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  • The Market Adheres to Newtown's First Law By: Charles Payne 0 comments
    Nov 13, 2009 1:42 PM

    There are different types of conviction and ways to assess conviction from volume trends to price movements and to the ability to fend off external forces. This takes us back to Newton's First Law also known as the Law of Inertia. In a nutshell this laws states that an object at rest tends to stay at rest and that an object in uniform motion tends to stay in uniform motion unless acted upon by a net external force. Hmm...so that would suggest the motion generated by corporate earnings news this morning is more powerful than the following concerns:

    • Surge in trade deficit
    • Plunge in consumer confidence

    That's really interesting to say the least. Consider the trade deficit news this morning. The 18% spike is the biggest since 1999, while the 5.8% spike in imports is the biggest in 16-years. A lot of this came from the increase of oil prices but it also reflects the risk of massive spending plans to go awry, just like the profits that escaped out of the country through the cash for clunkers program. American exports climbed 2.9% to $132.0 billion. The University of Michigan sentiment data continues to portray the public as being extremely worried about the future. That continues to be perplexing after, all we have been pulled from the brink, right? The public is always better than Wall Street economists at predicting the future and that makes the trends more problematic. Some of the more disturbing month to month trends include:

    • Current conditions 69.6 from 73.7
    • Six month outlook 63.7 from 68.6
    • Twelve month outlook 69.6 from 73.7
    • Inflation rate next twelve months 3.1% from 2.9%

    Equities tumbled initially when the consumer confidence news was released (see arrow) but rebounded quickly and to me that was a huge buy signal, justified or not.

    This is the kind of move that draws investors off the sidelines. There were two shots taken at stocks and both failed to stop the momentum proving an object in uniform motion can even smash through external forces when there is emotions and money involved.

    Oil Slips

    The price of oil has been under pressure for the first part of the session as market participants focused on the fact that the demand for the commodity in the US still remains anemic. This sentiment was underscored by data earlier in the week by the Energy Information Administration that refineries were operating at some of the lowest levels ever recorded.

    Nonetheless, oil along with the rest of the commodity complex rallied intraday as the value of the U.S. dollar weakened against a basket of other international currencies. The value of the dollar has an inverse relationship with the price of oil. At this juncture, traders and investors are looking for a pick up in the demand of oil as the broader economy emerges out of one of the worst recessions since the 1930s

    Economic Data

    Import and Export Prices

    The U.S. Import Price Index rose 0.7% in October, the U.S. Bureau of Labor Statistics reported on November 13, led by a 1.8% increase in fuel prices. The rise followed a 0.2% increase in September. U.S. export prices advanced 0.3% in October after decreasing 0.2% the previous month. Import prices have risen in seven of the past eight months and were up 8.1% over that period. Despite the recent increases, import prices declined 5.7% for the year ended in October driven by a 12.8% drop in prices between October 2008 and January 2009. With respect to fuel, natural gas prices increased 24.1% during the month of October which coupled with the 0.9% increase in oil prices was a key component for the import increase. Exports were weaker as agricultural products (namely wheat and soybean) continue to be weak, which was partially offset by the increase in corn prices.

    The Dollar Dips, Again

    We have talked about this a lot recently, but today the dollar is really getting whacked, and today it's down more than 2%, which in currency terms is a big move. In fact, it's right on the edge of breaking into new lows for the year and I can't say I blame the traders to for weighing it down. Today, there are a few factors that are likely playing into people's minds. First was the aforementioned trade deficit, which was well larger than expectations. Second is an upcoming speech from Big Ben Bernanke on Monday; he doesn't have a lot of wiggle room as we balance quantitative easing with cheap money, and the consensus seems to be now that overall interests rates are going to stay low for some time. Thirdly, and this is where the controversy may begin, is some light chatter of stimulus 2 (again). During his speech on Tuesday, President Obama noted that he will be holding an economic summit on job creation. There is apparently momentum gaining in congress about some sort of measure like the current stimulus plan, but more focused on job creation.

    Michigan Sentiment

    While consumers had been feeling a sigh of relief as they perceived that the rate of job losses was decreasing, they are now realizing that "less bad" job losses is just not good enough, particularly as the unemployment level has recently topped 10% sooner than expected. As a result, consumers have been turning less confident according to the University of Michigan Consumer Sentiment Index. Earlier today the Consumer confidence index for November landed lower than expected, decreasing to 66.0 from the 70.6 level posted in October and falling below the Street's expectation of 71.0.

    Consumers are now getting a different perspective about the future and are beginning to realize that the even as the rate of job losses gets less bad, companies will not be looking to hire for quite some time, increasing the risk that delinquencies on credit cards and consumer loans will likely increase. Consumer spending is very critical to the economy, and if they hold back on spending as a result of their less confident outlook, the economy can dip back into a recession once again. Government spending should help but at the end of the day consumer spending has to be sustained on its own legs, not assisted by the government.

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