Market Talk

A very quiet day. US stocks little changed on the day, with the blue chips easing while the broader indexes see slight gains, even with a lot of options contracts expiring, which usually drives up volume and sometimes volatility. But volatility was nowhere to be seen, even with the euro getting jerked around, as it seems most people must be out buying Christmas presents and not equities.

DJIA slips 7 to 11493, S&P 500 adds 1 to 1244, Nasdaq Comp rises 6 to 2643. For most of the day, you needed an EKG machine to get the market’s pulse.

Moody’s slashes Ireland debt rating, but IMF warning that a “disorderly eruption” (is there another kind?) in Ireland could spread to other nations, like the US and the UK, gets investors’ attention. That drives down the euro, which slips under $1.32, and helps Treasurys; 10-year yield falls to 3.33%.

Of all the analysts out there, all the strategists up and down and off Wall Street, the best we’ve ever come across is one you probably haven’t heard of, Joan McCullough, who works out of East Shore Partners. If you are lucky enough to get her research, you already know this. (I’m not trying to do East Shore’s outreach for them; just telling you the plain truth.)

Nobody cuts through the noise like McCullough. One way she’s been illustrating this lately is by noting that the market is essentially keeping two sets of books regarding data points and news flow. In one, every data point is good, the spin is all positive, stocks have nowhere to go but up.

In the other…well, the other is the real world.

The following summary of the past week’s economic news is an absolute must-read, and if the block of text below strikes you as too thick, look, it’s not a James Joyce paragraph. Just read it, and then tell me the talking heads on CNBC have a clue.

From Ms. McCullough:

The stock market is runnin’ on anticipation of FED-induced “Enbubblement.” Totally detached from the fundamentals which have been divided into two parts:

1. The regularly released, incompletely read, heavily spun statistics which are customarily analyzed in hindsight where they are adjudged in accordance with the perceived need to justify current market action. Example: 8:30 a.m. data gets a hiccup and a flat-line. 2:30 p.m., market takes off like a shot, hot dogs gunnin’ for the “stops” for sport only. 3:00 p.m. headline: “Market rallies on robust economic data, Obama’s choice of tie.” Whatever. You get the picture.

2. The big macro issues including but not limited to insolvency, massive deficits and serial monetization.

In the past week, we have seen releases such as retail sales, which were led higher by fuel prices while enhanced by holiday gift-giving, spotlighting a US consumer crusade for cheapest prices whether that be driven by the empowerment of high tech gizmos or raw necessity; Biz Inventories (which got little press but which declined, boding poorly for Q4 GDP, leaving a hole that can only be plugged by increased final demand; keep your fingers crossed); a December NY Empire State Manufacturing Index which, having cratered unexpectedly in November, rebounded likewise unexpectedly this month, although both employment indicators (hours and body count) remained negative, something that was glossed over; November IP which had a similar zig-zag, having bombed in October and rebounded last month and which focused on the production of business equipment, not consumer goods; the NAHB Housing Index which flatlined across present conditions and six months out, with traffic slipping small; Jobless claims which see-saw back and forth week to week, plus or minus a couple ‘o grand but which nevertheless get rave reviews whenever that number declines, begging the question of how we would spin a headline like this: “Initial Jobless Claims, week ended of xx/xx, ZERO” which is as low as it can go…when we’re all finally laid off, eh? New Residential Construction which ex the statistically bogus headline, was abysmal, yet from the sound bites, you’d never, ever know it; and finally, a hot, steamin’ December Philly FED which hit a five-year high, contradicting the earlier-in-the week Biz Inventories, suggesting 3% GDP growth, but which cannot quantify the anticipatory boost to Exports based on the debasement of the US dollar nor can it augur for the damage if Europe, for example, flops. (I’ll give you an example of how this last indicator, the Philly FED can get two-sets-of-fundamental-books spin: Books #1:Europe all together is not even 20% of exports; all our exports combined support less than 10% of overall US growth, so who cares about Europe? Books #2: If Europe really gets rocked, this will no longer be a matter of how many US-made gedunks XYZ company in Boise can sell them. Rather, it will become a question of another widespread, massive, financial dislocation and subsequent, global economic nosedive. Do you copy the difference of the two sets of fundamentals books? Alas, the Micro and the Macro are waging war, eh? You bet.)

Get all that?

The only sign that the U.S. is headed for a sustainable recovery, she says, is simply this, and it’s a point we’ve made ourselves, if we do say so: job creation.

When you start seeing some meaningful, month-after-month job creation, enough to absorb population growth, enough to bring down the unemployment rate, then you can start talking about a sustainable economic recovery. When jobs are being created, when wages are rising, you can start to feel better about the state of the nation. Until then, we’re just being carried along by the powers-that-be.

We’re getting ready to tie this year up in a bow and put it under the tree. Not much going on in the markets today, except for some M&A activity. Meanwhile, a couple of second-tier data points are, well, pointing to at least a decent year next year.

It’s time to get back into stocks. Didn’t you know? At least, that’s what USAToday — that venerable source of market-based wisdom — is telling us, polling five Street vets in its 15th annual survey. The vets are Goldman’s Abbey Joseph Cohen, Merrill’s David Bianco, Richard Bernstein of Richard Bernstein Advisors, BlackRock’s Bob Doll and Alger Funds’ Dan Chung.

Please, somebody, find me more than one example of any of these five ever saying it’s time to get out of stocks. I just don’t have the time to do it myself. But I can guarantee you those five are mainly, if not always, in favor of investors buying stocks. So I don’t know exactly what public service USAToday thinks it’s serving, unless it’s Wall Street’s public service.

“Experts Agree: Get over your fear and get back into stocks” is the headline. Good God, that reads like the title of some sell-side research report. At least the paper has a sidebar noting what the pros think are potential pitfalls; not that they expect any pitfalls, mind you, just that if there are, oh, say, a “disorderly eruption” in the sovereign-debt arena.

The constant drum-beat of people telling you to buy stocks should be a big, red, flying flag, and when USAToday, of all non-business media outlets, is getting in on the drumbeat, you know this song’s getting tired. Listen, don’t forget one very important fact: the stock market is still down from its October 2007 highs. It is still down from its 2000 highs. Bonds have outperformed stocks over the past decade. The stock market has been a bad bet for a decade. Still, the lessons of Nasdaq 5000 haven’t seemed to soak in on the Street.

Continue reading…

We’ve been among the crowd pointing to the bond sell-off as a potential sign of something bigger. David Kotok of Cumberland Advisors is also among that crowd. But whereas our concern has been the bond vigilantes lashing out against Washington profligacy, his main point is that the rise in bond yields isn’t solely a U.S. happening.

It isn’t necessarily being driven by inflation either, he notes. But what is sure is that investors are moving out of sovereign debt and exhibiting a herd mentality and going into stocks and commodities. I’m not sure exactly where that puts us; seems stocks and commodities were having something of a run before the recent bond sell-off. Still, the idea the there’s a global move out of bonds is important.

Via The Big Picture:

First and foremost, let’s be clear. This bond market riot is a global phenomenon. US-centric observers are blaming the rise of the benchmark ten-year Treasury note yield on an inflation-risk scare or on Fed money printing with QE2 (quantitative easing round 2) or on expanded deficits because of the tax-cut extensions. These observers are missing the boat.

This is global. Look at this chart (http://www.cumber.com/content/special/G4.pdf) on Cumberland’s website in the Special Reports section. The title is “Charts for Bond Herd Commentary.” In chart one we have rebased the yields of the four key global currency benchmark ten-year notes. We start at the low yield day of October 12. Since then the upward movement in yields has been correlated worldwide. We pick the four big denominations of debt, the yen, pound, dollar, and euro. Together they define the overwhelming majority of world capital markets.

This correlated movement suggests that the selling is coming from a reallocation of assets in large indexed global funds. They are moving monies out of the highest-grade sovereign debt bonds and into other sectors. We have now confirmed this with several large portfolios. We infer from our anecdotal evidence that there are many others doing the same thing. Their reasons for acting may be different but their actions constitute a herd mentality in this sector of high-grade sovereign debt.

It hasn’t been the flashiest week for US stock markets, with the Dow Industrials sport a roughly 114-point range from week’s high to low, but they’ve been able to churn upward, with DJIA closing at its highest level since early September 2008.

Early complexion this morning suggests the staid activity will continue, with markets generally flat in Asia overnight, and Europe currently just edging slightly lower. With only November LEI on the economic data calendar (at 10:00 a.m. ET), the main influence for US stocks may come the direction of the euro, which has eased this morning.

EUR/USD currently 1.3255 after earlier being well above 1.33. S&P futures off 0.70, DJ futures up 1. Ten-year yield down to 3.37%.