Who Do You Believe?

Daily State of the Markets  Friday Morning - May 27, 2011 Good Morning. The markets sent mixed messages on Thursday, leaving the traders not already on their way to the beach left to scratch their heads. Cutting to the chase, stocks advanced for a second straight session while bond yields fell on the weaker-than expected economic data. Normally, such divergent action might not be a problem or even worth noting. However, with the yield on the 10-year diving to its lowest level of the year, investors may be wondering which market they should put their faith in. Logic would seem to dictate that crummy reports on both the economic and employment fronts would lead to falling stock prices, especially when you add a dive in bond yields to the mix. But instead, the S&P moved steadily higher for much of the session, finishing with a gain of +0.4% while the NASDAQ tacked on +0.8% and the Russell 2K jumped an impressive +1.32%. Hmmm.... Although many economists were looking for the first quarter's GDP growth rate to perk up a bit from the initial guesstimated rate of +1.8%, the first revision (which actually includes data from the entire quarter this time around) contained no such upside surprise. Thus, investors were forced to come to grips with the fact that the economy definitely began to struggle a bit during the March/April period. Prior to the GDP report however, the bulls could be heard arguing that the data was "old news" by now as everybody has already accepted the fact that the economy hit a speed bump around the time that the Japanese earthquake/tsunami/nuclear disasters hit. Thus, our heroes in horns should have been more than a little red-faced when the very current report on initial claims for unemployment insurance also came in below expectations - again. But as anyone who has been watching the action closely over the past month can attest, this isn't exactly your run-of-the-mill market environment. And instead of tanking on bad news, stocks managed to shake off the data and move on. How can this be, you ask? We've got three quick reasons for the divergent behavior seen on Thursday. First, the tech sector caught a bid on the back of some decent earnings and Einhorn's call for Ballmer to step down at Microsoft so that shareholders could make some money on the stock for a change. Next there may have been a little thing called window dressing occurring Thursday as portfolio managers do indeed have a tendency to put any cash still laying around in portfolios to work in the last few days of a month. And finally there was the fact that while not completely tick-for-tick on Thursday, "the trade" did seem to have an impact as the rising Euro/falling dollar appeared to produce some gains in the stock market. Getting back to the question posed in the title to this morning's missive, we're of the mind that if you are an investor who focuses on the fundamentals, you have got to believe the bond market here. Yesterday's reports did follow the trend of the data coming in on the punk side and as such it makes sense that yields are going down. However, it is worth noting that the uncertainty of the debt ceiling debate coupled with the Fed still buying bonds regardless of price may also have contributed to the big drop in yields Thursday. But if you are a member of the church of what's working now, then you can ignore all of that fundamental mumbo jumbo and keep on keepin' on with "the trade." As we've been saying, at some point stocks will stop being driven by the action in the dollar. But with a long holiday weekend now upon us, we'd be willing to bet that today isn't likely to be the day. Turning to this morning... European bourses are up nicely on the back of a report that EU banks may be able to avoid part of the new capital requirements. However, Fitch's downgrade of Japan's credit outlook is keeping things in check here in the U.S. On the Economic front... Personal Incomes rose by +0.4% in April, which was in line with the consensus expectations for an increase of +0.4%. The March level was revised lower to +0.4%. Personal Consumption for the month rose by +0.4%, which was a tenth below the expectations of +0.5% and also below the March revised reading of +0.5% The Core PCE (think inflation) came in up +0.2%, which was above expectations for +0.1%. Looking ahead, we'll get the University of Michigan Sentiment report at 9:55 am eastern and Pending Home Sales at 10:00 am. Thought for the day... Best of luck on this Friday and be sure to enjoy the long holiday weekend! Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell...   Major Foreign Markets: Australia: +0.53%   Shanghai: -0.98%   Hong Kong: +0.95%   Japan: -0.42%   France: +1.10%   Germany: +0.37%   London: +0.81%   Crude Oil Futures: +$0.66 to $100.89   Gold: +$4.80 to $1527.60   Dollar: higher against the Yen, lower vs Pound and Euro   10-Year Bond Yield: Currently trading at 3.143%   Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +5.61   Dow Jones Industrial Average: +41   NASDAQ Composite: +6.12   Wall Street Research Summary Upgrades: Heinz (HNZ) - Estimates and target increased at Citi   Broadcom (BRCM) - Added to Top Picks at FBR Capital   Anadarko Petroleum (APC) - Sterne, Agee   Noble Energy (NBL) - Sterne, Agee   Entergy (ETR) - Wells Fargo   Downgrades: Target (TGT) - Mentioned cautiously at Citi   Rock-Tenn (RKT) - Deutsche Bank   Weyerhaeuser (WY) - Deutsche Bank   Aflac (AFL) - Morgan Stanley   Itron (ITRI) - RW Baird   Blue Coat (BCSI) - William Blair   Long positions in stocks mentioned: none For more "top stock" portfolios and research, visit TopStockPortfolios.com   The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. 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