Market Talk

Equities are overvalued by a few different measure, like 30-50% overvalued, but the Fed doesn’t care. It just wants another bubble to fuel the wealth effect. Newswires’ Alen Mattich explains.

US stocks sell off sharply, along with equities across the globe, after North Korea opened fire on a South Korean island, and amid the ongoing stresses breaking down the Irish government, and threatening a European Union painfully aware of the dangers of contagion.

DJIA drops 142 (1.3%) to 11036, S&P 500 falls 17 (1.4%) to 1181, Nasdaq Comp loses 37 (1.5%) to 2495. NYSE volume stronger than it was yesterday, but still weak overall; there’s just not as many people in the market this week, and that tends to exacerbate any moves. GM loses more ground, closes at $33.25, just a quarter above the IPO price.

Euro falls below 1.34 as matters as not only is Ireland in flux, but investors are turning wary eyes to Portugal and Spain.

Second reading on 3Q GDP comes in at 2.5%, better than the first report of 2% and better than expected. But Fed downgrades economic outlook again for this year and next year, as revealed in the minutes of the November meeting. That means the QE2 trade will likely be alive and well in six months, when it’s expected to run its course. It also means unemployment will still be intractably high, and it’s a fair bet the Fed will be talking about QE2.1 come springtime.

US stocks fall broadly as investors are treading cautiously following the big September rally and ahead of Friday’s jobs report. Stocks soared in September, but once the S&P 500 hit 1150 last week, the rally stalled out. The 1150 level is considered an area with lots of resistance, and the fact that traders have tested and failed at that resistance level on multiple occasions doesn’t bode well for future trading. Newswires’ technical guru Tomi Kilgore reports:

Resistance at the S&P 500′s 1150 may have finally won out. The index had hit intraday highs within two points out 1150 in six of the past seven sessions, including so far today, without closing above it. Index currently down 12 at 1134. The 1130 level is a key support area since it had been strong resistance until the index finally broke through on Sept. 20. Below that, there should be some buying interest at the gap in the charts between the Sept. 10 high (1111) and the Sept. 13 low (1113) and at the 1100-1105 area, which was resistance in early September.

Other technicians are also expressing doubt about the market’s near-term future. “Historically, a strong September leads to a strong fourth-quarter rally, but October may bring more of a ‘Trick’ to investors than a ‘Treat,’” BofA Merrill technician Mary Ann Bartels writes. “We remain defensive expecting a correction that could be up to 10%-12%.

S&P 500 was recently down 13 at 1134.

The index is stuck in a tight trading range right now between 1130 and 1150. Today’s pullback has stalled right around 1130, just like rallies over the last few weeks have also struggled moving through 1150. It’s an interesting tug of war between the bulls and bears as both camps have compelling arguments. The bulls point to another round of QE2 as a positive move for the market, but the bears say QE2 highlights how bad the economy truly is.

Whoever comes out on top could signal big moves ahead. Technicians say if the market can decisively move above 1150, it could ride a clear path at least to 1200 and even 1230. But a move below 1130 and support would exist at the July-August lows at 1040-1100.

- The recession getting an official ending isn’t a surprise, but it doesn’t change the fact that to the average Joe, it doesn’t feel like the recession’s over. “Obviously, the employment picture is still dismal, and people complaining that policymakers should focus on labor markets rather than output have a point,” Ryan Avent says. “It’s just not one that’s particularly relevant to what the NBER Dating Committee does.”

- – NBER says recession’s over, but it’s not clear employment has bottomed out yet. “That is my worry about this call,” writes Mark Thoma. “Whether or not we stay near the trough for an extended period or move gradually but consistently back to full employment is an open question, but I don’t think we can discount the stagnation outcome.”

- Many strategists have been cautiously optimistic about the September rally because it has come on low volume, but Reformed Broker blogger Josh Brown says he actually prefers a low-volume breakout. “Nobody is in,” he says. “Fear is the conductor of this train right now, period, end of story…Fear of missing out is exactly why a stealth rally in stocks with low participation would be more meaningful and bullish than almost any other scenario.”

- Expect an interesting week ahead, says PIMCO CEO Mohamed El-Erian, as Europe’s debt crisis returns to spotlight amid increasing solvency concerns. And global configuration of currencies is quickly becoming hot-button issue. “This week will shed light on whether policymakers can do anything to deal with these two issues,” he says. If they continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.”

- Calculated Risk blogger Bill McBride doesn’t expect any major changes to tomorrow’s FOMC statement. Too soon for Bernanke to comment on further easing, especially considering his Jackson Hole speech. “Bernanke suggested that additional easing would probably require ‘significant weakening of the outlook’ or a meaningful decline in inflation expectations (or further disinflation),” he notes. “The first hasn’t happened yet…although they might express more concern about disinflation this week.”

- Paul Krugman provides more evidence that unemployment remains high because aggregate demand is too low. “Every single major industry has seen a rise in involuntary part-time work; so has every major occupation,” he says at Conscience of a Liberal. “There’s no hint that any major kind of labor, in any sector, is in short supply.”

- Weak demand remains most important factor holding back job growth. But it’s not the only factor, James Hamilton argues at Econbrowser. He points to latest NFIB data which show respondents say sales are their biggest problem, but they’re increasingly worried about taxes as well as government regulations.

- S&P 500′s double-digit percentage rally off July lows has been broad based, lacking a particularly strong sector during run-up, Bill Luby writes at VIX and More blog. Materials and industrials have been top performers, while consumer discretionary and tech have recently shown signs of life. “Consumer and financial sectors cannot afford to be a significant drag on stocks or the current rally will likely run out of steam.”

- Google (GOOG) CEO Eric Schmidt recently said he wants to add social networking to the company’s core products and services. “When I read those remarks, an alarm bell went off in my head,” Mathew Ingram writes at GigaOm. “To truly be successful, social media or social networking…can’t just be bolted onto what you are already doing. It’s not a software upgrade or a hardware fix…social just isn’t something the company understands very well.”

- Here’s a perfect example of an inspiring hypomanic entreprenuer: “I had friends at Princeton; I’m sure it’d be fun to see them,” says 21-year-old Seth Priebatsch. “But I know that what I’m going after is huge and others are going after it, and if they’re not, they’re making a mistake. But other people will figure it out, and every minute that I’m not working on it is a minute when they’re making progress and I’m not. And that is just not O.K.”

US stocks modestly rise, but show little conviction, after Fed’s beige book report, Obama’s speech and consumer credit data.

DJIA gains 46, or 0.5%, to 10387, and has risen five times in last six days. But Newswires columnist Tomi Kilgore finds some reason for caution:

The DJIA might look strong, since it has held onto most of its gains throughout the day, but the inability to get through resistance after a third attempt should put bulls on edge. The DJIA’s intraday high is 10427, following highs of 10447 and 10451 the past two sessions. Meanwhile, the 200-day moving average has been coming in right around 10450. The DJIA was recently up 40 at 10381. If the DJIA can’t get above the 200-day tomorrow, a test of the 50-day moving average, which comes in around 10286, should follow shortly. Meanwhile, a close above the 200-day would target the Aug. 9 high of 10720.

Meanwhile, S&P 500 gains 7, or 0.6%, to 1099, yet still can’t shake the psychologically-significant 1100 level. Nasdaq Comp jumps 20, or 0.9%, to 2229. Volume was weak again.

Encouraging developments from European banks helped shed yesterday’s pessimism. But Fed says economy hit soft patch in July and through August and Obama introduces new policies to kick start economy. Consumer credit in July also dropped for sixth-straight month.

The FOMC yesterday finally got around to formally acknowledging something that most already knew — that the US economic recovery isn’t so hot, and the Fed’s largely symbolic action (reinvesting in Treasurys as agency assets on its balance sheet mature) won’t be much help.

Negative reaction in Asian markets overnight to Fed’s assessment of the economy, and stocks now sharply lower in Europe, with the euro tanking, briefly dipping below $1.30 after a knee-jerk rally late yesterday. Yen hit a 15-yr high vs USD.

June trade deficit widens to a record 21-month high.

S&P futures down 18.20; Dow futures off 146. Ten-year note still rising, yield down to 2.72%.

- Tone of Bernanke’s remarks yesterday didn’t deviate much from minutes of June FOMC meeting — surprising considering weak economic data that’s come out since then, Derek Tang writes at the Macroadvisers blog. Bernanke sounded “a bit out of touch,” he adds.

- Bernanke’s testimony lacked a sense of urgency, Paul Krugman says. “We really have to bear in mind that the Fed is failing in fulfilling its dual mandate, price stability and full employment…Bernanke’s answer to all this seems to be that the Fed is doing a lot. But it’s obviously not enough — the central bank is supposed to deliver results, not get an A for effort. And those results aren’t coming.”

- Financial Armageddon blogger Michael Panzner offers a harsh take on the earnings expectations game. “During ordinary times, a racket like this is simply a source of amusement,” he says. “Now, though, when it’s more important than ever for people to have an accurate read on where things stand, the beat-the-number scam is a pathetically cynical joke.”

- Netflix’s outlook calls for weaker revenue growth, especially as consumers shift toward cheaper plans, Dan Frommer notes at Silicon Alley Insider. Ultimately, NFLX may have to raise streaming fees, “or just deal with lower revenue per subscriber.”

- The fact that Exxon Mobil, Chevron, Royal Dutch Shell and ConocoPhillips are forming a JV to create a rapid-response force to deal with future oil spills is a great development, Barry Ritholtz writes at The Big Picture. “It gives a face-saving resolution to everyone, lets the White House declare victory and lets the oil keep on flowing,” he says. “This is an excellent announcement — now let’s see if they follow through on it.”

- Existing home inventory increased 4.7% from a year earlier, the third straight monthly rise and largest year-over-year increase since early 2008, Bill McBride notes at Calculated Risk. “This increase in inventory is especially bad news because the reported inventory is already historically very high, and the 8.9 months of supply in June is well above normal,” McBride says. “This was another a weak report…If months-of-supply increases sharply as I expect, then there will be additional downward pressure on house prices.”

- The Daily Beast’s Peter Lauria says there is “growing resentment” among some executives that Microsoft’s (MSFT) stagnant stock price is CEO Steve Ballmer’s fault. “Sources say the talk around Microsoft’s Redmond, Wash., headquarters — which has grown increasingly louder ever since Apple surpassed Microsoft in market capitalization — is that the company’s stock suffers from a ‘Ballmer discount’ and that the CEO is on the clock to significantly move the needle on its share price over the next two or three quarters or face a potential move to oust him,” Lauria says.

- Apple (AAPL) Operations VP Jeff Williams has been promoted to SVP and will oversee the company’s supply chain and ensure product quality. The move prompts speculation by the AppleInsider blog that AAPL was readying a succession plan for CEO Steve Jobs, who the blog says could be replaced by operations chief Tim Cook.

- If Microsoft’s Ballmer plans to send an email to employees about Thursday’s earnings announcement, he may want help from ToneCheck. The beta version of this new plug-in for MSFT’s Outlook mail program checks outgoing emails for emotional displays of, say, elation, humiliation, excitement and even fear, according to a blog post at PC World. Given Ballmer’s penchant for emotional outbursts and mounting criticism about his leadership of the software giant, he might be well-advised to test drive ToneCheck.

- “Tack on another month of no progress with weekly unemployment claims,” Mish says. “The 4-Week moving average is still hovering around the 450,000 to 460,000 level where it was in mid-December 2009.”

Dow Jones’ Michael Derby reports:

Fed’s Bernanke calls the outlook “unusually uncertain” and notes the central bank is prepared to take additional action if needed.

His economic outlook sees lower than expected inflation and at best a slow pace of falling unemployment levels. He notes financial conditions are hindering growth and expects interest rates to stay low for “extended period.”

He also says the Fed is continuing to think of ways to shrink its portfolio, and any asset sales will come gradually.

Bernanke’s comments to Congress are largely as expected, but some may be a bit taken aback by his comments on shrinking the balance sheet, which doesn’t suggest much central bank appetite to provide additional stimulus to a troubled economy.

Bernanke says the economy needs continued government stimulus now, but says it’s also important to form plan to bring longer run deficits back in line. He says of stimulus now “I would be reluctant to withdraw support too precipitously,” given the economy’s current challenges.

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Does helicopter Ben have something up his sleeve?

US stocks looking to extend their weekly gains on Wednesday, as a slew of corporate earnings is taking a backseat to Fed Chairman Ben Bernanke’s Congressional testimony later this afternoon.

Speculation has been swirling about what measures the Fed may announce to stimulate growth, especially as chatter of the economy double-dipping back into recession keep increasing. Even though it’s unlikely Bernanke will announce anything substantial in his semi-annual testimony before Congress, the prospect of additional support for the economy has helped lift the major averages more than 1% this week.

“There is hope that the Fed will ride in again on its white horse and save the day,” David Carter, chief investment officer at Lenox Advisors, told me yesterday. But he cautioned that potential further loosening of monetary policy or other any other moves by the Fed could have negative long-term implications.

But does the Fed even have a white horse to ride in on anymore? There’s a growing sense that there’s only so much the central bank can do to prop up the stock market and, subsequently, the overall economy. Miller Tabak equity strategist Peter Boockvar hit the nail on the head in his morning commentary today:

What everyone watching must ask is has the law of diminishing returns set in with the actions of the Fed. I believe yes.

It’s a great point and one that has us reflecting on the Fed’s first major interest rate cut during the financial crisis. In January 2008, the Fed instituted a surprise rate cut, slashing its overnight lending rate by 75 basis points to 3.5%, in a move intended to help prevent the economy from falling into a recession.

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It’s a bit perverse to think that US stocks may’ve rallied yesterday on notions that the economic situation is getting bad enough again to warrant some sort of language today from Ben Bernanke indicating that the Fed will engage in more monetary jiggering to try to get this engine to turn over.

Sort of a “so bad it’s good” scenario for bulls?

Hard to imagine that’s good for stocks, but it seems to be the drift out there. No shying away from risk in Europe today, with stock markets there sharply higher, even as the euro continues to ease off recent highs.

No economic data, but a ton of 2Q earnings, including Coke, UTX, Wells Fargo and Morgan Stanley all before the open. S&P futures up 4.90; 10-yr a shade lower, yield at 2.94%.