Why Traders Have Little To Look Forward To

Daily State of the Markets 
Tuesday Morning – May 24, 2011

Good Morning. Let’s see here… We’ve just entered the “Sell in May and go away” season. The next earnings parade doesn’t start rolling for another month and a half. The next employment report isn’t due out for a couple weeks yet. The Fed is surely going to stop flooding the market with dollars at the end of next month. Just about everybody everywhere expects inflation to pick up. This same group is looking for the economy to slow a bit as the year progresses. With Europe struggling and the Euro possibly in trouble, the dollar could easily move higher (killing off any and all stock and commodity rallies in the process). And the Chinese, as well as many of their emerging market brethren are raising rates. Thus, the question becomes, what exactly do investors have to look forward to right now?

In short, this could easily be the message that the recent lackluster action is sending us. Remember, the stock market is a discounting mechanism. And depending upon who you listen to, the market tends to focus on what is likely to occur six months or so down the road. So, with the emerging markets struggling with inflation, Europe on an austerity kick, and the U.S. having used up its stimulative bullets, there just might be a money manager or two out there thinking about doing a little de-risking.

Yes, I know that the stock market also likes to climb a wall of worry. But with the sentiment indicators where they are (most models still sport a healthy level of optimism) and the fact that the market has only declined a little more than 3% during the recent sloppy period, I’m not so sure the masses are overly worried about much of anything right about now.

One of my primary concerns is tied to what I call the “structure” of the market these days. Cutting to the chase, the hedge fund industry has made a healthy comeback since the universal drubbing seen in 2008. And because of this, I believe there is a boatload of money (with a bunch of it being borrowed) tied to the dollar-carry trade. And if the events of the last five years have taught us anything it is that a crowded trade can become a big problem should managers be forced to exit the trade at the same time.

To be sure, at least part of the problem leading up to Wall Street being all but wiped out a couple years ago was the fact that everybody on the street was playing the same game. And when the margin calls started coming, managers sold the stuff they could (i.e. stocks) as opposed to that portfolio of alphabet soup that apparently nobody wanted anymore.

My point isn’t to bring everyone down on this fine Tuesday morning. No, the idea here is to remind us all that the Euro/Dollar/Stock trade is, like the Energizer Bunny, still going. And while it may be merely a coincidence that this particular combination has traded in lockstep for the past few weeks, I remain leery of “the trade” ending at some point. If I’ve learned anything over the years it is that once something becomes popular on Wall Street, it usually doesn’t end well.

On a more positive note, a rising dollar will likely be a positive for the stock market again at some point in the future. And I’m fairly confident that unless an unanticipated external event occurs, the economy will likely continue to expand – it’s just the rate that is in question. But given the uncertainties facing traders at the present time, we’re just not sure there is much for them to look forward to in the near term. As such, it is probably best to step away from the margin account for a while and play some small ball.

Turning to this morning… Surprisingly, overseas markets did not follow Wall Street lower overnight to any meaningful degree. Decent data out of Germany and talk about fixing the Greece situation (via the extension of terms) has led European bourses higher and is pushing U.S. futures up a bit as well.

On the Economic front… There is no economic data to review before the opening bell. However, we will get a report on New Home Sales at 10:00 am eastern.

Thought for the day… Keep in mind that not every opinion is worthy of your attention…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets: Australia: -0.31% Shanghai: -0.25% Hong Kong: +0.09% Japan: +0.17% France: +0.16% Germany: +0.71% London: +0.39%
  • Australia: -0.31%
  • Shanghai: -0.25%
  • Hong Kong: +0.09%
  • Japan: +0.17%
  • France: +0.16%
  • Germany: +0.71%
  • London: +0.39%
  • Crude Oil Futures: +$1.41 to $99.11
  • Gold: +$5.40 to $1520.80
  • Dollar: lower against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 3.152%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +4.42 Dow Jones Industrial Average: +30 NASDAQ Composite: +5.77
  • S&P 500: +4.42
  • Dow Jones Industrial Average: +30
  • NASDAQ Composite: +5.77

Wall Street Research Summary


  • PepsiCo (PEP) – Mentioned positively at Citi
  • Mosaic (MOS) – Credit Suisse
  • Campbell Soup (CPB) – Credit Suisse
  • KBR (KBR) – Goldman Sachs
  • TiVo (TIVO) – Lazard
  • Salesforce.com (CRM) – Morgan Stanley
  • Teradata (TDC) – Morgan Stanley
  • Carrizo Oil & Gas (CRZO) – Wells Fargo
  • DeVRY (DV) – William Blair
  • Education Management (EDMC) – William Blair
  • ITT Educational (ESI) – William Blair


  • East West Bancorp (EWBC) – Credit Suisse
  • Ternium (TX) – Deutsche Bank
  • Diamond Offshore (DO) – Goldman Sachs
  • Ingram Micro (IM) – Goldman Sachs
  • Chimera Investment (CIM) – Jefferies
  • Hewlett-Packard (HPQ) – Morgan Stanley
  • QLogic (QLGC) – Morgan Stanley
  • Capella Education (CLA) – William Blair
  • Strayer Education (STRA) – William Blair
  • Research In Motion (RIMM) – Wunderlich Securities

Long positions in stocks mentioned: none

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