Friday, July 27, 2012

Anticipating ECB Liquidity

The markets are higher again in early trading.  Asian markets rose overnight following the rally in the U.S. yesterday and the comments from ECB President Draghi about doing whatever is necessary to save the euro.  Some of that sentiment has been echoed in France by Hollande this morning.

Moreover, the French paper Le Monde wrote about the possibility of an asset purchase program by the ECB that would involve open market purchases of govt bonds in Italy and Spain.  The goal would be to reduce their borrowing costs, but again this would just be a short-term solution and only prolongs the day of reckoning as these countries need to deal with debt levels, deficits, and slowing growth.

In economic news, the advance GDP reading for U.S. GDP for Q2 came in at +1.5%, which was better than the 1.2% that had been expected.  But 1.5% is still a low growth rate for the economy.

Also, the Univ. of Mich consumer sentiment survey's final reading was adjusted slightly higher to 72.3 from 72.0 previously.

In earnings news, it has been another mixed back of reports with some high profile names taking it on the chin today.  Starbucks (SBUX) and Facebook (FB) are the two biggest disappointments today, with both of their stocks down double digits this morning.

Stocks rising on earnings: AMZN, EXPE, MRK, AMGN, EDR, GILD, N, VSI, HMSY

Stocks falling on earnings: FB, SBUX, CSTR, NTGR, QLGC, NEM

The euro is bouncing for a third day, pushing the dollar lower.  Commodities are also higher again with oil prices near $90 and gold prices up to $1618.  Copper prices are also higher, while silver looks flat.

The 10-year yield is finally seeing a bounce.  I'm not sure why 1.5% GDP is the spark, but the yield is rising above the 1.50% level today to 1.51% currently.  This is still a pretty low absolute level, but at least we've bounced from the 1.40% floor the 10-yr had been sitting at.

As for the VIX, it is down another -4% today to around 16.80.  I think the VIX can hang around these low levels while market participants are anticipating more QE from the Fed and the ECB.  But I also believe the VIX will get back above 20 if we get an August pullback.

Trading comment: Color me surprised by all the strength in the market, but I think folks are bidding up stocks given all the chatter about more QE from the Fed and now the ECB talking about it also.  Earnings season has been mostly a mixed back from where I sit.  I don't think we are going to see estimates for the S&P 500 revised higher.  And we know from past central bank interventions that it has the effect of boosting the market for a brief time, but eventually reality sets in and we are back to dealing with the underlying problems.  So enjoy the lift, and take advantage of it if you are nimble.  But long-term investors with a big picture focus don't need to chase here, imo.  If the market continues higher, I would look to trim equity exposure a little more and stay conservative as we head into fall.

KAM Advisors has long positions in FB, SBUX, EDR


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