Good morning. It is often said that a disagreement between opposing sides is what "makes a market." What's especially interesting about this concept in the stock market is the fact that although there are two clearly defined teams in the game, oftentimes the expectation each has with regard to the future doesn't vary to any great degree. However at this point in time, the lines are clearly drawn and our two teams are diametrically opposed in their view as to what is likely to transpire next.
Given that by definition the bulls typically expect stock prices to rise over the intermediate-term and the bears look for prices to fall, I probably need to work a bit harder in order to clarify the point of this morning's meandering market missive. You see, although our heroes in horns do typically see the glass as at least half full while our friends in fur typically take the other side, the degree of disagreement is rarely this expansive.
Put another way, there is no wavering on the expectations from either of our two teams. The bulls firmly believe that water will soon spill over the edge of the glass while the bears don't see any liquid in the glass at all. The key here is that when the disagreement over the outcome becomes this extreme, one of the teams is likely to crash and burn with their view while the other basks in all the glory of victory. As such, it is probably best to understand both sides of the argument before taking sides.
So let's begin. As far as our furry friends are concerned, the big-picture case begins and ends across the pond. The bear camp is adamant that there is no easy fix to Europe's debt crisis and the whole euro experiment is going to eventually unravel using the best case scenario or implode under the less than optimistic view. To hear the bears tell it, this will cause the banks of Europe to crash and burn, which will, in turn, cause the global banking system to crumble. And if the sun does happen to come up after this occurs, then we're told that the economies of the world will be destined to spend a couple of decades trying to get up off of the mat. Thus, the bears contend that stocks prices have nowhere to go but down and the coming couple of years could make 2008 look like a cake walk.
On the other side of the aisle, the crowd adorned in their matching rose-colored Revos couldn't disagree more. And aside from the usual gibberish about rates, valuations and earnings (yea, we get it; these areas always good) there are some interesting points. The first that caught my attention is the idea that we've seen the worst out of Europe. The key point made here is that we've been dealing with this crisis for more than two years and don't look now, but the S&P 500 isn't exactly on the precipice of collapse as the index is only about 5% away from the recent bull-market highs.
While the bulls tend to shy away from any discussion involving the fix to Europe's debt crisis, they are quick to jump on the idea that "the bazooka" (aka a globally coordinated, stimulative response from the world's central bankers - which is thought to possibly be unfolding now) most certainly will cause markets to sit up and take notice. The thinking is that a little inflation in asset prices is just what the world needs right now and what better way to encourage higher prices than by having central bankers hit CTRL+P a few trillion times or so. In addition, the corresponding drop in the currencies being printed will provide an added bonus of increasing the competitiveness of the economies involved. After all, wouldn't parity between the euro and the greenback make Europe more competitive in the global marketplace?
Our bovine buddies go on to suggest that with Europe likely to print its way to prosperity, China's worries will soon be history. This, of course, will be music to the ears of U.S. businesses and will induce the "risk on" trade at the corner of Broad and Wall (or at any and all supercomputers near you). And just like that, so say the bulls, stocks will be at all-time highs.
If you've detected even the slightest hint of sarcasm in my review of the two teams' cases, you've earned a trip to the candy bowl. For as you might suspect, I'm not exactly a true believer of either team's case. In fact, I could spend the next five hundred words shooting down both sides. But the key to this morning's exercise wasn't to pick a side, but rather to attempt to see each side - because somewhere in the middle is usually where the true market is found.
Turning to this morning ... Stock futures are pointing to a modest improvement at the open on the back of a decent T-Bill auction in Spain as well as strong earnings from Goldman Sachs.
On the Economic front ... In addition to Ben Bernanke's testimony before the Senate Banking Committee at 10:00 am eastern, we'll get CPI, Industrial Production and Capacity Utilization, as well as the NAHB Housing Index.
Major Foreign Markets:
- Australia: +0.77%
- Shanghai: +0.62%
- Hong Kong: +1.75%
- Japan: +0.35%
- France: +0.55%
- Germany: +0.60%
- Italy: +0.50%
- Spain: +1.23%
- London: -0.25%
- Crude Oil Futures: +$0.29 to $88.72
- Gold: -$0.50 to $1591.10
- Dollar: lower against the yen and euro, higher vs. pound
- 10-Year Bond Yield: Currently trading at 1.493%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.71
- Dow Jones Industrial Average: +35
- NASDAQ Composite: +12.10