Waving Goodbye (And Singing a Happy Tune)

Daily State of the Markets 
Thursday Morning – November 4, 2010  

After all the endless discussion, analysis, and hand wringing over both the mid-term elections and the size and duration of the Fed’s latest plan to pick up a few bonds for its portfolio, investors are now able to wave goodbye to these two sources of uncertainty. And for anyone still doubting the stock market’s ability to discount future expectations, we will offer up the rally over the past two months (as well as the market’s inability to decline even a smidge during the period) as Exhibits A and B.

The issues of QE II and the Republican resurgence are not the only things that investors can wave goodbye to this morning. For those of you keeping score at home, the cycle highs for the current bull market were eclipsed on both the DJIA and NASDAQ yesterday (the S&P 500 still has some work to do on this score). In addition, it is safe to say that we can wave goodbye to worries about the possibility of a double-dip recession given the recent data points.

According to our furry friends in the bear camp we should also be waving goodbye to the current joyride to the upside. The glass-is-half-empty crowd could be heard telling anyone that will listen yesterday that while investors can be seen standing on the dock saying bon voyage to the QE II, the question of “what’s next?” will undoubtedly come to mind. As such, the bears contend that (a) the “sell the news” portion of this anticipatory trade may be upon us, and then if that doesn’t work (b) that all the good news has to be priced in right about now.

However, while our heroes in horns will certainly acknowledge that the game has been more than a little one sided lately, some of the bolder members of the bull camp were spotted at the corner of Broad and Wall yesterday doing a rousing rendition of the refrain from a 70’s classic. Although it was hard to make out, I believe they were singing, “You ain’t seen nothin’ yet… b-b-b-b-aby you just ain’t seen nothin’ yet!”

Although there may have been a celebratory adult beverage or three involved, our perhaps overly enthusiastic friends in the glass-is-definitely- overflowing crowd remind us that anyone with long holdings has history on their side right about now. And in case you were skeptical, all the members of yesterday’s chorus were able to quickly produce a chart showing the tendency of the stock market to move up smartly for the six to eight months following the mid-term elections.

So, does this mean that the straight-up run that began back on September 1st will continue unabated? While anything is possible in this business, our guess is that something will come out of the woodwork to cause traders to rethink the current bout of exuberance. And then, it will likely take less than a second for the HFT gang to turn the game on its head – well, for a short-time anyway.

In all seriousness, we will offer up the idea that a pullback in the near-term might set up a year-end rally. So, when the bad news hits, and trust us, it will hit at some point soon, you might want to be ready with your shopping list.

Turning to this morning… the celebration continues around the world as the expectation is that QE II will get the U.S. economy moving in the right direction.

On the economic front… The Labor Department reported that initial claims for unemployment insurance for the week ending October 30 rose by 20,000 to 457K. The week’s total was 12K above the Reuters consensus for a reading of 445K. Continuing Claims for unemployment for the week ending October 23 were below consensus at 4.34M vs. expectations for 4.389M and last week’s revised (higher) 4.382M.

Next up, the government reported Nonfarm Productivity in the third quarter increased by +1.9%, which was above the consensus for +1.3% and Q2 decline of -1.8%. On the inflation front, Unit Labor Costs were reported to have fallen -0.3% versus the expectations for an increase of +0.7 and Q2’s reading of +1.3%. Remember, labor costs are one of the key components to inflation – which the Fed is trying to pump up.

Finally, don’t forget, ego is the real enemy in this game…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.49%
  • Shanghai: +1.85%
  • Hong Kong: +1.62%
  • Japan: +2.17%
  • France: +1.84%
  • Germany: +1.55%
  • London: +1.73%

   

• Crude Oil Futures: + $1.41 to $86.40
• Gold: + $32.90 to $1370.50
• Dollar: higher against the Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.503%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +12.34
  • Dow Jones Industrial Average: +95
  • NASDAQ Composite: +26.89  

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

Wall Street Research Summary

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