Daily State of the Markets
Thursday Morning – October 20, 2011
Good morning. A good bit of the rationale behind the stock market’s most recent run for the roses from the low of October 4th has been based on the idea that European leaders were finally going to get ahead of the curve and create a ‘comprehensive plan’ to deal with the debt crisis that now threatens the health of the global economy. However, that premise now appears to be in question as the clock continues to tick on deadline for the EU’s plan of attack.
One way to interpret the market’s recent action is that when there was plenty of time left on the deadline clock, traders were confident that the powers-that-be in Europe would come up with and agree on a plan (or more appropriately, the plan that the markets are looking for – a leveraged EFSF approach) before Sunday’s EU Summit. Therefore, despite the fact that EU leaders are not known for swift action and that the term shock-and-awe isn’t in their vocabulary, the “hope trade” could be put on and risk assets could be purchased.
But, with the Sunday deadline drawing near and reports that Team Merkozy isn’t exactly on the same page at the moment, well, the hope that things will be peachy keen across the pond appears to have turned into fear that they will drop the ball. As such, the “fear trade” says to sell everything.
This hope versus fear thing has been exacerbated lately by what I’ll call overanxious business writers looking to scoop the competition and headlines that can be at best misleading and at worst, fraudulent. Recall the Tuesday article out of London’s The Guardian that basically said the EFSF would be boosted from €440 billion to €2 trillion. Sure, we all knew what the article “meant,” but the headline and the first paragraph were indeed misleading.
At issue here is the way the markets work these days. As we’ve discussed on numerous occasions, today’s computers electronically scan all headlines for key words and the react appropriately. It’s similar to the way the search algorithms work at Google, Yahoo, etc. Once the computers grab what is perceived to be a market-moving headline – Boom! – programs are run one way or the other.
Obviously there were buy programs run Tuesday in response to the Guardian article and then sell programs run after the Dow Jones headline deemed the report “totally wrong.” And then yesterday, we saw the sell programs again when the WSJ headline saying that the EU plan was “in doubt” hit the wires.
My point here is that in this environment, the difference between headlines saying “EU Plan in doubt” and “EU Plan details not complete” is everything to the HFT gang. In my humble opinion, the latter headline would have been more appropriate yesterday. However, it is hard to resist the temptation to create drama around the idea of Nicolas Sarkozy jumping on a plane to meet face to face with Merkozy, Lagarde, Trichet, et al.
I believe it is important to keep in mind that Team Merkozy has been in this situation before over the past 18 months and that we’ve been treated to scenes of smiles, hugs, and waves to the crowd when it was all said and done. So, will this time be different? Will the key players in Europe agree to disagree and drop the ball with the whole world watching? I’m going to say, no. I’m going to suggest that once again, there will be a plan that Team Merkozy can agree on by the time Sunday rolls around. The bottom line (again, in my humble opinion) is that there is just too much at stake – and they know it.
But until then, we may see traders continue to flip-flow between the hope and fear trades.
Turning to this morning… We do have reports that plans are emerging on how the EFSF will function and the details on bank recapitalization plans. In addition, the markets like the report that Greece is going to get its money soon and the futures got a small boost from reports that Mommar Gadhafi has been killed. As of this writing, the futures are pointing to a modestly green open.
On the Economic front… Initial Claims for Unemployment Insurance for the week ending 10/23 fell by 6,000 to 403K. The report was above the consensus estimate for 401K but better than last week’s revised total of 409k (from 404K). Continuing Claims for the week ending 10/8 came in at 3.719M vs. 3.693M and last week’s 3.694M.
In addition, there is a big batch of data out after the opening bell with Bloomberg Consumer Comfort at 9:45 am eastern and then Philly Fed, LEI, and Existing Home Sales all at 10:00 am.
Thought for the day… Remember that you can choose a peaceful mode at any point of any day…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -1.59% Shanghai: -1.94% Hong Kong: -1.78% Japan: -0.75% France: -0.44% Germany: -0.47% Italy: -0.38% Spain: -0.37% London: -0.38%
- Australia: -1.59%
- Shanghai: -1.94%
- Hong Kong: -1.78%
- Japan: -0.75%
- France: -0.44%
- Germany: -0.47%
- Italy: -0.38%
- Spain: -0.37%
- London: -0.38%
- Crude Oil Futures: +$0.12 to $86.23
- Gold: -$27.50 to $1618.50
- Dollar: higher lower the Yen and Euro, higher vs Pound
- 10-Year Bond Yield: Currently trading at 2.196%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +6.08 Dow Jones Industrial Average: +35 NASDAQ Composite: +11.04
- S&P 500: +6.08
- Dow Jones Industrial Average: +35
- NASDAQ Composite: +11.04
Wall Street Research Summary
- Regency centres (REG) – Credit Suisse
- Mednax (MD) – Deutsche Bank
- Toyota Motors (TM) – JPMorgan
- Optimer Pharmaceuticals (OPTR) – Mentioned positively at Canaccord Genuity
- Comerica (CMA) – BofA/Merrill
- American Express (AXP) – Removed from Top Picks Live at Citi
- Sonoco Products (SON) – Deutsche Bank
- Western Digital (WDC) – JPMorgan
- Polycom (PLCM) – Piper Jaffray
- CSX Corp (CSX) – Wells Fargo
- Fifth Street Finance (FSC) – Wells Fargo
Earnings Yesterday’s Earnings After The Bell
Estimate Amylin Pharmaceuticals AMLN ($0.09) * ($0.14) American Express AXP $1.03 $0.95 Buffalo Wild Wings BWLD $0.61 $0.59 Cheesecake Factory CAKE $0.36 $0.38 Cirrus Logic CRUS $0.33 $0.33 Covanta Holding CVA $0.24 $0.24 CVB Financial CVBF $0.21 $0.17 eBay EBAY $0.48 $0.48 E*TRADE ETFC $0.24 * $0.18 Edwards Lifesciences EW $0.38 $0.39 Lam Research LRCX $0.63 $0.65 Noble Corp NE $0.53 $0.53 Newfield Exploration NFX $1.04 $1.15 Polycom PLCM $0.26 $0.29 Raymond James RJF $0.55 $0.54 Riverbed Technology RVBD $0.24 $0.21 SLM Corp SLM $0.36 $0.35 Stryker SYK $0.91 $0.89 Tractor Supply TSCO $0.58 $0.52 Western Digital WDC $1.10 $0.96 Wynn Resorts WYNN $1.05 $1.16 Xilinx XLNX $0.47 $0.44
Today’s Earnings Before The Bell
Estimate Alliance Data ADS $2.16 $1.90 Alexion Pharmaceuticals ALXN $0.37 $0.32 AutoNation AN $0.48 $0.47 Baxter BAX $1.09 $1.08 BB&T Corp BBT $0.52 $0.49 Briggs & Stratton BGG -$0.10 ($0.20) Boston Scientific BSX $0.09 * $0.08 Cash America CSH $1.08 $1.08 Diamond Offshore DO $1.85 $1.50 ITT Educational ESI $2.48 $2.29 Fifth Third FITB $0.40 $0.33 FLIR Systems FLIR $0.43 $0.37 Huntington Bancshares HBAN $0.16 $0.16 Ingersoll-Rand IR $0.81 $0.79 KeyCorp KEY $0.24 $0.21 Laboratory Corp LH $1.61 $1.60 Eli Lilly LLY $1.13 $1.13 Southwest Air LUV $0.15 $0.14 McGraw-Hill MHP $1.21 $1.23 Noble Energy NBL $1.24 $0.99 Penn National Gaming PENN $0.60 $0.56 Philip Morris PM $1.37 $1.24 Snap-On SNA $1.16 $1.03 AT&T T $0.65 $0.61* Report includes items that make comparisons to the consensus estimate questionable
Long positions in stocks mentioned: AXP, NE
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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