Shaky Start for September as Investors Sell the News

Investors know that markets cannot rise forever, and if anyone had forgotten, Tuesday was a healthy reminder. Despite macroeconomic data that was largely positive, the market rose in the morning and then sold off sharply and did not recover. The major economic data Wednesday signaled to the market that perhaps the impressive rally from the March lows had been right on track.

Tuesday could have been profit taking or the beginning of something more ominous, as the good news was met with fresh fear over financials. Specifically, another round of rumors swirled around Wells Fargo (WFC) needing a secondary offering to recapitalize and pay off TARP. Put option activity was heavy for Wells Fargo, and the VIX volatility index also attracted a lot of attention.

After the close, Wells Fargo’s CEO John Stumpf addressed concerns,

“We will pay {TARP} back, but we’re going to pay it back in a shareholder-friendly way. We are now earning capital so quickly, organically, we don’t want to dilute our existing shareholders.”

As far as macroeconomic data, the ISM Index of 52.9 showed that manufacturing was in fact expanding for the first time in a year and a half, and the better than expected results were the best since June of 2007. Pending home sales increased by 3.2% in July which was the best in two years thanks to greater home affordability and government tax rebates. Again, this greatly exceeded analysts expectations for more subdued improvement. Construction spending declined by .2%, which was a disappointment, but that was certainly not a surprise to us.

Auto sales were also strong but this number is virtually meaningless, and we will need to be average last month against the current month’s sales figures in order to normalize for Cash for Clunkers. That being said, the sales were still better than last year. The market’s behavior today seems to be a classic case of the market buying the rumors and selling the news.

Could this be a sign of what’s ahead this fall or is this simply the market taking a break for profit taking? In short, we don’t have the answer. However, we could get a big hint Wednesday morning as the ADP employment results are released prior to the market’s open. Watching the way the market reacts to the latest employment data should be very informative. We will be looking to see whether there is increased volatility to either the upside or the down.

It is clear that the markets have had a great run over the last six months, and in our opinion equities are no longer cheap. A substantial amount of economic improvement has already been priced in, and there are not going to be any major earnings reports to rally around for the next few weeks. Whether Tuesday was solely based on rumors of a struggling big bank, an opportunity for profit taking, or the start of a leg down, we are not sure. However, we are advising caution in this market environment because investor sentiment is extremely bullish, but that can change rapidly.

Original post

Comments

[Larry House]

The market goes up, and the posts are mostly positive and upbeat. The market goes down some, and the posts advise caution and watch out. Some of us have been saying along that caution should be exercised. Nothing has really fundamentally changed in the last six months. People usually see what they want to see. Hopefully prices will moderate from here or even go down a lot. It just creates a better buying opportunity.

2009 Sep 02 11:04 AM

[Chandragupta]

".......in our opinion equities are no longer cheap. A substantial amount of economic improvement has already been priced in.......". What an understatement! S & P 500 is at a P/E of 143. Miniscule tid bits of good news here and there, and how much have the markets jumped? Stock markets have completely lost touch with underlying economic reality.

2009 Sep 02 11:16 AM

[conceptwizard]

I wonder what they are making money on.

Consumer Loans- No
Commercial Real Estate- No
Residential Mortgages - No
Car Loans- No
Investments- maybe short term
Spreads from the FED- Yes, this is a short term window.

So where are the banks making all these billions?

2009 Sep 02 11:24 AM

[Mad Hedge Fund Trader]

iuyh. Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

2009 Sep 02 11:50 AM

[thechaser]

mad hedge fund must be using the copy command to say the same thing from post to post;

hey folks, two numbers today;

1033 and 1458; as in time

did you see 'em? i've got 10 pc's with 10 22" screens showing 5 stocks each, chart and quote; guess what?

on friggin command, I can name you the stocks that da boyz shot up at 1033 and down at 1458; now obviously 50 do not make thousands but it is incredible to watch the manipulation in this supposed "free market" and no, they were not by any stretch or form related to the "oil"market

what BS.

did you analyze the EIA report? 85% of that 400k reduction was due to import reduction due to as long as the ship doesn't offload, the official price is not MARKED

why do you think BDI and tanker indices are in the basement; they are getting paid demurrage rates, which pale in comparison to in-transit rates;

so why did the market then pop? look at the dial in on keeping that plunge that was accelerating from taking a life of its own; no, as MOTU (Masters Of The Universe), control is everything; in fact, I firmly expect a solid pop manana and then the big rug pull starts Friday am;

yeah, laying in wait for a Jobs Report...

remember, Thursday, July 2... hmmmmm, ya' know after weeks of green shoots, one would of thought that the number posted was OK; but no, did you see the drop in SPY futures about 0620; man, I thought, how the heck do these people know what's going on... hmmmmmm,

Gary Gensler is our new chief enforcer.... hmmmmm, 18 years at GS, let's see, out of Wharton at 23, plus 18 as a newly minted GS boy; revolving door slot for Demorats in mid 90's, then taking over the mantle of "change" from Greenberger in the 90's at CFTC, hmmm, maybe another Reisterstown crowd guy, ... hmmmmm, works 60% of career taking orders from the MOTU... hmmmmm, yeah, I can see him being real forceful in bringing about meaningful change for us lil' folk;

again, folks, stocks are cheap, cheap, and cheap

only reason they are down at these levels is because the da-boys and their brethen own lock, stock, and barrel the collective financial rear of the planet earth

you doubt me? i've been saying since early August, just wait for Labor Day...

hmmmmmmmmmm let's see, "shaky market", Friday before a 3-day holiday, hmmmmmmmm, maybe, I should unload with a "soft" market, can always reload come next week without much of a dent in my P&L,

just wait, hello Independence Day ditto, as we waltz with the proverbial talking heads;

but oh wait, Q3 results will usher in a new found "secular" bull market;

but Oh My God, the market is "again ahead of itself"; this is the Chief Larry mush around 15 Nov or so with the S&P in the lofty neighborhood of 1100;

2009 Sep 02 05:44 PM