Daily State of the Markets
Thursday Morning – July 14, 2011
Good morning. Stocks started off strong on Wednesday on the back of batch of decent data out of China and then really got moving to the upside when traders saw that Ben Bernanke had put the possibility of more quantitative easing in black and white.
However, the good mood didn’t last too terribly long as the Fed’s Richard Fisher was quick to point out after lunch that not everyone believes another round of QE would be a good thing and then House Speaker Boehner called the possibility of a debt deal “a crapshoot.”
I was asked a couple of times yesterday morning why Bernanke’s comments were worthy of a healthy advance in the markets. From where I sit, the fact that Ben Bernanke put the possibility of further Fed stimulus in black and white yesterday gave traders confirmation that QE3 is indeed on the table. Thus, those bullishly inclined can feel confident that Bernanke is still “on the case” and remains committed to doing whatever it takes to keep the U.S. economy from falling into a Japanese-style deflationary spiral.
To be sure, the issue of more quantitative easing is a hot topic amongst analysts these days. Many folks are asking the question as to how the Fed’s plan of printing money and then buying bonds with the proceeds can be considered a good thing. I think the thing to keep in mind here is that unlike the President’s not-so stimulative stimulus plan, where the government just spent a bunch of money (and didn’t get much economic bang for their bucks in return), the Fed actually gets something when it buys government bonds. Remember, T-bonds are considered to be just about the safest investment on the planet and they pay interest. Thus, when the Fed buys bonds they are (a) helping to keep rates low, which has proven over time to be a stimulative move for the economy and (b) helping to improve confidence, which is a key factor in the Fed’s current effort to get the economy off of life support.
While I am sure that there are opposing views out there and there are clearly unintended consequences relating to QE, I’m of the mind that the mere hint that the Fed isn’t out of bullets and that Mr. Bernanke is willing to go so far as to put it in black and white is a positive at the present time.
However, the comments from Dallas Fed President and sports afficionado Richard Fisher as well as the developments relating to the lack of any progress on the debt ceiling seemed to cause traders to shift their focus to more short-term issues. In addition, word that Moody’s was about to place U.S. debt on review for a possible downgrade may have been making the rounds late in the day yesterday. As a result, the rally faded in dramatic fashion as the day progressed. And while the indices did finish with plus-signs, the technicians suggest that a second straight disappointing finish may lead to red all over the place in the near-term.
The bottom line is that there is a massive amount of uncertainty in the market at the present time in front of some big earnings reports, Italy’s bond auction, the EU plan for Greece, the state of the economy, and the debt decision here in the U.S. As such, traders appear quick to take any profits they have in the current environment.
Turning to this morning… Italy’s bond auction, which some had called a critical test, produced satisfactory results and more importantly, was not a disaster. In addition, JPMorgan’s earnings came in better than expected on both the top and bottom lines. However, we have a big batch of economic data to deal with before the bell, so let’s get to it.
On the Economic front… The labour Department reported the Producer Price Index (an indication of inflation at the wholesale level) for June fell by -0.4%, which was below the consensus estimate for -0.3%. When you strip out food and energy, the so-called Core PPI came in at +0.3%, which above the consensus for +0.2% and below May’s +0.2% .
Next up, the Commerce Department reported that Retail Sales rose in the month of June by +0.1%, which was above the consensus for -0.2%. When you strip out the sales of autos, sales were unchanged, which was in line with the consensus for an unchanged reading but below last month’s unrevised +0.3%.
And finally, Initial Claims for Unemployment Insurance for the week ending 7/9 fell by 22,000 to 405K. This was slightly above the consensus estimate for 404K and last week’s total of 427K. Continuing Claims for the week ending 7/2 came in at 3.727M vs. 3.693M and last week’s 3.712M.
Thought for the day… Consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -0.48% Shanghai: +0.54% Hong Kong: +0.06% Japan: -0.27% France: -0.85% Germany: -0.46% London: -0.63%
- Australia: -0.48%
- Shanghai: +0.54%
- Hong Kong: +0.06%
- Japan: -0.27%
- France: -0.85%
- Germany: -0.46%
- London: -0.63%
- Crude Oil Futures: $0.22 to $98.27
- Gold: +$5.80 to $1591.30
- Dollar: lower against the Yen and Euro, higher vs. Pound
- 10-Year Bond Yield: Currently trading at 2.930%
- Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +4.03 Dow Jones Industrial Average: +26 NASDAQ Composite: +9.32
- S&P 500: +4.03
- Dow Jones Industrial Average: +26
- NASDAQ Composite: +9.32
Wall Street Research Summary
- Protective Life (PL) – BofA/Merrill
- Imax (IMAX) – Canaccord Genuity
- Potash (POT) – Added to Top Picks Live at Citi
- Energen (EGN) – Citi
- National Fuel Gas (NFG) – Citi
- Olympic Steel (ZEUS) – Goldman Sachs
- Williams Sonoma (WSM) – Goldman Sachs
- Toll Brothers (TOL) – Goldman Sachs
- Emulex (ELX) – Morgan Keegan
- Celgene (CELG) – Estimates increased at UBS
- Luxottica (LUX) – UBS
- 3M (MMM) – BofA/Merrill
- Netgear (NTGR) – Barclays
- MDU Resources (MDU) – Citi
- RTI International Metals (RTI) – Goldman Sachs
- Meritage Homes (MTH) – Goldman Sachs
- Stillwater Mining (SWC) – JPMorgan
- Quest Diagnostics (FGX) – RBC Capital
Long positions in stocks mentioned: CELG
For more of Mr. Moenning’s thoughts and research, visit TopStockPortfolios.com
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