Good morning. It appears that the current stock market is all about the battle between hope and reality. And after getting its butt kicked rather handily over the prior three sessions, hope made a bit of a comeback on Monday. Sure, the intraday spikes seen yesterday were likely driven by computers and/or short-covering. And yes, it is true that the Dow finished in the red on the session. But the bottom line is that it could have been worse - a lot worse. And yes, it's come to that.
In case the premise isn't obvious, my hope versus reality analogy refers to the clash between those wearing the rose colored Revo's who, by the way, are investing on the hope that the European debt crisis won't cause a global meltdown, and the gang focused on the reality that the world's economies are slowing. And for those of you keeping score at home, reality seems to be winning at the present time.
You don't have to look very far to find evidence that reality has prevailed of late. First and foremost there is the performance in the markets. For example, the stock market (SPY) is down -9.7% since April 1st, the bond market (as measured by the TLT) has soared 17.5% since mid-March and yields on the 10-year are at all-time lows, a basket of commodities (DBC) is off -16.5% in the last 3 months, the USO has fallen an eye-popping -25.2%, and the SLX (steel) has plunged -29.7% since early February.
Then there is the data. In short, the economic data has been the bears' best friend recently. While it doesn't seem possible, just about every report from every corner of the world has come in WTE (weaker than expected). According to Bespoke, of the 21 economic reports that were released last week, only one came in BTE and 18 were below the consensus estimates, which is the worst beat/miss ratio on record. And given that the market peaked on April 1st, it isn't surprising to learn that over the last 50 days, misses have outnumbered beats by a ratio of 15 to 1. Ouch.
This is to say nothing of the mess that is transpiring across the pond. You see, it is the misery in Europe that appears to be dragging the rest of the world down. Don't forget that Europe is one of China's biggest customers. Thus, if Europe is in recession (which seems like a foregone conclusion at this point) then the slowdown that is occurring in China makes sense. On that note, let's also keep in mind that U.S. corporations receive 40% of their profits from overseas. Sure, there are exceptions - have you seen a chart of Wal-Mart (WMT) recently? But the bottom line is if Europe is slowing and China is slowing, then the U.S. is going to slow too. Yep, it's that simple.
This brings us to the idea of hope. While we are somewhat surprised that anyone in their right mind is biting on the idea of a "master plan" for Europe that will save the day (again), this most certainly seems to be the case. With the stock market oversold, even the political leaders know that meetings, conference calls, statements, and rumors are sure to stop the pain for investors in the near term. Thus, with the EU, ECB, and Mr. Ben Bernanke all on tap this week, the hope is that somebody somewhere will find a way to keep the hope of a brighter future alive.
However, after spending a couple of summers fretting over Greece, it appears that we are finally coming to the crux of the matter in Europe - namely too much debt, not enough income, and very little ability to borrow any more money to pay the bills. So, as my father told me time and again growing up, "If your outflow exceeds your income, then your upkeep will be your downfall."
My point is that if Ms. Merkel can get the rest of the dysfunctional European family to come together to create a true fiscal union, then hope may indeed be warranted. Well, in time anyway. And if a true fiscal union can be formed - regardless of the time it will take to do so - the markets will undoubtedly be able to look ahead and hope will reign supreme. But until that time, traders may continue to get smacked in the face with reality on a daily basis.
Turning to this morning ... Hope springs eternal this morning in front of the G-7's emergency conference call on the subject of the eurozone debt crisis as Asian and most European markets are higher. However some weak data out of Germany is keeping some reality in the game.
- Major Foreign Markets:
- Australia: +1.46%
- Shanghai: +0.15%
- Hong Kong: +0.40%
- Japan: +1.04%
- France: +0.70%
- Germany: -0.69%
- Italy: +0.30%
- Spain: +0.75%
- London: Closed
- Crude Oil Futures: -$0.15 to $83.83
- Gold: +$6.40 to $1620.30
- Dollar: higher against the yen , euro and pound
- 10-Year Bond Yield: Currently trading at 1.549%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -4.73
- Dow Jones Industrial Average: -19
- NASDAQ Composite: -6.73