Portugal was a problem – and whether that article in the Sunday paper might have a point.

I recognize that I have likely used up my allotted pixels this morning and that my little diatribe probably didn’t add much value to your day. So, climbing down from the soapbox I will try to quickly summarize the driving forces in the market at the present time. In short, the game appears to be between the better-than-expected economic data here in the U.S. (Consumer Confidence, Chicago PMI, etc) versus the never-ending tale of woe relating to the deficits, the banks, and the bailouts across the pond. Up until S&P dropped their little nugget late in the day, it appeared that the bulls had once again held off the bear attack. But given the reaction into the close, the post-game activity, and the foreign market results, it looks like the two teams will line up and do it again on this first day of December.

Bottom line: Watch the action around 1174 on the S&P. For, as they say in the football locker room, the team that controls the line of scrimmage is likely to win the game.

Turning to this morning… Stock futures are pointing northward for a change on decent data out of China, a successful auction in Portugal (despite rates spiking higher), and a handful of decent reports here in the U.S.

On the economic front… ADP reported that the private sector job market expanded again during the month of November. The report shows that private sector jobs rose by 93,000 jobs during the month, which was well above the consensus expectations for a gain of about 43K. October’s report was revised higher to a gain of 82,000 jobs, up from the initial report of +43K.

In addition, the government reported U.S. Nonfarm Productivity in the third quarter rose by +2.3%, which was dead on with the consensus expectations for a reading of +2.3% and Q2’s unrevised level of +1.9% (Q1 was +3.9%).

On the inflation front, Unit Labor Costs were reported to have fallen -0.1% versus the expectations for an decrease of -0.3%. Q2’s reading was unrevised at -0.1%.

Finally, choose to have a mind that is open to anything…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.01%
  • Shanghai: +0.12%
  • Hong Kong: +1.05%
  • Japan: +0.51%
  • France: +0.56%
  • Germany: +1.95%
  • London: +1.62%

   

• Crude Oil Futures: + $1.37 to $84.92
• Gold: + $5.00 to $1391.10
• Dollar: lower against the Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 2.907%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +15.30
  • Dow Jones Industrial Average: +132
  • NASDAQ Composite: +28  

Wall Street Research Summary

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