Daily State Of The Markets: When We Assume...

by: David Moenning

Good Morning. Of the time I commit each day to market analysis, the vast majority is spent attempting to identify and understand the drivers of the action on both a short- and longer-term basis. As I've said a time or twenty, if I can get a handle on "why" the market is doing what it is doing in the short-term, I shouldn't get fooled by market moves over the long-term. And as anyone who has been around this game awhile will likely attest, avoiding big mistakes is really the key to longevity.

Please do not confuse my obsession with indentifying the market's driving forces with making market calls. Long-time readers know that I simply don't make predictions as to which way the market is going to go next. As Martin Zweig once said, "Those who rely on a crystal ball will likely to wind up with an awful lot of crushed glass in their portfolio." In short, I have learned (yes, the hard way) over the years, that assuming Ms. Market is going to act in a certain way can be detrimental to your career as well as your portfolio's health.

While employing my approach likely means that I will never make the cover of Barron's, it does help keep me in line with what the market IS doing at any given time. And as any of my colleagues will attest, I do not allow the use of the words should, could, or would in our work. No, the goal around here is to try and stay in tune with what is actually happening. We don't want to spend a moment rationalizing/justifying what we think should be happening given our positions.

Don't worry, there is a point coming - and soon. You see, I spent much of my analytical time Monday trying to figure out why the market wasn't higher (or lower). Based on my assessment (which is usually subject to an argument here or there), stocks were moving up again on Monday on the assumption that Team Merkozy was going to do everything it could to encourage the ECB to bring out the bazooka.

In English, this means that French President Nicolas Sarkozy and German Chancellor Angela Merkel needed to announce that they had come up with an agreement on a way to create the "fiscal compact" Mr. Draghi so desperately needs in order to start buying bonds with both hands. As we've discussed, a commitment by the ECB would mean lower rates and an end to the fear of credit contagion. And before you could get all of this week's important European meeting dates put into your Outlook on Monday, Team Merkozy was out in front of the press touting their agreement.

Although we were not treated to many of the details of the agreement, the market's assumption for much of the session seemed to be that the deal passed the sniff test. This brings us to the really big assumption that the markets appear to be making. The assumption that the ECB is going to do exactly what it has said it won't do: backstop the government bond market in Europe with its unlimited balance sheet.

Instead of waiting for an announcement on Thursday as to the ECB's intentions, stocks seem to be assuming that Mario Draghi's recent comments have been a series of hints that if Merkozy builds it, the bond buying will come. And upon careful review of the ECB President's latest remarks, I do see how one could come to the conclusion that the ECB might be ready to step up to the plate with a significant quantitative easing program. Which brings me to my dilemma.

If we assume that the ECB is actually going to fire the bazooka, then stocks could have room to rally, perhaps a lot. But if you find yourself hesitant to jump on the Merkozy bandwagon and assume that the ECB may be unlikely to suddenly change its tune overnight, then after a rally of 9.3% (to Monday's high), you might expect stocks to pull back, perhaps a lot.

So which is it? Which assumption are you going to make? Are we going to the moon in response to the assumption that the crisis is just about over or is this rally going to quickly crash and burn on the assumption that there isn't going to be any kind of quick fix?

In case you haven't already picked up on it, the key point this morning is that it may be a mistake to assume anything at the present time. Instead of betting money on an assumption, I believe it makes infinitely more sense to let Ms. Market tell us what she thinks about the plans from Merkozy and the ECB. Is it enough? Does it solve the problem? Or is this just another in a long string of Euro-style false starts? Sure, taking a wait-and-see approach might make me late to the party one way or the other - and my year may not be made (or lost) - but at least my portfolio won't be bet on an assumption. Because as the saying goes, when you assume ...

Turning to this morning ... S&P's warning that it has placed all but two of the eurozone nations on CreditWatch Negative (Cypress was already on the list and Greece, well, it doesn't really matter), put the markets on their heels overnight. However, word that the BOE has created a new liquidity facility and that Industrial Orders in Germany were above expectations has given the bulls hope that the current rally could continue later today. Currently stock futures are pointing to a mixed open on Wall Street.

On the Economic front ... There are no important economic releases scheduled for today.

Thought for the day ... Regardless of the colors on the screens, make the decision to enjoy your day.

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -1.32%
    • Shanghai: -032%
    • Hong Kong: -1.24%
    • Japan: -1.39%
    • France: -0.26%
    • Germany: -0.67%
    • Italy: -0.43%
    • Spain: -0.19%
    • London: +0.28%
  • Crude Oil Futures: -$0.11 to $100.88
  • Gold: -$17.80 to $1716.70
  • Dollar: lower against the Yen, higher vs. euro and pound
  • 10-Year Bond Yield: Currently trading at 2.059%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -1.18
    • Dow Jones Industrial Average: -3
    • NASDAQ Composite: +0.75

Positions in stocks mentioned: None

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