What’s It All About?

Daily State of the Markets 
Thursday Morning – February 24, 2011

Something happened in stock market on Wednesday that hasn’t occurred since the scary days of last summer when the words ‘double dip’ and ‘European debt crisis’ were all the rage: a second straight triple-digit decline. Given that traders haven’t seen more than a handful of triple-digit drops in total since September 1st of last year, two consecutive days of meaningful losses may have left some people scratching their heads. Thus, the key question on the minds of the investors I talked to yesterday was, “What’s it all about?”

It seems that everyone I spoke with yesterday had a different opinion as to the root cause of this particular dance to the downside. In fact, I jotted down no fewer than nine potential drivers during conversations with colleagues on Wednesday. Let’s see, we’ve got Libya, Saudi Arabia, Bahrain, Greece, Oil, Inflation, Stagflation, Global Growth (or a lack thereof), and Sell Programs. So, let’s get started.

The news flow out of Libya is surely enough to create the urge for even the most experienced investors to become more risk averse. Reports that Gadhfi’s forces opened fire on protestors in Tripoli kept the media’s attention and the dictator’s vow to stick around until the last bullet was fired suggests that there isn’t an easy and/or quick resolution – ala Egypt – on the horizon. And from a financial perspective, word that Libya’s oil production was being steadily reduced put a steady bid under the oil futures.

Speaking of oil, an intraday print of $100 also got people’s attention on Wednesday. Although traders sold into the big, round number and oil closed at around $98 a barrel, the move to $100 got everyone thinking about the 1970’s and what an oil shock might do to the global recovery. In short, many feel that gasoline prices approaching $4 might push the consumer back into their caves and short-circuit what appears to be a pretty decent economic rebound.

On that note, one of the biggest worries yesterday was Saudi Arabia. After an initial dive at the opening bell, stocks rebounded as the dip buyers decided that the odds didn’t favor an extended corrective phase (after all, most declines had been one- to two-day affairs for many months). However the buying came to an abrupt halt when reports began to circulate that there were calls on FaceBook, Twitter, etc., for protests (and worse) in the Kingdom of Saudi Arabia.

Although King Abdullah returned to the Kingdom on Wednesday and unveiled a series of public programs worth about $35 billion to help offset inflation, support affordable housing, and help provide jobs for young people, the fear that the anti-establishment unrest would soon spread to Saudi Arabia was enough to embolden the sellers (and their computer programs), send the buyers to the sidelines, and reinforce the “risk off” environment that is quickly developing.

Also interesting but perhaps of lesser import yesterday were the scenes of protests in Greece, more talk of monetary tightening from the ECB and members of the Bank of England, the ongoing concerns about commodity inflation (recall that the doubling of food prices was one of the triggers to the unrest in Egypt), and new predictions of stagflation (rising prices and a stagnating economy) here in the U.S.

So, the answer to this morning’s question (what’s it all about?) would appear to be two-fold. One, it’s about a lot of things at the present time. And two, it’s complicated. And the bottom line is that after the stellar run for the roses seen since over the last six months, a scary pullback is about par for the course.

Turning to this morning… The move toward risk aversion continued overnight in the foreign markets with oil moving back over $100/bbl. However, the better-than-expected economic numbers here at home have taken some of the edge off the early decline.

On the Economic front… Orders for long-lasting goods rose in January. The Commerce Department reported that Durable Goods orders increased by +2.7% during the month, which was below the consensus expectations for an increase of +2.9%. The December reading was revised higher to -0.4% from -2.3% When you strip out the volatile orders for transportation, orders fell by -3.6%, which was well below the consensus for +0.3%.

Next up, Initial Claims for Unemployment Insurance for the week ending 2/19 were reported at 391K. This was well below the consensus estimate for 406K and last week’s total of 413K.Continuing Claims for the week ending 2/12 came in at 3.79M vs. 3.893M.

Thought for the day: Knowing what you don’t know is vital to problem solving (and to the stock market game)…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.70%
  • Shanghai: +0.58%
  • Hong Kong: -1.34%
  • Japan: -1.19%
  • France: -0.25%
  • Germany: -1.10%
  • London: -0.49%

   

• Crude Oil Futures: +$2.48 to $100.58
• Gold: +$2.77 to $1417.8
• Dollar: higher against the Yen and Pound, lower vs. Euro
• 10-Year Bond Yield: Currently trading at 3.474

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -4.00
  • Dow Jones Industrial Average: -9
  • NASDAQ Composite: -2.00

Wall Street Research Summary

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