The Nvest Market Blog, our current thoughts on the Street

Climbing the Walls of Worry - Week Ended 2/19/10

posted 02.22.2010 at 10:31 a.m. by steve

It was a week of untarnished green as US stocks finished higher in each of the 4 trading sessions (markets were closed on Monday for Presidents Day). The S&P 500 advanced +3.13% while the Dow and NASDAQ jumped +3.00% and +2.76%, respectively. More than half of the surge for the week came on Tuesday as strong corporate earnings and better than expected manufacturing data hit the wires. But the gains continued even later in the week despite the stall of positive news; markets managed to shake early losses and conclude higher. In fact, developments that had the potential to unravel the early week recovery, including a slight setback in new jobless claims from the prior week and the raising of the discount rate by the Fed, failed to derail upward momentum.

The last two weeks have been slow from a news perspective, but the biggest worry on investor minds is how (and when) governments and central banks will implement exit-strategies for stimulus (monetary and policy) actions of the past two years. The Chinese markets are currently closed for their New Year festivities, which has allowed investors to concentrate on domestic issues rather than worry about actions of foreign governments. Even the European debt issues (Greece) have seemed less problematic in recent days. Still, we are given frequent reminder that the current economic recovery is fragile, segmented and asynchronous. Parts of the world like China are experiencing robust growth following the recession while others continue to struggle (developed Europe). The same is true when looking within sectors of the economy in countries like the United States. Here, the manufacturing sector continues to post data that surpasses even optimistic expectations and looks V-shaped, while housing and consumer-related sectors appear more like an L- or U-shape, respectively. Those illustrations remind us that while a world economic recovery is underway, it remains choppy and uncertain. If that were not enough, it is likely that in coming weeks the data here in the US will take a temporary turn for the worse as the winter storms of recent weeks will show up as a negative impact on consumer spending, productivity and jobs. Storms have historically had a chilling effect on those areas of the economic data for a short time. Aside from the usual flow of weekly jobless claims and housing-related data, the focus this week will be on Consumer Confidence (tomorrow) and the second revision to 4Q GDP (Friday). Hopefully, any revisions from the January reading will be more subdued than changes seen during the 3Q 09 period.

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Stocks Close Higher Despite Ongoing Worry - Week Ended 2/12/10

posted 02.16.2010 at 09:53 a.m. by steve

After 3 consecutive weeks of trending downward (since January 19), US stocks managed to post a gain for the week ended February 12. Despite a rough start, which included the Dow dropping below 10,000 for the first time since November 6, the Dow and S&P 500 both gained +0.87% while the tech-heavy NASDAQ added +1.98%. It was a quiet week on the economic front, with little in the way of new data. Eurozone issues continued to dominate headlines (Greece debt worries taking center stage); China also took further steps to curb the pace of its brisk economic growth by increasing reserve requirements for banks (effectively reducing the money supply). Perhaps the most encouraging data point in weeks came from the unemployment report Thursday showing that new claims totaled 440,000, exceeding consensus expectations and prior readings of 467k and 480k, respectively. The data was welcome relief following weeks of worse than expected (but perhaps holiday-distorted numbers). Economists signaled that the latest update is likely a more meaningful gauge of employment changes than prior weeks.

Despite an earnings season that has been positive (companies have largely beaten both top-line sales AND bottom-line earnings guidance), economic data has been less favorable than at 2009 year-end. And, markets are worried that moves by China to cool its economy may derail the recovery in other countries that are in a more fragile economic state (including the US). Said another way, there have been several headlines in 2010 that suggest the bill (for stimulus of past years) may be coming due more quickly than hoped. Worries have included new taxes, early Chinese tightening, calls on certain countries (namely Greece) to get their budgets under control, and just this week a weaker US treasury auction (relatively lower demand for US debt). Perhaps the biggest story worth noting (and directly tied to our most current monthly commentary) is that the New Decade, New Book; Chapter 1 is indeed about China. Recent weeks highlight this concept. China seems to have ever increasing clout with the US on issues ranging from our ballooning budget deficit to foreign policy and trade. Still, while the above seems discouraging, markets have a way of climbing a wall of worry and economic recovery looks to be more likely than not. From a technical perspective (price, momentum, trend) the recent correction in stocks continues to appear a correction, rather than the end of a bull run. Key this week will be new data out on housing and a continuation from last the better employment data out last week. Meanwhile, we would not be terribly surprised if the current correction, now having run for roughly one month, has run its course and a new leg up for the markets is just around the corner.

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The Correction Continues - Week Ended 2/5/10

posted 02.08.2010 at 10:09 a.m. by steve

Now the fourth consecutive week in the current stock market correction (began January 19), investors are feeling increasingly nervous as volatility has risen dramatically. Four of the last five trading days have registered intraday swings of greater than 1%; Thursday and Friday saw swings of 3.2% and 2.2%, respectively. Despite the heightened volatility, the S&P finished the week down just -0.7% from where it started. But amid the more uncertain backdrop, the number of bulls to bears has ebbed from over 3:1 just 3 weeks ago to roughly 1:1 last week. This suggests that there is much skepticism about the current rally and confidence has been shaken. A multitude of worries has been the cause, most recently including fear that a global debt crisis could be spurred by instability of the Euro. Several EU member countries are struggling with ballooning deficits and weak credit profiles.

What began as a correction led by concerns of a slowing Chinese economy and tough talk from Washington directed at the banking industry is now being perpetuated by a package of still improving, but relatively disappointing economic data. Outside of the very positive 4Q GDP announcement two weeks ago, the economic data has generally been weaker than consensus expectations. Data relating to the unemployment situation has been the most painful as it seems that we are moving in the wrong direction. We are careful to remind ourselves that it is not uncommon to see distortion around year-end as seasonal hiring makes the numbers temporarily look better than reality. We also have said since the recovery began in 2009, that the recovery (especially with jobs) was likely to be choppy and non-linear. In other words, we do not expect that the jobs data will show a straight line trend of improvement. The real key to this will be that weaker data does not persist for an extended period of time. Despite worries have been many, a story that has went largely untold this new year is that corporate earnings results are looking great. With now more than 50% of the S&P 500 index constituents having reported 4Q earnings, roughly 70% of companies have beaten top-line (revenues) guidance and 78% have exceeded bottom-line (earnings) estimates. The story being told is that companies are starting to see a pickup in demand; improved earnings are no longer solely attributable to the massive cost cutting that took place in late-2008 and 2009. Companies have likely exhausted their ability to grow earnings through reducing costs (costs can only be reduced so far). New sales (demand) will ultimately lead to rehiring laid off workers as companies cannot keep up with growing business. This week will be relatively quiet in terms of new economic data; maybe the corporate data can get some of the attention it deserves.

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January Finishes With a Loss; Politics Continue as Focus - Week Ended 1/29/10

posted 02.01.2010 at 10:12 a.m. by steve

Politics and populist ire continued to be a heavy weight on stocks and commodities in the final week of January. US stocks, as measured by the S&P 500 finished the week down -1.65% and extending loss in January to -3.71%. Economic news and corporate earnings continued to take the back seat to political issues. Admittedly, economic data was generally on the disappointing side, but suffice to say that the markets sold off more than economic fundamentals warranted. Even the bright news that GDP rose in the 4Q period at the fastest pace since 2003 (up +5.7%) was not enough to power through the generally negative tone of politics. The GDP report should have helped send the market notably higher. It would seem that with all the hard talk from politicians (who have been attacking the financial industry on a multitude of fronts: from threatening the re-appointment of Fed Chairman Bernanke to levying special fees and taxes on banks), confidence in the current rally has been greatly challenged.

Ultimately, the markets are very concerned with the hand of government intervention and regulation, which seems to get heavier and heavier. We acknowledge that some new regulation for the financial industry is necessary to prevent excessive risk taking that threatened the US financial system just a year ago. Still, it is a disheartening start to the year following a +26% rise for the S&P; the recent two weeks have now managed to shift the bull-to-bear ratio from over 3:1 to now 1.5:1. However, one month does not a year make and we should be careful to look at the current weakness as much more than a short term correction. Actually, while the current slide has put technical analysts on heightened alert, as a group they believe the correction is probably healthy for the market and the more sober sentiment is favorable for future market gains; more so than the uber-bullish and almost complacent sentiment that had been developing weeks ago. History also has shown that the year following gains of +25%, the market has gained 6 of 7 times and by an average of +14%. Looking ahead, this week offers new data on personal income, manufacturing, home sales and employment and the continuation of corporate earnings. Earnings will likely continue to be strong; we imagine economic data will resume its more positive tone shortly but housing and employment will continue to be a prime focus in the weeks ahead.

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