Daily State of the Markets
Wednesday Morning – April 20, 2011
Good morning. Stocks rallied on Tuesday and at first blush, there didn’t appear to be any primary driver to the advance. As always, there were positive inputs such as earnings from Johnson & Johnson, the European PMI’s, and the housing starts as well as the usual batch of negatives, which included more talk about Greece’s likely debt restructuring and the overhang from S&P’s rating outlook cut of U.S. debt.
Some analysts argued that the Turnaround Tuesday was actually a continuation of the rebound that began Monday afternoon and was a positive while others contended that the advance was merely a bounce – and a rather weak one at that. However, for the deep thinkers out there, I’ll offer up the idea that the rally had more to do with the U.S. being forced to come to grips with its debt problem than anything else.
The thinking here is that the move by Standard & Poor’s to cut its outlook on our debt rating may actually be a positive due to the idea that it could actually force those in Washington to stop kicking the can down the road. Up until Monday, the attitude toward the trillions of government debt was to worry about it later – after the economy recovered, and more often than not, after the next election. In other words, the debt was an issue nobody wanted to talk about because there are no politically expedient answers.
Part of the impetus for this idea that coming to grips with the debt sooner rather than later is a positive originated in the bond market. Many analysts found it odd that interest actually rates fell on Monday while the stock market was busy tanking on the fear of what the ripple effect of the downgrade might look like. But unlike their hysterical cousins at the corner of Broad and Wall, bond traders tend to be a little less emotional. After all, bond traders don’t have to worry about earnings, sales, new product launches, or analyst expectations. Nope, the basic game in the bond pits is to gauge the strength of the economy and stay in tune with the expectations for inflation.
To be sure, this is an extreme oversimplification of the issues facing both the stock and bond markets. However, the key here is that bond yields have fallen the last two days (meaning prices have gone up) because if Congress were to actually do something about the debt it would mean slower economic growth, a less aggressive Fed, and fewer bonds in the market. As such, the downgrade by S&P may have been a buy signal of sorts for bonds.
In an attempt to take this full circle, lower interest rates are a good thing for the macro outlook but also a bad thing for the U.S. dollar. And since every hedge fund manager on the planet knows that a falling dollar leads to the buying of “risk assets” such as stocks, commodities, and emerging markets, it isn’t terribly surprising that stocks rallied on Tuesday.
However, before you break into a rousing chorus of “happy days are here again,” let’s remember that this little trade doesn’t work indefinitely. I’m sorry to say that at some point, the idea of a slowing economy is going to be bad for the stock market for all the obvious reasons. But until we start to see actual signs of an economic slowdown, don’t be terribly surprised if the lower rates/falling dollar/rising risk assets trade doesn’t find some renewed interest for a while.
For my money though, I’m going to continue to keep a close eye on the market internals and watch the action as the indices approach important resistance and/or support zones.
Turning to this morning… Strong earnings from some big names in technology (Intel, IBM, and Yahoo) sent foreign markets higher overnight and have pushed U.S. futures up substantially. Thus, it would appear that the correction phase may have ended and that a trading range has now begun.
On the Economic front… There is no economic data scheduled for release before the bell. However, we will get a report on Existing Home Sales at 10:00 am eastern.
Thought for the day: As the Great One said, “You miss 100% of the shots you don’t take”…
Here are the Pre-Market indicators we review each morning before the opening bell…
Major Foreign Markets:
- Australia: +1.35%
- Shanghai: +0.29%
- Hong Kong: +1.60%
- Japan: +1.76%
- France: +2.42%
- Germany: +2.75%
- London: +2.16%
Crude Oil Futures: +$1.37 (May contract) to $109.65
Gold: +$8.40 to $1503.50
Dollar: lower against the Yen, Euro and Pound
10-Year Bond Yield: Currently trading at 3.402%
Stocks Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +18.03
- Dow Jones Industrial Average: +164
- NASDAQ Composite: +37
Wall Street Research Summary
- Mylan (MYL) – Target and estimates increased at Citi
- Williams Companies (WMB) – Target and estimates increased at Citi
- Overseas Shipholding (OSG) – Credit Suisse
- China Unicom (CHU) – Deutsche Bank
- Vodafone (VOD) – Deutsche Bank
- Intel (INTC) – FBR Capital, JPMorgan
- Sanderson Farms (SAFM) – Jefferies
- Goldman Sachs (GS) – Mentioned positively at Oppenheimer
- Noble Corp (NE) – RBC Capital
- Marsh & McLennan (MMC) – RBC Capital
- Arthur J. Gallagher (AJG) – RBC Capital
- Noble Energy (NBL) – Wells Fargo
- Pioneer Natural (PXD) – Wells Fargo
- Blackboard (BBBB) – BAC/ML
- BHP Billiton (BHP) – BAC/ML
- Adobe Systems (ADBE) – FBR Capital
- Wisconsin Energy (WEC) – Goldman Sachs
- Cree (CREE) – Kaufman Bros, Merriman Capital
* Report includes items that make comparisons to the consensus estimate questionable
Long positions in stocks mentioned: none
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