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