Thursday, July 28, 2011

Debt Ceiling Headfake

Most people are looking at the stalled talks about the debt ceiling as the culprit for the market selloff. But I think the debt talks are just a sideshow. If the markets were really worried about the potential for default and ratings downgrade, we would see that worry manifest in the bond market. Yields on the 10-year Treasury are still very low at 2.95%. So where's the worry?

All you have to do is look at Italy to see what real concern looks like. Italy held a bond auction yesterday for 10-year notes that saw the yield surge to 5.77% (from 4.94% previously). And bond yields have risen in many of the PIIGS countries in response to debt concerns.

A more likely scenario for the selloff in stocks is the global slowdown we are seeing. Emerson (EMR) talked about it yesterday and said how its affecting their sales. Other large industrials have said the same thing. The financials are also weak due to uncertainty about increased regulations here and possible capital raising requirements, and banks abroad are weak due to debt issues in Europe. All of these are more likely causes to the recent weakness in the stock market.

In earnings, one of our recent buys Borg Warner (BWA) is up 11% on a strong earnings report and raised guidance. This company continues to execute very well, in addition to be positioned for growth. On the flip side, the reaction in Stericycle (SRCL) looks overdone to me, as the company topped revenue estimates and only missed EPS by a penny. This is still a good growth story.

Asian markets were mostly lower overnight; commodities are mixed, with oil prices higher near $98 and gold lower to $1607; and the VIX is down -4% back near the 22 level after a sharp spike higher yesterday.

Trading comment: I still favor employing the strategy of picking at stocks that have pulled back to take advantage of the recent dip. I think that when the dust settles we will look back at this correction as another good buying opportunity. I also like to watch investor sentiment, which hasn't flashed the same signs of bearish extremes that we have seen at other trading bottoms, but we are starting to see some in terms of a spiking VIX and rising put/call ratios.



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