Investor’s first read – Brooksie’s edge before the open
Monday, June 18, 2012 9:13 a.m. ET
DJIA: 12,767.17
S&P 500: 1342.84
Nasdaq Comp.: 2872.80
Russell 2000: 771.32
TODAY: Part of the market’s strength in recent days has been in expectation of new Fed measures to stimulate the economy.
But that’s not news, the Fed has been saying all along that it would step in to juice the economy if needed. What has changed is a further slippage in the economy and drop in inflationary expectations, ergo a bright green light for the Fed to stimulate with a smaller risk of triggering inflationary pressures.
The other contributor to recent market strength was front running good news out of Greece. Finally, options expiration Friday may have propped the market at the close.
CONCLUSION: First a recap of Last week’s blog: Friday, I wrote of a possible spike to DJIA 12,766 (S&P 500: 1343, but said odds favored the market would give most of it back by closing bell. While the DJIA closed at 12,767 and S&P 500 at 1343, stocks did not sell off at the close.
I also wrote, Monday could feature a big up-day at the open today if pro-euro forces won in the Greek elections Sunday, if so, I would be prepared to sell into the surge during the first 25 minutes of trading, assuming that would be the top for a while followed by a sharp decline as investors realize Greece is not the only euro-problem out there.
Overnight the futures were up big in response to the news, but cooler heads prevailed and the open will down.
Thus Friday’s late day sell off is coming today.
BOTTOM LINE: Partial solutions will take time, which means moré uncertainty. The market is attempting to adjust to the variables, but it doesn’t have enough info to find a comfort level. Greece is less of an uncertainty today than Friday – fine, but it has a steep hill to climb.
Borrowing costs in Spain and Italy have been rising at a time most of Europe is slipping into a recession.
CONSIDERATIONS:
Greece’s New Democracy and Pasok parties gained enough seats in parliament in Sunday’s election to ensure Greece will remain in the euro.
A coalition government must be formed quickly before its stash of cash runs out in July. Additionally, it must employ more spending cuts to qualify for euro-area and IMF financial help.
To its credit, Greece has narrowed its deficit from 15% of GDP in 2009 to 9.1% in 2011 and is on target to reduces it to 7% this year, all this in spite of being in recession for 5 years.*
The Group of 20 (G-20) meets today to boost the present $430 billion anti-crisis firewall . Additionally, European leaders will meet on June 28and 29 to discuss a better coordination of political and economic issues among euro-area nations.
European Central Bank (ECB) president Mario Draghi says it will continue to supply liquidity to solvent banks to which it has already loaned 1 trillion euros for three years. European stock markets have been firm recently amid speculation that central banks would take steps to stimulate global economies.
HOUSING:
Housing is becoming a positive contributor to our economic recovery after three years of being a drag. Home prices are edging up and that’s great news for the wealth effect, people’s perception of their financial well being.
In time, that will lead to increased consumer spending, which stands to pressure corporations to spend, as well.
FOMC:
Expect the Street to be Fed-watching this week attempting to determine when (and if) the Fed plans to employ additional measures to stimulate the economy. If Fed chief Bernanke does NOT refer to more “easing” in his press conference Wednesday (see below) the market could plunge.
Facebook (FB): Thursday, I said I would cover some FB shorts if I had them. The stock was 27.30 at the time and closed Friday at 30.01 just shy of my target of 30.36. This looks like short covering, as some short sellers see their paper gains diminish with each uptick. However, at some level, the shorts will likely begin shorting (selling) to stop the run and hopefully trigger another plunge.
Without a credible and strongly reinforced “Buy,” buying FB after a big run is risky. Nevertheless, its market action in recent days raises “support” to the 28.45 – 28.65 area.
ECONOMIC DATA: Big week for economic data, especially Thursday (see below). The Federal Open Market Committee (FOMC) meets Tuesday with commentary and Fed chief Bernanke’s press conference Wednesday at 2:15 p.m.
MONDAY:
Housing Market Index (10a.m.)-Rose 5 points in May to a new recovery high of 29 vs. a 4-point drop in April. Was driven by current sales and traffic.
TUESDAY:
Housing Starts (8:30a.m.)-Rebounded 2.6% in April after a 2.6% drop in March. Both multifamily and single house sales contributed.
WEDNESDAY:
FOMC Meeting Announcement 12:30p.m.)–
FOMC Forecasts (2p.m.)
Bernanke Press Conference (2:15)
THURSDAY:
Jobless Claims (8:30)-Rose 6,000 in the June 9 week to 386,000 claims vs. a revised 380,000 the prior week. The 4-week average was up 3.500 to 382,000.
PMI Manufacturing Index (9a.m.)-Slipped 2.1 points in May to 53.9.
Existing Home Sales (10a.m.)-Up 3.4% in April after a 2.8% drop in March. Gains were solid across all regions, however year-to-date is flat.
Philly Fed Survey 910a.m.)-Dropped in May to a negative 5.8 from a positive 8.5 in April. New Orders dropped 3.9 points to a negative 1.2 for the period. A year ago, this Index plunged from the 40 level in February to a negative 25 in August, rebounded to a positive 10 until March 2012 after which it declined. Its behavior in 2010 was similar. I took the data from a chart so the exact numbers may vary slightly.
FHFA House Price Index (10a.m.)-Rose 1.8% in March after a 0.3% gain in February. Year over year rate also surged to a plus 2.7% reflecting a pronounced increase in home prices.
Leading Indicators (10a.m.)-Declined 0.1% in April after a 0.3% rise in March and 0.7% jump in February. Building permits and jobless claims were the big contributors to the April decline.
George Brooks
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
