ECB Rate Cut is the Big News
- US economic data okay but the ECB rate cut is the big news of the day.
- Greece PM purportedly to cancel any referendum vote.
- Jobless claims slip below 400K.
- ISM Services misses expectations on mixed internal data.
- September Factory Orders rise versus fall.
- Down 5% in two days, up 3.5% in two days: that kind of volatility does not last.
- Stocks on the road to year end gains . . . one more time . . . if jobs report gives them a pass.
Surprise ECB rate cut puts some snap into the upside bounce attempt.
You have to love the smell of a rate cut in the morning market air. On Thursday the ECB and its new chairman, just three days into the job, cut rates 25BP to 1.25% on its main rate. The amount of the cut did not really matter; it was the cut itself. Jean-Claude Trichet, the Hawk, refused to lower rates, but the new guy who they are calling Super Mario wasted no time in cutting rates. The ECB has a one-level mandate, and that is inflation. It does not have to balance that with growth as the U.S. Fed is required to do. Thus it was somewhat surprising that a rate cut was forthcoming given that inflation rates are quite high in many of the EU nations. It looks like they are trying to adopt something of a GDP-based rate policy. Of course that would not be within its charter, but we are in an era where the government oversteps its bounds whenever it feels it is appropriate. We have a Constitution, but it does not seem to bother our leaders to step around it when expedient
I hear people who, supposedly in a mature way, adopt a pragmatic view of how we should govern. There are liberties and principles we should uphold, but they say we just have to go around the law of the land sometimes to get things done. It is like the means justify the ends, but that is obviously not the case. Our whole country is founded upon the belief that we have rights that are not given by the government but by the deity. The government cannot take them away, and it has to respect those rights. Our framework was built in order to prevent the government from trampling those rights. It is not all right to say we will go around them to get the “right thing” done.
As Milton Friedman said, who are these angels from heaven in our leadership who will protect our rights if we do not obey the document designed to protect our rights from the government? Benjamin Franklin said that those who are willing to sacrifice liberty for the sake of safety deserve neither. That is kind of what we are doing now. Of course the irony is that we are losing our liberty as we lose our safety. It is not only safety from our enemies but safety from the government. It took me about 30 seconds to digress, but I will return to the day’s news.
Futures jumped to the upside and the market jumped to the upside with a gap on the open based upon the rate cut from the ECB. We also had rather decent news from U.S. economic picture. Jobless Claims fell below 397K. That is the lowest move they have had in five weeks. No records set, but everyone was excited about the fact that they fell below 400K. We will take what we can get. Productivity was outstanding at 3.1% after a -0.1% on Q2. That was revised up from a -0.7%. Not bad at all. Factory Orders came in at 0.3% versus an expected -0.2%. We are getting a little better. The trend over the past couple of months has been better economic data, but I think that will end. Do not ask me why. I cannot tell you why other than the fact that the ECRI says it is so, and I put a lot of stock in what they say. Then there is also history. There is no reason for a recovery. Without some reason, we will probably maintain the trend. The trend is lower with the occasional bounce just as stocks can trend lower with an occasional bounce back up that makes it look like things are getting better but not really.
Another big report on the day was the ISM Services. It came in lower at 52.9 versus 53.8 expected. That was a disappointment. Hiring was up at 53.3 versus 48.7 in September. That is seasonal hiring that has already started. The businesses are already touting Christmas. It took about two seconds to clear out the Halloween items and start the Christmas items. They were in transition even days before Halloween. We are starting a very early holiday season, no doubt. It is amazing the sales that are out there. I just had to go to the local sporting goods store, and Sun and Ski was already marking new ski gear down 40% and then another 40% off of that. I am not sure what is going on, but I am a bit concerned about the economy.
Last night I was watching the financial stations, and one analyst was adamant that things were better. She said retail sales were up and things were not bad, but you have to remember something: retail sales measure dollars rather than units. If your dollar is buying less because of inflation, is that a good indication? You could be spending more dollars but still getting fewer goods for your dollar. Is that a sign of robust retail sales? No. If your dollar is depreciating and the cost of oil and gasoline is moving higher, you are just paying more for one commodity and burning up more of your deposable income. Over the last seven months, incomes have been adjusted for inflation flat to negative. We have 9.1% unemployment. It does not take long to figure out that we cannot maintain even this “increased retail sales level” for long, inflation or no inflation. We are not seeing an increase in retail sales in real means. Inflation is the reason for this increase.
There may be some areas that are increasing, but let’s face it: Food costs are higher, energy costs are higher, and commodities costs are higher. That is pushing up prices. We are buying less with our dollars even though we are spending more dollars. You have to adjust for inflation otherwise the numbers are very deceiving. I was frankly shocked at how easily the opponents rolled over to the person pushing this idea that the consumer was just fine. Come on, guys. If you are going to be on TV, at least be able to discuss the issue and add a little knowledge and depth to the analysis versus just getting mad and stomping your foot. But there I go digressing once again.
Suffice it to say that the data was good enough (really it was the news out of the ECB) to start the market higher. It did move higher early on, but it gave it all back right away. Indecision. Last night I said that we are moving up like we want to, but it does not have a lot of strength. That was worrisome. It was good to see the buyers come back in. They came back in and pushed stocks to the opening high. The move stalled there for an hour, and then stocks received a new and bid and broke higher. What was the news? Papandreou, the Prime Minister of Greece, said that they may not need that referendum after all. Apparently he met with France’s leaders and Germany’s leaders, and they said he would not get his money for the next tranche if you do not play along. They had a heated Parliamentary meeting, and at the end of the day they decided they may not have this referendum vote. That gave the market a shot in the arm, and it closed out at the session highs.
SP500, +1.9%; NASDAQ, +2.2%; Dow, +1.75%; SP600, +2.3%; SOX, +3%.
SOX finally caught hold after languishing for a couple of days and watching the rest of the market move down and then back up. A second solid move to the upside. You have to love that.
Let us take a look at that a bit closer. Whether you are looking at SP500 or the NASDAQ, what do we have? Everyone was talking about the Monday and Tuesday decline. 5% in two days, and then Wednesday and Thursday it was back up. Up 3.5% in two days. That is incredible volatility, and it cannot last. It is showing that the sellers and buyers are beating each other up again just as they were back at the top of the August to October range. One day up and the next day down. We are talking 2-3% back and forth each day. Then there was the breakout. It looked like they had done the job. Then the test, and then the surge back up last week only to give it all back this week. You can get whiplash with this.
The key is we had the breakout, it tested, it bounced, and then it tested again. Now it is bouncing again. The trend is trying to move higher into the final range below the 2011 peaks. Do I think we will have a breakout? From what I understand about the economy, I do not think we will. I think this is about seasonal factors where we have a rise in techs, and that drags the rest of the market along in Q4. Then you also have funds trying to play catch up. They are trying to capture some of the gains toward the end of the year with some of these good stocks that are starting to move higher. They want to look good at the end of the year.
I have heard more than one smart fund manager say that, although it may just be a temporary move, we should try to capture this move because it is there for the taking. Where have you heard that before? I am not bragging. You just look at what the market is doing, understand what the economics are and what the trends are (seasonal or otherwise) and you play them. That is what we are trying to do. We saw a bunch of stocks set up bases, and they are moving. We were taking advantage. We were buying on Wednesday. We were buying early on Thursday on that test of the gap. Then we also bought some late as they showed they could hold their move. On some of these stocks we wanted to make sure they were holding their move before we stepped in. Does that leave us doing much on Friday? Likely not after two big days and 3.5% to the upside. But there are some that we would look at. I still think we have room to run up inside this range. We could get halfway in the range up at the April low, which is also coincident with the mid-July low. That still gives us a nice run to the upside that can make us good money.
That is a synopsis of where we stand and what we plan on doing. Maybe I could just cancel the rest of the report, have a glass of wine, and prepare for Friday or deer season that opens on Saturday. But there are a few more issues I want to point out. In summary, I would say that we have tested the breakout again. It looks like the seasonal trends want to hold. As long as nothing major comes along and sinks things, then the seasonal trends should be able to move the market to the upside. The market has stomached a lot of bad news and is still holding on. I said last week that it looked like the funds would provide a backstop for the market on dips, and they have thus far. Now we have to see if they can continue the move.
FRIDAY
We have had a 5% move down and we have had a 3.5% recovery. Friday we have the Jobs report. Will it give the market a pass to continue to move to the upside? If you will notice, the numbers have been downgraded a bit. They were up at 88K with 90K expected. Down from 103K the prior week. I think they are just playing it conservatively. ADP was better than expected at 110 versus 100. We may get a bump higher. After all, we had the initial weekly jobless claims improving somewhat. We will see. The unemployment rate is still supposed to be at 9.1%. It is all kind of a crapshoot. No one really knows what is going on. Employment tends to lag. It has improved a bit as economic numbers have improved over the past couple of months. It has lagged, so it may bump up a little better. That would give everyone a good feeling and perhaps continue the market move. In other words, it could give the stock market a pass to continue to the upside.
That would be fine. That is my thesis. We want to play the move to the upside to end the year or as close to the end of the year as it will give us. We are taking what the market will give. It is very choppy right now. The buyers and sellers have been fighting it out this week. Big downside moves and big upside moves. That cannot last forever. Typically one will win out at some point. Near term it looks like we can get the seasonal trends to work for us, but we have a very important move on the SP500 to get through the March and June lows. Seasonal trends can move it higher into this range and make us some money. After that, we have serious troubles. I do not think the economy will continue this little bump higher. As the New Year starts, we could see the market starting to build in downside for a negative (or close to negative) Q1. Before then, seasonal trends are pretty powerful if we can get the pass from the Jobs report and perhaps out of Europe if they do not have any more issues. Maybe they will just commit to printing more money to try to get away from the problem caused by printing too much money. That is a short-term fix. It will not solve the problem if history is a good judge.
We also have the Fed out there hinting about QE3 at some point if the economic data starts to weaken. That would, in theory, bump stocks back to the upside. That is all in theory right now. What we are playing is this move. The key move right now is for SP500 to get through the March and June lows and take out last month’s high. Tall order, but we have some good patterns that can make the move. We bought positions on the last two days as the market bottomed and started to move higher. We have a few new positions we will look at on Friday, but we probably do not want to buy too much. We had two good days to the upside. That 3.5% move. We anticipate more days to the upside. We will just have to see if we get good entry points. It is all about getting the probabilities on our side right now. If we can do that, we can add some positions here and there. But we will likely not be doing any wholesale buying. We have already had two good days to the upside.
