MorningWord: 11/15/11: European equity markets are getting knocked around a bit this am, although most of the major indices are about 1% off of their lows of the session. The news flow and the set-up this morn seems a bit similar to yesterday’s, as all eyes on are on the weak Euro and rising bond yields among the PIGS. It appears that the “honeymoon” of just a couple days is over following the Burlesconi resignation, and now the Italian 10 yr is hovering right back around the psychologically important 7% level.
One of the more interesting comments I read this morning was from a Bloomberg article speaking of the challenges new Italian Prime Minister Monti now faces:
Monti, a former European Union competition commissioner, struggled to get political parties to agree to participate in his so-called technical Cabinet during talks in Rome yesterday. A government lacking political representation will find it harder to muster support from the parties in parliament to pass unpopular laws. Monti said he’ll conclude his talks today.
I guess what many market participants who bought the Greek and Italian leadership changes late last week failed to properly price is what does this new level of uncertainty bring to debt and equity markets that are desperately seeking some stability?
Yesterday’s sell off in the SPX was anything but scary as the market traded on fumes in one of the lowest volume days in a long while. The weakness never felt like it had a chance to get sloppy like last Wednesday and in some ways was almost healthy given Thursday and Fridays melt up.
The news flow over here this morning continues to be ok with Retail Sales and New York Manufacturing coming in better than expected as inflationary data was milder than expected. The S&P futures which were down a little more than 1% about an hour ago in sympathy with European have now halved those losses and will be looking for some leadership on the opening….Leadership has been hard to come by of late as the banks can’t seem to get out of their own way and some large Tech like AAPL seem to be for sale. Lots of retail earnings out this week; HD beat and raised this morning with the stock trading up 2% in the pre-market but this is on the heals of a solid report out of competitor LOW yesterday and should not have come as a surprise. On the flip side WMT is trading down 2% in the pre-market, as the company missed earnings on weaker than expected gross margins. Both stocks have outperformed the broader market this yr about about 9% and both are up at least 22% from the August lows. I am not sure this will be the sector that will continue to lead the market as a tight consumer may be the merging theme as we get closer to the holiday selling season.
As for today, I think you want to be careful not to press the down opening on the short side, but if you must, as I probably will, wait for a rally to lay them out. European leaders seem to be back towards their clueless-ness and as we get closer to our super-committee deadline for budget cuts Nov 23rd, we could see a market that doesn’t know which way is up.
So I remain cautious and defensive, I just don’t see the risk reward on the long-side of the market, but clearly recognize the need for many market participants to want this thing to close higher than current levels at year end. I think any extreme weakness in the coming week or so before Thanksgiving will be met with buyers in an effort to keep the markets within a few % points of unchanged on the year. That way as we head into a holiday shortened month of December they have a good shot of ripping them back towards the previous highs.
MorningWord: 11/14/11: Just when you thought our markets could once again focus on stuff like our own economy and corporate earnings, Italy has to go and try to sell some Treasury’s to fund itself. The 5 yr auction this morning with “yields at 6.29 percent, the highest since June 1997 and up from 5.32 percent at the last auction on Oct. 13.” So even with a new Italian govt in the process of being re-organized, the credit markets are telling investors that they don’t care. The Euro is down 80bps and most European equity indices are down betwn 1/2% and 1% (the DAX though is down about 1.7% from the opening highs).
This past Thursday and Friday saw a fairly impressive rally, albeit one on low volume, which recaptured much of Wednesday’s losses……Our markets appear to be in a bit of a holding pattern between 1220 and 1270 in the SPX and they clearly want to go higher…….The closer we get to next week’s holiday shortened week the more likely we are to see low volume spikes higher like we did Friday while the bond market is closed…….Make no mistake about it most institutional money mangers share the same self interest to push this thing higher into year end and this is not a battle you want to fight from the short side. Everyone and their mother prefers equities to go up and when you consider the massive under-performance by most mutual fund and hedge fund managers in a volatile yr like we have seem, the path of least resistance at this point is up in an effort to mark their current positions so their performance looks “less bad”.
So my healthy dose of caution as it relates to most late year rallies has to do with my long standing belief that it is a fairly rigged game. I continue to short opening gaps higher with tight stops, and I will continue to look to short over extended single names. So while I think from a seasonal standpoint, the market points higher between now and Xmas, I think the hard trade is to try to short rallies. As long as there remains an uncertain solution to the Euro debt crisis, I will continue to lean short….at some point I may through in the towel and buy names like AMZN and AAPL for beta moves into holiday selling season. I’ll be sure to let u know when that happens.