Thursday, November 01, 2012

Is China's Economy Bottoming?

Markets are sharply higher this morning on what has to be the first of the month type of action in terms of portfolio managers putting money to work.  There was some positive economic data out also, but not so strong that it would cause a 150-point rally in the market.

The ADP Employment report showed that private businesses added 158,000 jobs in October, slightly better than the 143k consensus.  The October ISM manuf index also came in above expectations at 51.7 vs. last month's reading of 51.5.  Consumer confidence rose to 72.2 in October from 70.3 in the prior month.  And Q3 unit labor costs actually fell -0.1%, indicating little inflationary pressure on the labor front.

So those are all good economic data, and its nice to see the data coming in above expectations.  Another thing that could be helping the market today is some hope that China's economy may be bottoming.  China's stock market rallied 1.7% overnight after its PMI reading ticked up to 50.2, the first expansionary number in 3 months.  But the HSBC PMI reading is still below 50 at 49.5.  The Chinese press reported that the PBOC injected a record 379 billion CNY into their financial system last week.  So if manufacturing is bottoming and monetary stimulus continues, we could see the slowdown in GDP growth subside.  Time will tell.

In M&A news, Williams Controls (WMCO) will be acquired by Curtis-Wright (CW) for a 41% premium.

Retail sales numbers are also out this morning.  Some positive reactions can be seen in stocks like KSS, JWN, and M.  While I see disappointments in ZUMZ, ROST, as well as TGT.

Stocks rising on earnings: V, K, CBOE, ADP, CTRX

Stocks falling on earnings: PFE, CRUS, GNC, ITRI, EL

The dollar is lower again and commodities are mostly higher.  Oil prices are up to $86.75 and gold prices are a tad higher near $1720.  Copper prices are also rallying on the positive China sentiment.

The 10-year yield is getting a small boost to 1.73%.  And the VIX is down 6.7% this morning to 17.35.

Trading comment: I said earlier this week that I thought we could see some beginning of the month strength in the market.  I didn't think we would see a 150 point rally, but that's why we play the game.  The market is always surprising us.  Of course, it's still early in the session so I don't want to jinx the rally.  Looking at the charts of the major indexes, the S&P 400 midcap is rallying back above its 50-day average today.  This is the first index to recapture this key moving average, so it will be interesting to see if the S&P 500 and Nasdaq follow suit.  If they do, I think PMs will rush to buy stocks.  I don't think we will see too much buying enthusiasm ahead of the elections though, as there is still that element of uncertainty.

KAM Advisors has long positions in CTRX, V


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