Thursday, October 27, 2011


Good morning. To those who have grown accustomed to entering trades at light speed in reaction to the latest headline, there is a chance that the game may become a bit less exciting in the near future. Yes, it is true that the uber-fast money crowd did enjoy another round trip of up-one-minute, down-the-next action on Wednesday as there was a fair amount of trepidation in front of the EU's much anticipated 'comprehensive plan' yesterday. But now that the details of the plan are out and there doesn't seem to be any major disappointments (other than the timing of the release of the details), it might be enough to put an end to the extreme volatility we've been treated to for that past three months. Well, maybe for a while, anyway.

I may be just spitballin' here, but unless our friends across the pond fall on their face in terms of getting the details of their grand plan finished, it appears that their much vaunted 'comprehensive plan' might be just enough to counter all the end-of-the-world talk the bears have been so fond of lately. Sure, there are some pretty big macro issues to be concerned about in places like Greece, Ireland, and Portugal. But let's run through some of the headlines from yesterday and see if there isn't a theme developing.

The day started off on an upbeat note in response to speculation that the Chinese might be about ready to put the kibosh on their monetary tightening campaign. And then Premier Wen Jiabo really got the bulls fired up when he said that his industry ministry is currently studying "stimulative policies" for small companies. As a result, Chinese stocks are up 5% this week, the industrial metal stocks are movin' on up, and copper posted a five-week high. Remember, if China is in a happy place, the global economy tends to wind up in a happy place too.

While we're on the topic of China, it is also positive that Chinese officials continue to talk about "lending a hand" to their European friends. And with France's Nicolas Sarkozy boarding a plane today for a meeting with the Chinese, it looks like there may be more than just talk about investing in the SPV (via the IMF, of course) sometime soon.

After China came a flurry of headlines out of Europe. Some were good and some were disheartening. And the market did take a pretty good nosedive on word that the EU summit would be a little light on details. But as the day progressed, it became clear that the EU leaders had at least been listening. Greek debt writedowns look like they will be significant (between 40% and 60%), which means that there just might be some hope for Greece's future. Next, there was talk of European bank recapitalizations. The good news is there were no surprises on the subject. And speaking of no surprises, while there won't be any details for a while, the leaders of the EU let us know that they WILL indeed lever up the EFSF to about €1 trillion ($1.38 trillion) via a combination of the 'insurance plan' AND the public/private special purpose vehicle (SPV). Again, the key here is there weren't any huge disappointments.

Closer to home, the news wasn't half bad. Yes, it is true that this week's consumer confidence number was a definite bummer. However, the bottom line is the economy has not fallen off of a cliff. Yesterday, we learned that the capital spending component of the Durable Goods report was much better than expected and that New Home Sales can actually rise.

Now mix in an earnings season that has not been as bad as had been feared, the propensity for fund managers to dress up their books at year-end, and the fact that most wonderful time of the year is upon us (no, not the shopping season... It's the November through April season, which is traditionally the strongest time of the year for the stock market) and well, it's hard to be a negative Nancy at the moment.

However, we should recognize that stocks have run a long way in a very short period of time. And as such, a period of backing and filling - which appears to be what might be happening so far this week - is to be expected. And my pals in the bull camp tell me that as long as the S&P doesn't fall back below 1220 to any meaningful degree, our heroes in horns should be given the benefit of the doubt.

So, if you want to look at the glass as being half full (which was my secret challenge this morning), you could summarize the situation as follows. The big-bad EU event appears to have come and gone without it becoming a debacle. The U.S. has so far averted a dip back into recession. China may be ready to start growing fast again. And corporate profits are at record highs. Thus, this just might be enough to allow the bulls to run with the ball a while longer. But then again, maybe not. However, I did want to see if I could scare up a bullish case this morning.

No comments: