Daily Insight: Reality Bites

Well, I guess the way stocks ended the day yesterday was apropos for the quarter. A decline in the back-half of the session turned into a slide in the final hour, despite a momentary rally from the day’s low. For the quarter, stocks also fell in the back-half, sliding at the end despite a mid-June rally. The difference is for the quarter the final session recorded the period’s nadir.

Stocks actually began yesterday’s session up a bit as traders were feeling a little juice in pre-market trading after hearing European banks borrowed $161.5 billion via the ECB’s three-month lending facility, below the roughly $200 billion expected. This was all part of the refunding we talked about in Tuesday’s letter due to the ECB’s one-year refinancing facility being closed out. Although, an interest-rate strategist at BNP Paribas did mention that many of the banks that borrowed $540 billion via the one-year funding program from the European central bank did so not because they needed it but as an arbitrage opportunity – and much less arbitrage is to be had now that the facility is for a term of three months rather than one year. So it’s possible that the lower-than-expected borrowing from the ECB may not be as positive as it seems -- yet another example of premature excitement I’m afraid.

It is inconceivable that the EU financial system has suddenly begun to heal, as the headlines suggested, when it is likely to get worse. Nothing but solid-to-strong economic activity will heal the loans on their books, the bonds they hold and inter-bank lending rates.

Anyway, the feel-good sensation didn’t last as a much weaker-than-expected ADP employment report later weighed on sentiment -- we’ll touch on that below. Offsetting the bad preliminary jobs report was another strong regional factory survey, but the market appears to be looking forward, concerning itself with what may unfold over the next several months rather than manufacturing activity for a month that has now ended. Reality appears to have overcome easy money.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Aimless

U.S. stocks wandered aimlessly the entire day…up, down, up, down -- you know the drill, eventually erasing the final rally in the waning 10 minutes of the session. There is zero conviction right now as short-term traders just wait to see which direction we go -- headed to test that 1040 level on the S&P 500 or higher to the top end of the most recent range, about 1118.

The economic data was not a help really. Personal income and spending was offsetting as incomes came in a bit below expectations, while spending a bit higher. Overall, I thought the report was a good one, as the gain in income outpace spending; it would be nice to see this play out for a while, but as we elude to below this is probably not the type of stuff traders would like to see – spend baby, spend.

Energy and basic material stocks were the worst hit groups yesterday, It was a divided session as five of the top 10 industry groups fell with five gaining ground. Consumer staple and telecom shares were the out-performers.

Treasury securities continued to rally, making it four of the past five sessions, as the yield on the 10-year fell to 3.02% -- again – and the two-year looks headed below 0.60% -- a record low yield, even below the 2008 and 2009 lows. And the rally continues today as the 10-year yield is down another five bps to 2.97% and the two-year just barely above that 0.60% mark at 0.617%...continued after the jump.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Weaker by the Revision

U.S. stocks endured another up and down session but the broad market held on to a late-session bump to close higher for the first session of the week – it was the one of the worst weeks of the year with the Dow down 2.94%, the S&P 500 off by 3.65%, the NASDAQ down 3.74%, the S&P 400 (mid cap) sliding 3.75% and the Russell 2000 (small cap) slipping 3.27%.

Financials led the S&P 500 marginally higher as traders viewed banks had dodged a bullet due to watered down limits on derivatives trading and investing in hedge funds – although banks were going to find a way around this anyway, but likely at a higher cost. (Sorry to say, I don’t think banks will dodge the double-dip housing market bullet.) And with the death of Senator Byrd last night and Senator Brown now expressing doubt he’ll vote yes, FinReg may ultimately come up short of the needed 60 votes in the Senate.

Consumer staples led the four major industry groups that closed lower. The other traditional areas of safety – health-care and utilities – did gain ground for the session.

Did the overall market truly rally on the news Friday morning that FinReg was watered down? I’m not sure as this is a strange market environment; you never know if it’s some algorithmic dollar-down computer order buying (that is, programmed to bid prices higher on dollar weakness – waning of the safety trade), as some suggested and is supported by the chart below. And even though FinReg doesn’t appear to be a worst-case scenario for the economy’s credit outlets, House and Senate Chambers rushed agreement via a Thursday all-nighter, which doesn’t exactly give one the sense that a whole lot of consideration was given – the law of unintended consequences will likely be rife with this legislation, if it ultimately passes.

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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: NFIB and What's a Keynesian Central Banker to Do?

U.S. stocks bounced between gain and loss on several occasions yet again yesterday, but eventually rallied to end a two-day slide that had sent the S&P 500 to a seven-month low.

Comments from Fed Chairman Bernanke reportedly put the brakes on an early-morning rally with his comments on the labor market. The Fed head stated that the unemployment rate is likely to remain “high for a while.” But you can’t keep a good market down, most stocks pulled a reverse of what’s played out over the past couple of sessions and rallied late in the day to close at the session high.

In Monday’s letter, following Friday’s loss that brought the S&P 500 back down to the 1060 handle, we mentioned that it wouldn’t be long before a retest of 1040 occurs – that is the intraday low hit on May 25 and the lowest closing level since last November. We came close to that mark yesterday morning, hitting 1042, and rallied from there; although not in a straight line.

Basic material shares enjoyed a really nice day, jumping 2.49%. These shares, which were among the top-performers when the market was in rally mode, had been hit hard, falling 18% since April 26. Technology shares were the laggards, but all 10 major industry groups did rise for the session.

I did notice commentary suggesting that the market rebounded on speculation the Swiss National Bank (SNB) has intervened to support the euro. Speculation? They have been intervening for a while, as we’ve been discussing. The Swiss Franc has plunged 9.5% over the past six weeks due to the SNB selling the heck out of it to support the euro – yeah, euro would probably be down to that 1.15 USD/EUR level (the all out intervention level) without the SNB’s actions.
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Brent Vondera, Senior Analyst
http://www.acrinv.com/

Daily Insight: It's Different and Consumer Credit

U.S. stocks slipped again on Monday, beginning the week much like we did last Tuesday (last Monday being a holiday) as the major indices gained ground at the open before sliding late in the session.

Industrial and financial shares led the broad market lower, again. Industrials are feeling the pressure that weaker Chinese growth and European government debt issues will have on the global economy. Financials took it on the chin after Goldman Sachs was subpoenaed by the Financial Crisis Inquiry Commission for failing to comply with information requests in a “timely manner.”

The S&P 500 index that tracks utility shares was the only major industry group to gain ground. Health-care and telecoms performed well on a relative basis, but did decline slightly.

Stocks closed at session lows for the second-straight session as the latest report on consumer credit, which we touch on below, reminded of household balance sheet problems. Overall consumer credit has declined 6.6% since December 2008 and is down 4.6% at an annual rate since GDP turned positive again in the third quarter of 2009. It is unusual for consumer debt to decline, much less during the initial stages of expansion, but then household debt levels are more elevated than at any time in the postwar era.
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Brent Vondera, Senior Analyst
http://www.acrinv.com/

Daily Insight: Apps, Durable Goods, New Homes and Shoot to Kill

After spending most of the day on the plus side U.S. stocks failed to hold positive territory, falling below the cut line in the final 40 minutes of trading. You can’t say it was a mirror image of Tuesday’s session, when stocks erased a 3% plunge to close mildly positive, but it was close. At its intraday peak, the S&P 500 was higher by 1.54%, but momentum began to fade at about 1:00 CDT and completely fell apart as we headed for the close.

There was a report from the Financial Times, out about the time that stocks went negative, stating that China may begin reducing their positions in European government bonds. Obviously, and it shows just how skittish this market is for it to react this way, the Chinese are not going to announce such a strategy to the world; they hold $630 billion in euro-zone bonds, they’re not going to want to see those positions summarily crushed. But from a wider perspective, such action would put immense pressure on the European banking system since they have significant exposure to these bonds. Actually, the exposure is more likely massive, but I don’t have the number in front of me so I’ll call it significant for now.

The EU banking system is in trouble anyway you look at it. The central bank and various euro-zone governments can delay the damage, but they can’t ultimately erase what only good policy and time can cure.

The day’s economic reports were mixed with the April durable goods report beating expectations on the headline number, but missed via the more reliable ex-transportation reading. New home sales for April jumped, destroying the consensus estimate, but as the prior three weeks of mortgage apps have shown, the tax credit simply stole sales from the future…more on these data below.

Nine of the 10 major industry groups closed down for the session, industrials being the only survivor – the S&P 500 index that tracks these shares was up as much as 2.5%, but ended just 0.25% higher . Telecom and tech led to the downside, both were also positive earlier in the session.
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Brent Vondera, Senior Analyst
www.acrinv.com

Market Minute: Putting The Correction Into Perspective

We officially had a market correction, which is defined as a 10% decline from a market’s peak, but a period of market consolidation was inevitable after the straight-up rally from the March 2009 nadir.

As the market climbed higher, shares moved from being slightly cheap (using a cyclically-adjusted P/E ratio) to expensive. Meanwhile spreads on high-yield bonds (the extra yield investors demand to hold company debt rather than government securities) fell from more than 16 percentage points at the start of 2009 to less than six points.

So we were due for a correction, but that is no reason for investors to fall into the fetal position. Corrections are pretty normal. According to David Rosenberg of Gluskin Sheff, corrections historically have occurred about every 12 months and tend to occur more in the second year of a rebound than in year one.

Market contractions like the last 30 days feel severe, but it must be viewed in the context of an 80% surge from the March lows. It would have been surprising if the markets had not paused to catch its breath. I laid out a plethora of market risks in my April 22 blog post and made it abundantly clear that this recovery will be bumpy and market pullbacks should not come as a surprise.

Before markets turn bullish again, we need to see LIBOR (London Interbank Offered Rate) spreads begin to narrow. LIBOR is the interest rate one bank charges another for a loan and serves as the benchmark for $360 trillion of financial products worldwide, ranging from mortgages to small business loans to credit cards. This key benchmark of interbank lending continues to rise, suggesting that there is rising caution even among banks about lending to each other. Banks’ reluctance to lend to each other stems from concerns about (1) the deteriorating quality of each other’s collateral as a result of the Eurozone’s financial problems, and (2) the U.S. financial reform bill that could adversely affect the credit ratings and profitability of major U.S. banks.

Of course, LIBOR is nowhere near the levels reached at the worst of the financial crisis back in October of 2008 – 3-month LIBOR is currently 0.537% compared to 4.81% in October 2008. Still, I’d expect investors want to see LIBOR come down before they start plowing money back into riskier assets.

Peter Lazaroff, Investment Analyst
http://www.acrinv.com/

Daily Insight: CaseShiller, Consumer Confidence, and What Rout?

U.S. stocks began the session deeply lower, following another ugly session in overseas trading – European and Asian bourses down 2.0%-3.0% -- as a couple of risks jumped out to drive the safety trade. But as the day progressed U.S. stock traders got the nerve to look the debt and geopolitical risks in the eye to say: You’re not so scary. Now, whether that confidence is due to naiveté or just a willingness to look past what is right in front of our faces right now doesn’t matter, the reversal was extraordinary.

Here’s a quick commentary on some of the news stories that appeared to move the market during the very volatile session – a 3% decline at the open for the S&P 500 that was completely erased by the close.

Stocks bounced from an opening plunge, fueled at least partially by the latest reading on consumer confidence (there are a few different measures but yesterday’s look from the Conference Board is the most-watched), but then dipped back below what technicians are calling the key 1050 level on the S&P 500.

The market then staged another move higher after Federal Reserve Bank of St. Louis President Bullard gave a speech stating that the European debt crisis probably won’t lead the world back into recession, but then fizzled again to remain 2.0% below the opening price.

The third time proved the charm, a rally that made it to the close, helped by news that House Financial Services Committee Chairman Frank believes the Senate’s FinReg language on swaps-trading operations “goes too far.” This boosted the view that one of the most harmful aspects of FinReg, with regard to future credit availability, would be struck from the bill.

Basic material, consumer discretionary, financial and telecom shares closed higher for the session. It was a 5% intraday swing for basic material shares, ending higher by 1.6% after an opening 3.3% slide – even as underlying commodity prices were down yesterday; figure that one out. Consumer staples led the six of the major 10 industry groups that closed down on the session.

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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Existing Home Sales and More European sPain

U.S. stocks bounced around the cut line for most of Monday’s session in a show of either remarkable or unbelievable resilience -- considering the developments out of Spain over the weekend could be seen as a harbinger of European banking problems soon to come and mounting tensions in Korea. But the major indices did succumb to weakness late in the day, erasing almost all of Friday’s gain in the final 90 minutes of trading.

Financials, energy and basic material shares led the market lower. Health-care and tech were the best performing groups, but even these were down as all 10 major industry groups declined on Monday. Tech actually spent most of the session in positive territory, up as much as 0.85% even as the broad market struggled to peek above the cut line, but sold off by 1.38% in the afternoon.

Four Spanish savings banks are set to merge in a coordinated effort by the Bank of Spain in an attempt to strengthen their solvency. The four banks hold more than $168 billion in assets, which is kind of a big deal for a $1.6 trillion economy. These banks went on a lending binge during the Southern European real-estate boom and as Spanish unemployment has leapt to 20% from 8% in less than two years the banking troubles are clearly widespread.

On the Korean peninsula, the South has begun to respond, although tepidly, to the March 26 sinking of their warship. The North has reportedly ordered their military to ready for combat. One can hardly take anything news that comes out of the North at face value, but conditions are ripe for trouble.

We’ve mentioned a couple of times now that risk lurks around many corners, just waiting to jump out and scare the complacency out of everyone. A couple of these risks have begun to do so.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Jobless Claims, Philly Fed and For All the Wrong Reasons

As everyone knows, U.S. stocks got hit hard yesterday, extending the latest losing streak to three sessions but the weakness has really been in play for three weeks, hitting a crescendo since the so-called “flash crash” two weeks back. Yesterday’s open to close decline was actually larger than the May 6 (flash-crash day) move.

Stocks looked ready to stage a comeback on a couple of occasions yesterday, a rally late in the morning session and then again about mid-way into afternoon trading. But a late-session slide, which coincided with news that the Senate came up with the 60 votes necessary to end cloture and clear the way for passage of financial regulation legislation -- which they ultimately passed last night, slammed the market back down to close at the intraday low. The Senate version will have to be reconciled with a House plan passed in December. After that it gets signed.

To no surprise, financials led the market slide. Industrials, energy and basic materials (all the most cyclical industries that are having trouble now that the state of the global economy are in doubt again) weren’t far behind. Telecom, consumer staples and utility shares were the relative winners, but even these were off by roughly 3%.

The broad market – as measured by the S&P 500 -- is now off its recent high by 12%, a decline of more than 10% is considered a correction, as markets follow the Shanghai Composite lower. The Shanghai exchange is down 18% since April 15 and 25% off its near-term peak. The trend of Shanghai leading has been in place since late 2008. I’m not saying this trend is in place for the long term, but it’s tough to ignore for now. As China continues to rein in its stimulus, which has provided a kick to the entire Asian region, commodity-rich economies and technology & certain industrial firms, the market may continue to pull back from the risk trade. Of course, concerns over Europe and the drag those economies will have on global growth are also part of the problem. But Shanghai has been quite the indicator.

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Brent Vondera, Senior Analyst
www.acrinv.com

Market Minute: Tips For Market Volatility

The fact that market volatility has been elevated recently is no secret. Volatility can have a harmful effect on investor behavior. One of the most common mistakes is attempting to time the market, as investors generally react too late to be able to capitalize on gains or avoid major losses (not to mention the significant costs that come with market timing).

It’s no surprise that this behavior is more prevalent in volatile markets since it is our human nature to seek safety in times of trouble. The problem with selling in fear is that you also have to determine the appropriate time to re-enter the market. Unfortunately, most people that wait until “the coast is clear” miss out on the gains and end up buying at high prices. I don’t have to tell you that selling low and buying high is harmful.

Today I would like to present you with a few tips that you may find useful in volatile times. Follow these tips and you will never fall victim to market timing.

Stay the course. Maintaining your target asset mix of stocks, bonds, and cash is the most important part of a long-term investment plan. In fact, 90% of variation in portfolio performance can be attributed to your asset allocation. There is no one-size-fits-all allocation since everyone’s asset mix depends on individual objectives, time horizon, risk tolerance, and current financial situation. Once you (with the help of your financial advisor) determine the appropriate asset allocation for your circumstances, stick to it.

Continue automatic investment contributions. Making regular contributions to your 401(k), IRA, or taxable investment accounts is one of the best and most disciplined ways to grow your wealth. For most people, this means having a predetermined sum transferred directly from their paycheck into an investment account. Others will have automatic transfers from a checking or savings account. Regular contributions result in better average purchase prices – you buy more shares when prices are low and fewer shares when prices are high – and take emotions out of investment decisions.

Tune out the noise. These days there is an amazing amount of news outlets vying for your attention. Newspapers, magazines, and news reporters all try to identify the causes of every market gyration and predict the next move, but it’s impossible to explain market activities until long after the dust has settled. Try to ignore all this noise and keep focused on your long-term goals. As a close friend of mine so perfectly said to me, “I’m going to let you worry about all the nonsense.” Good idea.

Volatility is the norm, with market fluctuations cancelling each other out over the long term. There is never any guarantee in the financial markets, but staying on course over the long run increases the chances of meeting your financial goals.

Peter Lazaroff, Investment Analyst

www.acrinv.com

Daily Insight: Regulatory Regime, Housing Starts and Give Me Yield Baby!

U.S. stocks began the session higher on Tuesday, but prices deteriorated as we headed into the afternoon session. Chances of recovery within the eurozone are falling, which caused traders to run for a little more cover. German Chancellor Merkel sated that she would support a tax on the financial sector to help fund the costs of the sovereign-debt rescue plan.

Combining with this ongoing worry was a surprise ban on naked short-selling and credit-default swaps by German regulators. I’m certainly not going to defend naked positions, but this sudden unilateral decision had on affect on U.S. trading as people believed it would shake up European markets when they opened last night – and indeed they were shaken, down 2.5%-3.0% across the board. Politicians can maintain their attempt to control the markets from responding to terrible policy decisions, but if they take away just one in a number of ways to short policy then traders will just shift their assault to the currency – and the euro surely doesn’t need additional attack.

Further complicating things was an amendment out of the U.S. Senate that would allow states to enforce their own credit-card rate limits regardless of where the issuer is located. Banks currently get around various state usury laws by domiciling in states with the least regulations – imagine that. Differing state laws is about as messy as legislation can get, leading to confusion within the industry. This is on top of the debit-card “swipe” fees – the fees charged to merchants on each transaction, which continues to whack shares of Visa and MasterCard. Financial regulation is really starting roll.

To no surprise, financial shares led the market lower. Consumer discretionary shares also got hit hard, along with tech. Consumer staples and telecoms were the relative winners for a third session. All 10 major groups did decline during the session.

In other regulatory news, U.S. stock exchanges and regulators proposed a six-month pilot program to help guard against events like the “flash crash” that occurred on May 6. Circuit breakers will be put in place on individual stocks (trading paused if a stock price moves 10% or more in a five-minute period). Broader circuit breakers will be rolled out at a later date that will force a pause in market-wide trading. These new circuit breakers are aimed at electronic exchanges. The New York Stock Exchange has had circuit breakers in place for many years, as laid out below the jump.

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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: First Look at Manufacturing and Eurozone Still Pressures

U.S. stocks remained under pressure as the 5% slide in Shanghai overnight (Sunday night) and continued concerns that the European crisis will derail the global economic recovery weighed on investor sentiment. However, the market shook off its morning-session weakness, rallying in the afternoon to erase a 1.8% decline, closing just above the cut line.

Six of the 10 major industry groups gained ground during the session. Telecom and consumer staple stocks led the led the way – so there remains a safe-haven play here (telecoms are not traditional safe-havens, but since the sector is dominated by Verizon and AT&T it is the dividend yields that has investors seeking succor in this area). Energy shares led the four declining groups. Industrials, basic material and financials rounded out the losing sectors.

We’ve talked about this European debt crisis since first bringing it up in the December 9, 2009 letter and really got into it with the February 10 issue when we stated: It was always a fantasy that the EU would escape bailing out Greece, and unless things go very well they’ll be bailing other countries too as the Greek situation is the canary in the coal mine. But we’ve also said that EU trouble has implications beyond that continent as the eurozone is the world’s second-largest importer (a plunging euro will make life more difficult on the globe’s main exporting economies – specifically Asia) and the entire situation puts the hurt on European banks. It appears the market is beginning to think about these implications and unfortunately is likely to keep pressure on riskier assets.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Jobless Claims, Import Prices, On the Dole

U.S. stocks spent most of the session bobbing around the cut line (the opening price for new readers), but slid in the final 90 minutes to make it two up and two down for the week thus far.

The fact that regulators have moved beyond Goldman Sachs and are now scrutinizing eight banks with regard to their mortgage-bond deals certainly didn’t help investor sentiment.

Also, a couple of retailers forecast weak same-store sales results for the second quarter, which led to some worries about today’s retail sale report for April.

Finally, more people seem to be talking about what we mentioned yesterday: a European economy that has become heavily dependent on government spending isn’t going to respond well to the necessary austerity plans coming from EU members.

Consumer discretionary shares led the declines (been a while since that happened as performance-chasing behavior in the sector has been running wild), with financials not far behind. Of the 10 major industry groups, only telecoms gained ground for the session.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Mortgage Apps, Trade and The Fabulous Keynesian Experiment

U.S. stocks rallied on Wednesday to have now fully recouped the big losses from late last week – the ubiquitously called flash crash. Another 1.2% pick-up and all of last week’s decline is gained back. More government back-stopping (this time from the EU), a few click of the heels, and voila the worries from just seven days back go poof. Man that was easy.

Stocks picked up momentum after a Portuguese bond sale went well, Spain announced a measure to cut their deficit and the UK election results offered optimism that the new coalition government will make progress on their debt situation. More on this below.

Tech, industrials and basic material shares were the top-performing groups yesterday. Tech has really benefited from the equipment-spending snap back after businesses froze spending for most of 2009; Chinese stimulus measures have also played a major role as Asia is the growth engine, for now. Health-care and consumer staples -- the traditional areas of safety -- were the laggards, but all 10 major groups did gain ground.

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Brent Vondera, Senior Analyst
www.acrinv.com

Reflecting On The Market Sell-Off

I was out of the office on the two trading days that followed last week’s “flash crash,” which allowed me some time to reflect on the events of that day.

In case you haven’t heard, market indexes dropped precipitously in a matter of minutes last Thursday on basically no fresh news (unless you count the reports that a new Pampers diaper made by Procter & Gamble is causing rashes).

The first conclusion I’ve come to is that last Thursday’s market action clearly demonstrates the inherent risks of our increasingly automated stock market.

High-frequency traders account for 50% to 70% of daily trading volume and, thus, these computerized trading systems provide gobs of liquidity in a normal market. But when the high-frequency crowd jumped ship last Thursday, they took their liquidity with them. I don’t think this right or wrong, fair or unfair. However, I will remember this event the next time I hear someone argue that the “constant” liquidity these computerized trading systems provide justifies their grab-every-fractional-cent-in-sight nature.

Another conclusion I have reached in the aftermath of the “flash crash” is that while human error and computer glitches are accused of being the primary culprits for the epic freefall, I think in some sense the market had been craving a sell-off.

In my April 22 post I suggested that the market would take a breather once earnings season slowed down. There is nothing wrong with sentiment growing bullish, but it’s a problem when markets are willing to shrug off just about any bad news. The bright side of a sharp market reversal like last week’s is that the jubilation dissipates and investors more soberly assess the potential risks at hand.

I’ve said this before and I’ll say it again: stocks rarely go up in a straight line. The S&P 500 has seen five pullbacks of at least 5% since March 2009, none of which ultimately prevented the market from continuing upward. This latest 8.7% drop from the April 23 peak may prove no different than the others.

The final topic I’ve reflected upon is Greece. Before the big plunge, the S&P 500 was already down on concerns about Greek debt problems and the stability of the Euro zone.

I’ve avoided talking about Greece in past weeks simply because I was never that concerned about the situation to begin with. Greece’s economy is just 2.3% the size of the U.S. economy. A default on Greece’s debt would not be big enough to derail the global economy or topple any major financial institutions in the U.S. That said, if a Greek default causes a major bank in, say, Germany to fail then all bets are off.

Still, even if Euro zone economies stagnate for years, the global economy is not highly reliant on them. Only 13.6% of U.S. exports go to Euro zone countries and only 12.7% of our imports come from the Euro zone. Europe’s economy is also of little threat to Asian economies, which are leading the world’s economic recovery. This is not to say that there wouldn’t be any global economic consequences of a Greek default, but I don’t think pain and terror would spread across the globe the way it did following the Lehman Brothers bankruptcy in 2008.

That’s all for this week. Thanks for reading and keep those comments and questions coming!

Peter Lazaroff, Investment Analyst
www.acrinv.com

Daily Insight: Small Business Optimism, Consumer Confidence and The Killer Crossover

U.S. stocks were unable to build upon Monday’s powerful snap-back as concerns that the Chinese will further tighten lending requirements weighed on the basic materials and energy sectors and doubts began to surface over the effectiveness of Europe’s bailout plan.

Commodity-related (basic materials and energy) have been a play on both massive monetary easing and Chinese stimulus, and now that one seems to be going by the wayside these sectors were yesterday’s worst-performers. Of the 10 major sectors, utility and consumer discretionary shares were the only groups up on the day.

The $38 billion 3-yr auction went very well as buyers stormed in. The bid-to-cover (measure of demand) came in at a near-record of 3.27, and all for 1.41%.

The Chinese stock market is worth watching as it has been a leading indicator for the direction of the S&P 500 over the past two years (only exception being a six-week period last summer). That market is now officially in bear market territory again as the Shanghai Exchange is down 20% from its most recent peak.

So the Shanghai has had two cyclical bull markets (in a secular bear) over the past 18 months – the rallies incited by the government’s very aggressive stimulus package, and the reversals on the talk of and now actual reining in of that policy. The Shanghai had plunged 72% from October 2007 peak to the November 2008 trough. Currently, the index remains 56% below its record high. We’re watching the folly of the most aggressive Keynesian experiment in history and insaniac monetary policy.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Europe's Poker Face, The Unlimited ATM and Today's Data

U.S. stocks recouped about 40% of the prior week’s losses as the market surged following European policymakers’ announcement they’ll go “all in” with regard to bailing out Greece and attempting to contain what sure appears to be a debt contagion.

Industrial, financial and consumer discretionary stocks definitely liked the news – all were up more than 5% for the session. Tech and basic material stocks rallied more than 4%. Energy shares were up more than 3%. Even the worst-performing group during the session, telecoms, managed a 2.4% gain.

“All in.” I heard, or read, someone refer to it this way; that’s a great analogy. We are after all talking about a game of poker here; if the market gets a sense that the EU is bluffing, they’ll go right at the throats of the weakest sovereigns. The stronger governments of German and France are definitely “all in,” the IMF is “all in,” and the ECB may or may not be “all in” – they haven’t yet expressed just how aggressive they’ll be buying up government and private debt as they try to avert what could have turned into a run on southern European banks.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Oil Slick, Mortgage Apps, Jobs Picture and Service-Sector

The headwinds of European debt concerns and the evaporation of Chinese stimulus continues to assault the markets, although the major indices held in there pretty well considering the drag the Eurozone is going to put on global growth. The run, well maybe a jog for now, for safety persists as Treasury securities recorded a second-straight session of meaningful gain.

The dollar rallied as the euro got slammed again -- pretty much shaping up as our commentary suggested would be the case via the March 24 letter entitled Can the Dollar Rally Continue? (archived on the website) – as even ECB council member Axel Weber acknowledged that Greece’s fiscal crisis is threatening “grave contagion effects.” He’s got it partially right at least, it’s just not the Greek budget but the entire entitlement-centric system is crumbling, and another EU banking crisis is not out of the question. To repeat, so-called rescue packages can ease the concern on a day-to-day, even week-to-week basis, but eventually the Eurozone will have to ultimately face reality; their system is not sustainable.

Eight of the 10 major S&P 500 industry groups decline for the session, led by energy, industrials and consumer discretionary shares. The traditional areas of safety out-performed the market for a second day – health-care and consumer staples were the only groups in the black. Naturally, with this weakness, volume has begun to pick up, hitting levels that we haven’t seen with this consistency since early in 2009.
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Brent Vondera, Senior Analyst
Acropolis Investment Management
www.acrinv.com

Daily Insight: Driven to the Shadows, Lost in Translation and Pending Home Sales

U.S. stocks took a little bit of a beating yesterday, as the market has run into the headwinds of EU debt troubles and China’s early-stage unwind of their stimulus measures via the tightening of lending standards. The broad market has dropped 3.5% over the past seven sessions, but then again it had rallied 80% from the March 9, 2009 13-year low.

As we’ve been touching on, the Chinese are in the process of reining in their stimulus efforts for fear of further inflating the housing market. Traders on the Shanghai Exchange got their first chance to react this week (they were closed on Monday) and pushed the index down another 1.2% to a seven-month low. Also in the region, the Aussie central bank hiked their benchmark interest rate for the fifth time in six months – man, it would be nice to have short-term rates at 4.25%. But maybe a little too much too fast Aussie’s, looks like you’ve been tricked into thinking the Pacific growth story is sustainable; we’ll see as the Chinese lay off the nitrous.

The EU sovereign debt crisis also played a role in spooking traders after Germany’s economic minister added uncertainty to the situation when he stated the $140 billion EU/IMF rescue was not intended to cover Greece’s borrowing needs for the next three years, but possibly just 18 months – more on this below.

Market sentiment will continue to ebb and flow because the EU government debt problem isn’t going away. Talks, plans and even implementations of bailouts may ease investor concerns in the short term but the reality of dealing with these structural issues will be harsh and felt by the global economy.

Basic material shares led the major industry groups lower, with industrials and tech also down big. The relative winners were traditional areas of safety – health-care and consumer staples – but they also closed lower as all 10 major groups declined.
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Brent Vondera, Senior Analyst
Acropolis Investment Management
www.acrinv.com

Daily Insight: Spend It Like You Got It and Factories Humming

U.S. stocks were able to shake off some market weakness overseas and China’s continued pull-back of stimulus measures, as they tighten lending standards, to end two-sessions of decline on Monday. The three major indices gained back most of Friday’s losses.

Certainly a bang-up manufacturing report helped to ease some concerns but the Commerce Department showed the income/spending ratio deteriorated again, which means spending is being stolen from the future. These reports pretty much offset each other, if one is thinking beyond the here and now. More on this data below the jump.

A reader expressed surprise that I didn’t touch on the attempted car bombing in Times Square in Monday’s letter, particularly since I’ve spent several years talking about the importance of geopolitical risks/domestic security with regard to economic growth. The markets found it unnecessary to put in any additional terrorist premium as futures trading was not affected in the least, so I decided not to use space on the topic. However, while we’re on it now, even though it didn’t seem like a serious explosive device, one would think it to be a large enough act to raise concern of the larger issue of terrorism, but no worries for this market…yet. When risks lurk around many corners, it’s only a matter of time before some form jumps out and scares the complacency out of everyone.

Industrials, consumer discretionary (spend it like you got it), and financials led the market higher. The S&P 500 index that tracks basic material shares was the only group down for the session.
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Brent Vondera, Senior Analyst
www.acrinv.com

April 2010 Recap

Market volatility picked up in April as investors grew concerned about the indebtedness of several European countries, a major oil spill in the Gulf of Mexico, and Goldman Sachs’ legal mess. Despite the concerns, the S&P 500 managed to post a 1.58 percent gain for the month.

Corporate earnings reports helped offset some of the negative sentiment, with 77.9 percent of companies in the S&P 500 that have reported beating expectations. According to Bloomberg, earnings estimates for companies in the S&P 500 increased 10 percent on average in April, the largest monthly increase since at least 2006. Earnings have certainly benefited from low expectations and year-ago comparisons, but this era is rapidly coming to a close. On the bright side, positive earnings results and outlooks with little price movement allow the fundamentals underlying the market to catch up to the price action.

A bigger reason for domestic equities’ April performance was the Fed’s decision to keep its benchmark interest rate at a record low to help keep the economy from dipping back into a recession. The Fed continues to paint a “Goldilocks” scenario for the economy in which growth is not too hot and not too cold. Although there are signs of prices picking up in the production pipeline, consumer prices have been showing deflationary signs in recent months. In addition, it’s very unusual for the Fed to tighten until the unemployment rate goes down.

Small caps continued to outperform large caps during April. Smaller firms tend to thrive in low interest rate environments, which allow them to borrow cheaply to fuel their growth. Additionally, new net inflows into small cap funds may also be providing support to small cap stocks, with the four-week moving average inflows topping $701 million in April according to Lipper FMI data. Small caps began the year with outflows exceeding $144 million.

The best performing S&P 500 sector was Consumer Discretionary, which benefited from improving sales data and consumer confidence. Consumer Discretionary and Industrials, which has benefited from global economic improvement, are the top performing sectors year-to-date. Healthcare stocks were the worst performers in April as the sector’s earnings reports exposed the bottom-line effects of the new U.S. healthcare legislation.

Volatility, as measured by the VIX Index, perked up 25 percent. For a market that seemed overly complacent in recent months, the return of volatility can be interpreted as a healthy development. The uptick in volatility coincided with several negative events including fraud charges by the SEC against Goldman Sachs, continued Eurozone debt problems, financial regulation concerns, and tightening by numerous foreign central banks.

Problems in Greece, Spain, and Portugal sent investors fleeing to the safety of U.S. assets. As a result, Treasuries rallied and the dollar strengthened. Mortgages followed Treasury yields lower, with spreads more or less unchanged, as the market yawned in response to the Fed’s MBS-buying program coming to an end. Meanwhile, Commercial MBS gained despite widespread worries about rising commercial defaults and high-yield bonds add to a record run that began in late 2008.

Overall, investors continue to show desire to put cash that yields nothing to work, but they are hesitant to stick with riskier bets in the face of volatility. Investors have plenty of headwinds ahead including the removal of monetary and fiscal stimulus, interest rate uncertainty, weak housing market, national debt burdens, Chinese economic and policy questions, expiration of the Bush tax cuts, and the growth-restraining effects of the rapid rise in commodity prices.


Peter Lazaroff, Investment Analyst
Acropolis Investment Management
www.acrinv.com

Daily Insight: Q1 GDP and Chicago PMI

U.S. stocks gave back nearly all of the prior two-session rebound on Friday as the broad market declined 2.51% for the week – the first meaningful pullback in 10 weeks. The Dow held just about the 11K mark, but slipped 1.75% for the week. The NASDAQ got thumped by 2.73% last week, but is still up 14% over the past three weeks. The broad market made a key reversal as it hit a new 19-month high, failed to hold that level, and dipped below the prior week’s close.

Financials led the declines, the group generally leads no matter the direction, falling more than double that of overall market. Tech, industrials and consumer discretionary shares rounded out the worst-performers. The S&P 500 index that tracks utilities shares was the sole gainer, up about 0.5%.

Greece struck a EU/IMF deal but it effectively ensures the country will remain a zombie as a huge percentage of its revenue will be necessary to pay these loans back – revenues that will already be depressed as its economy has become ultra-dependent on government spending. The Greek government also pushed out its schedule for getting the deficit within the 3%-of-GDP EU guideline – although “guideline” isn’t the correct word as budgetary rules are not enforced and can’t be based on the zone’s massive entitlement programs. They now say that the threshold will be met by 2014, previously stated to be achieved by 2012, but that’s highly unrealistic as well. The deal will involve direct loans to Greece, for now planned at $145 billion over three years with EU members on the hook for $80 billion of it.
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Brent Vondera
www.acrinv.com

Daily Insight: Jobless Claims and FOMC is FIDO

U.S. stocks rose again on Thursday, helping the S&P 500 erase more of Tuesday’s slide. – a 1% pick up today will compete the circle. Of the major indices, the NASDAQ gained the most, followed by the S&P500 and then the Dow.

The German Parliament came to consensus on supporting their $11 billion share of the Greek rescue package, which will prove to be the first in a series of installments over the intermediate term. Optimism over the corporate-profit story also goosed stocks, along with Federal Reserve Board nominees that are unlikely to put pressure on Bernanke to tighten anytime before the unemployment rate hits 8% -- more on that below.

Financials, which led the market lower on Monday and Tuesday, was the top-performing sector for a second-straight session. Industrials and consumer discretionary rounded out the top spots. Energy and utility shares were the worst-performing groups, but all 10 majors gained ground on Thursday.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Richmond Booms, Housing Hesitation, Euro Trash, and The New Vigilante

U.S. stocks took a little hit on Tuesday after Portugal and Greece had their credit ratings cut by S&P -- Greece thrown to junk category and Portugal down two notches to A-as S&P stated the Portuguese government could struggle to stabilize it relatively high debt ratio through 2012.

I’m not sure whether it was the credit downgrades of Portugal and Greece, or the assault on Goldman Sachs by members of the Permanent Subcommittee on Investigations -- a circus event that showed these senators have no clue how market-making or hedging works. Goldman is not a fiduciary no matter how many times a politician wants to paint them as such; they are a market maker, which means they’re on both sides of the trade. Not that the ignorance of the political class should come as a surprise, but maybe market participants are finally acknowledging that these are the same rubes creating upcoming regulations on the financial industry, regulations that will have ramifications well beyond Wall Street. Thus far the go-for-the-gusto market sentiment has blocked clear thinking but it is only a matter of time, the potential peril via this growing wave of populism-by-convenience will be recognized.

Are investors also awakening to the fact that the European debt problems are looking increasingly like contagion? European economies, heavily dependent on government expenditures, will run into additional growth problem no matter how they react to their debt issues, has to get everyone’s attention. If the EU countries in the target circle make the tough choices to get their public finances in some sort of order, then intense near-term and intermediate economic damage will result; if they don’t then higher interest rates and debt burdens will crush them both in the short and longer-terms – either way you look at it, Europe is going to work as a large drag on global growth.

It was a broad-based decline with all 10 major industry groups down. Financials and basic materials were the worst performers, with health-care and telecoms the relative winners.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Achtung Baby, Today's Data, CAT's Not All That

U.S. stocks held onto early-session gains for most of the session but eventually succumbed to a bit of weakness as Europe’s sovereign debt issues remained in focus and China appears willing to continue their pull-back of stimulus measures.

Stocks got off to a good start after Caterpillar’s results were released during pre-market trading but the results didn’t justify the reaction, unless you’re talking about the go-for-the-gusto behavior of this stock market that has people ignoring the signs of weakness. (If you want more specifics on these results, I’ll post some comments at the end of the letter.) But the recent weakness in Chinese stocks, off 8% in 10 sessions as traders fear removal of the stimulus measures, and a spreading contagion in Europe was just enough to sap momentum late in the session.

Consumer discretionary, industrial and basic materials were the only three of the major industry groups to close higher yesterday. Consumer discretionary shares remain on fire, up 125% from the March 2009 low and up 25% since February as the momentum trade comes in. Are you kidding me? These shares are now just 10% below their all-time high hit in 2007, but this time the unemployment rate is 10% vs. 5%, incomes ex-transfer payments are down instead of rising and the cash-out refi is dead. Performance chasers don’t care about these realities; their actions are blind to anything but quick money. Some things never change, and never will.

Financials led the decliners, with health care and utility shares the next worst performers.
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Brent Vondera, Senior Analyst
www.acrinv.com

Preference for Value

We are frequently asked why we favor ‘value’ stocks over ‘growth’ stocks. In this article, we attempt to define growth and value stocks with two examples, provide an overview of the academic underpinnings that support value investing, explain why we believe that value investing is more intuitive than growth investing and conclude with why we still maintain growth stocks in our client portfolios.
Click here to view the full article.

David Ott
www.acrinv.com

Daily Insight: The Great Unwind, Durable Goods and New Home Sales

U.S. stocks were able to shake off the increasingly early signs of government debt-related contagion in Europe as a great durable goods orders report and a bounce in new home sales – albeit from at least a 47-year low – helped the market focus on things more positive. The gains among the benchmark indices made for the fourth winning session this week and the 11th of the past 13.

Energy shares were the clear leader, up 2.29% on Friday, as the price of crude has quickly returned to $85/barrel. Eight of the 10 major industry groups closed higher. Telecoms and consumer staples were the only groups down on the session.

For the week, the S&P 500 added 2.10%; the Dow rose 1.68%; and the NASDAQ Composite gained 1.97%. The S&P 400 (mid cap) rallied 3.56% and the Russell 2000 (small cap) jumped 3.82%. The S&P 500 has now rallied 80% from the nefarious March 9, 2009 low of 666.

Greek government-bonds continue to get hit as Germany plays a game of chicken – a game Greece is going to win, but only in the short term. Germans don’t like bailing Greece out of their troubles because they’ll be on the hook for most of the cost; to begin with, Germans seemed fairly reluctant to go with this Euro System anyway, unwilling to give up their Deutsche Mark all the way up to the Euro’s initial adoption in 1999. Greek 10-year bond spreads have hit 626 basis points (that’s 6.26 percentage points above German bunds), which means a yield of 9.03%.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Home Sales, Inflation Watch, Jobless Claims and It's the Fed, Stupid

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Brent Vondera, Senior Analyst

Daily Insight: Mortgage Apps, Stimulating Default and EU Under Pressure

U.S. major stock indexes ended essentially flat on Wednesday as the EU sovereign debt story weighed just enough to erase early-session gains. The Dow closed up slightly and the S&P 500 down a smidge. The tech-laden NASDAQ performed the best of the three majors; tech earnings are the most solid of all industries – financials profits are up the most on paper but it’s artificial.

Yesterday’s earnings reports were good for the most part, which offered support to the market. Again though, I can’t help but mention for a second day that multinational companies are reporting weak domestic growth; most of the profit growth is coming from overseas, currency translation and payroll cost-cutting. The financial company reports of the past couple of days showed that their profits are coming from big trading profits, thanks to Dr. Zero. I continue to believe that the banks are going to have a reality problem a couple of quarter out as the home sales reports will show distressed properties are making up a larger percentage of total sales – that percentage has been averaging about 35% and data from various states suggests it’s going over 40%; price declines will follow and that means banks will have to set aside more cash, which cuts into earnings. With 30% of home borrowers either underwater or with less than 5% equity, there is zero room for additional price declines.

On the EU sovereign debt problem, the relevance regarding the Greek financing issue is not that the country defaults on some payments per se, but that other EU countries have similar budget problems. Since the Eurozone is heavily dependent on government spending, the required and austere budget cuts will certainly be seen in their already very weak GDP readings. Further, I suspect that European banks hold large amounts of government debt and as those securities get whacked, so does the capital of those banks – as goes the capital so goes the lending.

The major industry groups were split with five up and five down. Industrials led the gainers and health-care the losers – the shares got hammered relative to the market, down 1.74%.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Is Eight Enough, Crude Reversal and Not So Confident

U.S. stocks marched higher on good earnings reports, moving above the 1200 mark on the S&P 500. This puts the broad market within 4% of its pre-Lehman collapse level. The tech-laden NASDAQ Composite has already fueled past its pre-Lehman number of 2300, crossing the 2500 mark for the third time in a week so we’ll see if we can hold it this time.

Profit reports are looking good again this quarter, the second quarter of improvement following nine periods of decline; although the theme among the multi-nationals has been Asian growth, with sales from the Americas weak-to-flat relative to the year-ago period -- IBM and Coca-Cola’s results were the latest examples. Also, corporate cost-cutting via payroll slashing is the primary boost to profits. This massive cost-cutting is both good and bad. While it helps the profit story, it stings personal incomes – exclude the $365 billion in transfer payments over the past 18 months, which cannot be sustained anyway, and personal income is down 4% over the last year-and-a-half.

As we’ve discussed, this profit cycle should extend for a few quarters, but for it to prove the multi-year run that is usually the case we’ll have to see the final demand necessary to fuel top-line improvement; that means several quarters of above-average GDP that is required for strong job growth. The requisite household de-leveraging process once job growth picks up will prove a headwind for consumer activity. If stocks hold these gains, it will make the process easier; if not, then consumers won’t have that relative wealth effect that helps propel spending. For now, the more cars bought (as 0% loans and $0 down is all the rage again) and the more iPhones purchased by generations X and Y that just can’t do without their gazillion apps, the necessary de-leveraging is only delayed.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Europe vs. The Volcano, and SEC Vote

U.S. stocks erased early-session losses after it was learned that the Securities and Exchange Commission’s (SEC) vote on pursuing a case against Goldman Sachs was not unanimous. The vote came in at 3-2, which means the SEC pursuit of the way Goldman has allegedly conducted itself may not be as vigorous as previously expected.

While many will say that it’s GS for the SEC not to pursue the case aggressively, the market also feared the short-term market ramifications of such action. But we shouldn’t put our guard down, as Congress and state attorneys general are there, in all their populist fury, to go after the entire financial industry by way of a new regulatory regime.

I do find it surprising the SEC voted this way, considering the several acts of serious malfeasance they missed over the past couple of years, or decades in terms of Madoff. One would have thought they’d go after this case, maybe even to overdo it, just to make a statement.

The early slide was largely led by basic material shares. China’s pullback on its stimulus, particularly on the loan front as they shift to more stringent credit standards and halt loans to those speculating within the housing market (third home buyers as they call them), has people worried about Asian demand a few months out. China’s very aggressive stimulus program, both in terms of outright government spending and in massive credit creation, has fueled the Asian economic bounce. But the market’s mid-day rally gave life to the commodity trade and basic material shares bounced back.

In the end, all 10 major industry groups close up for the session. Industrials were the laggard, essentially unchanged. Financials, Friday’s big losers, was the best-performing group, up 1.10%.
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Brent Vondera, Senior Analyst
www.acrinv.com

Eli Lilly (LLY) Earnings and Measuring the Costs and Impat of Healthcare Reform

Eli Lilly (LLY) became the first Big Pharma firm to give some concrete numbers relating to the cost of reform.

LLY trimmed its 2010 earnings guidance to reflect a 35-cent (full-year) impact from U.S. healthcare reform. The company projected government rebates related to healthcare reform to reduce full-year revenues by $350 million to $400 million. The healthcare reform-related charges in the first quarter amounted to 12 cents, or 9% of EPS.

The charges were higher than analysts were expecting, but this will not necessarily be the case for all drugmakers. Roughly 20% of LLY’s total sales are to government programs Medicare and Medicaid, both of which received discounts from pharmaceutical firms in the healthcare bill. As more pharma firms report earnings, I think we will see that LLY’s high exposure Medicare and Medicaid creates a disproportionately large impact for the firm relative to its peers.

It will take several years for the volume created by newly insured patients to offset the costs associated with the healthcare legislation. At the same time, I expect LLY to be one of the harder hit firms in the industry.

Shares of LLY are basically flat on today’s earnings release, but they have trailed the broader market over the past year. The firm’s pipeline will not offset the revenue loss expected from looming patent expirations and it seems inevitable that LLY will need to acquire a late-stage drugs.

Without additional revenues, LLY will need to slash its attractive dividend. Of course, any M&A activity would likely lead to a reduction in the payout anyways. The bigger downside to M&A is that it has historically destroyed shareholder wealth for drugmakers.

These concerns are well-known and something I’ve covered before; I’d say the bigger takeaway from LLY’s results is that investors will now expect the same level of disclosure regarding the impact from healthcare reform. That’s better than nothing, right?

Peter Lazaroff, Investment Analyst
www.acrinv.com

Daily Insight: Housing Starts, Confidence, Korea and Goldman Not So Golden

U.S. stocks ran into a little trouble on Friday as the IMF is headed to Greece, the latest consumer confidence reading erased three-months of gains, the potential for conflict on the Korean peninsula got a little hotter and Goldman Sachs is now officially under investigation for defrauding investors.

Pre-market trading, which was pointing lower very early Friday morning, weakened just before the open when South Korea stated there’s a high possibility the sinking of their warship last month was due to an external explosion – one would think if their ship ran into a mine or was hit by a torpedo that they’d know by now. But if it was external, it has North Korea written all over it. This concern extended into the official trading session.

But concerns on that front were suddenly overcome by an SEC charge that Goldman Sachs defrauded investors. The deal is Goldman stated a financial product they marketed that was tied to subprime mortgages, as the housing market was beginning to crumble, was structured by an independent, objective third party. It appears though that the product, a synthetic CDO, was not structured by an independent source, but rather the portfolio selection was influenced by John Paulson’s hedge fund who was betting the securities underlying the CDO would default. This resulted in new fears that ramifications from the financials chaos of late 2008 may not have completely blown over. More on this below the jump…

The market has become incredibly complacent, and while stocks improved from the session’s low point, the news out of Korea and yet another case of financial fraud may have reminded traders of the various risks that lurk in the marketplace today. There are always risks, but they are abundant right now and when the market is so complacent, as illustrated by the VIX index, its sets up for stocks to get rocked.

Friday we held in there pretty well, a 1.6% decline is not getting rocked in my view. Hopefully, Friday slapped enough people from their pretty little wonderland to lower expectations just enough so we don’t endure something that scares traders and makes a harmful move lower self-fulfilling. This still fragile economy will not respond well to such an event.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Jobless Claims, Manufacturing, IP, and Housing

U.S. stocks gained a little more ground Thursday, extending the winning streak to six sessions, as strong regional manufacturing reports and an upbeat earnings pre-announcement from UPS offset troubling jobless claims figures, the rolling concern over European sovereign debt, and the lowest UK consumer confidence reading since July 2008 that had pre-market trading lower.

The numbers out of the manufacturing sector are really very good, but that’s about all we’ve got right now. If we’re going to pass this ball off from government stimulus to something that can achieve just mild economic growth without all of this support then we’re going to need big employment gains.

The UPS report was a good one, at least in relative terms as we’re coming out of two years of depressed package volume, but it showed domestic activity remained weak. Package volumes rose 24% within countries outside of the U.S., and make no mistake this is driven by China’s huge stimulus efforts, but U.S. shipments rose less than 1%.

Just three of the top ten industry groups closed higher on the session, led by industrials shares. Information technology and consumer discretionary shares were the other two winners. Financials led the seven industry groups that fell, health-care yet again was near the bottom of the list as it held the penultimate spot. Regulation that will cap health insurer profits have obviously led to investor unease.

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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Mortgage Apps, Retail Sales, and Thanks to Dr. Zero...For Now

U.S. stocks extended the latest winning streak to five sessions on Wednesday after getting a boost from a strong retail sales report and positive comments from JP Morgan’s Chairman/CEO. Oh, and a stocks received little more help from Dr. Zero as he told lawmakers that the recovery faces “significant restraints” – this pretty much assures no change in the next FOMC meeting’s language with regard to fed funds at virtual zero.

JP Morgan’s CEO Jamie Dimon stated the following: China is growing, India’s growing, Japan is growing, home prices have stopped going down, consumer income is up, consumers are spending, service and manufacturing indexes are up, inventories are still low, I could go on and on.” I guess he could but one’s got to question a few of those points.

Asia is certainly growing, but we’ll see what happens when China reins in their massive government spending and loan activity (and even now it’s mixed as China just printed 12% GDP but Japan pretty much remains in recession); home price activity is precarious at best and existing home prices have engaged in second-round slide that has brought the median price back to the cycle low’ consumer incomes are flat, and that’s only because government transfer payments as a percentage of total income are at record highs, excluding these temporary payments incomes continue to fall. While he’s correct on spending and manufacturing activity, it seems his other assessments are a bit misplaced. But he’s the Chairman/CEO of the second-largest bank by assets and I’m just this guy commenting on the data – I guess we’ll just have to wait and see how things play out.

Financials led the rally, with tech and consumer discretionary rounding out the top spots. Telecoms and health-care (again) were the only two industry groups to decline.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: NFIB, Trade, Buyers Show Up But Greece Pays, Intel Inside

U.S. stocks shook off early-session weakness to gain ground for a fourth-straight session on Tuesday. The broad S&P 500 has jumped 15% over the past two months, bouncing off of the late-January pullback of 8%; the market has its eyes set on the pre-Lehman collapse level of 1250 – about 4% above yesterday’s closing price.

This 57-week rally from the 13-year low hit on March 9, 2009 currently stands at 77%, as measured by the S&P 500.

Consumer discretionary, technology and industrial shares led the gainers. Consumer stocks got a lift from the latest trade balance report that showed strong import activity in February; without fear of sounding repetitive, I’m highly skeptical of the idea that consumer activity will improve in a consistent manner – appears to be a minority view, but I’m fine with that.

The four industry groups that closed lower yesterday were energy, utility, basic material and telecoms.

On the EU sovereign-debt financing front, Greece sold $2.12 billion in 6-12 month Treasury bills on Tuesday and demand was super-strong with bid-to-covers at 7.67 for the six-month paper and 6.54 for 12 month – a figure approaching 3.00 is strong. But Greece had to pay up as yields came in at 4.55% and 4.85%, respectively. Dang, U.S. savers would love deposit rates even half these levels – sit tight, we’ll get them in time.

So the EU states that they’ll come to the rescue of Greece if they have trouble funding government debt, which means risk of default over the next 12 months is about zilch. I wonder what Greece would have had to pay without that backstop, 7-8% on 12-month paper? What will they have to pay when this debt needs to be rolled a year from now? Which begs the question: where will EU budget-deficit funding costs rise to when Italy and Spain run into trouble? Germany and France won’t be able to bail them out too, without driving their own borrowing costs higher. This story has only just begun.
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Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Living on a Prayer, Commodity Inflation Watch, Budget Statement

U.S. stocks extended the latest winning streak to three days and the Dow, after facing afternoon rejection during a number of sessions over the past 10 trading days, finally closed above the 11000 mark for the first time in 18 months. This is now the third, I’m going to say secular, run through 11K after initially breaking through in May 1999.

A plan, this time with specifics (although it would take unanimous consent to implement), to bail out Greece from its debt financing problems helped stocks in pre-market trading. The hope that the first-quarter earnings season would post good results helped momentum just enough to hold onto half of the early-session gains – and the current earnings season will be a good one, it’s a couple of quarters out when things may get sketchy, as we’ll get to below.

First-quarter earnings season kicked off last night after the closing bell, but won’t begin in earnest for another week. Within three weeks time we’ll have about 30% of S&P 500 members in and a pretty good idea of how the season will turn out.

The fourth quarter of 2009 ended a nine-quarter string of declining earnings as ex-financial S&P 500 earnings per share rose 13.8%. This quarter the market expects 25%, and we should get that as industrials will finally begin to help out and consumer discretionary will have the easiest comparisons (remember what was occurring a year ago) in a very long time, if not ever. (Earnings results are matched against the year-ago period.)

Six of the major 10 industry groups led the broad market higher. Financials performed the best, with utility and technology shares not far behind. Basic material and health-care led the losers for the third-straight session. Telecom and consumer discretionary shares rounded out the sectors that ended in the red.
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Brent Vondera, Senior Analyst
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Daily Insight: mortgage apps, consumer credit and Fed speeches

U.S. stocks stumbled a bit Wednesday after Fed Chairman Bernanke touched on a number of challenges the economy will have to deal with and a large decline in consumer credit raised concerns about the pace of future consumption. All in all though, especially since the Greece story remained in the headlines, stocks held in there pretty well.

All 10 major industry groups lost ground on the session, with telecom shares leading the decline by a large margin – the index that tracks these shares lost 2.34%, which was well-worse than the 0.59% broad-market decline. Energy and utility shares rounded out the three worst-performing sectors.

The relative winners were tech and health-care, down 0.21% and 0.42%, respectively.

The major indices were able to withstand the rather negative comments from Bernanke, his speech occurred around lunch and an hour later the broad market was hovering just below where we opened. It was the consumer credit report that had the larger effect on sentiment, as the relative slide occurred directly after that release.
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Brent Vondera, Senior Analyst

Daily Insight: Interest rates and FOMC minutes

U.S. stock indices ended mixed on Tuesday as the S&P 500 and NASDAQ Composite gained some ground, while the Dow closed slightly lower; we’ll just have to wait for the third return to 11K in 10 years.

The broad market hovered around the cut line for most of the session as European government-debt concerns returned to hold sentiment back, but stocks caught a slight bid immediately following release of the FOMC minutes. (The FOMC is the Federal Reserve’s rate-setting committee and the minutes are the notes from their most recent meeting.)

The Fed talked about how they believe a lingering high jobless rate will curb the recovery and also trimmed their GDP estimates along with their inflation expectations. Traders heard that and read: ultra easy money will continue.

Stocks would have probably recorded a more substantial rise if not for renewed debt concerns in Europe – we’ve talked about how this issue isn’t going away. Right now the Greek government doesn’t like the fact that the IMF is involved, which means they’ll really (as opposed to just the old nod to EU officials) have to rein in spending. As a result, no one is totally sure there is a financial-aid package for Greece in place. Of course Germany and France, the two strongest economies within the Eurozone, will ultimately backstop Greece’s financial needs, but the issue is a bit more precarious than it was at least perceived to be just a week ago.

Financial, utility and basic material shares were among the six of the 10 major sectors that closed higher on the session. Telecom shares led the three sectors that fell; industrials ended the session flat.

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Brent Vondera, Senior Analyst

Daily Insight: ISM Service and Pending Home Sales

U.S. stocks gained ground for a second-straight session as better-than-expected economic data juiced investor sentiment. However, while the broad market held just about all of its early-session gains, the Dow retreated a bit from the session high and the 11K mark remained elusive for at least another day.

Energy shares led the broad-market’s advance as the price of crude jumped well into the $86/barrel handle – here we go again. Basic material stocks were the next-best performing group as the commodity play rolled. Consumer discretionary shares rounded out the top performers – this one really has me confounded; how can the market completely ignore the headwinds higher energy prices have on an already burdened consumer.

We’ll see how stocks react to possibly rising interest rates, at least over the near term. Treasury yields advanced yesterday, moving closer to that 4.00% level on the 10-year – a closely watched level. I’m not sure a continued sell off on the long-end of the curve (prices go down yields go up) will act as a wall, halting the run in stocks, but with roughly $80 billion in government debt issuance this week things may just get interesting on the interest-rate front.

http://www.acrinv.com/20100406255/blog/daily-insight-ism-service-and-pending-home-sales

Brent Vondera, Senior Analyst

Daily Insight: March jobs report

Nonfarm payrolls rose 162,000 in March.

Private-sector payrolls increased 123,000.

The unemployment rate held steady at 9.7%.

Specifics on the payroll report are after the jump.

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Brent Vondera, Senior Analyst

March 2010 Recap

Equity markets finished the fourth quarter strong, as market participants celebrated the Federal Reserve’s commitment to keeping exceptionally low rates in place for “an extended period.”

Economic data was mixed throughout March. Investors were excited early in the month by February’s labor report, which showed payrolls dropped less-than-expected. The strength of the labor market is widely considered the key factor determining the pace of household spending. The jobs situation is lagging previous recoveries, though, and may be weighing on consumers, which was evident with the preliminary consumer sentiment index contracting.

Weak housing starts and softening home price indicators dampened sentiment a bit, but also provided additional reasons for the Fed to keep interest rates at emergency levels. Low inflationary indicators also supported accommodative policy, with consumer prices remaining flat month-over-month and capacity utilization well below its long-term average.

Inflation remains a concern in the future and the Fed is walking a tightrope with its exit plan, but equity markets appear content with the Fed’s direction for now.

All equity asset classes moved higher in March, led by domestic REITs. REITs continue to benefit from merger and acquisition activity, headlined by the bidding for General Growth Properties, which filed for the biggest real-estate bankruptcy in U.S. history.

Small cap stocks outperformed their larger counterparts. This is somewhat surprising given the fact that credit is still relatively tight for small caps. Smaller businesses are also more likely to be affected by the healthcare legislation passed by Congress in March.

Speaking of healthcare legislation, hospitals and drugmakers appear to be the biggest winners as they pick up a glut of new paying customers. Meanwhile the insurance industry is coming out of all this relatively unscathed. In the end, the most controversial proposals – a government-run insurance option and direct government negotiation on drug prices for Medicare – were eliminated from the bill.

In overseas markets, concerns about Greece eased as the bailout of the debt-ridden country gained clarity. Despite nice gains in March, international markets have underperformed the S&P 500 in 2010, with performance for U.S. investors in many developed markets hurt by the relative strength of the U.S. dollar.

Treasury yields rose to their highest levels since late last year as investor’s appetite for risk improved following last month’s volatility in the credit markets. After a bout of flattening at the beginning of the month, the curve steepened back up to finish where it started at 280 basis points spread between the 2-year and the 10-year, just 11 basis points shy of its all time high of 291 set on February 22. The Barclays Aggregate Bond Index was down 0.12 percent for the month, with corporate debt being the best performing sector in the index.

A lot was written this past month on the end of the “Greatest Bull Market in Bonds Ever,” with many analysts calling March 2010 the beginning of the next rate cycle. A rising rate environment will hurt longer-term bonds significantly more than shorter-term bonds; given our bias toward the shorter-end of the curve, we consider our portfolios well positioned to weather such an environment. The majority of bonds we hold will allow us to reinvest more quickly than if we were to buy longer-term debt and take advantage of higher yields.

Peter Lazaroff, Investment Analyst
Cliff Reynolds, Investment Anlayst

Daily Insight: ADP, Chicago PMI, and Q1 Results

U.S stocks lost a little ground yesterday, falling back to the low-end of this range tight range (at least in terms of near-term standards) we’ve been in over the past 11 sessions. A disappointing employment survey got stocks off to a bad start as they hit the day’s nadir just 30 minutes into the session. The market did showed a little life by mid-day as the S&P 500 moved into positive territory, but retreated again in the final hour. With stocks closed tomorrow even as we get the March payrolls report, traders are just not willing to get in front of this data and hold those positions into the weekend.

It’s more than appropriate for the Exchange to close and observe Good Friday – don’t get me wrong I’m not at all inferring the market should open. Rather, the Labor Department should delay the employment report until Monday. The monthly jobs report is almost always released on the first Friday of the month, but this is the most market-moving data we receive and thus should be held until next week.

Only two of the major 10 industry groups closed higher yesterday, energy led the way and financials posted a slight gain. Consumer discretionary shares led the decliners, with technology and industrials rounding out the three worst performers.

Yesterday ended the first quarter and the major indices recorded another strong three-month period, marking the fourth-straight quarterly gain. Mid and small-cap stocks led the way, as the international indices lagged – you can see the results in the table below the jump via the YTD column.

For the quarter just ended, the Dow Industrials gained 4.11%; the S&P 500 added 4.87%; the NASDAQ Composite rallied 5.68%; the S&P 400 (mid-cap) surged 8.70%; the Russell 200 (small cap) jumped 8.51%. Overseas indices lagged as the main international index for developed economies rose just 0.22% and emerging markets added 2.11%
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Brent Vondera, Senior Analyst

Daily Insight: Case-Shiller and Consumer Confidence

U.S. stocks wavered during the entire session. The major indices put their intraday highs and lows in before 10:30 CDT, then pretty much flat-lined until a little pop in the final hour of trading. The Dow Industrials was the best performer of the big three, but it was all due to one stock: 3M’s 3.5% jump accounted for 22 Dow points, which more than offset weakness from Boeing, Travelers, AT&T and IBM.

For the broad market, technology, industrials and basic materials led the S&P 500 to a fractional gain. Financials led the decliners. Utility and telecoms also closed lower.

The market is just kind of trading in this range of 1160-1175 on the S&P (10840-10955 for the Dow) as traders probably don’t want to get ahead of the March jobs report on Friday. Stocks will actually be closed on Good Friday.

It will be interesting to watch how the market reacts to what will be the best payroll numbers in more than two years. We’ve got a good shot at a 200K-plus increase; we’ll be watching the private sector readings as we’re expecting to get 100K from 2010 census hiring, which is only temporary employment. Will the market celebrate the good news if private-sector payrolls rise 100K? Or will traders worry that such a number will hasten some Fed tightening and sell off? I think we really need to see a substantial multi-month move in payrolls before the Fed signals they begin to mildly end ZIRP. We shall see.
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Brent Vondera, Senior Analyst

Market Minute: Interest rates and the bond market

A colleague of mine asked me to touch on fixed income this week. Ask and you shall receive…

Bond funds have been extremely popular in the past 12 months, maybe even too popular. In 2009, equity mutual funds had net outflows of $35 billion while bond funds saw $421 billion of net inflows. So far this year, investors have placed about $89 billion with bond funds, or five times the rate in the first quarter a year ago. This is somewhat surprising given the powerful stock market rally over the last 12 months.

One explanation for the staggering bond flows could be the reality check investors got regarding their true risk tolerance. Pre-crisis, I commonly heard people insist they could handle more risk in the stock market or resist the idea that bonds play an important role in meeting long-term goals. If investors became more risk adverse following the crisis, then we should expect to see a spike in flows into bond funds.

A second explanation is that people got hungry for yield as they watched the stock market soar higher and their cash earned nothing. Chasing yield is a very dangerous game, especially under the belief that bonds can’t fall in value. But bond prices can fall if the Fed is forced to raise rates aggressively to fight off inflation, which seems like a reasonable possibility, and the interest rate shock would only be made worse by the fact that short-term rates are starting from zero.

I’m not suggesting this is any reason to sell all your bonds – I hope my readers stick to a more disciplined long-term investment plan– but it is worth discussing after seeing rising yields in last week’s U.S. Treasury auctions.

Rates for U.S. Treasuries were higher last week in part due to weaker demand from foreign investors such as Japan and China, but rates also reflect concerns about the massive supply of U.S. debt flooding the market and the inflationary effect of increased government spending. (You can read more about last week’s rise in rates in a post by Cliff Reynolds here.)

A sharp rise in long-term interest rates may be the biggest risk to both stock and fixed income markets today. In fact, I would expect to see a correction in the stock market if 10-year Treasury yields were to suddenly rise from today’s level of 3.87% to 4.5% in the near-term. That is because Treasuries are the benchmark for lending across the economy. Higher Treasury yields weigh on the economy by increasing mortgage rates, corporate borrowing costs, and interest on rising government debt.

I want to re-emphasize that I would only be worried about a significant near-term rise in rates. I say this because rates will go up at some point – government borrowing needs and the economic recovery make this inevitable. Nobody can know for sure when this will happen, although the Fed will telegraph the move by removing the phrase “extended period” from their view of the duration of “exceptionally low” rates.

Thanks for reading.

Peter Lazaroff, Investment Analyst

Daily Insight: Income & Spending, Dallas Fed, Profits

U.S. stock futures were higher in pre-market trading yesterday and that upbeat sentiment flowed into the official session. The major indices held onto almost all of the early-session gains, unlike the past two days in which morning rallies were completely rejected in the afternoon.

A better-than-expected Economic Sentiment reading within the Eurozone and a surprise 4.2% rise in Japanese retail sales drove the day’s relative optimism. A good spending number for February in the U.S., even though it was not accompanied by an increase in income, kept that momentum going.

Energy shares led the way as the price of crude rose 3% to close at $82.36/barrel. Other outperformers were utility, health-care, industrial and basic material shares. The indexes that track technology and consumer discretionary stocks were the only losers on the session.
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Brent Vondera, Senior Analyst

Daily Insight: Another prevention plan, GDP and confidence

U.S. stock indices ended mixed on Friday as the Dow and S&P 500 ended slightly higher, while the NASDAQ, mid and small cap indices failed to close above the cut line.

It was another session in which early gains were rejected as we headed into the afternoon session. Comments from former Fed Chairman Greenspan, calling the recent rise in Treasury yields the “canary in the mine” (regarding the government’s fiscal situation), may have been a factor weighing on investor sentiment. Stocks also had to deal with the downed South Korean naval ship along a disputed border with the North -- and naturally the rumors that follow.

Even though the S&P 500’s gain was only fractional, eight of the 10 major industry groups closed higher on the session. Basic material, consumer discretionary and industrials led the way. Health care and technology shares were day’s only losers.

For the week, the Dow Industrial gained 1.0%; the NASDAQ Composite rose 0.80%; and the S&P 500 added 0.50%. The gains marked the fourth-straight week of increase for all three indices.
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Brent Vondera, Senior Analyst

Fixed Income Weekly

Rates rose significantly in a week dominated by poor Treasury auctions and public statements by Ben Bernanke and other Fed officials. The yield on the two-year finished the week 6 basis points higher at 1.05%, while the yield on the ten-year rose 16 basis points to yield 3.85%. The broad bond market was down .51% for the week. US credit followed stocks higher while MBS held steady ahead of next week’s end to the Fed’s mortgage purchases.

I have spoken a lot about yields being stuck in a range for the past 15 months or so, and much of the same is likely to persist until the market senses that the Fed is closer to the removal of emergency levels of liquidity. The graphs below show the current range for the 2-year and the 10-year.


The 2-year and 10-year are in two different places within their ranges. The ten-year sits at the top of its range while the 2-year is more in the middle. As a result we now have record levels of steepness and liquidity is still being heavily favored in the market as investors continue to guard against rising rates. Despite differing greatly now, 2 and 10 year yields are set to converge as the Fed begins to reverse monetary policy. This isn’t a revolutionary view. Short term rates stand to move higher when the Fed tightens, and long term rates may actually come down depending on how the market views the Fed’s stance on inflation. Right now, the Fed isn’t even considering inflation as an issue, which could prove troublesome if they aren’t able to recognize the effects of their policy soon enough. Inflation expectations according to breakeven yields on 10-year TIPS are holding steady at around 2.25%, essentially unchanged since the beginning of this year.

I’m not saying the current position of rates is unjustified. In my opinion it makes sense for rates to be where they are. Bernanke commented briefly this week on the meaning of the “extended period” language, stating that there is no set period of time to be assigned to those words. I didn’t expect to hear him say “extended period means 6 months”, but questions from house members forced him to talk more about the subject than he felt comfortable with I think.

Below is the excerpt from his prepared remarks detailing asset sales.

If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities. The redemption or sale of securities would have the effect of reducing the size of the Federal Reserve's balance sheet as well as further reducing the quantity of reserves in the banking system. Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies. In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve's dual mandate of maximum employment and price stability.

In my mind his remarks telegraphed a removal of at least some of the longer-term securities on the Fed’s balance sheet (i.e. MBS, Treasuries and Agency debt), before an actual rate hike. He still maintained that reverse repurchase agreements, where the Fed would essentially lend out their securities for a predetermined amount of time, are still an option but talked more about actual sales more than he has ever before. In my eyes the MBS purchases were even more “emergency” than bringing the funds rate at zero, making it the logical choice to remove first. With that being said, there is no way to really know until they decide to move. Until then I will speculate.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst