Wednesday Market Outlook

 |  Includes: DIA, QQQ, SPY
by: Philip Davis

We had a nice close yesterday - let’s hope we don’t blow it

We discussed last night how it doesn’t matter what GS et al tell us to do, what matters is what the markets actually do perhaps DESPITE all the doom and gloom we are being hit with lately. I am, of course, rooting for us to get back into my 13,000 to 13,300 range so I can continue to be right but I also don’t want to get too far over the top as Doctor Sachs isn’t done bleeding the markets yet (this will make no sense if you didn’t read the previous post).

Pre markets are looking good so far (8am) and Asia had a mixed close, mainly led lower by the energy sector while the Shanghai Composite lost another 1.2%, now down over 20% from it’s highs in both A and B class shares. Sinotruk caused a stir as the IPO DROPPED 15.7% from it’s open, making it the worst IPO of the year in China. Imagine if Chinese IPOs weren’t a guaranteed double anymore…

"Investors are a a bit skittish at the moment in the light of recent market volatility," said Ben Kwong, chief operating officer of KGI Asia Ltd. Don’t cry for Sinaotruk though, they still managed to raise $1.2Bn for 32% of the company - not bad for a company that manufactures just 70,000 trucks a year, that works out to a value of $52,000 per truck, perhaps not out of line but who can tell with these ADRs but I did find this very interesting web page from their Russian distributor extoling the virtues of Chinese manufacturing.

Our own manufacturing is looking pretty pathetic with durable goods down 1% but Fed Gov Kohn indicated that further rate reductions are on the table so we can expect the bulls to hang their hats in that camp this morning. I particularly liked this statement: "Central banks seek to promote financial stability while avoiding the creation of moral hazard. People should bear the consequences of their decisions about lending, borrowing, and managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill advised. At the same time, however, in my view, when the decisions do go poorly, innocent bystanders should not have to bear the cost." You can read anything you want into that - very Greenspan!

Whether moral or not, whether hazardous or not, the markets are ready to rally back into my range but let’s see if they can hold it today. I’m expecting 13,150 to be a good point of upside resistance but I’m much more concerned with simply holding the floor at 13,000, a level I think is key if we are going to consolidate for a good run once we get bored with all the bad news. We did the math last night and the impact of oil falling back to $70 could yield an astounding improvement in consumer spending.

OPEC Minister Ali al-Nuaimi is obviously one of our readers as he said this morning: "There is NO relationship between the fundamentals today and the price of oil. There is a mismatch. Fundamentals do not support high petroleum prices. The world market is well supplied." We’ve been hoping for a rally to short oil into but Ali may have killed it for us. Inventories are today so let’s see how that charade plays out.

Europe is all perky this morning, up over 1% across the board for no particular reason. China is already agreeing to float the Yuan higher against the Euro, so the EU officials accomplished in 24 hours something our administration hasn’t been able to get China to do for 6 years! The recovery in Europe is led by the financial sector based on the news from HBC and BCS we’ve been talking about for 2 days now - so much for believing in an efficient market… Cheyne Finance seems to be working out it’s $7Bn SIV without too much damage, this is something that should be encouraging on both sides of the Atlantic.

At home FRE cut their dividend 50% and WFC set aside $1.4bn to cover losses on loans and we say YAWN as this is old bad news and we have already ACCEPTED the problem and are ready to move on with our investing lives. As we expected, Cyber Monday was a huge success with on-line sales up 21% from last year with the total number of buyers up 38% while spending 12% less per person, mirroring the regular retail performance. This is going to be good for the whole web sector, from AMZN to XLNX and we’ll see how the Nasdaq does by watching the QQQQs at the critical $50.50 level.

If all goes well, we hold the line at 13,000, 2,600 and 1,530 but it’s going to be a fun day either way!