If markets climb a wall of worry, this is certainly a wall of epic proportions. After German Chancellor Merkel made comments that were taken to imply that the Euro-zone problems were insurmountable, the Dow swung from a 120 point gain to a 40 point loss on Wednesday, a late day swing of 160 points. The negative catalyst was of no surprise, as was the drop in the Euro in reaction to Merkel’s comment. It wasn’t the only reason. The recent domestic economic data suggest that this economic recovery may not be as solid as investors had hoped. The recent employment report for May showed far fewer private sector jobs being created than anticipated. Recent efforts to slow the pace of growth in China have also been part of the market’s recent “wall building”. As we moved over the hump on Wednesday, the market was plagued by economically weaker prospects from Asia, Europe, and the United States. Several key leadership groups, Energy, Basic Materials, Technology, and Financials were facing headwinds of their own. The political rhetoric keeps heating up over British Petroleum BP (+12.32%), how much is BP responsible for, and what should the US do about drilling? The heavy-handed political beating up of BP caused British politicians to react, escalating the war of words between Britain and the US. The US has just moved from its party primaries to kick off the campaigns against the parties for seats in the House and Senate. British Pete is the likely one to be “tarred and feathered”, both figuratively and literally. BP may be taking the brunt of the negative sentiment, but the calls to expand and extend the drilling moratorium, the inability to get the job done in the Gulf, and the expanding negative sentiment against the industry is wielding political power to do damage to this sector.
Goldman Sachs GS (-2.2%) is another. The company has become the face of everything that is wrong with Wall Street. It is the evil greed that must be defeated with reams of financial reform. The subpoena may mar Goldman’s pristine image, but the real problem is that it gives the politicians a case to tighten the reforms instead of watering them down as we head into the self-imposed July 4th deadline. Goldman wasn’t doing well, but there was a distinct departure in the direction as many of the major banks continued to bounce off of recent lows. The Financial Sector SPDR broke below 14 but did not take out its February low of 13.51. The ETF hasn’t broken above anything of consequence. In fact, it needs to top 15 just to raise an eyebrow, and despite the 3.28% gain, it closed well below that at 14.47. To say that the Financials are climbing a wall of worry is a fair assessment of what we are seeing.
The Euro finally got an inspired bounce off of its new 4-year low. The catalyst stemmed from positive comments from the China Fund, saying it was looking at investments in Greece and that the Euro was overdone. Also helping the prospects for the Euro-zone was that the German Supreme Court ruled that they would not block the government contributions to the EU bailout program. They did not throw out the case, but they would not stop those investments from moving forward during the proceedings. ECB President Trichet said the central bank will continue to provide unlimited liquidity in coming months. Months ago we said that the ECB needed to tear a page from our Fed’s playbook and move forward on a politically unpopular bailout. It was the Fed’s assurance that everyone was too big to fail that eased the pressure on the CDSs that were driving the stocks of several financial institutions into oblivion. Investors were wary that the ECB had enough centralized strength to pull it off. Yesterday was another step in a positive direction, and it helped lift the Euro up through 1.20 and 1.21, to its best level in a week. However, it too has not broken above anything of consequence. It was just a very good single day. It will be a reversal week, and that may have been enough of a cause to cover short positions. The gain in the Euro, and subsequent decline in the Dollar, lifted the Basic Material and Energy sector stocks.
Technology has been the subject of recent negative action tied to the broader downward outlook for the global economies. Yesterday, it got a small boost from the Semiconductor Industry Association, which put out a report Wednesday evening that global chip sales for 2010 were expected to increase by 28.4% to $209.5 billion. The research firm said that 2011 should add to the turnaround story by seeing sales increase by 6.3% and another 2.9% in 2012. The company reported that all major product sectors and geographic areas showed healthy demand in the first 4 months of the year. Gartner Inc, another closely followed industry research group, said they expect global spending on semiconductors to grow by 113% in 2010 over last year’s $16.6 billion. The Philly Semi Index, SOX, slipped on Tuesday for yet another test of the May lows around the 326 level. Thrice tested, Wednesday’s close was below its 200-day moving average. However, yesterday’s rally pushed the index up 3.8% to get back above the moving average at 341.16.
Technically, fundamentally, geopolitically, and globally, there is a huge “wall of worry” that has been built since the April high. The recent decline in the averages either came excruciatingly close to, or slightly below, the February correction low, raising concerns of another leg to the downside. Oil is still spewing into the Gulf. The European crisis hasn’t seen anything that might be considered a positive tick. Politicians are escalating the rhetoric to gain public support. However, there is a carrot on the other side of the wall, and that is what we believe is moving this market. That carrot is earnings. Let’s just put the positive spin on recent numbers. The trade deficit was fairly flat at -$40.3 billion. Exports slipped by 0.7% to $148.8 billion, but hey, we’re still exporting! Great news. I know that many were upset by the poor May jobs report. However, look at it this way: companies are fully anticipating a “double dip”. They are sitting on over a trillion in cash. Companies are still keeping inventories tight. Finally, they aren’t wasting money on new-hires. That means they will be reporting exceptional profit margins, solid earnings, and against easy comparisons. This is the carrot on the other side of the wall.
If markets climb a wall of worry, this is certainly a wall of epic proportions. After German Chancellor Merkel made comments that were taken to imply that the Euro-zone problems were insurmountable, the Dow swung from a 120 point gain to a 40 point loss on Wednesday, a late day swing of 160 points. The negative catalyst was of no surprise, as was the drop in the Euro in reaction to Merkel’s comment. It wasn’t the only reason. The recent domestic economic data suggest that this economic recovery may not be as solid as investors had hoped. The recent employment report for May showed far fewer private sector jobs being created than anticipated. Recent efforts to slow the pace of growth in China have also been part of the market’s recent “wall building”. As we moved over the hump on Wednesday, the market was plagued by economically weaker prospects from Asia, Europe, and the United States. Several key leadership groups, Energy, Basic Materials, Technology, and Financials were facing headwinds of their own. The political rhetoric keeps heating up over British Petroleum BP (+12.32%), how much is BP responsible for, and what should the US do about drilling? The heavy-handed political beating up of BP caused British politicians to react, escalating the war of words between Britain and the US. The US has just moved from its party primaries to kick off the campaigns against the parties for seats in the House and Senate. British Pete is the likely one to be “tarred and feathered”, both figuratively and literally. BP may be taking the brunt of the negative sentiment, but the calls to expand and extend the drilling moratorium, the inability to get the job done in the Gulf, and the expanding negative sentiment against the industry is wielding political power to do damage to this sector.
Goldman Sachs GS (-2.2%) is another. The company has become the face of everything that is wrong with Wall Street. It is the evil greed that must be defeated with reams of financial reform. The subpoena may mar Goldman’s pristine image, but the real problem is that it gives the politicians a case to tighten the reforms instead of watering them down as we head into the self-imposed July 4th deadline. Goldman wasn’t doing well, but there was a distinct departure in the direction as many of the major banks continued to bounce off of recent lows. The Financial Sector SPDR broke below 14 but did not take out its February low of 13.51. The ETF hasn’t broken above anything of consequence. In fact, it needs to top 15 just to raise an eyebrow, and despite the 3.28% gain, it closed well below that at 14.47. To say that the Financials are climbing a wall of worry is a fair assessment of what we are seeing.
The Euro finally got an inspired bounce off of its new 4-year low. The catalyst stemmed from positive comments from the China Fund, saying it was looking at investments in Greece and that the Euro was overdone. Also helping the prospects for the Euro-zone was that the German Supreme Court ruled that they would not block the government contributions to the EU bailout program. They did not throw out the case, but they would not stop those investments from moving forward during the proceedings. ECB President Trichet said the central bank will continue to provide unlimited liquidity in coming months. Months ago we said that the ECB needed to tear a page from our Fed’s playbook and move forward on a politically unpopular bailout. It was the Fed’s assurance that everyone was too big to fail that eased the pressure on the CDSs that were driving the stocks of several financial institutions into oblivion. Investors were wary that the ECB had enough centralized strength to pull it off. Yesterday was another step in a positive direction, and it helped lift the Euro up through 1.20 and 1.21, to its best level in a week. However, it too has not broken above anything of consequence. It was just a very good single day. It will be a reversal week, and that may have been enough of a cause to cover short positions. The gain in the Euro, and subsequent decline in the Dollar, lifted the Basic Material and Energy sector stocks.
Technology has been the subject of recent negative action tied to the broader downward outlook for the global economies. Yesterday, it got a small boost from the Semiconductor Industry Association, which put out a report Wednesday evening that global chip sales for 2010 were expected to increase by 28.4% to $209.5 billion. The research firm said that 2011 should add to the turnaround story by seeing sales increase by 6.3% and another 2.9% in 2012. The company reported that all major product sectors and geographic areas showed healthy demand in the first 4 months of the year. Gartner Inc, another closely followed industry research group, said they expect global spending on semiconductors to grow by 113% in 2010 over last year’s $16.6 billion. The Philly Semi Index, SOX, slipped on Tuesday for yet another test of the May lows around the 326 level. Thrice tested, Wednesday’s close was below its 200-day moving average. However, yesterday’s rally pushed the index up 3.8% to get back above the moving average at 341.16.
Technically, fundamentally, geopolitically, and globally, there is a huge “wall of worry” that has been built since the April high. The recent decline in the averages either came excruciatingly close to, or slightly below, the February correction low, raising concerns of another leg to the downside. Oil is still spewing into the Gulf. The European crisis hasn’t seen anything that might be considered a positive tick. Politicians are escalating the rhetoric to gain public support. However, there is a carrot on the other side of the wall, and that is what we believe is moving this market. That carrot is earnings. Let’s just put the positive spin on recent numbers. The trade deficit was fairly flat at -$40.3 billion. Exports slipped by 0.7% to $148.8 billion, but hey, we’re still exporting! Great news. I know that many were upset by the poor May jobs report. However, look at it this way: companies are fully anticipating a “double dip”. They are sitting on over a trillion in cash. Companies are still keeping inventories tight. Finally, they aren’t wasting money on new-hires. That means they will be reporting exceptional profit margins, solid earnings, and against easy comparisons. This is the carrot on the other side of the wall.