The Deal Loses its Luster
- So much for the belief Europe has it all together.
- Bank of Japan jumps back into currency market, devaluing the yen.
- Chicago PMI less than expected but not atrocious.
- Others pick up the notion the Fed may just get involved in more QE as part of Administration’s tactics.
- JPM raises its Q4 GDP target back up. Sign that it won’t happen?
- Ugly day but the market has logged gains even with Europe issues. Seasonal patterns likely still there, new money can come in, hedge funds still want to come in.
- Despite the downside many stocks are testing the break from their bases just as we wanted.
The deal loses its luster.
You expected it would happen given the ‘details’ of the agreement were so thin. You could put the whole thing on an 8 x 11 and still have doodle room. The market so wanted a deal last week that pretty much s**t on a shingle would have sufficed for a rally. Monday saw a bit of buyer’s remorse.
Why? China admonished Europe that it could not ‘play the role of savior,’ giving Europe some left-handed encouragement that the EU could handle its own problems. Classic China: say you cannot really help in public but then gladly loan money with strings attached.
What else? Italian and Spanish bond yields spiked and the spread between those bonds and German bonds widened significantly. Yes the bond market has a lot of confidence in the deal’s ability to stave off troubles on the Continent. The deal and general economic condition is so strained that one observer commented that the EU deal embodied ‘Madoffian proportions,’ a reference to the borrowing from one to pay another Ponzi scheme the 1.4T added to the bailout fund represents.
The topper: late in the day Greece’s PM issued a statement that he would seek a referendum on last week’s deal. As I recall this is the second referendum on a deal the Greek’s have sought. No time given.
Banner day for Europe’s image in the world.
And in the US?
Things were not bad here at home. Not great, but not bad. The Chicago PMI missed expectations (58.4 versus 58.9) and was lower than September (60.4). The lowest since May but compared to other regions, solid growth was logged again. Didn’t help the market much. Perhaps Tuesday’s national ISM manufacturing report will be more helpful.
There is also more talk of the Fed initiating some form of quantitative easing. Nice to see others picking up on this. I have written and talked about the President taking a pro-active stance, kind of a Bill Clinton effort to show the electorate he is a take charge kind of guy. Of course that means writing executive orders (he signed one recently saying he was signing ‘this bill, er, executive order’) and other end runs around Congress. Student loans, mortgage refinancing for all (well, almost all). Makes sense to get the Fed involved.
Talk is something more in the mortgage arena (mortgage backed securities or MSB’s) given the President’s focus in that area versus Treasuries as were the case in QE2. We will see but the talk is more and more. How convenient the Fed has a 2-day meeting this week. Wednesday we will see what kind of nod it makes toward some kind of new QE.
Recall that the market started to peak ahead of QE2′s end and when it was official started the rather ugly slide. Europe didn’t help, but it was all folded in together. Recall in the summer of 2010 how the market chopped around for months before it found its legs gratis QE2. Very similar activity here.
TUESDAY
Lots of gloom Monday in the aftermath of last week’s surge upside. Some hefty losses on the indices yet as noted, NASDAQ and SOX are still in position to move. Indeed many of the plays that ran away last week on the big Thursday move are testing, setting themselves up for a continued move upside. Those are those rounded bottom bases that broke higher and are testing as well as those stocks that gapped higher on earnings and are holding the gap, forming nice handles. Those present potentially very good entries after the market gets over the resurgent worries regarding the EU economy. That is just what we were looking for and talking about to end last week and over the weekend.
You don’t want to ignore Monday and rationalize it away; there were some hefty losses. Those potential new leaders, however, still look solid and thus the prospects for a continued move in the upper range just below the rally peaks remain good.
Patience is a virtue in these situations, i.e. letting the play come to you and not getting too anxious. There is always a position or two that you test buy if they look solid and start to move higher even if the market overall is still sluggish. Leaders by definition move higher first, so if you see a move in a strong stock, take it or at least a partial position.
There are the other factors at work as well, e.g. the season and the trends this time of year. There is also a new month ahead and that can produce new money ready to invest. Given many funds are attempting some catch-up, new money plus catch up can mean good rallies. Again, if good stocks in good position start to move, we typically start picking them up.
Tuesday there is also the national manufacturing index, the ISM, and with Chicago lower but still solid we anticipate the national number to hold above 50 once again. There are many regions below the expansion/contraction threshold, however, and they are dragging the overall numbers lower. Nothing from the more recent data would suggest the ISM would slip below 50, but then again, manufacturing is the leading economic report since this recession started to grow. Thus it could turn down before the other economic reports being the leader it is. If ECRI is right ISM will turn down likely before year end. Thus the Tuesday report will be, as usual, an important report.
Again, patience is a virtue right now as these stocks come back in their tests. SP500 was getting hit pretty hard and needs to slow the descent. Patience but ready to move in if the plays show us the rebounds we want to see.
