Friday, September 07, 2012

China Pumps Up The Stimulus

Markets are mixed in early trading after gains in overseas markets.  Markets soared yesterday after ECB President Draghi announced his new bond buying program, the Outright Monetary Transactions (OMT).  Asian markets soared overnight with Hong Kong up by 3.1% and Shanghai spiking 3.7%, its best single day in three years.

As speculated China announced some big stimulus plans yesterday and today.  Yesterday Beijing said that 18 cities in China would get subway systems.  Today the govt. laid out plans to build more than 1250 miles of road (more roads to nowhere).  Materials stocks shot higher on the news.  Copper prices are also spiking to 4-month highs (JJC) and stocks like FCX, JOY, and CLF are all rallying stongly today.

In economic news, the big bad payrolls report once again disappointed investors, but the damage in the market has been contained.  I said yesterday that the strong ADP report does not have a great history of predicting how strong the govt. payrolls report will come in.  Lo and behold today's jobs report showed just 96k jobs created in August vs. 130k consensus estimates.  On the plus side, the unemployment rate fell to 8.1% from 8.3%, but I presume that this is more from a continued decline in the labor force.

In corporate news, Intel (INTC) stock is lower after the company lowered revenue guidance due to weak demand.  On the flip side, retails stocks LULU and ULTA are both spiking higher today after reporting strong earnings and guidance.

In Europe, optimism is present today as peripheral bond yields continue to come down.  Spanish yields have fallen back to 5.64% and Italian yields are down to 5.08% on 10-year debt.

In the US, our 10-year yield is falling today on the weak jobs report, back down to 1.62%.

The VIX is also another 5.7% lower today back down to the 14.70 level.

Trading comment: The action in the market has been solid.  Yesterday's breakout held into the close with the market finishing right near its highs of the day.  Also, more growth stocks are starting to breakout and lead the market.  This is a change from the last couple of months when defensive stocks were leading the market.  If you look at utility stocks as an example you can see that the bloom has really come off the rose in that sector.  Today materials stocks are leading the rally by a wide margin.  And despite Intel, other tech stocks have been rallying nicely.  AAPL and GOOG are both at new highs.

KAM Advisors has long positions in AAPL, GOOG, ULTA


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