David Moenning's  Instablog

Daily State of the Markets
Thursday, April 25, 2013

Good Morning. It is always interesting to see what captures people's opinion in this game. For example, Tuesday's "hack job" of AP's Twitter account produced a mini flash-crash in which the DJIA fell 145 points in about 120 seconds and then recovered 134 points in the ensuing 3 minutes. So, in just 300 seconds, the DJIA traveled 279 points. But since the source of the dance to the downside was identified instantly and then the event was reversed almost as quickly as it came, I really didn't give it much thought. The bottom line is this type stuff happens all the time (albeit on a smaller scale) to individual stocks. However, since this time the computers hit the DJIA and the emotions from the Boston Marathon bombings were still raw, the public can't seem to get enough of this story.

While most professionals in the game understand that there are lots and lots of algos combing through the news wires looking for combinations of words that will trigger buy and sell orders, apparently the public does not. It's actually fun to see these programs in action at times, as the computers grab words that don't necessarily go together correctly. But since the computers can read a wee bit faster than we humans can and they do seem to get "the story" right most of the time, this is a game that probably isn't going to go away just because somebody sent out a false tweet.

One of my colleagues (Ted Lundgren of Hg Capital Advisors, a firm that, by the way, runs some pretty nifty investment strategies) called me yesterday and asked me if I thought the "mini crash" meant anything from a market environment perspective. Ted's contention was that this was an event that could have, or perhaps even should have, shaken the confidence of investors. He suggested that while not on the same scale, the Flash Crash of May 6, 2010 might be used as a guide here. "If you look at the Flash Crash," he opined, "You'll see that it was part of a larger move lower. But on Tuesday, the market didn't miss a beat. So, doesn't that tell us something?"

I admitted that I hadn't considered Tuesday's event from that perspective as market participants largely ignored the move. But Ted's contention was interesting because of the fact that CNBC spent much of the day Wednesday talking about what I'm calling the "hack crash." And in terms of the media coverage, it was as if this type of thing had never happened before.

But I digress (yes, there is indeed a reason that I often refer to this column as a "meandering" morning market missive). The key point that was made to me was that the "hack crash" occurred and nobody really seemed to care (other than the financial news networks, that is). I was reminded that by the end of the day Tuesday, the market had moved to the high of the day and there was a fair amount of talk making the rounds about the potential for new highs. In other words, despite the deep-dive that had occurred earlier in the day, fear was most definitely not in the air.

I countered with the argument that there is a large number of trend-following algos these days pushing the indices around and that computers don't scare easily. After all, the trend is indeed an algo's best friend when the market is moving in one direction or the other for any length of time. But I will admit that my friend had a point.

You see, there wasn't any panic to speak of in the market on either Tuesday or Wednesday. People weren't fearful that stocks would fall out of bed again at any moment. And while the bears could be heard pushing their agenda (this day was no different from any other day in that regard), the concept of the market falling apart at the seams did not seem to dominate anyone's conversation. No, it appeared that the "hack crash" was all in a day's work and that the bulls were continuing to go about their business.

Speaking of the bull business, it looks like the word "accumulation" is definitely to be included in the description. Remember, despite all the worries about earnings, Europe, the rising wedgie-something-or-other chart formations, the defensive leadership, and the weak economic data, it does appear that stocks are still being accumulated here in the good ol' USofA. As such, it looks like it will take more than a "hack job" to take this market down. But, then again, today is another day, so stay tuned!

Publishing Note: My travel schedule is about to get pretty nutty. First, I am first attending NAAIM's annual conference with meetings starting on Friday. Then I will be traveling in Europe with my wife for two weeks. And finally, the day after we return, I set off to fetch my youngest from college. So, I will be schedule-challenged for much of the next three and one-half weeks and will publish morning commentaries as time permits. However, rest assured that since vacation isn't a word in my vocabulary, I will be monitoring the markets on a daily basis.

Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

Turning to This Morning...

The majority of overseas markets sport green numbers this morning with the exceptions of Spain and Shanghai. The fact that the UK avoided a triple dip recession in Q1, a rebound in gold, and a steady flow of earnings appears to be keeping the mood upbeat on Wall Street prior to the open. Futures currently point to a gain of about 50 Dow points at the open.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Shanghai: -0.87%
- Hong Kong: +0.98%
- Japan: +0.60%
- France: +0.18%
- Germany: +0.64%
- Italy: +0.49%
- Spain: -0.73%
- London: +0.10%

Crude Oil Futures: +$0.28 to $91.71

Gold: +$23.10 to $1446.80

Dollar: higher against the yen, lower vs. euro and pound

10-Year Bond Yield: Currently trading at 1.712%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +6.81
- Dow Jones Industrial Average: +51
- NASDAQ Composite: +9.68

Thought For The Day...

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Daily State of the Markets
Wednesday, April 24, 2013

Good Morning. To be sure, there are times when the market's "logic" makes little sense to anyone not familiar with the way the game is played. Cutting to the chase, this would appear to be one of those times. Tuesday's rally, which took the S&P 500 back to within a positive tweet of its all-time high, was a pretty good example of this concept.

As I got to my desk at about 5:15 am Tuesday morning, I was expecting the worst. Before I had gone to bed, I had seen the report on China's HSBC Flash PMI. The report, which is designed to be a preliminary and/or independent read on the state of the country's manufacturing sector, had not only come in below expectations but had fallen from March's reading. And while the index reading was still above the "growth" line, there wasn't much room for error left in the number. As such, the Shanghai index had fallen -2.55% overnight. Ouch.

As I scanned my emails for updates on overnight data, I came across the preliminary PMI readings for the Eurozone, Germany, and France. In short, the readings weren't good... Eurozone: 46.5 vs. last month's 46.8. Germany: 47.9 vs. 49.0. France: 44.4 vs. 44.0. Okay, to be fair, the France number was actually a "beat." However, the problem in the report was Germany. You see, Germany is the strongest economy in the Eurozone and if they are starting to struggle, well...

Then there was Markit's Flash PMI for the U.S. manufacturing sector. And just like the vast majority of the other economic indicators that were not housing related, this one too missed the mark. April's Flash PMI was reported at 52.0, which was well below the consensus estimate of 54.2 and March's reading of 54.3. In fact, you have to go back to last September to find a lower reading. Ughh.

And while I didn't report on it, the Richmond Fed index also came in well below expectations. This seemed to match the decline in the Chicago Fed National Activity Index, the Philly Fed Index, the LEI, and the Empire Manufacturing Index for April. In case it isn't obvious, the point is that the vast majority of the recent data points have come in weaker than expected lately.

And if you will recall, it was a turn in the economic data that helped produce the severe stock market corrections that occurred in 2011 and again in 2012. And since the S&P's bounce off of important support over the past two days hadn't exactly been robust, one couldn't be blamed for expecting to see an ugly day on Wall Street yesterday.

Next, for some reason, the cover of the latest Barron's also zipped across my brain. My thinking was that the image of a grinning bull bounding around on a pogo stick was likely the icing on the cake for the bears and that we might see the advance of last two days erased in about 10 minutes.

So, what did stocks do yesterday in response to all that negative data? The Dow gained 152 points, of course! Sure, there was a 2-minute span Tuesday where the algos pulled all their bids and the Dow plunged 145 points in 120 seconds in response to the "hack job" tweet that said Obama had been injured in an explosion at the White House. But the dive was erased almost as quickly as it had arrived (it took 3 minutes for the Dow to recover after the drop) and before long, the bulls were back on track. Perfectly logical, right?

If you are relatively new to the game, this is called the "bad news is good news" environment where traders celebrate the idea that the ongoing spate of weak economic data means that nary a single central bank around the globe is likely to pull their QE punch bowls any time soon.

Another way to look at the situation is the recent weakness in Germany has increased the expectations that the ECB will cut rates at their next meeting. In addition, the latest macro developments across the pond have added to calls for a shift away from austerity and towards policies that stimulate growth in the Eurozone.

How did the European bourses react to the bad news yesterday, you ask? Not too bad, actually. The FTSE 100 was the laggard of the group and closed up +2.00%, while Germany's DAX gained +2.41%, Italy's MIB was up +2.93%, and France's CAC 40 soared +3.58%. As such, the bad news did indeed appear to be good news.

So, while today is another day and traders may very well decide to shift their computers' focus to the next shiny object, for now at least, it appears that bad news is good news again and that the concept of a Goldilocks economy is just fine for all that money sloshing around in the financial system these days.

Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

Turning to This Morning...

The "bad news is good news" rally is continuing to some degree in Europe this morning as Germany's IFO Business Climate result confirmed yesterday's weaker than expected data. Here at home, earnings continue to be in focus. Procter & Gamble shares are sliding after it's earnings report, which may put some pressure on the "safety trade" here in the U.S. At this juncture, futures point to a flat-to-mixed open on Wall Street.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Shanghai: +1.53%
- Hong Kong: +1.73%
- Japan: +2.32%
- France: +0.77%
- Germany: +0.63%
- Italy: -0.71%
- Spain: +0.60%
- London: +0.26%

Crude Oil Futures: +$0.33 to $89.51

Gold: +$14.30 to $1423.10

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.717%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.17
- Dow Jones Industrial Average: +25
- NASDAQ Composite: -6.82

Thought For The Day...

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Daily State of the Markets
Tuesday, April 23, 2013

Good Morning. Former Vice President Dick Cheney, who may be more famous for his hunting acumen (or lack thereof) than his economic policies, once told us that "deficits don't matter." The likely thinking was that running up deficits during times of need is okay because the good ol' USofA has always been able to "grow its way" out of difficulty. So, the Keynesian strategy employed by past administrations (both Democratic and Republican alike) has been to run up a deficit and assume that economic growth would take care of the problem down the road.

This approach is akin to a family where the primary breadwinner works on commission. Since the business of sales tends to be cyclical, the family may need to borrow on their credit cards or via a home equity loan in order to pay for their expenses when times are slow. And then the plan, of course, is to repay that debt when times are good again.

As you are likely aware, it's the latter part of this plan that Washington seems to have trouble with. Our lawmakers have no problem running up bills on the country credit card. However, paying down the debt (or even agreeing to talk about paying down the debt) is another story entirely. But since nations have been carrying huge debt loads for eons now, it's become a generally accepted concept. In other words, spend now and pay later (via the issuance of government debt) has been fine - as long as the country's total debt didn't exceed some percentage of its GDP.

The budget hawks contend that the debt being run up in Washington has now become a problem of monstrous proportions. Of course, those responsible for running up the debt counter with the idea that deficits are misunderstood and that the country will be able to grow its way out of the problem in the future.

Those in favor of running huge deficits also argue that since the amount of interest being paid on the outstanding debt is manageable, there isn't a problem - because, hey it's "affordable." Another argument being made is that the debt/deficit situation is actually improving. Statistics show that the U.S. government's income is actually rising (federal receipts rose 10% over the past 12 months) while spending is slowing (federal outlays fell -2.8% over the past year). And this was happening BEFORE the sequester cuts went into effect.

So, despite the fact that the Gross Federal Government Debt stood at an all-time high of $16.4 trillion at the end of 2012, we needn't worry, right? And according to data provided by the Federal Reserve, the Gross Interest Payments on Federal Debt has fallen to 8.8% of government spending, which is down from 20% in 1990, about 17% in 2000, and approximately 12% in 2007. Therefore, we must be on the right track, right?

While these may be good arguments for the idea of more government spending to try and stimulate the economy, the real story is that interest rates are at generational lows. Correspondingly, the average interest rate paid on government debt has also declined. Currently the interest paid as a percentage of government debt is about 2%. This is down dramatically from the 10% level seen in 1980 and less than half the average rate of 4.51% seen over the past 65 years.

The question here is what happens if the Fed succeeds and the economy improves? Logic dictates that interest rates would then rise. And if Bernanke gets his wish, the economy might finally get on a sustainable growth path at some point soon. But wouldn't this also mean that interest rates would move up toward more "normal" levels?

The point here is that if rates were to return to a more "normal" low level - as opposed to the artificially low levels caused by the Fed's ZIRP (zero interest rate policy), the government's payments on the outstanding debt would more than double. And even that number is probably very low due to the fact that the government is currently adding about $1 trillion a year in new debt.

Thus, at some point, the debt bomb currently being assembled in Washington might just go off. Given that the country currently pays about $331 billion in interest a year, if rates rise to 4.5% that amount would grow to something along the lines of $750 billion a year. So, assuming that Washington doesn't reduce spending, this means that the annual deficit would grow by about 40% when rates rise. Yikes.

What does this have to do with the markets, you ask? The simple fact here is that this country can't afford for rates to rise at the present time. In fact, almost no major country can afford for rates to rise right now. As such, it is probably a safe bet that the central bankers of the world are likely going to err on the side of low rates for as long as possible. Because, in short, a rise in rates could easily push most countries back into recession and we'd be soon looking for QE5, 6, or 7.

So, while rates are artificially low and the economy is expected to improve in the second half of the year (fingers crossed!), betting that rates will rise a lot in the coming months and that a vicious bear market in bonds will ensue may not be the lock that so many are calling for. Again, the bottom line is that nobody can afford higher rates. Thus, betting on the central bankers staying with their stimulus programs longer than expected may be the more pragmatic way to play.

Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

Turning to This Morning...

Overnight markets were mixed as Asia fell on weak Flash PMI data in China. However, across the pond, investors are celebrating an improvement in Spanish bond yields and the idea that the recent data should encourage the ECB to cut rates at their next meeting. As a result, European bourses are up strong. Here at home, we continue to get a steady flow of earnings and there is some data after the bell this morning. But the bottom line is U.S. futures are following Europe higher at the present time and are pointing to a positive open.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Shanghai: -2.35%
- Hong Kong: -1.08%
- Japan: -0.28%
- France: +2.30%
- Germany: +1.34%
- Italy: +2.39%
- Spain: +1.87%
- London: +1.12%

Crude Oil Futures: -$0.74 to $88.45

Gold: -$0.10 to $1421.10

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.667%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.20
- Dow Jones Industrial Average: +56
- NASDAQ Composite: +9.52

Thought For The Day...

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.