Daily Insight: Bernanke shifts market, jobless claims

U.S. stocks rebounded yesterday morning as traders returned to dabble in some riskier assets after a 24-hour respite. The DJ Industrial Average got within 44 point of 11000 and the S&P 500 looked ready to gear up to tackle the pre-Lehman collapse level of 1250 as it moved past the 1175 mark at one point. But the rally was rejected after lunch and the major indices went into freefall in the final hour of trading to completely erase the earlier gains.

Fed Chairman Bernanke, during Congressional testimony officially intended to explain the eventual exit strategy, made it abundantly clear that this discussion in no way signals the Fed is ready to pull back on their extraordinary level of accommodation. In fact, he explicitly stated that the economy continues to require the support of a record low fed funds rate. These statements follow comments from other Fed officials on Monday that also suggested the Fed will remain on hold. Monetary tightening is a ways away and that’s ecstasy to stock traders.

However, that morning rally evaporated as people apparently read Bernanke’s text and noticed a little comment touching on actual sales of mortgage-backed securities when the Fed does begin to withdraw stimulus. What? Actual MBS sales, instead of just letting them pay down? Now, such action would really be a ways down the road, as doing so anytime in the near future would obliterate the housing market – and Bernanke was there to talk about an exit strategy so it shouldn’t be surprising that he brough this topic up. But just as traders find ecstatic delight in ZIRP, they view even the mention of asset sales by the central bank as anathema and this was probably behind the late-session pullback.

The third ugly Treasury auction in a row, this one being the issuance of $32 billion in seven-year notes, may have also played a role in the market’s reversal.

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Brent Vondera, Senior Analyst

Mortgage Apps, Durable Goods Orders, New Home Sales

U.S. stocks pulled back a bit on Wednesday as sovereign debt worries continued after Fitch lowered Portugal’s credit rating, and warned of another to come, and the latest housing market data showed new-home sales slipped to an all-time low, for the second month in a row. An overall positive report on durable goods, although uneven with a number of components showing orders declined, wasn’t enough to offset the negatives.

Nine of the 10 major industry groups lost ground on the day, led by telecoms and consumer staples – strange for a traditional safe-haven like consumer staples to lead the declines on an overall down day for stocks, I don’t get that one. Financials were the only group to close in the black, boosted by Bank of America shares after the bank announced plans to expand in Beijing. I guess traders ignored the news that BofA will have to reduce principal values on more mortgage loans.

Treasury securities got clocked, the yield on the two-year jumped 11 basis points to 1.09% (which is hardly attractive but that’s a large one-day increase) and the 10-year yield soared 14 basis points to 3.83%. Tuesday’s $44 billion two-year auction was met by relatively weak demand, and that was followed by yesterday’s 5-year auction in which Treasury had to pay up in yield as demand was considerably weaker than prior auctions. We’ll see more than $100 billion in monthly government debt issuance until the cows come home, at some point that should cause yields to break through this very low-level range. (More on this below the jump)
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Brent Vondera, Senior Analyst

Tracking Volatility with the VIX Index

Volatility, as measured by the VIX Index, has fallen to 17.5% so far in 2010. Often referred to as a “fear gauge,” the VIX moves up as investors buy bearish options (puts) on the S&P 500 and down when investors sell these options.

The VIX tends to drift between 10 and 20 under normal circumstances, but moved above 80 following the Lehman Brothers bankruptcy in November 2008. Since then, the VIX has returned to more historically normal levels – today it sits at 17.9 compared to the historical average of 20.3 – for several reasons.

For starters, there is a lack of participation in the options markets by institutional investors who are afraid of getting trapped in the event of a quick market movement – a symptom of the scars from the credit crisis. Internal risk management systems are also limiting banks from facilitating options trades as the return of capital trumps the return on it.

And we can’t ignore the influence that vast amounts of liquidity has in driving down volatility while pumping up risky assets such as stocks or corporate bonds. Other policy responses to the crisis have reduced price swings too. For example, the Federal Reserve bought up to $1.25 trillion in mortgage-backed securities (MBS) sold by agencies Fannie Mae and Freddie Mac, basically meaning that the Fed is the market for such debt. No surprise such a big buyer would help keep volatility under wraps.

Increased volatility could spell trouble for equities, but don’t become fixated on the VIX in hopes of predicting the market’s future direction. While options activity reflects market participants’ expectations of future market conditions, their outlook and sentiment can change at a moment’s notice.

A widely publicized study released this month by Birinyi Associates showed that the VIX “is a measure of current volatility with little or no predictive or indicative value regarding the course of the market,” but the study does suggest that high volatility may be a contrarian indicator. Birinyi Associates concluded that the contrarian value of low volatility is less clear.

This Wall Street Journal article suggests that the futures contracts on the VIX may be a better gauge for predicting stock market moves. This means that investors should be bullish when the futures are significantly lower than the VIX and bearish when futures are higher. Data from Bloomberg shows that July futures on the VIX are trading at 23.25, August futures at 23.40, and September futures at 23.60 – all considerably higher than the 17.91 level today, but still not what I would consider crisis levels.

What could be pushing futures on the VIX higher?

The Fed’s MBS purchase program ends this month, which could very well allow volatility to pick up again. Other looming concerns such as rising government debt levels or a potential overheating in Chinese markets could also provide impetus for bigger price swings. VIX futures may also be pricing in a pullback in the stock market following the strong run we've had over the past five weeks.

It’s hard to imagine the VIX continues to trend lower, but the pick-up in volatility that futures are predicting is relatively minor and not worth losing sleep over.
Peter Lazaroff, Investment Analyst

Daily Insight

U.S. stocks gained ground for a second-straight session, pushing to a new 17-month high. The broad market hasn’t endured a significant sell-off (which I’ll define as more than a 1% move) in 20 sessions. The market appears to be strangely complacent as just one of the five down days during this 20-session stretch has been to the degree of 0.5% and three have been only fractional losses.

The National Association of Realtors reported that existing home sales came in a bit better-than-expected during February, showing activity fell 0.6% for the month. This followed record declines during the previous two months. Even though the headline figure beat expectations, the inventory data within the report suggested trouble lies ahead for home prices. As a result, stocks moved into negative territory following the report. However, comments from two Fed officials suggested that the central bank was likely to remain extremely accommodative for longer than the market had previously expected and that gave fuel to a rally that began around lunch and accelerated in the final 30 minutes of trading.

Specifically, it was the later of the two speeches, delivered by San Francisco Fed Banks President Janet Yellen, that was likely behind the rally late in the session. She stated: “The economy will be operating well below its potential for several years.” The market hears that and gets juiced that the Fed will keep monetary policy floored for well beyond a six month time frame.

Not surprisingly, commodity-related basic material stocks led the rally – the commodity trade rolls on dovish Fed comments. Industrials and tech were the other leaders. All 10 major sectors gained ground on the session.
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Daily Insight: The Cost of Entitlement

U.S. stocks rallied shortly after the open and held the gains to the close. A rebound in commodity prices, helped by a lower dollar, overshadowed concerns that higher interest rates (India’s monetary tightening) and rising public-sector debt will derail the global recovery.

The rolling concern over European sovereign debt issues that was eminent in pre-market trading didn’t last long. To be specific, the worries lasted exactly 30 minutes into the regular trading session as that’s how long it took for stocks to rebound into positive territory – and for the dollar to give up its early-session rally and turn lower. As we’ve been talking about, the only thing the greenback has going for it right now is fear.

Consumer discretionary, basic material and tech shares led the way. Energy and utility stocks were the only losers out of the major 10 sectors. The price of crude reversed an earlier decline, but the shares didn’t follow suit.

It is interesting to watch consumer discretionary shares rally with oil over $80, pump prices inching closer to $3 (national avg. at $2.82), 10% unemployment and high household debt levels. The index that tracks these shares has doubled over the past year and is just 18% below the all-time high hit in 2007 (for perspective the broad market remains 25% below its peak). Something doesn’t exactly seem rational with this picture, if you ask me. Either job growth is going to come back with a vengeance and justify this move, or…well you know where I’m going with this.
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Brent Vondera, Senior Analyst

Fixed Income Weekly

A fairly slow week was highlighted by comments from the FOMC and February’s CPI reading that flattened the curve as short-term yields and long-term yields moved inversely to each other. The two-year Treasury yield rose 4 bps to .99% while the ten-year fell 2 bps to 3.68%.

Consumer prices were unchanged in February from the previous month, versus an expected .1% rise, the first time the index didn’t print a positive change since last March when prices fell -.1%. The actual reading missing expectations by .1% isn’t huge news, but a larger trend of decreasing inflation expectations made its presence felt in the marketplace this week. Breakeven yield’s, which measure the spread between yields on TIPS and nominal Treasurys, fell steadily throughout the week. Ten-year breakevens fell 7 basis points to 220 as investors demanded higher real yields while nominal yields fell. Some of the movement on the long end of the curve is due to some positioning before next week’s $118 billion in Treasury issuance but words from the Fed this week also had an impact.

The “extended period” language was left unaltered, which indicates that the Fed intends to keep rates where they are for at least the next 4-6 months. A fed hike in early 2010 was a popular thought last fall, but any chance of that has been put off until the summer at the soonest. Implied probabilities point to a 28% chance of a hike to .5% by the August meeting, lower than the 50% chance the market was assigning to that at the beginning of the year. Regardless, removal of the “extended period” language will have to come first. If you follow the 4-6 month buffer between the removal of the language and the actual hike, the language will have to be dropped after the next meeting if we are to get a hike in the summer.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst

Plant some seeds in Monsanto (MON)

I’ve mentioned recently that it is difficult to find bargains in the market today, but it may be time to plant some seeds in Monsanto (MON).

The stock market rally has left behind the seed giant as falling grain prices sapped demand for seed and profits from selling herbicides were squeezed by generic competition. Not only has MON lagged the broader market, but it has trailed its peers in the fertilizer and agricultural industries.

But MON has two game-changing products about to hit the market that can drive margins and market share gains for years. The first is SmartStax corn, which has the broadest array of genes available for fighting pests both above and below ground and for tolerating pesticides. The second is Roundup Ready 2 Yield soybeans, which promise higher yields (more beans per pod).

Success of these products will further expand MON’s dominance over the food chain and help win back investors frightened by the shrinking herbicide unit and regulatory concerns. As the saying goes: be greedy when others are fearful.

“Wait, did he just say dominance over the food chain?” Yes, I did.

World population is growing and appetites are growing in developing countries with rising wealth (see related article). With only so much land and water for farming, seed technology that improves crop yield is essential to the planet’s food supply. And unlike fertilizer, the market for genetically tweaked seeds still is largely underpenetrated outside the U.S.

When it comes to the U.S. seed market, MON has at least one of its patented genes in 90% of soybeans and 80% of corn. And competitors can’t seem to catch up, choosing to partner with MON rather than compete. Pouring 10% of sales into research and development, MON has an unmatched product pipeline that Credit Suisse estimates is worth $11 to $17 per share alone. Add this to an intrinsic value between $85 and $88 for the core business and the shares appear to be a steal.

Of course, those who plant seeds in MON shares today must be patient as the upside is limited until we see positive yield performance on the company’s newest products from this fall’s harvest, these results will drive longer-term acreage targets. But, given the decent valuation, strong product pipeline, and solid fundamentals in the agricultural biotech industry, MON represents a compelling long-term investment.

Peter Lazaroff, Investment Analyst

Healthcare stocks may rally on reform bill

Bloomberg reports that U.S. health stocks are poised to rally if the overhang of uncertainty is removed by the passing of a healthcare reform. The argument in this article is extremely similar to a post of mine from January (see: Healthcare sector trending up).

The most visible positive catalyst for the industry is that the worst-case reform scenarios – a single-payer system or a public plan with a Medicare-linked fee schedule – are no longer a threat. Managed care companies like WellPoint (WLP) and UnitedHealth Group (UNH) stand to gain new customers as coverage expands to people who previously went without insurance.

A common concern for these insurers is that the government will restrict profitability by scrutinizing rate hikes as we’ve seen in recent months in California, but this concern is not justified. The fact that is important to consider is the cap Congress proposes to put on the medical-loss ratio – the percentage of premium revenue used to pay patient bills – is well above the industry’s historical average, which means that they will not be impinging on profitability as much as feared.

Overhaul or not, health insurers have always found ways to make money and preserve profitability despite government regulation. I don’t expect that to be any different this time around. Managed care, as well as pharmaceuticals, are still looking very cheap relative to the rest of the market, and removing the uncertainty surrounding reform will provide a catalyst to expand valuations throughout the healthcare sector.

Peter Lazaroff, Investment Analyst

Daily Insight: Jobless Claims, CPI, Philly Fed

U.S. stock indices ended mixed as the Dow and NASDAQ gained ground, while the broad S&P 500 closed fractionally lower. Mid and small cap stock indices also closed to the downside.

The broad market bounced between gain and loss on several occasions, as traders were conflicted by the positive of a strong manufacturing report yet the negatives of increased jobless claims and speculation the Fed will move to raise the discount rate – I wouldn’t call that a negative but traders don’t seem to like it much.

The discount rate is the rate at which banks can borrow from the Fed. They last raised the rate on February 18 as they are in the process of normalizing the spread between the discount rate and fed funds – normally disco is one full percentage point above that of fed funds, but the spread was cut to 25 basis points during the crisis and now stands at 50 basis points above fed funds. Now, it’s not like the market sold off on this speculation, the S&P 500 was essentially flat (but then again the rumor was fairly silly as it is unlikely the Fed would leak this news), but if traders are going to get a bit antsy about an increase in the discount rate, what’s going to happen when the Fed eventually begins to increase fed funds?

The 10 major sectors within the S&P 500 were split as five gained ground, while five declined. Industrials’ and health-care led the gainers; energy and financials led the declining sectors.

The Dow was boosted by shares of Boeing, 3M and IBM, which accounted for 60% of the index’s gain.
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Brent Vondera, Senior Analyst

Daily Insight: Dollar, EU Second Thoughts, Mortgage Apps, PPI

U.S. stocks gained ground for a third-straight session, and the only two down days of the past 15 sessions were nothing more than fractional declines, on the heels of Tuesday’s Fed statement – yesterday’s reported decline in producer prices for February only reinforced the fact that the Fed won’t feel pressure on the inflation front to remove their unprecedented level of accommodation anytime soon. (Not that the Fed would be focused on inflation if it were a threat, not with 10% unemployment, banks that need a super-steep yield curve and a housing market that remains beaten down…but this is for another discussion I guess.)

The broad market did give back about a third of its earlier gains late in the session, but held on to record solid performance.

Energy shares led the advance (first time for that in a while) along with financials and materials. All 10 major sectors gained ground on the session, but there were clear laggards as utilities and health-care shares were the deepest under-performers.

The Dow Industrial Average followed the S&P 500 in making a new 17-month high, surpassing what had been the recent high of 10,725 hit on January 19. Shares of Exxon, Chevron and Caterpillar led the Dow higher – energy stocks had conspicuously lagged the broad market over the past couple of months, but with crude now testing $83/barrel, they’ve found a bid.
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Brent Vondera, Senior Analyst

Daily Insight: Import Prices, Housing Starts, FOMC Statement

U.S. stocks gained good ground on Tuesday after S&P affirmed their credit rating on Greek government debt of BBB+ (they had threatened to lower that rating) and the EU signaled they’d sidestep “no-bailout” rules and provide emergency loans to that government. The market rally accelerated in the afternoon after the Fed confirmed the rate on fed funds will remain floored for an extended period (yeehaw!) and provided the impetus for traders to push past that 1150 market on the S&P 500 – had been stuck there for three sessions. The broad market sits at a new 17-month high.

Basic material, financials and industrial shares led the advance. All 10 of the major S&P 500 sectors gained ground on the day, but consumer staples and health-care (the traditional area of safety) along with telecoms were the laggards.

And speaking of commodity-related basic material shares, the price of oil is back above $82/barrel this morning – call it a Bernanke bounce. I’m watching for the price to breach $85, which hasn’t occurred since economic mayhem began in late 2008. At some point the market is going to view higher energy prices as another noose around the consumer’s neck. In quick order we could have both oil and stocks at fresh 17-month highs, both are unlikely to move higher in tandem for very long.

Sovereign debt default concerns eased again yesterday, here’s the ebb and flow we’ve been talking about, as European finance ministers laid out unspecific groundwork for a financial lifeline to Greece. If Greece runs into trouble rolling their debt, EU officials will provide emergency loans as members pool funds. The meeting didn’t provide an actual euro amount of these potential emergency loans.
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Brent Vondera, Senior Analyst

General Electric (GE) to raise dividend in 2011

General Electric (GE) CFO Keith Sherin told investors the company would like to grow the dividend in 2011. Sherin said losses and delinquencies from GE Capital are going to peak sometime in 2010, which could allow for “a real earnings snapback,” going forward.

Substantial improvement to the leverage ratio and GE Capital, vastly improved capital market conditions, and projected earnings of $23 billion over the next two years support the idea of hiking the dividend. The company’s equipment and service and equipment backlog stands at $175 billion and is “slowly turning.”

In other news, financial reform proposals put GE under the Federal Reserve’s regulation, but do not force a break of the parent company and the finance unit. It appears GE will be able to keep its controversial industrial loan and thrift banks based in Utah.

The market seems to finally be warming up to GE and I feel vindicated.

Peter Lazaroff, Investment Analyst

Fixed Income Weekly

Treasurys were slightly lower across the curve after a quiet week of trading. The curve was 4 basis points flatter at end the week at +275 bps, 17 bps under the all time record set on Feb 22.

A strong credit market last week was followed up by heavy issuance of corporate debt this week. According to Bloomberg, some $30 billion in corporate bonds were issued by close of business Thursday, bringing the year to date total to just shy of $200 billion. Credit spreads have been steadily moving lower while Treasurys have remained in a tight range. CFOs are definitely aware of this and are taking advantage of the environment to raise cheap capital. And thanks to today’s news that Obama plans to nominate San Francisco Fed President Janet Yellen to Vice Chairman of the Federal Reserve, one of the most dovish of the 12 Fed Presidents, companies will likely see better chances still to borrow cheaply. The term “dovish” is used to describe those who favor easy monetary policy, as opposed to “hawkish” policy makers, who traditionally lean toward tighter monetary policy. The effect of ZIRP on the cost of debt is two-fold. Rates are low, and as investors stretch out to grab more yield in the face of measly low-risk returns, spreads will continue to tighten as long as rates stay here.

The FOMC meets next week and is expected to stand pat on rates, but all eyes will be reading the comments that accompany the rate decision. Namely, “the exceptionally low/extended period” section. Not much is being said one way or another on that, but I expect to hear more speculation early next week. I don’t think the committee is ready to remove them yet, but we are certainly closer than we were in January.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst

Daily Insight: Jobs, Trade Balance, Household net Worth

U.S. stocks closed smack-dab on the 17-month high Thursday (1150 on the S&P 500, initially hit on January 19) to fully erase the 8.1% pullback the market ran into a month back. A late-session surge brought the market out of negative territory, where it had been for virtually the entire day, to match that near-term high.

Jobless claims that remain stuck at high levels and foreclosure filings that continue to rise at a pace of 300K per month couldn’t stop a spate of optimism that banks have put damaging loan quality behind them. That’s a dangerous assumption in this environment. But hey, it sure feels good.

As a result, financials led the market higher with consumer discretionary shares being the next best performing sector. Basic material stocks participated in the advance for the first time in three sessions as the U.S. dollar lost ground.

Nine of the 10 major industry groups rose yesterday. Energy was the sole loser.
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Brent Vondera, Senior Analyst

Daily Insight: Crude Oil, Mortgage Apps, Wholesale Inventories

U.S. stocks gained ground for a second day on Wednesday, and if not for Monday’s fractional decline the broad market’s re-rally would be two weeks in length. As a result, the S&P 500 has inched closer to the 15-month high hit on January 19.

The tech-laden NASDAQ Composite led the way. Mid and small-cap indices also out-performed the broad market. Shares of Travelers, Chevron and 3M weighed on the Dow Industrial Average, which lagged the other major indices -- a big day from Boeing (added 17 Dow points) kept the index in positive territory.

Financials, tech and energy were the leaders for the session – although as mentioned above Chevron didn’t follow other energy names. Telecom, consumer staples and basic material shares were the three of the 10 major sectors that closed lower on the day.

On the sovereign debt problems over in Europe, former European Commission President Romano Prodi stated: “For Greece the problem is completely over. I do not see any other case now in Europe.” I don’t think comment on those remarks is necessary.
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Daily Insight

U.S. stocks gained some ground on Tuesday amid growing optimism an improving economy will justify an extension of the year-long market rally, or so it was written by the financial press. Stocks were considerably higher for most of the session, but slid to negative territory late in the day before bouncing back above the cutline 25 minutes ahead of the closing bell.

As stocks grind higher and attempt to break past the near-term highs hit in January, the latest NFIB small business survey illustrated that small biz owners are not so ebullient about things and the IBD Economic Optimism reading for March suggested that things are not quite right with the world. Both surveys fell. The NFIB survey remains stuck at a level that’s well below the marks hit during the past two economic contractions and the Personal Financial Outlook segment of the IBD survey fell to the lowest level since February 2009 – a period when everything but the safest of assets was getting hammered. More on the NFIB report below the jump.

News from Cisco Systems that they’ll roll out a heavy-duty router capable of 12 times the capacity of rival equipment helped boost information technology and telecom shares. The router will allow internet providers to carry data traffic at speeds 100 times faster than most home connections today and able to direct traffic based on the priority of the data – this thing is all about video.

Basic material, utility and consumer staples stocks were among the session losers.

The dollar rallied after Fitch Ratings warned about deteriorating credit quality In Europe, which prompted traders to seek refuge in the greenback as they sold euros and pounds.

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http://www.acrinv.com/20100310224/blog/daliy-insight-3-10-2010

Is the market fairly valued?

It’s the one year anniversary of the S&P 500 lows, and what a difference a year makes! The S&P 500 is up over 68% in the last 12 months, but clearly the tremendous opportunities that were in place a year ago are no longer there.

There are two market conditions, however, that will allow investors to take advantage of opportunities. The first is that volatility is dramatically lower. As measured by the VIX index, volatility is nearly 80% lower than it was at the time of the Lehman Brothers bankruptcy.

The second favorable condition is that correlations between assets and within markets have come down. When correlations were extremely high, and everything was going down at the same time, the only thing that mattered to investors was to have as little risk exposure as possible.

Lower volatility and lower correlations across different asset classes presents the opportunity for investors that do their homework to generate good returns. That means looking at fundamentals such as earnings, cash flow, and dividend payouts. It also means identifying long-term trends that will cause specific sectors to outperform. For example, the Technology and Industrial sectors are positioned to perform well in 2010.

But are stocks way ahead of the economy? Is the good news already baked into stock prices?

Clearly the stock market is a forward-looking mechanism that moves in advance of the economy, but it hasn’t necessarily moved too far at this point.

Economic data over the past few weeks makes the double-dip scenario seem less likely, with new orders for equipment, retail sales, and even things like hotel stays pointing to a brighter economic climate. The jobs numbers are still bad, but have shown improvement. More importantly, many individuals are feeling less uncertain about their job prospects.

Meanwhile, corporations are reporting strong cash flow and balance sheets look relatively healthy. We are starting to see businesses buy back stock, raise dividends, and increase investment for future growth – all of which are positive signs.

We always hear about historically high P/E ratios (here is a good story in today’s Wall Street Journal), but when the market is measured by cash flow (P/CF) the S&P 500’s valuation is 37% below the 12-year average and half of its valuation in 2007. P/CF has increased from roughly 4.5 in March 2009 to 8.2 today. With data going back 1998, the CF multiple has never fallen below 8.0 prior to 2008.

I believe the S&P 500 will finish 2010 somewhere between 1200 and 1250, 5% to 9% above today’s levels, but I would be concerned around 1300. Notice that I say “in 2010.” There are many uncertainties beyond 2010 that are keeping investors at bay. Because the market is forward-looking, it is affected by how far investors are willing to look into the future, which depends on their level of comfort and safety. One year ago, investors could barely look a week into the future. When a bull market is under way, investors are willing to look 18 to 24 months into the future to discount future earnings.

Some may argue that fair value is 20% below where the market stands today. I agree that buying stocks at prices 20% lower than today's would better compensate for the long-term risks facing the U.S. economy; however, I am not selling stocks because waiting for this event to occur could take several years. Markets are historically "overvalued" for extended periods of time. At the same time, ignoring the significant risks at hand is not prudent behavior either. Expectations must remain reasonable.

One year ago, investor sentiment and psyche was quite low among both individual and institutional investors. One year later, the easy money has been made, so it's important to remember that the recovery will be slow and bumpy as the economy moderates.

- Peter Lazaroff, Investment Analyst

Daily Insight: Dollar Strength on Weakness...and Policy

U.S. stock indices ended mixed on Monday as the Dow and S&P 500 closed technically lower (essentially flat), while shares of Cisco Systems helped drive the NASDAQ Composite into positive territory.

Stocks really need some sort of catalyst at current levels, the broad market has basically recouped the 8% slide that occurred during the three weeks ended February, and we were without an economic release to provide that boost. There were additional comments out of Europe over the weekend that offered the clearest evidence Germany and France would be at the ready to help Greece refinance their debts if needed, but this was already baked into last week’s trading.

(I did found it interesting to read that the Greek Prime Minister excoriated “unprincipled speculators” yesterday for threatening to bring a new global financial crisis. He’s referring to the CDS market – in short, CDS is just insurance against default. This market can be a bit screwy, particularly the naked sort – not to be confused with the naked-Rahm that’s allegedly found loitering in Congressional showers. Naked CDS is when someone is using this derivative to bet for or against default, but has no direct exposure to the underlying debt. But look, speculators wouldn’t be betting against Greece in the first place if the government hadn’t promised benefits they can’t possibly afford. Get your finances in order and you wouldn’t be dealing with this problem, which should be a lesson to all governments.)

Telecom, consumer discretionary, tech and financials were the sectors up on the session. Tech and telecoms were boosted by news that Cisco Systems will unveil new tools to help build systems to increase download speeds. The index that tracks financial shares was most likely helped by news that AIG was able to sell another of its premier units. This must have offset talk that banks are going to have to take much more losses on mortgage loans, which to this point have been valued on the prayer that housing is going to make a sustained comeback sometime in the near future.

Industrial and health-care shares led the six major sectors that declined on the session.

So we’re at the one-year mark of the nefarious intraday low of 666 on S&P 500 and the closing 13-year low of 676 by day’s end on March 9, 2009. The broad market has jumped 68% from that low, which means it’s recouped 52% of the value lost from the October 9, 2007 all-time high. The chart after the jump takes us back to that October 2007 all-time high.
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Brent Vondera, Senior Analyst

Daily Insight: February Jobs Report

U.S. stocks got a boost after the latest jobs report showed less payroll positions were lost than White House economic adviser Larry Summers had set the market up to expect, and more importantly that we’re likely very close to some mild monthly increases in employment. Now, we’re going to need 300K-plus per month for more than a year to bring the jobless rates down substantially (don’t forget among others waiting on the sidelines there are 2-3 million May graduates readying to enter the job market), but additions are additions and it looks like they’re around the corner.

The market also got help from a couple of Fed officials who stated the central bank needs to keep rates low until the recovery picks up (I thought the recovery was gaining steam; that’s what we heard from the last FOMC statement). ). Federal Reserve Bank of Chicago President Charles Evans stated he needs to see “highly sustainable” growth before supporting steps toward tighter monetary policy and St. Louis Fed Bank President James Bullard stated policy makers want to remain “very accommodative.”

Financials led the way on those Fed comments and energy was next in line as the price of crude jumped to $81.50/ barrel – wholesale gasoline rose to $2.27/ gallon, highest since October 2008; it appears that $3 retail is on its way.

For the week, the broad market gained 3.10% and is now within 1% of its 16-month high touched on January 19. The Dow Industrials added 2.33% for the week and the NASDAQ Composite jumped 3.94%. Small-cap stocks led the week’s advance, up 5.96% -- and have led the market during this nearly one-year rally from the March 9, 2009 depths. Mid-cap stocks added 4.35%.
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Brent Vondera, Senior Analyst

Fixed Income Weekly

Bond traders sat on their hands for most of the week, waiting for two big news releases, the prepayment speeds for Freddie MBS last night, and the jobs report this morning. For the week the curve was slightly flatter, falling 1 bp to 279 basis points 2s to 10s. Credit tightened after being flat last week, mostly on today’s positive news. Markit’s current CDS index stands at 85.6, 9 points higher than the multi-year lows set in January. CDS is quoted as the cost of default insurance, so the lower the better.

The curve actually sat much flatter before the heavy selling on the long end after this morning’s jobs report, which showed business cut 36,000 payroll positions, better than the 68,000 expected. The labor participation rate ticked up slightly from 64.7% to 64.8% and the unemployment rate held steady at 9.687%. The big story leading up to the release was that severe weather was going to put the hurt on the data. The effect of things like this is impossible to accurately measure, but the market was ready to see a terrible number, and ignore it, but instead we saw a better than expected number, and stocks rallied like a Subaru.

Prepayment speeds are usually a non-event, but Freddie Mac purchased every loan that was at least 120 days delinquent from their mortgage pools in February, so March FHLMC speeds were expected to skyrocket. Freddie MBS underperformed Treasurys in early trading, but buyers stepped in to prove the selloff was a little unjustified considering overall speeds may actually slow down going forward due to the cleanup. Fannie Mae is expected to follow Freddie’s lead in the next few months, but will buy only “a substantial portion” of their 120+ delinquent loans. Fannie Mae is considered to have more problems compared to Freddie, but although Thursday’s release gives some insight into what will come, it by no means answers the market’s questions on what is to come with FNMA.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst