Daily State of the Markets

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Friday Morning - April 15, 2011

Good morning. Just about a year ago, the stock market was on a roll and it appeared that the improvement in the economy was actually occurring ahead of schedule. And on April 23rd, the Dow set another high for the then one-year old bull market. But then the problems started. There was the European debt crisis, the "flash crash," and ultimately, fears of a double-dip recession. But after a great deal of consternation, an awful lot of volatility, and a fair amount of fear mongering, stock market investors finally came to the realization that the economy wasn't doomed and had merely encountered a soft patch - I.E. a short period of modest economic slowdown.

In fact, it was this "soft patch" in the economy that caused one Ben Bernanke to decide to err on the side of caution and to spend another trillion dollars or so on government bonds. Bernanke knew that if the economy did slip back into recession, the country ran the risk of entering a deflationary spiral, which once started, is awfully hard to stop. Thus, Bernanke & Co. went on a mission to push prices of everything they could think of higher. In short, the goal was to avoid deflation by putting a little inflation into the system. Better known as QE2, this program was designed to make darned sure that the soft patch ended as quickly as humanly possible.

It turns out that the plan worked like a charm. The soft patch ended in short order and "a little inflation" is exactly what we got as stocks, bond prices, commodities, and even some areas of real estate all rose. And all are higher now than they were at the end of last summer.

But the funny thing about "a little inflation" is it is tough to contain once it gets started. And while Bernanke's plan did appear to solve last summer's problems, it now looks like that solution may be leading us to this summer's potential problems - another soft patch.

To hear the bears tell it, the recent rise in commodities in general and oil in particular is starting to have an impact on corporate profits as well as the psyche and discretionary spending of consumers. Our furry friends also contend that this time the soft patch, which may or may not be starting to occur, won't be so easy to fix. After all, it looks as if the Fed is out of bullets and the government is out of political will to do any additional propping up of the economy.

So, while there has yet to be any concrete evidence that the economy is actually losing steam right now, with lots of people talking about another soft patch, we will want to pay particularly close attention to the upcoming data such as the ISM reports, the jobs numbers, and the commentary from corporations when they report earnings. Because, in short, if it begins to look like the economy is indeed starting to slow - even a little - I'd be willing to bet dollars to doughnuts that the next pullback could be a little nastier than what we've seen over the past couple of weeks.

Turning to this morning... Disappointing earnings out of Google and Bank of America, another downgrade of Ireland, and an increase in China's CPI has traders in a defensive mood at the moment.

On the Economic front... The Consumer Price Index for March rose by +0.5%, which was in line with the consensus for +0.5% and also Februarys reading of +0.5%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.1%, which was below expectations for +0.2% but in line with Februarys +0.2%.

Next up, the Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for April was reported at 21.7, which was above the consensus expectations for a reading of 15.98.

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.67%
    • Shanghai: +0.27%
    • Hong Kong: -0.02%
    • Japan: -0.65%
    • France: -0.28%
    • Germany: +0.45%
    • London: +0.21%

  • Crude Oil Futures: -$0.49 (May contract) to $107.62
  • Gold: +$4.80 to $1477.20
  • Dollar: higher against the Yen and Euro, lower vs. Pound
  • 10-Year Bond Yield: Currently trading at 3.460%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -0.32
    • Dow Jones Industrial Average: -7
    • NASDAQ Composite: -10.70

Wall Street Research Summary

Upgrades:

  • Alcatel-Lucent (ALU) - Added to Preferred Tech at BAC/ML
  • Logitech (LOGI) - Added to Preferred Tech at BAC/ML
  • Rosetta Resources (ROSE) - Canaccord Genuity
  • Archer Daniels (ADM) - Estimates and target increased at Citi
  • SK Telecom (SKM) - Credit Suisse
  • C.H. Robinson (CHRW) - Deutsche Bank
  • Silgan Holdings (SLGN) - Deutsche Bank
  • Harley Davidson (HOG) - Goldman Sachs
  • FirstEnergy (FE) - Jefferies
  • Corning (GLW) - Mentioned positively at Oppenheimer
  • Rhino Resources (RNO) - RBC Capital
  • CONSOL Energy (CNX) - RBC Capital
  • Fifth Third (FITB) - RW Baird
  • Buckeye Partners (BPL) - UBS

    Downgrades:

  • Cisco Systems (CSCO) - Auriga
  • Google (GOOG) - Citi, Target cut at Oppenheimer
  • China Mobile (CHL) - Credit Suisse
  • Dr. Pepper Snapple (DPS) - Deutsche Bank
  • Wausau Paper (WPP) - Deutsche Bank
  • Urban Outfitters (URBN) - Jefferies
  • MasterCard (MA) - Susquehanna

    Long positions in stocks mentioned: none

    David D. Moenning
    Editor State of the Markets
    Co-Founder TopGunsTrading.com



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