Publishing Note: I am traveling on Friday morning and will not publish a morning report. Daily State of the Markets will return on Tuesday (markets are closed on Monday for Memorial Day).
Good morning. So we're back to that. The shoot first, ask questions later, and oh by the way, don't bother me with any details type of market environment, that is. If you will recall, investors were treated to a brutal period of volatility during the last go-round with the Greek crisis that occurred from August through mid-December of 2011. During this nightmare of a market, an environment many professionals called the most difficult they'd seen in 30 years, stocks would soar or plunge based on the latest rumor, comment, or headline from across the pond. Traders didn't bother to check their facts or examine the logic; they simply programmed their computers to scorched earth mode whenever the news hit the tape.
But just when things looked bleak and many investors were deciding whether it might be better to go work at McDonald's (MCD) instead of trading stocks for a living, the ECB pulled a rabbit out of its hat with a little something called the LTRO. If memory serves, the ECB's latest FLA (four-letter acronym) basically put an end to the nightmare on Wall Street as banks suddenly had all the liquidity they needed. With the collapse of the global banking system off the table, a remarkable rally ensued. And although there were plenty of headlines during this time, the rumor-induced rampages simply faded away.
But unless you've been living in a cave or have given up investing altogether, you are likely aware of the fact that the rumor rampages have come back in a big way lately. To be fair, I'm not sure that traders in New York and Chicago are intentionally pushing the indices around at the drop of a hat. However, the computers that mine the headlines for words and/or combinations of words are doing just that.
Over the past two sessions, we've been treated to no less than four examples of what I'm now calling a rumor rampage, where the computers grab hold of a headline and launch into attack mode (remember, the boyz with the fastest computer toys can actually win at this game while the rest of us simply shake our heads in amazement). For example, on Tuesday, the algorithms found the combination of words "Greece + exit + euro + prime minister" all in the same sentence as Greece's former Prime Minister Lucas Papademos had stated that his country was preparing plans for a possible exit of the euro. Although Papademos did NOT say that Greece was planning to leave and anyone who has been paying attention knows that such plans have been in the works for some time, the computers had all they needed. And just like that; stocks dove into the close.
Then on Wednesday, investors were treated to a triple feature as the computers took hold of the market in response to not one, not two, but three different rumors. And if you were watching the action closely, the word rampage really fits with how the indices reacted. First there was word that the Eurogroup Working Group (a group who work for the euro bloc's finance ministers and the German central bank) had told leaders of each eurozone country to prepare contingency plans for Greece exiting the single currency zone - and they were to prepare these plans post haste. The market's response was a not-so pleasant dance to the downside.
With all the "Grexit" talk and the projections regarding the impact such action might have on the European banks (it will suffice to say that the banks of Europe would not welcome such a move) the mood quickly became downright dour. But just when it looked like the indices were about to break to new lows and that it was time to jump into some VXX, SDS, BGZ or SPXU's, the rumor mill got cranking and the computers began to whir.
First there was the report that Angela Merkel had proved a verbal guarantee that a FDIC-like program would be instituted immediately in order to put an end to the bank runs in Europe. Boom -- stocks exploded to the upside. Never mind that this report was never verified or that Goldman Sachs (GS) had just released a report saying that such a plan could not be implemented quickly. Never mind that the statement had at least two ridiculous elements. Nope, the computers had their data and with real buyers waiting to see the statement that was to be issued when the informal EU summit ended, the rumor rampage was on.
However, that move was child's play when compared to the absolute stampede to the upside that occurred when word got out that Minneapolis Fed President Kocherlakota had purportedly started talking about "more cowbell" (a phrase that Doug Kass originated referring to another round of QE) in the financial hotbed of Rapid City, South Dakota. Never mind that St. Louis Fed President Bullard also said yesterday afternoon that the Fed has done all it can or that even Ben Bernanke has been talking more about more twisting than quantitative easing, apparently the chant of "QE3! QE3! QE3!" could be heard up and down Wall Street.
So, with the rumor rampage in full swing and Apple (AAPL) returning to form with a gain of more than $13, all appeared to be right with the world by the time the closing bell rang. Well, until the next rumor rampage begins, that is.
Turning to this morning ... Despite the weak preliminary PMI readings in China and Europe, U.S. futures have improved on rumors that the ECB will intervene and the Fed will have a window of opportunity to provide more stimulus at their June meeting.
On the Economic front ... Initial Claims for Unemployment Insurance for the week ending 5/19 were reported at 370K, which was a smidge above the consensus estimate for 369K and in line with last week's revised total of 372k (up from 370k). Continuing Claims for the week ending 5/12 came in at 3.26M vs. consensus of 3.255M.
Next up, Orders for Durable Goods rose by +0.2% during the month, which was a bit below the consensus expectations for an increase of +0.3%. When you strip out the volatile orders for transportation, orders fell by -0.6%, which was below the consensus for +0.7%.
Major Foreign Markets:
- Australia: -0.31%
- Shanghai: -0.53%
- Hong Kong: -0.64%
- Japan: +0.08%
- France: +1.14%
- Germany: +0.64%
- Italy: +0.52%
- Spain: +1.64%
- London: +1.46%
- Crude Oil Futures: +$0.68 to $90.58
- Gold: +$18.10 to $1566.80
- Dollar: higher against the yen, euro, and pound
- 10-Year Bond Yield: Currently trading at 1.749%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.04
- Dow Jones Industrial Average: +13
- NASDAQ Composite: -1.63