Tuesday, May 31, 2011

Monday Morning Musings

The markets are continuing to bounce from their oversold levels last week. This morning, stocks are up sharply on news of a bailout package for Greece. The Dow was up 100 points at the open, although it is fading a bit at the moment. We will have to see if month-end buying keeps a bid under stocks into the close.

The big news is obviously the prospect for a German-led bailout package for Greece. Details are thin right now, but the rumors are that it would avoid a total restructuring of Greek debt with more details coming out by the end of June.

Asian markets were up sharply overnight, led by a 2.2% rally in Hong Kong. China snapped an 8-day losing streak with a 1.4% bounce. Even India rose, despite GDP in the country slowing from 8.3% to 7.8%.

In economic news, the Case-Shiller home price index showed prices fell 3.6% in March to a new multi-year low. Consensus expectations were for a 3.4% drop.

Commodities are rallying, aided by the dollar being pushed lower due to the rally in the euro. Oil prices have topped $102.50, and gold prices are slightly higher to $1537.

The 10-year yield is flat near 3.05%, after a prolonged slide since topping out at 3.6% back on April 8th. At 3.05%, the bond market really seems far more preoccupied with a potential slowdown than worry about the end of QE2 and what that might mean for buying demand for Treasuries.

Trading comment: Last week, we said the markets were oversold and we were buying for a trade. Today is day 4 of the oversold rally, and we are taking some chips off the table. We could easily see new beginning of month money come in tomorrow as well, which we would probably trim a little more into. At current levels, the market is still likely to be down a couple of percent for the month of May. June is likely to continue to be choppy, with lots of questions about what the environment will look like post-QE2 (June 30th).

Wednesday, May 25, 2011

Stocks Beginning To Bounce From Oversold Levels

The markets are higher this morning, after falling for the last 3 days. Energy and materials stocks are the strongest so far, while defensive utilities and consumer staples are lagging.

The dollar is up modestly, but that isn't hurting commodities yet. Oil has risen back above the $100 level, and gold prices are higher near $1526. Silver prices are also moving up.

In economic news, durable goods orders fell more than expected in April, declining 3.6%. Though some of this decline is simply due to the robust 4.4% increase in the previous month.

In corporate news, Ralph Lauren (RL) is down -8% after missing earnings estimates. The retail sector is also lower on the day so far.

Asian markets were mostly lower overnight, and I continue to read troubling reports about China.

The 10-year yield is flat at 3.12%; and the VIX is down another 3% to 17.25.

Trading comment: I want to express my condolences to the family and colleagues of Mark Haines. Although I never met Mark Haines, CNBC has been on in the background of my office for the last 15 years. So I listened to Mark reporting on the markets every morning, and I can't count the number of interviews I've watched him give. He had a strong presence, was always no-nonsense and straight-forward, and wasn't afraid to challenge his guests. I have seen a lot of CNBC personalities come and go over the years, but he will be missed more than most.

Tuesday, May 24, 2011

Goldman Upgrades Outlook For Oil Prices

The market is up slightly in early trading, but the action is mixed. Energy is getting the biggest bounce following yesterday's selling, as commodity prices rebound.

The dollar is lower today, which is helping boost commodities. Oil prices are up near $99.50, bolstered by a bullish call from Goldman Sachs, who sees Brent Crude prices hitting $120 this year and higher next year. Gold prices are also higher, trading above $1525.

The IPO hype is back in effect today, with Russia's Yandex (YNDX) coming public. Anytime you label something "the Russian Google", you are bound to attract some hype.

Asian markets were slightly higher overnight, a nice reprieve to the recent selling pressure. Europe's markets are also higher this morning.

The 10-year yield is higher to 3.15%; and the VIX is down -4% this morning to 17.53 after a big spike yesterday that took it as high as 20 at the open before fading as the day wore on.

Trading comment: As long as the major indexes are trading below their 50-day moving averages, a more defensive posture is warranted. That strategy has kept me out of a lot of trouble in my career. That doesn't mean you can't pick at your favorite names, with an eye towards lowering your basis, but I don't like to get aggressive until the indexes are back above their key moving averages. Short-term, I am looking for some buying into month-end, but that is just for a trade.

long GOOG

Monday, May 23, 2011

Monday Morning Musings

The market is lower again this morning after weakness in overseas markets has been the primary driving factor behind the selling.

There were no economic reports here in the U.S., as investors took their cues from Asia and Europe. Asian markets were lower across the board overnight, led by a 2.9% drop in China. Europe is also lower this morning after Italy had its debt rating downgraded by S&P over the weekend, and Fitch downgraded Greece again.

This has also led to selling in the euro, and a bounce in the dollar. We are actually seeing the old "flight to safety" trade back on, with buying in the dollar, U.S. Treasuries, and gold.

Gold is up to $1511, but that is about the only commodity trading higher today. Oil prices have fallen back to $96.65, and the CRB Index overall is down roughly 1.3%.

Consumer staples stocks are down less than the market so far, but all sectors are in the red. Some food stocks are bucking the weakness, like Panera (PNRA), Chipolte (CMG), and Cheesecake Factory (CAKE).

Last week's IPO darling, LinkedIn (LNKD) is nearly 10% lower today, trading back near $84, which is slightly above the price at which it began trading on the first day it came public.

The 10-year yield is lower to 3.10%; and the volatility index (VIX) is up 6% right now to 18.55.

Trading comment: Bearish sentiment is on the rise. The CBOE put/call ratio averaged more than 1.0 for all of last week; the bull-bear spread in the AAII survey fell to -15%, the lowest level since last August; and the market is getting oversold again after 3 straight down weeks. The rub is that the S&P 500 is only 4% below its high, and we know that a 10% correction could easily occur this summer. My thoughts are just that any correction won't come in a straight line, and I think the bears may be overreaching at the moment. As such, I would wait for another bounce before doing any more selling, a strategy that worked well last week.

Friday, May 20, 2011

More Problems In Euroland

The market was set to open relatively flat, but the news that Fitch downgraded Greece again led to some concerted selling in the market. Fitch lowered its rating on Greece to B+ from BB+. This also caused spreads to widen on other Euro bonds, and has put pressure on the euro as well.

It's funny that our market seems so tied to the euro, but lately any day that the euro is down, our markets are down also.

With the dollar higher, most commodities are under pressure as well. Gold is bucking the weakness, and trading above $1500 today. But oil prices are down again near $97, and soft commodities (cotton, cocoa, coffee, etc) are are lower on the day.

In corporate news, retailers are weak after Gap and Aeropostale (ARO) both lowered guidance and their stocks are getting hit.

Asian markets were mixed overnight; the 10-year yield is flattish near 3.16%; and the VIX is +8% higher today to 16.75.

Trading comment: Today's weakness is an example of how I said I though we would see renewed selling pressure after an oversold bounce. I continue to think the market will be choppy in the months ahead, with a possible slight downside bias. As such, the only real way to make headway in that environment is to trade around your positions to take advantage of the volatility. Opportunistic trading means adding to your positions on material weakness, and selling into any sizable rallies.

Thursday, May 19, 2011

LinkedIn, LinkedIn, LinkedIn!

Does anybody care about all the stuff going on in the market today, or is it all about the LinkedIn (LNKD) IPO? CNBC has a special orange box at the top left of their screen monitoring each tick in the price of the stock today.

I was shocked when I awoke this morning to see the IPO trading up to $80, up 75% from its IPO price of $45. But instead of taking a step back, and contemplating if the company is really worth 30x sales right now, investors have continued to pile in, and as of this writing, the stock has topped the $100 mark, up more than 120% from its IPO price. Congrats to all the LNKD employees today.

Now back to our regularly scheduled program. The Philly Fed index was very weak today, coming in at 3.9 for May from 18.5 in April. Talk about a falloff.

Existing home sales were also below expectations, as the housing sector is literally bumping along on life support.

The market had started off the day on high note, but has since pulled back into negative territory. Asian markets were mixed overnight, but Europe was higher this morning.

The dollar is roughly flat, but commodities are pulling back. Oil prices are down to $99, and gold is trading lower near $1486. But agricultural commodities are higher as unfavorable weather and flooding continues to delay planting in the U.S.

The 10-year yield is higher to 3.19%; and the VIX is roughly flat near 16.25.

Trading comment: The market had a nice bounce yesterday from its 50-day support, but volume was rather low. That signals there wasn't much conviction behind the buying. I continue to look for an oversold bounce in the market, of which today is the third day, and then for some continued downside probing.

The put/call ratio hit 1.15 on Tuesday, which is a bit of an extreme. So the selling pressure might have abated for the time being. Also, the AAII survey showed more bears than bulls today. So sentiment is getting in the right place to help the market put in a trading bottom, but I don't think we are there just yet. Be patient.

Wednesday, May 18, 2011

Market Bounces From 50-Day Averages

Yesterday I commented that the major averages had come down to test support at their 50-day averages. So far, that support has held and the indexes are bouncing from those levels. The question is will the bounce last, or is it just an oversold rally?

There were some solid earnings reports that are boosting related stocks today, including the likes of DELL, ADI, and Abercrombie (ANF). One report that looked good but is not helping the stock is Deere (DE).

The big bank stocks are lower on renewed chatter about more stress tests.

The dollar is higher today, but that is not hurting a bounce in commodities. Oil prices are up to $99.67, and gold prices have bounced to $1496.

Asian markets were higher overnight, and Europe is higher this morning. The Bank of England decided to keep its interest rate unchanged at 0.5% and leave its asset purchase plan at 200 billion pounds.

The 10-year yield is up a touch to 3.14%; and the VIX is down -4% to 16.83.

Trading comment: I would expect the market to bounce from oversold levels, which also coincided with the indexes hitting their 50-day averages. We will have to wait to see how volume levels come in, and how leading stocks act. But for now, my guess is it will just be a bounce and then we will have to deal with some more selling afterwards. So I want to be patient here, and maybe even raise a little cash into this bounce with an eye towards putting it back to work at lower levels.

long DE

Tuesday, May 17, 2011

Markets Struggle To Hold 50-day Averages

The market is under pressure again in early trading, led by a bounce in the dollar and continued weakness in commodities.

The major indexes are now struggling to hold above their respective 50-day moving averages. The S&P 500 needs to close above 1325, while the Nasdaq needs to hold 2771.

In economic news, both housing starts and building permits came in weaker than expected. The housing market continues to bump along a long bottom without making much progress.

In corporate news, HPQ reported solid earnings but issued downside guidance for next quarter which really hit the stock hard. Wal-Mart also reported solid earnings and gave in-line guidance, but it's stock is slightly lower so far as well.

In early trading, materials and industrials stocks are leading on the downside, while defensive consumer staples and utilities are bucking the weakness and showing small gains.

Asian markets were mixed overnight, while Europe is mostly weaker this morning. A bounce in the dollar is weighing on commodities, with oil prices down to $96.50 and gold prices lower to $1482.

The 10-year yield is sliding further to 3.11%. It's funny that with QE2 ending, the fear was that bond yields would rise but the exact opposite is occurring.

The volatility index is up 1.5% to 18.51.

Trading comment: Volume accelerated during yesterday's selloff, making for another distribution day. The market is in a correction now, so it's prudent to space out your buys a little wider, and hold a higher cash cushion to take advantage of further dips. Emerging markets look broken, with the BRIC countries lagging most other parts of the world in relative performance. In the US, leading growth stocks continue to break down, signaling a more cautious stance is warranted. Ideally, this will just be another brief correction like many of the others, but you never know when something deeper is in the cards, so just be careful.

Monday, May 16, 2011

Monday Morning Musings

The market is slightly week this morning, while newsflow is relatively light to start the week. The big news over the weekend was the head of the IMF getting arrested in NY ahead of a eurozone ministers meeting today. While I would have expected that to weigh on the euro, the euro is higher today against the dollar.

Commodities are flattish, with oil prices slightly lower to $98.85 and gold prices also down a bit near $1494.

Among the sector funds, financials are strongest out of the gate so far while tech is mostly lagging.

Asian markets were lower overnight; the 10-year yield is steady near 3.18%; and the VIX is flat at 17.09.

Trading comment: The S&P 500 is still hovering in that 1335-1340 range that I have watching for support following the late April breakout and subsequent pullback. I expect the market to remain choppy around these levels, but so far the downside has been contained.

Among leadership, if you look at the defensive sectors like consumer staples (XLP) and healthcare (XLV), you can see that they have just experienced a period of significant outperformance. I would expect this bout of relative outperformance to give way to some sector rotation, but it remains to be seen which group with be the beneficiary of said rotation. It could be energy and materials once again, it could be tech, and there is an outside chance that financials catch a bid - but mostly just because sentiment is so negative for the group. Stay tuned.

Friday, May 13, 2011

Stocks Close Out The Week On A Down Note

My apologies for no posts yesterday and this morning. It was not for lack of effort, but the Blogger site that I use was down.

Stocks finished the week on a down note, with the S&P 500 declining 0.2% for the week.

The volatility in commodities continued this week as well. Oil prices closed at 99.50 for the week, and gold prices were lower at $1493.

Concerns in Europe finally led to a breakdown in the euro, which plunged this week to close at $140.52. (It figures the euro waited to fall until after I made my final payment for my golf trip with my dad to Ireland)

The 10-year yield continues to hover at low levels, currently 3.18%. And the volatility index jumped 6% today to finish at 17.07.

Trading comment: The SPX remains above its 50-day average, and within that 1335-1340 area where I was looking for the recent breakout to find some support. So on the bullish side, those are good indications.

On the bearish side, the action hasn't been very strong. Rallies have come on lighter volume, and the number of new highs has contracted. Also, many leading stocks remain under pressure. AAPL closed below its 50-day this week. And the emerging markets etf (EEM) sold off sharply today, closing below its respective 50-day for the third straight day.

As such, I want to keep some powder dry and see if we get more of a pullback. It's very likely we could bounce first, just to keep investors on their toes, but it still looks like volatility is heating up a bit as we near the summer doldrums.

Have a good weekend, and rest up.

long AAPL

Wednesday, May 11, 2011

Stocks Pause After Three Day Run

The market is lower in early trading after putting together a nice three day run. The rub on the recent rally is that volume has been very light. You really want to see the opposite. You want to see markets rally on strong volume and pullback on lighter volume.

There isn't much in the way of market moving economic data this morning, so most of this is just profit taking.

The dollar is up a bit this morning, which could be weighing on commodities. Oil prices have pulled back below $101, and gold prices are also down, near $1506. Silver prices are down sharply as well.

Macy's (M) reported very strong earnings and raised guidance, and its stock is sharply higher today. I think the general public thinks retailers are hurting since consumers are strapped for cash, but many retailers have reported better-than-expected earnings. Although we can't count Disney (DIS) among them, as they reported disappointing earnings and the stock is lower.

Asian markets were mixed overnight, with China reporting another increase in inflation. The 10-year yield is higher to 3.21%; and the VIX is up 2% to 16.33.

Trading comment: Energy and material stocks are seeing the most selling pressure this morning, as are the related commodities (oil, gas, etc). These stocks have been volatile lately, and I think their recent leadership in the market is likely to pause for awhile while other sectors take the lead. I think tech still looks good, and the one sector that could be a wildcard is financials, since sentiment is so bearish there and no one is looking for anything good from financials right now.

Tuesday, May 10, 2011

Will Microsoft Make Money From Skype?

The market is higher again in early trading, after Europe breathes a sigh of relief with respect to Greece. Greece completed a successful debt offering, issuing 1.625 billion euros of 26-week bills that drew an average yield of 4.88%.

This helped push European markets higher this morning, which likely aided sentiment here when our markets opened. Asian markets were mixed overnight.

Also in the news is a deal by Microsoft (MSFT) to buy Skype for $8.5 billion in cash. Considering eBay couldn't make any real money with Skype, I highly doubt MSFT will do any better. I love using Skype on my iPad, but I don't think it will move the needle for MSFT. And with a price tag of $8.5 billion, it looks like they significantly overpaid for this asset. Silver Lake Partners bought the company from eBay a few years back for closer to $3.5 billion.

Among the sectors, utilities and financials are leading the action, which is an odd pair. Healthcare is lagging the action so far.

The dollar is flat; gold prices are higher to $1515; and oil prices are up slightly to $103. The CME raised margin requirements in oil futures to help curb speculation. When they did this to silver, it killed the momentum in that commodity. I doubt it will have the same effect on oil, but it might help a bit at the margin (no pun intended).

The 10-year yield is fractionally higher at 3.16%, but has basically been on a one-month slide lower. The volatility index (VIX) is -5% lower today to 16.25.

Trading comment: Color me surprised by the strength in the market this morning. Of course, its still early, so it needs to hold. But overall things look good here. Stocks that sold off after earnings are bouncing back, and energy stocks that were hit last week are rebounding nicely as well. AAPL has been coiling in a consolidating fashion for nearly three weeks now, which makes me think an upside breakout could be in the works.

long AAPL

Monday, May 09, 2011

Monday Morning Musings

The market is a touch lower in early trading, after mixed action overnight in Asia but much weaker action this morning in Europe.

Spain fell 1.9% and Greece was down 1.4% after S&P downgraded Greece's debt again amid concerns the country would need more bailout funds.

This also has led to a slide in the euro relative to the dollar. But the bounce in the dollar isn't keeping commodities from bouncing also. Oil prices are up near $99.50, after falling more than 14% last week. Silver prices are up 5% after plummeting 27% last week. And gold is also getting a little bounce to $1505. The action in commodities was so vicious last week that I think at best they are going to be in multi-month trading ranges from here.

There is not a lot of action in the way of corporate earnings this morning. Energy and materials stocks are leading the action so far, while financials are lagging.

The 10-year is still weak near 3.14%; and the VIX is down 2% today to 18.0.

Trading comment: So far the S&P 500 has successfully tested that 1335-1340 support levels. The market is also getting back to oversold levels, but has a little more work to do. I don't get the sense the market is ready to rally yet in any meaningful way, but I still want to be a buyer on weakness as I feel the downside is limited as well.

Sunday, May 08, 2011

Commentary from RealMoney.com

Below is a full copy of my comments posted throughout the day last week when I filled in for Doug Kass:

It's nice to be back in The Edge this morning. I'll try to follow my usual routine when sitting in for Doug, which includes:

  • giving my thoughts on how the market looks;

  • updating the four components of my "market stool" (fundamentals, technicals, sentiment, and macro outlook);

  • giving readers an update on recent stock picks;

  • and answering questions from subscribers, so please email me.
I am surprised at how many investors are ready to throw their hands up after the last few days' selloff. I think the bullish camp remains highly skittish, and that helps to keep the proverbial wall of worry high. It also helps to sustain this pattern we have seen, basically since 2009, in which the market seems to take one step back but then two steps forward. This stair-step pattern higher has kept investors on their toes and helped keep bullish sentiment from ever getting too complacent.

I'm not saying there aren't plenty of bearish arguments out there that don't have merit. There are always sound bearish arguments that sound more rigorous than the bullish case. I'm sure if everything on the horizon looked great, the market would already be much higher. So I'll try to be balanced in my analysis today, with a focus more toward how investors can make money as opposed to win the never-ending economic debate.
Looking at the first leg of our market stool, the fundamentals still look solid. Earnings growth remains robust. At the start of first-quarter earnings season, many were questioning if we would achieve double-digit growth again. Currently, with 75% of S&P 500 companies having reported, earnings growth is estimated to come in 17% higher than the year-ago period. Not bad.

Furthermore, full-year estimates for 2011 remain above $97, and soon investors will start to look toward next year's estimates when doing their valuation work. At current prices, the S&P 500 is trading below 14x this year's estimates and just over 12x next year's projections. That is quite a reasonable valuation for the market, and I think it leaves room for multiple expansion if sentiment ever improves enough.

Corporate earnings are on track to surpass their 2007 highs this year. The S&P 400 index has already surpassed its 2007 (price) high. Ditto the Russell 2000, corporate bond spreads, etc. As such, I think it is a matter of time before the S&P 500 also makes a new price high before this cycle is over.
The commodity selloff continues in earnest today. Today's action is also likely being exacerbated by a rare bounce in the dollar. Gold prices have fallen back to $1,510, oil prices are all the way back to $105, and silver is down another 5% today. The selloff in silver has been particularly severe. This shouldn't come as a big shock to chart watchers. The chart below shows the weekly ramp in the iShares Silver Trust (SLV) recently. What you can see at the end is the signs of a classic blow-off top.

At the end of the run in SLV, volume exploded just as the ETF was topping. Then it sold off with another surge in volume. That huge spike in volume right at the top is textbook blow-off action, very similar to Yahoo! (YHOO) back in 2000. I don't know if it will end the same way for SLV. The key will likely be how it acts if and when it ever rallies back to test its previous highs. If it is unsuccessful next time around and puts in a lower high, it could mark the end of a great run. But we won't know until we see it.

As for the commodity complex at large, I think that hedge funds and the like probably got a little overweight during the recent run and are rushing to take profits at the same time. So you get the effect of everyone trying to squeeze through the exit at the same time. But as long as the dollar remains in a downtrend, I expect these trades to get put back on in time. The bigger concern for me would be if the wheels start to come off in China, which I will try to touch on later.
Checking in on the second leg of our market stool, the technical picture of the market remains solid, from my perch. Starting with the big picture, the S&P 500 remains above both its 50-day and 200-day moving averages, and both of those key moving averages are upward-sloping in nature. So the long-term trend of the market remains up.

Digging a little shorter-term, the S&P 500 entered its most recent correction on Feb. 22, and it lasted about eight weeks. That is ample time during a bull market for a correction to consolidate recent market gains and build a short-term base for another upleg. The S&P broke above its February highs last week at 1343 and sprinted up to about 1370. Now the market is pulling back, and textbook technical analysis would tell us that prior resistance should become support. So, as the market tests these current levels, I would not be surprised to see it find support here.
Also, the market just completed a short-term head-and-shoulder bottoming formation. If you pull up a chart of the S&P 500, you can see the left shoulder around Feb. 24, the head near March 16, and the right shoulder around April 18. Last week, the market completed that bottoming formation by clearing the neckline. That formation projects out to a target for the S&P in the range of 1425.

As for the "sell in May" axiom, I agree that there is always some trouble for the markets in the summer months. I don't know if it will happen this month, but I do think we will chop around in the intermediate term, and that 1425 target may be a better year-end target to shoot for at this juncture. But overall, I still like the technical picture of the market.
My concerns with China are many, and I certainly can't do them all justice in this short post, but I will highlight the major issues. Also, for the record we exited all of our direct China exposure via the iShares FTSE/Xinhua China 25 Index Fund (FXI) late last year and early this year. If I had to pick my top three concerns with China right now, they would be controlling inflation, pricking the property bubble, and dealing with excess capacity.

China's central bank has said that controlling inflation is its top priority. Inflation was recently estimated at 5.4% in March, the third straight month it exceeded the government's target of 4%. And similar to many things coming out of China, I would suspect the real numbers are higher than this headline figure. China has already raised its one-year lending rate to 6.31%, and more hikes are coming -- you can be sure. So inflation is a big problem in China, and the tightening cycle is likely to reach worrisome levels in order to deal with it.

A coincident issue is the property bubble China is experiencing in real estate. The property bubble there is said to be of epic proportions, and we know how the recent real estate bubble in the U.S. ended. It wasn't pretty. China has raised reserve requirements at its biggest banks to a record 20.5%, and implemented several other measure aimed directly at speculation in real estate lending. It is extremely hard to deal with bubbles and engineer a soft landing afterward. Economists liken it to landing a plane in a parking lot. Central banks don't have a great track record in this regard, and China's central bank is experiencing this for the first time in recent history.

The third major issue I see is all of the excess capacity being built. China's controlled economy is building massive infrastructure, office buildings, housing, commercial developments, etc. as far as the eye can see. This is due to the millions of residents moving from the rural parts of the nation into the industrialized economic centers. The problem is, they are all extremely poor. Most can't afford any of the things that are being built, and so they lay idle. At some point, this, too, is likely to become a problem, and my worry is that all of the above come to a head at the same time.

If China sneezes, all of Asia and many emerging markets will catch cold. It would dampen the global economy as well. So I am certainly rooting for the nation to be successful in its efforts to cool things slowly and foster a soft landing, but investors should be aware of the size and scope of the issues with which China is dealing and the possibility for a policy mistake that disrupts the markets. Just saying.
Looking at the sentiment backdrop of the market, most of the indicators I follow are basically in neutral territory. That's about what you'd expect during a market rally that has yet to reach an extreme. By that I mean that if the market were extended and bullishness running rampant, I would expect to see highly complacent readings in the adviser surveys, put/call ratios, etc. But to date, that is not the case.

Yesterday the CBOE put/call ratio exceeded 1.0 and the ISEE was below 100. These readings support the notion that investors are certainly not complacent here. They also aren't extended enough to mark a short-term bottom (like I nailed on March 16). The AAII survey is also closer toward showing elevated levels of pessimism than it is showing elevated complacency.

A better indicator of recent sentiment might be seen in mutual fund flows. For the past two months, bond fund inflows have been exceeding stock fund flows (which have been on the decline). Last month, bond funds took in $11.5 billion while stock funds attracted only $2.07 billion. This tells me that the risk appetite among the investing public is still very cautious, and they have yet to embrace this bull market, even though it is in its third year.

I don't know what it will take to reverse all those inflows into bond funds, as well as the huge piles of cash that remain on the sidelines. Maybe it won't even happen during this up cycle. But it remains a bullish factor for the markets, and it's evidence that there is still pent-up buying power out there that could continue to propel the markets.
I think I've been fairly optimistic for the most part in my posts today. The last leg of our stool is the macro picture, and that is where the outlook is probably the most cloudy. Interest rates are low, but for how long? QE2 has caused a pickup in inflation, which needs to be monitored after the Fed's experiment is concluded. And the issues with government debt, both among states as well as the federal government, have no clear solutions in the future and are likely to foster heated debates for quite some time. I'm just glad the issues are finally being talked about in a serious manner.

Long-term bond yields have been coming down recently, hinting at an economic slowdown. But we saw the same thing happen last year as well. I think the weaker first-quarter GDP and probably weakish second-quarter GDP qualify as the slowdown, and growth should pickup in second half of 2011. My favorite economic survey, the ECRI WLI, has continued to point to modest growth and has not signaled a slowdown like some of the other indicators.

I think the uncertainty in the macro picture is what has kept a lot of folks leaning bearish. I certainly hear a lot of it from my clients, but I go back to the wall of worry theory, and remind folks that these potential negatives are the reason that valuations are still reasonable and huge cash balances remain on the sidelines.
Thanks for reading The Edge today. In my last post, I wanted to give a quick update on my stock picks for 2011. Here's an update on my top 5 picks:

  1. Priceline (PCLN), up 35%, has exceed expectations so far this year and has had a great run. The company reports earnings after the close, but I think expectations remain subdued, such that a solid report should help the stock continue its run. I think that management is executing well in a difficult environment and want to stick with this one.

  2. Mercadolibre (MELI) is up 29% -- ditto my comments above. The stock was slow out of the gate this year but recently really started to take off. Yesterday's earnings report was pretty solid, but the stock action was better. After selling off after hours, Mercadolibre bounced back today and is nicely higher. I still like the growth profile and market opportunity for this one.

  3. Intuitive Surgical (ISRG), up 34%, reported a great quarter. You can find my comments to it here. This company is expanding its addressable market, executing well, and it still has plenty of growth left in the tank. Stick with it.

  4. Mosaic (MOS), down 7%, has had a rough go so far this year, but so have all the fertilizer companies. Full disclosure, we sold all of our Mosaic when the company announced that Cargill would be distributing its stake, and we switched into Agrium (AGU). Agrium is also struggling a bit, but I want to stick with it for now, as I still subscribe to the global demand for more food and the need for farmers to maximize yields from their crops.

  5. Urban Outfitters (URBN), down 10%, was doing OK until its last earnings report, when the stock really took it on the chin. Also for full disclosure, we sold half of our positions before the last earnings call, and the remainder of the positions after the call. I still like Urban Outfitters longer term, but the company needs to deal with some merchandising issues first. Then growth should get going again. For an alternative, we have recently started to buy Fresh Market (TFM) on the whole organic and natural foods secular growth story. It's still early in the company's growth story.

Friday, May 06, 2011

Nonfarm Payrolls Surprise To The Upside

The market is sharply higher in early trading, bouncing back nicely from yesterday's forced selling. I call yesterday's selling "forced" because you have to know that there was serious margin selling going on.

Think about all of the leveraged players out there, like hedge funds, who have been playing the commodity rally for all its worth. When silver broke, it started to put pressure on the commodity complex. But when gold rolled over, and oil got crushed yesterday, we begin to hear that margin calls go out to all of the leveraged players that they either need to exit their positions or put up more money.

So that type of forced selling not only exacerbated the declines in oil, gold, silver, etc, but if these funds needed to raise cash quickly they also likely sold stocks as fast as they could to meet these margin calls. Today the action looks to have calmed down, but I don't think the wounds heal that quickly, and I would expect some continued volatility in the days and weeks ahead.

The good news today is the monthly payrolls report came in much better than expected. The economy added 244,000 jobs vs. expectations for 185,000. Private payrolls added 268,000 jobs. But the unemployment rate ticked higher to 9.0%, likely due to more people re-entering the work force.

Trading comment: It looks like today will be a nice end to a rough week. But I expect more volatility in the near future, so I will look to put cash to work on upcoming dips.

I wrote my thoughts all day yesterday for RealMoney.com, and I will post a copy of my comments here later for your weekend reading.

Thursday, May 05, 2011

Quick Look: Commodity Selloff Continues

The market is lower in early trading, after a weaker than expected jobless claims report. Tomorrow is the monthly nonfarm payrolls report, which is always heavily scrutinized.

ECB President Trichet made some comments about monitoring price stability which hit the euro. The Bank of England held rates steady at 0.5% and reiterated its 200 billion pound asset purchase plan.

Those events helped push the dollar higher, which only exacerbated the selling in commodities. Oil prices are down again to $105.40, and gold prices are trading down to $1511. Silver prices are also down sharply again today, nearly 4% so far.

Nice earnings reactions can been seen in the likes of JDSU, WFMI, and CI, to name a few.

Trading comment: Yesterday I said the market should find some support near its recent breakout at SPX 1343. That worked great yesterday, as the market bottomed around 1342. This morning, the SPX is again testing those support levels. We'll see if it works out again, but I think it is time to start putting a little cash to work around these levels.

Also, I'm filling in for Doug Kass today on RealMoney.com, and will post a complete roundup of my comments tomorrow.

Wednesday, May 04, 2011

Will Gas Prices At The Pump Fall?

The market is sharply lower in early trading, coming on the heels of a selloff in Asia overnight and a continued decline in commodity prices.

Commodities continue to trade lower, led down by silver after its historic runup. This shouldn't be surprising, as the pace of gains was clearly unsustainable. The question now is, is the top in for silver or is this just a correction?

Silver has just dropped below the $40 level; gold prices are lower to $1533; oil prices are down to $109.50; and gasoline futures are trading lower as well. Mastercard's spending report said that demand for gasoline has fallen recently, prompting some to speculate that we could see lower prices at the pump soon. Living in LA, this would be a welcome development.

In economic news, the ISM services index came in at 52.8, which is down from the 57.3 reported last month. Also, the ADP Employment change report showed private payrolls increased by 179,000 in April, but this is below estimates for 200,000.

There was a big takeover in the semi equipment space, with AMAT buying Varian Semi (VSEA) for a big premium. VSEA is up 51% today.

The 10-year yield is drifting lower to 3.22%; and the VIX is +3% higher to 17.27.

Trading comment: We have seen this action before. When energy and materials stocks lead the market higher, and then there is a big selloff in commodity prices. In the short-term, it takes everything down and related stocks selloff hard. But longer-term investors realize that lower commodity prices are a net positive, and that should improve consumer sentiment and help other areas of the market rally.

The S&P 500 recently broke out to new highs above 1343. So technical analysis says that the former area of resistance should now act as support on a pullback. We are just about there on the SPX, so we should see buyers step in soon.

Tuesday, May 03, 2011

Enthusiasm For Earnings Reports Fading Today

Investors have been giving a pass to many companies reporting earnings, but today that no longer seems to be the case. Two of our portfolio holdings, EMR and CTSH, both reported earnings that were not near as bad as the stocks action would have you think.

EMR missed by one penny, but beat on revenues and raised guidance. The conference call isn't until this afternoon, but I think the selloff is overdone, and I am looking to add to our positions.

CTSH beat earnings by 8 cents and also raised guidance. Their financials looked great. But what I think is going is that India was down -2.4% last night after a bigger than expected rate hike by the central bank, and that is coloring the action in CTSH. I am also a buyer here on weakness.

Asian markets were mixed overnight, with India and Hong Kong lower but China higher.

The dollar was higher earlier, which helped spark some strong profit taking in commodities. Gold prices have fallen back to $1558, and oil prices are near $112.30. Let's see if oil prices stay down for the day. They have had a tendency to bounce back by the end of the day lately.

The 10-year yield continues to slowly slide, now at 3.26%; and the VIX is up 3% today to 16.46.

Trading comment: The market is overbought and lots of stocks are extended. Energy and materials stocks have been leading the market, but the last couple days seem to be signaling they need a rest. Hopefully some new sectors will step up to the plate. Financials are firm today, but they have been very unexciting lately for investors. Networking stocks also continue to pullback.

I think the market needs a little rest. Yesterday's failure to hold on to the Bin Laden relief rally supports this thesis.

long CTSH, EMR

Monday, May 02, 2011

Monday Morning Musings

The market is trading higher in early trading on the heels of the news that US forces killed terrorist leader Osama bin Laden. Last night, when the news came out and the President made his statement, the Dow futures spiked up over 100 pts. But today they are up about 50 pts so far.

Corporate newsflow is relatively light. Cephalong (CEPH) announced it will be acquired by Teva Pharma (TEVA) for $81.50. That bid tops the one from Valeant Pharma (VRX), whose stock is trading lower this morning as a result.

Commodities were also lower overnight, but are mostly higher this morning. Gold prices are hovering near $1558, but silver prices are down from last week's spike. Oil prices were also lower but have since climbed back above $114.

The 10-year yield is still flat around 3.29%; and the VIX is higher today by 3.6% to 15.30.

Trading comment: After stringing together 2 solid weeks without much of any selling, the market is once again nearing overbought territory. That said, last week's breakout of the major indexes looks solid, and I think the markets will continue to stair-step into higher ground. Participation is broadening as well. Last week we added Digital Realty (DLR), a REIT that focuses on corporate data centers and is an ancillary play on the rise of cloud computing. I also still think AAPL is consolidating and should breakout soon now that the Nasdaq rebalancing is behind us.