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Follow The Leader!

Daily State of the Markets
Thursday Morning - April 5, 2012

Good Morning. I got a kick out of the reports from the popular financial press yesterday morning. It seemed all the news outlets were falling all over themselves trying to tie the market's weakness to "disappointment" over the hawkish tone of the FOMC minutes. In short, everybody was suggesting that it was the lack of any hints about more Fed stimulus that was responsible for the triple-digit decline in the Dow futures. Never mind that interest rates and debt spreads were spiking in Spain or that the PM had said something about a bailout. Never mind that European bourses were down big. Nope, it was the idea of Bernanke pulling the punchbowl that was getting all the attention.

But let's examine the timeline of events and see if this makes sense. Lest we forget, the minutes from the March 13 FOMC meeting had been released on Tuesday afternoon at 2:00 pm eastern. It was at that time that traders received the news that only "a couple" of FOMC members were in favor of the Fed providing additional stimulus for the economy. This was down from last month's count of "a few" members looking to do some more bond buying. If you will recall, the market's response wasn't pretty as the indices tanked. But, but by the end of the day, the Dow was only down 60 points or so and the venerable index hadn't even violated its five-day moving average. So, as tank-jobs in reaction to news go, that one was pretty tame. And as such, I'm going to suggest that traders had had their chance to react to the "Fed disappointment" and they hadn't done much with it.

Maybe it was the fact that Japan got hammered overnight or that Europe was being crunched again that caused the press corps to latch onto the "disappointment over the Fed" idea. Or maybe it was Jon Hilsenrath's article in the Journal Tuesday evening (don't forget that Hilsenrath is the WSJ's chief Fed Watcher and is very well respected) in which he opined that the Fed is in no hurry to implement additional stimulative efforts that was to blame. But in any event, the idea of Fed disappointment seemed to be everywhere as I got to my desk at 5:00 am yesterday.

I know what you're thinking, why do I care? So what if nearly every popular press report got it wrong? Isn't the goal for us to get it right?

Yes, the goal of this game (and of this particular column each morning) is to make sure we understand what is REALLY driving the market. So, if you wanted to write about Spain's awful bond auction, or Draghi's comments, or the big dive in Japan, or the fact that this month's Nonfarm Payroll numbers will be released when the market is closed, or even that traders were looking to book some very nice gains after a big rally in front of a long weekend, well, I'd be okay with that. But this stuff about the Fed just seems a little far-fetched to me.

From my perch, there are a couple of really key drivers to this market. First, we need to understand that the performance chase by underinvested fund managers has clearly been driving the action for the past couple of months. According to Hedge Fund Research, their hedge fund index was only up 3.1% in the first quarter, which is a far cry from the 12.00% put up by the S&P 500. Again, in my humble opinion, this has led to rabid dip-buying as a big bushel of cash has needed to find its way into the U.S. stock market.

However, the most important point to understand right now is that the U.S. is the leader of the pack this year. Yes, China matters (a lot). And yes, Europe matters (a little). But the real key is that the U.S. economy is improving. And since the U.S. is the biggest economy in the world, if our GDP is movin' on up, then stocks can follow suit. Yep, sometimes (but definitely not always) it is that simple.

This is why the market has been able to brush aside all the worries about Europe, China, and oil prices. Again, if our economy is growing then the "growth slowing" crowd is simply barking up the wrong tree. But... and this is a mighty big but... If we start to see any signs of a slowdown in the U.S., then all bets are off and risk management will likely become the two most important words in the stock market game again.

Until then though, our job is to get it right each morning and to understand what is driving Ms. Market to do what she is doing. And in my eyes, this means that we should follow the leader right now.

Turning to this morning... Stocks in Europe have reversed an early rebound after another yields on Spanish bonds spiked higher again and the UK Manufacturing data was subpar. In addition, there is likely some trepidation in front of tomorrow's Jobs report, which will be released when markets are closed for the Good Friday holiday.

On the Economic front... Initial Claims for Unemployment Insurance for the week ending 3/24 fell 6,000 to 357K, which was dead on the consensus estimate for 357K and below last week's revised total of 363k (from 359k). Continuing Claims for the week ending 3/17 came in at 3.338M vs. 3.362M

Thought for the day... Best of luck today 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: -0.38%
    • Shanghai: +1.74%
    • Hong Kong: -0.95%
    • Japan: -0.53%
    • France: -0.51%
    • Germany: -0.90%
    • Italy: -1.66%
    • Spain: -1.07%
    • London: -0.40%
  • Crude Oil Futures: +$0.50 to $101.97
  • Gold: +$13.10 to $1627.10
  • Dollar: higher against the yen, euro and pound
  • 10-Year Bond Yield: Currently trading at 2.243%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -5.86
    • Dow Jones Industrial Average: -43
    • NASDAQ Composite: -7.90

Positions in stocks mentioned: none

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

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