Daily State of the Markets
Friday Morning – October 14, 2011
Good morning. Although the all the major indices remain in the red on the year, it is important to recognise that the stock market has spent the vast majority of 2011 moving sideways. Stocks came into 2011 riding the QE2 rally that quickly gave way to concerns about triple-tragedy in Japan, the unrest in the Middle East, Europe, etc. And while the markets did make a new high in April, the indices then worked sideways right up until August. And then following a lightning-fast dive of -18%, the markets have been moving sideways for the past two months. Thus, except for the early rally during Jan-Feb and the 11-day dance to the downside in late-July, 2011 has been a sideways affair.
Although there have been enough short-term market drivers this year to make your head spin, the overriding theme has been one of uncertainty. And although it does appear that the bulls are on a mission at the present time (gee, do you suppose the fact that a large percentage of mutual funds have year-ends of 10/31 has anything to do with the relentless buying seen since the “great save”?), there is still a great amount of uncertainty in this market – especially on the topics of the global economy and the European debt debacle.
On that note, we should point out that a stock market rally in the face of what would appear to be the growing chances of recessions both here and abroad isn’t terribly unusual. You see, economic data comes in all shapes and sizes. Some of the reports are rear-view mirror oriented, some look at the current environment, and some are forward looking. Therefore, despite the fact that some of the best forecasters in the business say the U.S. is heading toward recession, the current data doesn’t look too bad. And it is for this reason that economists have predicted exactly zero of the last 12 recessions in the U.S.
Then there is the not-so small matter of the economic backdrop in Europe. The bottom line here is that the continent does appear to be headed toward recession. Besides the PMI data that clearly shows the Eurozone to be in contraction mode, we should note that confidence among consumers and CEO’s alike in Europe is now at levels seen only when the economies of Europe are in recession.
Granted the slowdowns we’re looking at are nothing compared to the “Great Recession” that stopped the economies of the world in their tracks in 2008. No, we’re probably looking at more garden-variety recessions going forward. But with ECRI telling us recently that the U.S. is heading into recession and there is nothing the Fed or the Government can do to stop it, well, it is hard to get too excited about the “it’s all good” attitude that has taken over Wall Street for the past two weeks.
My point this morning is this is the way the market works during a trading range environment in the age of HFT. The bottom line is the cycles of fear, hope, and greed wind up getting compressed and moves that once took weeks or months to occur now happen in just a matter of days (and sometimes hours).
So, with the computers having produced the “great save” on October 4th and the economic data in the U.S. having not been terrible recently, traders (or in this case, mutual fund managers looking to improve their results before the clock strikes midnight on 10/31) appear to be firmly entrenched in “hope” mode. There is the hope that everything will be fine in the U.S. economy. There is the hope that this quarter’s earnings parade will prove the naysayers wrong. There is the hope that the economies of Europe and China will suddenly turn around and get better. There is the hope that the current correction in the stock market is about over and that history will show this time to be more like 1998 than 2008. And there is the hope Europe’s debt crisis will be “fixed” before the weekend is out.
If you find yourself in the “hope” camp, then, by all means, this is the time to be buying stocks for the long-term. The S&P 500 remains -11.7% off of the highs for the year and the indices are still down ytd. Thus, the “bargains” may be compelling to some. However, while we recognise that this is a one-way joyride to the upside at the moment, those who are not so sure everything is going to be quite so peachy keen going forward may want to saddle up and “ride the range” right about now.
For me, I am fully aware of the fact that while people are often wrong, Ms. Market never is. As such, if the market breaks on through to the other side of the range – and does so on big volume – I’ll be happy to put my macro worries on hold and join in on the fun.
Turning to this morning… The hope trade continues unabated so far as the leaders meet in Europe to come up with a plan this weekend and the Retail Sales numbers in the U.S. came in above expectations.
On the Economic front… The Commerce Department reported that Retail Sales were up 1.1% in the month of September, which was above the consensus for +0.8%. When you strip out the sales of autos, sales were up +0.6%, which was above the consensus for a reading of +0.4% as well as last month’s revised +0.5%.
Thought for the day… Best of luck on this Friday and be sure to enjoy the weekend!
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -0.86% Shanghai: -0.30% Hong Kong: -1.37% Japan: -0.85% France: +1.06% Germany: +0.99% Italy: +1.88% Spain: unch London: +1.41%
- Australia: -0.86%
- Shanghai: -0.30%
- Hong Kong: -1.37%
- Japan: -0.85%
- France: +1.06%
- Germany: +0.99%
- Italy: +1.88%
- Spain: unch
- London: +1.41%
- Crude Oil Futures: +$2.12 to $86.35
- Gold: +$13.10 to $1682.10
- Dollar: lower against the Yen, Euro, and Pound
- 10-Year Bond Yield: Currently trading at 2.258%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +12.89 Dow Jones Industrial Average: +102 NASDAQ Composite: +23.00
- S&P 500: +12.89
- Dow Jones Industrial Average: +102
- NASDAQ Composite: +23.00
Wall Street Research Summary
- ADTRAN (ADTN) – Jefferies
- Ameriprise Financial (AMP) – Keefe, Bruyette & Woods
- Monsanto (MON) – Ticonderoga
- Skyworks (SWKS) – Mentioned positively at UBS
- Baker Huges (BHI) – BMO
- Complete Productin (CPX) – BMO
- Nabors Industries (NBR) – BMO
- Noble Corp (NE) – BMO
- Patterson-UTI (PTEN) – BMO
- Rowan Companies (RDC) – BMO
- Ecolab (ECL) – Citi
- UBS (UBS) – Fitch
- Boeing (BA) – Oppenheimer
- Harris Corp (HRS) – Oppenheimer
- RailAmerica (RA) – Stifel Nicolaus
- JPMorgan (JPM) – Target cut at UBS
- Gap (GPS) – Wells Fargo
Long positions in stocks mentioned: none
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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