Daily State of the Markets
Good morning. Although stocks did finally manage to hold onto a gain on Friday, it felt more than a little artificial as the tug of war between the macro issues such as sovereign debt in Europe and the debt ceiling here in the U.S., and the micro picture involving earnings from individual companies continued to hold sway for much of the session. In short, solid earnings from early reporters such as Citi (NYSE:C), JPMorgan (NYSE:JPM), and Google (NASDAQ:GOOG) have been all but ignored by the major indices as traders appear to be focusing all of their energies on the macro view, all of the time.
As we have mentioned previously, this market is clearly being driven by the headlines. Given the fact that we are now smack in the middle of vacation season, we continue to be of the mind that the computers are largely in control of the short-term swings in the market as programs automatically react to each and every headline that hits the tape. And although the "hedgies" had been having a tough year through June 30th (most lagged the market badly and many very big name hedge fund managers were down for the year - yea, it's been that kind of year), the uber-fast-money crowd seems to be playing the sovereign debt game we described last week for all it's worth right now.
However, it strikes me as a bit odd that this game continues to work with the macro issues all so well known. The point here is that these trades are likely getting a bit crowded. Remember, whenever you can ask people on the street what's wrong with the market and the majority can quickly come up with issues such as European debt, jobs in the U.S., and the political wrangling over the U.S. debt ceiling (which, by the way, is becoming embarrassing for both sides), the decline is usually closer to an end than the beginning. But then again, momentum is always an important part of the game.
From a near-term perspective then, it is likely that the issues such as the debt ceiling and CDS spreads in Europe will continue to control the action. So, with a thin summer environment and the hedgies banging the sovereign debt trade hard on a daily basis, it appears that we could be in for more "summer of discontent" (and more of the current trading range). However, at some point before the kids go back to school, these two major focal points are likely to get resolved. And THIS is when things may get interesting and longer-term investors may want to start paying attention.
At some point, the powers-that-be will likely produce a solution for both the U.S. debt ceiling and the sovereign debt mess across the pond. Yes, it may take a while and things could be messy before these issues are put to bed. However, everybody knows (yes, even the politicians) that there is simply too much on the line to mess things up (think the failure of the first TARP vote back in 2009). As such, I continue to believe that we will avoid disaster on both of these fronts.
But from there, it might get interesting. Once traders return their focus to such mundane things as the U.S. economy and/or the earnings parades of the day, they may not be terribly happy with what they see. Keep in mind that earnings expectations have been declining for the past couple of months as the reduced guidance by companies has been running well ahead of increases during the latest preannouncement season. And then the key ingredient to the market's recipe for success - the state of the economy - remains a question mark.
Although Ben Bernanke has made it very clear that he won't let the economy enter a deflationary spiral on his watch, we need to keep in mind that inflation is no longer zero and with core levels of inflation quickly approaching the Fed's target levels, the potential for additional stimulus may be declining. Just this morning General Mills (NYSE:GIS) said that it had to pay twice as much for corn this year as compared to last year and that oats are 30-40% higher. The cereal maker then said that some of these costs will be passed on to the consumer. Hmmm...
In sum, it appears that while the focus may shift in the next month or so, this market may continue to be dominated by macro themes for some time. Therefore, I'm going to spend some time this morning looking around for that crystal ball.
Turning to this morning... Spreads in Europe continue to be a problem as CDS and yield spreads are climbing once again. This has the foreign markets solidly in the red and the futures in the U.S. pointing to a lower open.
On the Economic front... There is not data to report on before the bell, but we will get the number from the NAHB Housing Market Index at 10:00 am eastern.
Thought for the day... Remember that there is more to life than increasing its pace...
Here are the Pre-Market indicators we review each morning before the opening bell...
Wall Street Research Summary