Daily State of the Markets
Monday Morning – September 19, 2011
Good morning. Short-term trends come and go during bull markets, bear markets, and everything in between. However, it is important to remember that the really big money is made in this business during what we like to call the “important trends.” So, with the markets having moved sideways for the past month and a half, the key issue facing traders is the direction of the next “important trend.” But in order to get this question right, one has to be able to answer another: Can we escape?
Weekends are great because without the crush of the daily news flow, the blinking screens, the IM’s, emails, and phones, one actually has time to think. (What else would a market-geek do when mowing the yard for the final time of the summer?) During this weekend’s pondering, I came up with several things that the market needs to escape from if the bulls are going to prevail going forward. I will submit that our heroes in horns will need to see the PIGIS escape a default on sovereign debt, the Eurozone escape a widespread credit contagion, the US escape first a recession re-do and then a Japan-style deflationary cycle, and the stock market escape another bruising encounter with the bears.
On the well-worn topic of the Eurozone’s debt debacle, it is important to recognise that the bond markets are assuming Greece will default. With yields on one- and two-year notes near the triple-digit mark, it is pretty obvious that anyone buying these bonds isn’t expecting to get all of their money back. And as the saying goes, if your outflow exceeds your income, then your upkeep will be your downfall. And with Greece’s GDP already expected to contract by -5.5%…
With the expectation that Greece will default sooner or later, the key issue then becomes one of contagion in the Eurozone. The bears will argue that CDS rates, yield spreads, and last week’s action by the central bankers of the world all seem to indicate that contagion is already occurring across the pond. And with banks and money funds in the U.S. unwilling to lend to their European brethren, well, this remains something that needs to be closely monitored – regardless of the short-term movements in the stock market.
Next up is the state of the economy here at home. While most economists currently argue that there is less than a 50% chance of a recession, it is important to keep in mind that economists and central bankers have predicted zero of the last nine recessions in this country. So, waiting for the consensus to agree on this topic may put investors well behind the curve.
It is also said that while the stock market leads the economy, the market has predicted thirteen of the last nine recessions. As such, it is probably a good idea to avoid listening to both the consensus of economists AND the stock market. However, if we were left on a desert island with just one economic indicator it would likely be ECRI’s Weekly Leading Index. Although not infallible, our interpretation of the index shows that it has called all seven of the recessions that have occurred since 1970. However, the indicator did provide false alarms on two occasions. But with the indicator having gotten the call right seven out of nine times, it’s probably a good idea to pay attention.
The bulls will point out that today’s rapid dissemination of news is responsible for much of the negative sentiment right now (and perhaps even the new recession signal from the ECRI index – again, this is our interpretation of the index). Since everybody sees what is happening in Europe, in the stock market, and in Washington D.C., the feedback loop is self-reinforcing during times such as these. In short, bad news means consumers get scared and do less – until the news improves, that is.
As we’ve mentioned a couple of times, the key to the next trend in the stock market will likely be the issue of recession in the U.S. While this should clearly be filed in the “duh” category, it is important to remember that according to the historical trends that have occurred after a severe correction in the stock market, stocks tend to rebound and continue higher if the economy can skirt a recession but tends to head lower if GDP goes sub-zero.
What about the President’s new stimulus plan and the Fed’s next foray, you ask? Traditionally, such measures have been good news for owners of stocks as the Fed during the Greenspan/Bernanke era has been able to inflate its way out of all difficulties since the late 1980’s. In addition, stocks have also tended to react rather favourably to the idea of Washington handing out money. The question, of course, is if either of these ideas will continue to work in this slowing growth and rising risk environment.
So, while short-terms trend are what they are and I’ll be happy to try and profit from them in both directions if my models tell me to, from a big picture standpoint, I’m still wondering if we can escape some of these issues.
Turning to this morning… The macro worries from across the pond are back as traders are reacting negatively to the lack of action from the EU gathering in Poland (the one that Geithner was basically booed out of), the election results in Germany, and the fact that Spain will nationalize another chunk of their banks. And while all eyes will be on the Fed and their “Twist and Shout” routine this week, stock futures are lower this morning.
On the Economic front… We’ll get the report on National Home Builder Sentiment at 10:00 am eastern.
Thought for the day… Remember that it pays to be open minded (in more ways than one)…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -1.56% Shanghai: -1.80% Hong Kong: -2.76% Japan: NA France: -2.71% Germany: -2.76% Italy: -2.40% Spain: -1.68% London: -1.91%
- Australia: -1.56%
- Shanghai: -1.80%
- Hong Kong: -2.76%
- Japan: NA
- France: -2.71%
- Germany: -2.76%
- Italy: -2.40%
- Spain: -1.68%
- London: -1.91%
- Crude Oil Futures: -$1.26 to $86.70
- Gold: +$4.50 to $1819.20
- Dollar: higher against the Yen, Euro and Pound
- 10-Year Bond Yield: Currently trading at 1.970%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -18.86 Dow Jones Industrial Average: -146 NASDAQ Composite: -29.56
- S&P 500: -18.86
- Dow Jones Industrial Average: -146
- NASDAQ Composite: -29.56
Wall Street Research Summary
- Suncor Energy (SU) – Barclays
- Sprint Nextel (S) – Bernstein
- Cardinal Health (CAH) – Citi
- McKesson (MCK) – Citi
- Quanta Services (PWR) – FBR Capital
- Warner Chilcott (WCRX) – Goldman Sachs
- Micron (MU) – Goldman Sachs
- Bristol-Myers (BMY) – Jefferies
- BE Aerospace (BEAV) – UBS
- Texas Instruments (TXN) – UBS
- analogue Devices (ADI) – UBS
- Maxim Integrated (MXIM) – UBS
- Linear Technology (LLTC) – UBS
- Vail Resorts (MTN) – Wells Fargo
- ON Semiconductor (ONNN) – Estimates and target cut at FBR Capital
- Alcoa (AA) – Estimates cut at Goldman Sachs
- Trina Solar (TSL) – Target cut at Goldman Sachs
- Suntceh Power (STP) – Target cut at Goldman Sachs
- Forest Labs (FRX) – Goldman Sachs
- Lam Research (LRCX) – Goldman Sachs
- Applied Materials (AMAT) – Goldman Sachs
- Cabot Corp (CBT) – Jefferies
- SEI Investments (SEIC) – Oppenheimer
- Forest Oil (FST) – Stifel Nicolaus
- Continential Resources (CLR) – Stifel Nicolaus
- Hexcel (HXL) – UBS
Long 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. Stocks 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.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.