Market Talk

A dose of cautionary comments on three things that seem to only go up lately: the euro, stocks and corporate earnings.

First on the euro, which surged through $1.43 today its highest level vs USD since January 2010, and looks as if it’s left any and all concerns about sovereign debt in the dust.

Nomura says in a report that it’s too early for the euro to shed that risk. “The uncertainties about the economic outlook, debt dynamics, and the political framework around managing sovereign insolvency are simply too great,” firm says.

It estimates “a debt restructuring isolated to Greece/Ireland/Portugal would trigger direct and indirect losses around $240bn for core Eurozone banks, while bank losses would rise to $480bn in a restructuring including Spain.” German banks have the largest exposure to the periphery, Nomura says, with estimated losses of $185B in a restructuring scenario involving Spain.

Implied risk premium on the euro “has compressed significantly since January,” firm says, as the single currency “decoupled from sovereign risk.” That process “has probably run too far at this point: a persistent risk premium is still needed.”

On to stocks and some thoughts from BofA Merrill small-cap strategist Steve DeSanctis. He points out that weaker economic news, higher energy prices and disaster in Japan tripped up stocks in early March, but a “liquidity driven rebound” has put the Russell 2000 within 1% of its all-time high.

“Volatility came tumbling down despite the fact that none of the earlier concerns…have been resolved,” he writes, and small caps “are now very close to the full year’s return we have been expecting.” DeSanctis says he’s been “taken back by the strength of the overall equity market and in small caps in particular given the economic backdrop and where absolute and relative valuations stand,” and thinks 1Q earnings estimates are too high. Continue reading…

Let’s start putting some of the pieces of this puzzle together, shall we?

The news has been almost uniformly bad the past two weeks, unless you were the one person in your office pool who had Virginia Commonwealth. But stocks have been on a tear. Why, exactly?

We have a few facts from which to start constructing a theory:

- On March 16, the yen spiked, reaching Y76 to the dollar. The next day, finance ministers from the G7 nations held a conference call and agreed to intervene in the forex markets to put a cap on the yen.

- The DJIA and S&P 500 hit their year low on March 16.

- The yield on the U.S. 10-year Treasury note hit a year low of 3.20% on March 16.

Since March 16:

- The yen has appreciated no further, and currently resides around Y82.88.

- The DJIA is up about 6.5%. The S&P is up about 5.8%.

- The 10-year Treasury yield rose as high as 3.49% on Tuesday. Through Tuesday, it had risen every session since March 16, a streak that has not occurred since 1990.

Do not think these various things are unconnected. March 16 was a pivotal day in the global markets.

Continue reading…

- The Fed is often accused of being behind the curve, and for good reason. Look at this headline that ran earlier on the broadtape, quoting Dallas Fed’s Richard Fisher:

*DJ Fisher: Sees Early Signs Of Unconstructive Market Speculation

Early signs? Take a look at a chart of any commodity or major stock index. Early signs of unconstructive speculation? And this comes from a guy who’s considered to be one of the FOMC’s biggest hawks. Good heavens. Here’s his quote, reported by Newswires’ Frances Robinson in Brussels:

“We have abundant liquidity, now there’s excess liquidity, which is working through the system,” Fisher said. “There are in my view, early signs of speculative activity that I don’t consider constructive.”

If he’s only seeing “early signs,” how far behind the curve do you think the rest of the Fed gang is? By the way, Fisher quipped that protectionism is “the syphilis of economics.” Interesting analogy. What’s the gonorrhea of economics? Probably speculation. It’s bad, but you can get rid of it pretty quickly.

Meanwhile, Philly Fed’s Plosser is dishing up some hawkish comments, saying headline inflation is “all that matters,” and core is just for filtering noise. The frank talk is welcome, but stock market ignores him because his hawkish tendencies are well know.

- US stock markets seemed to find euro strength a source of comfort yesterday, and have frolicked with the single currency again today. But euro’s lost some zest in early afternoon trading and is catching some notice from stocks, which have since pulled back from their earlier highs.

As is often the drill, IBM and CAT together account for roughly 40% of the DJIA’s advance, at this point up 70.

- Now to the absurd file. JPMorgan strategist Thomas Lee takes the cake today for the headline on his morning US equity strategy note: “History showing post-nuclear disaster bounce is 9.6% for the next 3-mos plus negative investor sentiment point to upward bias in next few weeks.”

We kid you not. That’s what he wrote. After nuclear disasters, stocks usually bounce about 10% in the next three months. Uh, yes, sample size is a little small, so be careful taking this one to the bank, citizens.

Question for Mr. Lee: What are the returns for stocks three months after two regimes are deposed in North Africa, another nation erupts in civil war, a third European nation collapses financially and needs a bailout, and the world’s third-largest economy gets hit with a 9.0 earthquake, followed by a tsunami, followed by a nuclear crisis?

(Paul Vigna contributed to this post.)

The news headlines certainly aren’t bullish today, but gloomy news seems to be little match for the bountiful liquidity traversing the globe.

Bernanke and company’s continued insistence this week that the Fed’s uber-accommodative policy hasn’t played a role in driving up commodity prices continues to grate, and undermine the central banker’s credibility.

We’ve highlighted the extensive (and comprehensive) list of commodities with rising prices in ISM’s manufacturing survey, with few commodities reported as being in short supply. And no commodities — zilch — falling in price.

Well, no surprise, ISM’s February non-manufacturing survey out today shows essentially the same thing. Count 41 separate items listed as commodities up in price, while only three — cotton, cotton products and electrical components — are considered in short supply. Two commodities were down in price –  computer supplies and janitorial services.

Perhaps there are some nuances to supply and demand, and their effect on commodity prices that Dr. Bernanke has uncovered to explain all this. I’m certainly not an expert, but I can read a chart, and just about every commodity I look at began rising right after the Fed chairman’s Jackson Hole QE2 warm-up speech in late August.

To illustrate this even better, let’s go back to ISM’s reports, pre-Jackson Hole. Take a glance at the August manufacturing survey. Just three — three commodities – up in price (caustic soda, copper and corrugated containers); three down in price (polyethylene, polypropylene and steel) and only one — capacitors — listed in short supply. Continue reading…

Hope you’re not still wondering about the effectiveness of the Fed’s QE2 program, as there should be no more debate: Dow Industrials close at their highest level since August 2008; S&P 500′s highest close since early Sept 2008; go back almost three years to see Nasdaq close at this level.

Fed officials have proffered that one ambition for QE2 was to help increase stock prices. Well, mission accomplished so far. Sure, it’s lighter, pre-holiday trading, but gains are gains, right bulls?

Feel wealthy, citizens? Case closed.

Financials soar, followed by materials and energy. CAT, IBM and JPMorgan contribute 50% of the Dow’s gain. DJIA rises 55.03 to 11533.16, and Nasdaq Comp climbs 18.05 to 2667.61. S&P 500 ends 7.52 higher at 1254.60. Continue reading…

The euro earlier slumped to a session low $1.3072 vs US dollar (after earlier rising to $1.3202), continuation of a drop sparked when the Fed announced it will extend existing US dollar swap line facilities with a handful of foreign central banks.

US stocks appear generally oblivious to the develop, which could be chalked up to a simple focus on wrapping up the year’s business, and trying to grind out more gains in thinner, pre-holiday, formulaic and mechanical trading. Slap the blinders on and buy.

The Fed’s swap-line extension is telling — it’s reinforcement that the debt problems in Europe have a certain intractability, a stubbornness that won’t be dissolved by wishful thinking, promises of new “support mechanisms” or kind words from the Chinese. Continue reading…

One thing’s fairly obvious in this broad stock-market selloff today — every asset that’s benefited from a strong bid courtesy of QE2 expectations is getting hit…hard.

Metals, oil, Treasurys, stocks and the euro all tanking, after a near vertical run-up since the Fed first began to telegraph its easing intentions at the end of the summer. Maybe this selling will end as a bout of short-term profit taking. Perhaps it turns into a well-deserved correction, a consolidation of gains reaped since September. Or could it be something more? At some point, the traders who’ve piled into risky assets at the Fed’s behest will decide the easy money has been made. Time to cash out and go elsewhere. Maybe we’re near that time.

It’s been a rocky week for the Fed’s latest monetary easing plan. Outside of Wall Street, QE2 has been savaged by nearly everyone, raising questions about a program that seems hard to defend. In addition, turmoil in Europe appeared to be under wraps when the QE2 trade really began to catch on, and the latest troubles with Ireland and others in the periphery presents a big fly in the ointment. If gains in the euro — a key beneficiary of the QE2 trade — come undone, so will much of the stock-market rally since September.

We suggested Tuesday there may be some cracks forming in the QE2 trade. It’s become crowded, and we may be seeing the least-committed heading for the exit. Certainly no panic evident in today’s action. But there is a whiff of smoke.

Bears are aiming for some follow-through to yesterday’s sell-off in US stock markets. Asian markets fell sharply overnight, with concerns about interest-rate hikes in China being cited as the catalyst, and European markets are edging lower as sovereign debt concerns — particularly in Ireland — continue to fester.

Interesting complexion premarket, with recent correlations — both positive and negative — appearing to loosen a bit . Euro recovering from big drop overnight, USD index softening, oil and gold in retreat (even as
the dollar eases) and Treasurys a shade lower.

Only data on tap is Reuters/Univ of Michigan prelim Nov consumer sentiment gauge, out at 9:55am ET. S&P futures down 9.30; 10-yr note down slightly, yield at 2.66%.

Stronger dollar, sliding euro set the stage for an overdue moderate pullback in US stocks. Equity markets have been on a relentless climb for weeks, fueled by prospect of cheap, easy money, so a breather here is well-warranted.

Call it inflation jitters, or concerns about European sovereign debt or even anxiety about demand for US debt, if you’d like. Financials hit hard; materials and consumer discretionary also a focus for sellers. Treasurys also see sharp selloff. Perhaps a hint of doubt about QE’s power to keep pushing up asset prices? Drop in Treasurys and stocks certainly an attention-grabber.

DJIA falls 60.09 to 11346.75, and Nasdaq Comp sheds 17.07 to 2562.98. S&P 500 ends 9.85 lower at 1213.40 amid an uptick in volume.

Weekly jobless claims due tomorrow, with Veterans Day government holiday Thursday (bond market also closed Thu). Sept trade deficit, Oct import prices also due tomorrow.