Market Talk

Here’s a link to the latest quarterly musings of Jeremy Grantham, always informative, thought-provoking and entertaining. Titled “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever,” here’s a nice little taste:

Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions. I was once invited to a monthly discussion held by a very diverse, very smart group, at which it slowly dawned on my jet-lagged brain that I was expected to contribute. So finally, in desperation, I gave my first-ever “running out of everything” harangue (off topic as usual). Not one solitary soul agreed. What they did agree on was that the human mind is – unlike resources – infinite and, consequently, the intellectual cavalry would always ride to the rescue. I was too tired to argue that the infinite brains present in Mayan civilization after Mayan civilization could not stop them from imploding as weather (mainly) moved against them. Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources. This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.

Stocks end lower, but reclaim most of the ground lost after mid-morning word of a strong aftershock quake in Japan.

Quake headlines and tsunami warning send a chill through a market that’s grown rather blase lately toward various pockets of global upheaval (Mideast/North Africa; Japan disaster; Eurozone debt problems). Despite the bump in volatility, trading volume remains anemic.

Industrials, financials and utilities among the weakest sectors; energy stocks finish higher as Nymex crude tops $110.00/barrel, to its highest settle since Sept 2008. Gold settles at fresh Comex high of $1,458.50/oz; silver hits fresh 31-yr high.

DJIA slips 17.26 to 12409.49, and Nasdaq Comp edges 3.68 lower to 2796.14. S&P 500 falls 2.03 to 1333.51.

Latest aftershock doesn’t appear to have done too much additional damage, but rapid, sharp plummet on initial quake/tsunami warning headlines may’ve put some fear back into a market that’s had an impressive ability to shake off troubling news.

Abundant liquidity has nurtured the risk trade, building complacency amid a hazardous backdrop as everyone thinks they can get out before the stampede begins. After glimpsing that hair trigger this morning, looks as if some risk-takers may have seen enough.

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…

Seems as if corporations feel more cautious than the investors who have bid up their stocks lately, with companies content to conservatively bide their time sitting on loads of cash.

“Healthy profits, combined with opportunistic borrowing at very favorable market interest rates, are providing corporations with an ample cushion against the next business downturn,” Credit Suisse says, noting “the ratio of liquid assets to total assets on nonfinancial corporate balance sheets is hovering near a 45-year high.”

Big cash buffers are a manifestation of “the severe money demand shock American firms experienced in recent years,” the firm suggests. While that’s not good for long-term growth, it remains hard to get businesses “to risk even more of their precautionary holdings” on expansion, which could lift job growth.

The continuing decline in weekly jobless claims suggests employers have trimmed their workforces about as much as they can, but as Credit Suisse infers, they remain reluctant to expand or hire. Demand remains uneven, at best, and there’s clearly enough uncertainty related to the geopolitical picture and global growth to hold off on hiring, at least here in the US. Continue reading…

The stock market has recovered all its losses suffered after the Japan earthquake/tsunami/nuclear crisis, shrugging off at least the economic consequences of the event. That’s a posture that seems entirely premature, and the New York Times had a story Saturday that illustrates why it’s too soon to make conclusions about the disaster’s impact on the global economy.

The NYT headline reads “Global Supply Lines at Risk as Shipping Lines Shun Japan,” and the gist is that some shipping companies are reluctant to call on ports in Tokyo Bay because of concerns about radiation spewing from the damaged Fukushima Daiichi nuclear plant.

Cargo carriers have a lot at stake. As the story notes, they’re obviously concerned about the safety of their crews, but they also don’t want to risk contaminating cargo or their ships. One industry source explained that a vessel may need to be scrapped “if quarantined even temporarily for radioactivity, because they would face extra coast guard checks for years at subsequent destinations.”

Sounds extreme, but those extra inspections would make it hard for a ship to stay on schedule, and who wants to ship cargo on a vessel that’s always delayed?

So it’s no small matter, this reticence to sail into Tokyo and Yokohama. As the Times story says, those ports “are normally Japan’s two busiest, representing as much as 40 percent of the nation’s foreign container cargo.” Continue reading…

Stocks had a strong week, bolting higher in a stout rebound after the sell-off instigated by Japan’s earthquake/tsunami/nuclear crisis nightmare. A nightmare that’s still ongoing, by the way.

Oil didn’t move much today, but energy stocks led the way, along with the material and industrial sectors. IBM, CAT, Chevron and Exxon Mobil account for almost 80% of the DJIA’s advance. DJIA rises 50 to 12220, Nasdaq Comp adds about 6 to 2743 and S&P 500 grinds out 4 to 1313.80.

What’s most impressive about the week’s gains is that they came amid a cascade of unpleasant headlines. Leaking radiation; European debt problems flaring up again; horrendous housing data; weak durable goods orders; another commitment by US military forces as civil war rages in Libya; spreading unrest in Middle East and North Africa; and oil prices marching higher. And of course, that air-traffic controller sound asleep in the DC tower. Horrifying. 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 tone remains bullish for stocks this morning as the ongoing stream of liquidity provided by the Fed’s QE, and more recently by Bank of Japan, courses through global markets. Stocks were strong in Asia overnight, currently higher in Europe and US stock futures point to a higher open.

As of yesterday’s close, major US indexes have erased declines following the Japan quake/tsunami/nuclear crisis. Risk aversion remains just a dalliance, a mere gesture now and again, even as the litany of stresses and perils around the world hardly ever seemed higher.

A third look at 4Q GDP due at 8:30am ET, and final look at Reuters/Univ of Michigan March consumer sentiment at 9:55am. S&P futures off their earlier highs, up 3.60; 10-yr note up a little, yield at 3.39%.

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