Wednesday, October 26, 2011

Is Recession Being Priced Off The Table?

The market opened higher this morning, but quickly turned tail and traded into negative territory. Earnings reports have been mostly positive, with a few negative reactions in the associated stocks. And optimism still seems somewhat lofty that EU leaders will emerge from this summit with some concrete solutions.

In economic news, durable goods for September slid 0.8%, but actually rose +1.7% ex-transportation. That's a fairly good number. Also, new home sales for September also rose more than expected by 5.7%. Recent economic data has not been nearly as soft as the market had been expecting, and it seems that a few weeks ago recession was being fully priced into this market but now is definitely coming into question and at least partly explains the lift we have seen in stock prices.

In earnings news, we are seeing positive action in names like PNRA, ESRX, FFIV, and MHS to name a few. Negative reactions include AGN, LMT, F, and of course AMZN which missed its numbers and is taking it on the chin.

We should hear this morning from EU leaders about the details of their summit. The market is expecting something near a 50% haircut on Greek debt, and word that the EFSF bailout fund can be leveraged up somehow to at least $1 trillion. I don't think we are going to get a firm figure on the size of bank recapitalizations. Investors have been saying that the bank recap figure needs to exceed $100 billion. So depending on how much details we get, we will see if sentiment in the market has become too bullish. I would also not be surprised to see them say that more details will be given in November ahead of the G20 meeting.

The euro is higher today at the expense of the dollar. Commodities are mixed. Oil prices are lower near $91.20, while gold prices have broken out over the $1700 level and are currently around $1718.

The 10-year yield is slightly higher to 2.13%; and the VIX is also higher and still stubbornly above that 30 level (currently 32.68). We still need to see this come down.

Trading comment: Tough juncture as we are somewhat held hostage to political decisions out of Europe. But with solid earnings reports coming in, and economic data this isn't as bad as feared, I still feel like underinvested portfolio managers will look to put money to work and buy dips in the near-term. Barring another shoe to drop in Europe, I would look to add to those stocks that recently reported good earnings and are beginning to break out.



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