Daily State of the Markets
Good Morning. During the majority of last year, it seemed that all (yes ALL) the news was bad. Greece was surely going to default, which was going to trigger vast unknown quantities of CDS, which, this time, would tank the global banking system, which, in turn, would send us back to the middle ages bartering for goods and services with grains and livestock, and protecting our homes with guns. In a nutshell, the news flow and the macro outlook was a nightmare as no one could imagine anything positive ever happening again.
As I recall, even if Greece was somehow spared and a "messy default" avoided, the domino effect from the rest of the PIGIS would take over and the world as we know it would cease to exist. And if by some off chance the defaults could be avoided in Europe, then the recessions resulting from the mess this crisis had created would surely plunge even the best economies of the world into something that would make the Great Depression in the U.S. look like a cake walk.
As I have written any number of times over the past six months, the negativity had become so thick you probably couldn't cut it with even the sharpest knife. A pall of gloom engulfed the markets and just about everybody on the planet knew we were doomed. It appeared that the leaders of Europe were powerless to fight the contagion that would surely spread throughout the world. And while politicians talked a good line about working together, it became apparent near the holidays that no other country was willing to buck up and lend the trillions needed to "save Europe."
However, as we were allowing our brains to be invaded by the pervasive negative feedback loop, one very simple fact was forgotten. You see, even during the worst of times, good things can occasionally happen. Although even the good news was ignored last year, this year appears to be a horse of a completely different color.
Thus far in 2012, the good news has come in bunches and from the strangest places such as the U.S. housing market (which to hear the bears tell it should be heading down still), corporate earnings, economic output, and yes, even the jobs market. To be sure, things are not peachy keen by any stretch of the imagination. But at the same time, things are FAR better than the doom that dominated the markets near the end of last year.
Thus, the most important lessons to be heeded in 2012 are: (1) Good things can happen - no matter how dark the night may appear, and (2) Investors simply must be flexible enough to change with the times (or at the very least, follow systems that can force them to adapt - even if they don't want to).
Am I saying that things are wonderful in the global economy and that we've embarked on a new secular bull market. Uh, no. But I am saying that when the market discounts the worst and then the sky doesn't actually fall (I know, I know, it's coming, just wait), again, good things can happen. Remember, the stock market is a discounting mechanism of future expectations. And right now, stock prices appear to be suggesting that the U.S. economy is growing, that the deal in Greece is going to get done, that the ECB DID know what it was doing with the LTRO, that there won't be a 'Lehman moment' in Europe, and that Apple may sell more of its products than anyone - including the late Steve Jobs - ever dreamed of.
The key point this morning is that something that everyone knows (such as how the world was going to end because Greece was going to default) isn't really worth knowing in the market. In short, by the time "everyone" knows what's going on, the market has already discounted the potential outcome. And then if something good actually does come along, traders scramble to get back on the right side of the macro view and an unstoppable melt-up ensues.
So, while stocks are indeed overbought and a pullback could occur at any time and for any reason, the fact that the S&P 500 is up +23.5% from its low means that according to the most common definition, this is a new bull market. And as such, one should be flexible enough to play the game accordingly. You never know, good things might just continue to happen.
Turning to this morning... Overseas markets played catch up to Wall Street's gains and with expectations for the Greece deal to get done, futures in the U.S. are pointing to a flat-to-slightly higher open.
On the Economic front... The Consumer Price Index for January was up +0.2%, which was a tenth better than the consensus estimates for an increase of +0.3%. you strip out food and energy, the so-called Core CPI also came in with a gain of +0.2%, which was in line with expectations but above January's level of +0.1%.
We will also get a report on LEI at 10:00 am eastern.
Thought for the day... Best of luck on this Friday and be sure to enjoy the LONG holiday weekend!
Here are the Pre-Market indicators we review each morning before the opening bell...
Positions in stocks mentioned: None
For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com
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