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Daily State of the Markets Good Morning. Of the time I commit each day to market analysis, the vast majority is spent attempting to identify and understand the drivers of the action on both a short- and longer-term basis. As I’ve said a time or twenty, if I can get a handle on “why” the market is doing what it is doing in the short-term, I shouldn’t get fooled by market moves over the long-term. And as anyone who has been around this game awhile will likely attest, avoiding big mistakes is really the key to longevity. Please do not confuse my obsession with indentifying the market’s driving forces with making market calls. Long-time readers know that I simply don’t make predictions as to which way the market is going to go next. As Martin Zweig once said, “Those who rely on a crystal ball will likely to wind up with an awful lot of crushed glass in their portfolio.” In short, I have learned (yes, the hard way) over the years, that assuming Ms. Market is going to act in a certain way can be detrimental to your career as well as your portfolio’s health. While employing my approach likely means that I will never make the cover of Barron’s, it does help keep me in line with what the market IS doing at any given time. And as any of my colleagues will attest, I do not allow the use of the words should, could, or would in our work. No, the goal around here is to try and stay in tune with what is actually happening. We don’t want to spend a moment rationalizing/justifying what we think should be happening given our positions. Don’t worry, there is a point coming – and soon. You see, I spent much of my analytical time Monday trying to figure out why the market wasn’t higher (or lower). Based on my assessment (which is usually subject to an argument here or there), stocks were moving up again on Monday on the assumption that Team Merkozy was going to do everything it could to encourage the ECB to bring out the bazooka. In English, this means that French President Nicolas Sarkozy and German Chancellor Angela Merkel needed to announce that they had come up with an agreement on a way to create the “fiscal compact” Mr. Draghi so desperately needs in order to start buying bonds with both hands. As we’ve discussed, a commitment by the ECB would mean lower rates and an end to the fear of credit contagion. And before you could get all of this week’s important European meeting dates put into your Outlook on Monday, Team Merkozy was out in front of the press touting their agreement. Although we were not treated to many of the details of the agreement, the market’s assumption for much of the session seemed to be that the deal passed the sniff test. This brings us to the really big assumption that the markets appear to be making. The assumption that the ECB is going to do exactly what it has said it won’t do: backstop the government bond market in Europe with its unlimited balance sheet. Instead of waiting for an announcement on Thursday as to the ECB’s intentions, stocks seem to be assuming that Mario Draghi’s recent comments have been a series of hints that if Merkozy builds it, the bond buying will come. And upon careful review of the ECB President’s latest remarks, I do see how one could come to the conclusion that the ECB might be ready to step up to the plate with a significant quantitative easing program. Which brings me to my dilemma. If we assume that the ECB is actually going to fire the bazooka, then stocks could have room to rally, perhaps a lot. But if you find yourself hesitant to jump on the Merkozy bandwagon and assume that the ECB may be unlikely to suddenly change its tune overnight, then after a rally of 9.3% (to Monday’s high), you might expect stocks to pull back, perhaps a lot. So which is it? Which assumption are you going to make? Are we going to the moon in response to the assumption that the crisis is just about over or is this rally going to quickly crash and burn on the assumption that there isn’t going to be any kind of quick fix? In case you haven’t already picked up on it, the key point this morning is that it may be a mistake to assume anything at the present time. Instead of betting money on an assumption, I believe it makes infinitely more sense to let Ms. Market tell us what she thinks about the plans from Merkozy and the ECB. Is it enough? Does it solve the problem? Or is this just another in a long string of Euro-style false starts? Sure, taking a wait-and-see approach might make me late to the party one way or the other – and my year may not be made (or lost) – but at least my portfolio won’t be bet on an assumption. Because as the saying goes, when you assume… Turning to this morning… S&P’s warning that it has placed all but two of the Eurozone nations on CreditWatch Negative (Cypress was already on the list and Greece, well, it doesn’t really matter), put the markets on their heels overnight. However, word that the BOE has created a new liquidity facility and that Industrial Orders in Germany were above expectations has given the bulls hope that the current rally could continue later today. Currently stock futures are pointing to a mixed open on Wall Street. On the Economic front… There are no important economic releases scheduled for today. Thought for the day… Regardless of the colors on the screens, make the decision to enjoy your day. Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell…
Positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. |
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