Daily State of the Markets
Good morning. On July 15th, my morning missive was entitled Nobody Wants to Miss Out. After six consecutive down days, during which time investors had been treated to any number of negative headlines on the state of the U.S. economy, the weakening outlook in China, the latest Li(e)bor scandal, as well as the never ending debt crisis facing Europe, the market had spiked higher - on a Friday the 13th no less. If you recall, this particular joyride to the upside was triggered by comments from Atlanta Fed President Dennis Lockhart, who had told an audience that the "another policy decision looms" and that the FOMC could indeed take further action before the current round of Operation Twist ends. Boom - it was "risk on, baby" as the algo's knew exactly what to do with that headline.
Since then, traders have largely been "buying the rumor" that the Bernanke cavalry will indeed mount their white horses and ride to the rescue of the U.S. economy (which has seen GDP growth falter from a 4% rate to just 1.5% in six months' time) at either the August or September FOMC meeting. But to be fair, we do need to recognize that in between rallies stocks did succumb to another four-day rout in reaction to the latest flare up in Europe, which saw bond yields in Spain and Italy shoot to new Euro-era highs.
But with yields, CDS, and bond spreads in Spain moving up above the 7% mark, which is widely considered to be the point of no return, over the past week and a half, investors were soon treated to another reason to "buy the rumor." In short, while hopes for more QE in the U.S. is worthy of a decent "risk on" rally, if the ECB were to suddenly get off their duff and take action about the crisis in Europe, well, there just might be something more than a rumor to buy.
Perhaps Mario Draghi will disappoint on Thursday and the ECB won't cut rates again or start buying bonds. Maybe the Fed won't do anything at their Tuesday/Wednesday meeting or even hint at more stimulus. However, two things have led traders to believe that there is actually something beyond hope happening here.
First, there is the fact that WSJ reporter and purported Fed mouthpiece Jon Hilsenrath has recently laid out the options Bernanke's gang could take in either August or September. And since (a) the U.S. economic data has been sucking wind for a while now and (b) Ben Bernanke is keen on communication via the markets, it would seem that the Fed is indeed on the verge of taking additional action.
On that note, the same can be said for the ECB. While Super Mario has indeed accidentally misled markets with statements in the past, he also quickly said as much soon after. However this time around, there have been no statements from Draghi or ECB spokesmen suggesting that Draghi had been misunderstood. And with reports on Friday indicating that Draghi will be meeting with German Fin Min Schäuble prior to Thursday's ECB meeting to discuss the central bank's options, the markets do seem to be justified in getting their hopes up.
To be sure, if either of the world's superheroes of finance disappoints this week, stocks will suffer - and quickly. However, so far at least, there doesn't seem to be any real reason to think that Draghi or Bernanke has been deliberately misleading the markets. No, just the opposite appears to be true. Remember, the comments from Draghi last week were out of the ordinary for a central banker and appeared to be quite clear in their meaning. Recall that Draghi told an audience, "Believe me, it will be enough" in reference to the ECB's upcoming policy response.
In "Fedspeak" this type of comment was intended to be a threat to those continuing to short Spanish and Italian bonds. Put simply, Draghi appeared to be warning that anyone betting on higher rates in Spain might be in for a great deal of pain should they continue to do so. Apparently bond traders received the message loud and clear as the yield on the Spanish 10-year bond plunged from a Euro-era record of 7.62% on July 23rd to 6.76% at Friday's close.
So, is "the bazooka" on its way? Will the EU Central Bank AND the U.S. Fed take aggressive action in the same week? In reality, only time will tell. But from where I sit, the game right now is all about buying the rumor.
Turning to this morning... Despite improvement in European yields (Spain's 10-year is down to 6.628% this morning), green screens in the overnight markets, and more hints that the ECB is ready to act this week, U.S. stock futures are pointing to a modestly lower open at this time.
On the Economic front... There are no major economic reports scheduled for release today.
Thought for the day... You're never a loser until you quit trying. -Mike Ditka
Here are the Pre-Market indicators we review each morning before the opening bell...
Positions in stocks mentioned: none
Follow Me on Twitter: @StateDave
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (NASDAQ:HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.
Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.