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Daily State of the Markets Good morning. Long-time readers know that I tend to look at the bright side where the stock market is concerned. This began in 1994, when I was dubbed “Dr. Doom” at the office. After getting stuck in a “dark place” for far too long, I learned the hard way that it doesn’t pay to bet against the U.S. for any length of time – without a darn good reason, of course. And while I do concur that the European debt mess is not another “Lehman moment” and even has a fair chance at being resolved without becoming a total disaster, I thought the media’s explanation for yesterday’s rally was laughable. In looking for the reasons behind yesterday’s continuation rally, I can see that the Semis are showing some nice leadership here. After a tough period for the chips (the Philly Semiconductor Index fell -31% from February 17th through August 19th) it is nice to see the semis retake the lead. And I do recognize that the NASDAQ is “trading well” right now. So, if you want to argue that the Semis led stocks higher, I’d likely nod along. I will also admit that valuations in some areas have improved and that this too could have been used as a reason for the rally. The valuation debate especially makes sense when viewed from a mutual fund manager’s perspective due to the fact that the vast majority of managers are forced to remain nearly 100% long at all times. (Thus, if a fund manager wants to earn his or her bonus, buying the dips – especially the big dips – is a good strategy to employ.) Yes, I did read all of the chatter about China and the rest of the BRICS coming to the rescue of the Eurozone. Heck, I would even go along with the argument that this week’s options expiration event was behind the move up in prices. After all, there was a lot of talk about strike prices and the “pinning” that tends to take place in front of expirations. And come to think of it, I’d even endorse one of the media’s old standby’s for market rallies: short covering. However, to suggest that the reason stocks were flying higher yesterday afternoon was because “Merkozy” (the loveable new nickname for the dynamic Euro duo of Angela Merkel and Nicolas Sarkozy) told Greece via conference call that it was still part of the Euro family… Well, that may be one the dumbest ideas I’ve ever heard! If you learned anything about big government crisis management during the 2008-09 debacle, it was that “buying time” is the real key. The only reason Lehman went down was because Paulson, Geithner, and Bernanke simply ran out of time. If they had had the luxury of another week, I’m confident they could have worked a deal such as was done with Bear Stearns, AIG, Merrill, and the rest of the Wall Street firms. But in reality, it was the clock winding down to zero that forced Lehman into chapter 11 and the money markets into chaos. So, given that Greece needs enough Euros to fill the Parthenon within the next few weeks, what did you think the Merkozy duo was going to do yesterday? Yes, the Greeks have not delivered on their promises and are now making even bigger and even harder to keep promises. Yes, the Greeks are likely to default at some point. And yes, this event will indeed be messy. But does choosing to trigger the very “credit event” that the entire globe is worried about make a lot of sense? So, no, from my perspective, Greece was never at risk of being kicked out of the Eurozone yesterday. In fact, that may be the dumbest idea I’ve heard this year! Again, the goal of all governments involved right now is to buy enough time for this global economic slowdown to turn around. The thinking is if enough time can go by, the problem might just resolve itself. Okay, while that may actually be the dumbest idea yet, it appears to be the only real solution available at the present time. I guess this plan makes some sense. Instead inducing what will surely be a large amount of economic pain now, the plan is to hope that things will get better down the road and that there will be a better time to initiate a default or two. Come to think of it, this is a lot like the U.S.’s plan to deal with our debt. Everybody agrees that this isn’t the best time to start cutting spending. So, like the Eurozone, I’m assuming that Congress will be on the lookout for the right time to start taking the hard decisions, yes? Or wait a minute, maybe that is actually be the dumbest idea I’ve heard lately. |
Turning to this morning… The upbeat sentiment that arose following the Merkozy conference call with Greece continues this morning. This despite renewed signs of credit tightening in Europe and reports of a $2 billion rogue trading loss for UBS.
On the Economic front… We’ve got three reports to reveiw. Initial Claims for Unemployment Insurance for the week ending 9/10 rose by 11,000 to 428K. The report was worse the consensus estimate for 412K and last week’s revised total of 417K (up from 414K). Continuing Claims for the week ending 9/3 came in at 3.726M vs. 3.703M and last week’s 3.738M.
Next up, the Consumer Price Index for August rose by +0.4%, which was above the consensus estimates for an increase of +0.2%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.2%, which was in line with expectations for +0.2% and July’s +0.2%.
And finally, The Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for September was reported at -8.82, which was well below the consensus expectations for a reading of -3.8. This marks the fourth straight negative reading for the index, which up until May had been positive since November 2010.
Thought for the day… Don’t forget, ego is the real enemy in this game…
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets:
- Australia: +1.54%
- Shanghai: -0.23%
- Hong Kong: +0.71%
- Japan: +1.76%
- France: +2.69%
- Germany: +2.46%
- Italy: +2.04%
- Spain: +2.83%
- London: +1.88%
- Crude Oil Futures: +$0.25 to $89.16
- Gold: -$28.50 to $1798.00
- Dollar: higher against the Yen, lower vs. Euro and Pound
- 10-Year Bond Yield: Currently trading at 2.071%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.32
- Dow Jones Industrial Average: +45
- NASDAQ Composite: +12.30
Wall Street Research Summary
Upgrades:
- McGraw-Hill (MHP) – Argus
- Colgate-Palmolive (CL) – BofA/Merrill
- Estee-Lauder (EL) – BofA/Merrill
- Arch Coal (ACI) – Deutsche Bank
- Peabody energy (BTU) – Deutsche Bank
- Aeroflex (ARX) – Added to Conviction Buy at Goldman
- Onyx Pharmaceuticals (ONYX) – Goldman
- JM Smucker (SJM) – Goldman
- Dole Food (DOLE) – JPMorgan
- Applied Materials (AMAT) – Oppenheimer
- Union Pacific (UNP) – UBS
- Goodyear Tire (GT) – BofA/Merrill
- AutoNation (AN) – BofA/Merrill
- Genuine Parts (GPC) – BofA/Merrill
- LKQ Corp (LKQX) – BofA/Merrill
- Procter & Gamble (PG) – BofA/Merrill
- Scotts Miracle-Gro (SMG) – BofA/Merrill
- James River Coal (JRCC) – Deutsche Bank
- United Therapeutics (UTHR) – Goldman
- ConAgra (CAG) – Goldman
- Ilumina (ILMN) – Leerink Swann
Long positions in stocks mentioned: none
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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