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Time To Rethink The Thesis?

Daily State of the Markets
Tuesday Morning - April 10, 2012

Good Morning. We had an interesting discussion in the office yesterday about what is, has been, and will be driving the stock market. To my surprise, there was some lively discussion and differing opinions on what has been the impetus behind this year's joyride to the upside. To me, this is an easy one as I'm of the mind that it's been the better-than-expected economic data combined with the grossly underinvested positions of the hedgies driving stock prices higher for the past four months. And yet the topic of QE3 seemed to get a lot of attention in our impromptu strategy session.

I said, "Hey, I know the bulls have really had it going on, but you can't argue BTE (better than expected) and QE at the same time - well unless you've got one of those really rare markets like 1999 where nothing really makes sense, that is." I explained that while both BTE and the expectations for more QE can indeed act as drivers, they really can't exist at the same time or drive prices higher from the same levels. "It just doesn't work that way," I added.

This one created a blank stare or two so I continued. "Look, while Bernanke clearly doesn't want to take any chances with the economy and will likely err on the side of caution/stimulation, the rest of the Fedheads in the room have made it clear that they are not going to continue buying bonds on the open market just for the heck of it." I suggested that there needs to be a reason for the Fed to take action at this point in time and the market currently takes this to mean weak economic data. "So, you can't have it both ways right now. It's either QE or BTE, but not both - well not at the same time, anyway," I concluded.

The point is that if the economy does start to soften or if Friday's jobs report was even remotely accurate (clearly a question in my mind), then Bernanke's Bunch may have something to justify another round of stimulative action. And to be sure, the market has responded favorably to the QE and Operation Twist programs in the past. However, it seems logical to me that if we get data weak enough to cause the Fed to act, stocks would likely correct lower BEFORE celebrating the Bernanke Cavalry's latest ride.

Thus, the question I posed was "Just how weak does WTE (weaker than expected) need to be?" For example, yesterday's not-so closely followed Employment Trends Index dipped 0.2% in March, which was the first decline in 10 months. The primary reason the overall index pulled back was the fact that the percentage of firms with positions they couldn't fill has been rising. Then the Conference Board noted that "employment growth in December to February, averaging almost 250,000 a month, may not be a sustainable trend." Thus, while employment may not fall off a cliff, it might be reasonable to expect some moderation in the rate of hiring growth during the second quarter.

So, I wondered aloud, "Will a 'moderation' in the growth of jobs do the trick to get Bernanke back on the QE trail? Or is this just another argument that we should plunk into the bear side of the ledger?"

The bulls seem to be suggesting right now that both the ongoing buy-the-dip mentality and the prospects for the Fed to "come in" will provide support to any corrective action that might be caused by a period where WTE takes over. The thesis seems to be that the current pullback could easily last a while longer than the one to three-day affairs we've been seeing since mid-December. However, the key is that our heroes in horns aren't looking for anything more than a garden-variety corrective phase over the next couple of months and for the rally will to resume once the selling subsides.

The problem - at least in my mind - is, as I mentioned in our meeting, you can't have it both ways. Thus, the thesis being forwarded by the bull camp assumes that the WTE won't be weak enough to deter the dip buyers, who, in turn, will be buying in the expectation of more QE. Hmmm... I may need to noodle on that one for a while and maybe even reconsider this entire thesis.

Turning to this morning... Although European bourses are playing catch up after being closed since Friday and Italy is getting smashed, the futures in the U.S. are close to breakeven at this hour.

On the Economic front... The NFIB Small Business Optimism Index pulled back 1.5% in March, registering the first decline in the last six months.

In addition, we'll get the report on Wholesale Inventories at 10:00 am eastern.

Thought for the day... Don't forget, ego is the real enemy in this game...

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -0.65%
    • Shanghai: +0.88%
    • Hong Kong: -1.15%
    • Japan: -0.09%
    • France: -1.69%
    • Germany: -1.13%
    • Italy: -3.02%
    • Spain: -1.63%
    • London: -1.01%
  • Crude Oil Futures: -$0.70 to $101.76
  • Gold: +$0.80 to $1644.70
  • Dollar: higher against the yen, euro and pound
  • 10-Year Bond Yield: Currently trading at 2.057%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -1.50
    • Dow Jones Industrial Average: -7
    • NASDAQ Composite: +1.50

Positions in stocks mentioned: none

For more of Mr. Moenning's thoughts and research, visit

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