Market Commentary

It is really getting ugly.
June 30, 2010

It is really getting ugly.  The question at hand will the pivotal 1040 level on the S & P 500 hold?  The S & P penetrated this key point late yesterday afternoon but ended nominally higher.  I ask how much of the selling is result of end of the quarter window dressing, selling those stocks that did rather poorly for the quarter which I will add is almost all of them.

 I will also ask what was the impact of algorithmic trading and the loss of confidence in trade reporting systems.  Yesterday trading in Citicorp was suspended for 5 minutes following a false print suggesting the stock had fallen by more than 10%.

Fear is rising to a point that I believe is close to becoming irrational.  But we must remember markets are people and people move markets.  I ask, however, whoever said people are rationale especially as fear begins to reach heightened proportions.

Yesterday’ selling was initially predicated upon numerous factors…declining consumer sentiment, sovereign debt concerns and China’s economic health.  I would like to discuss the former.

Personally I have no regard for consumer sentiment surveys for they have virtually no predictive qualities.  They only tell us where we have been not where we are going.  Case in point; consumer sentiment was around an all time high in March 2000 with NASDAQ 5000.  Conversely consumer sentiment was around record lows September 2001. 

Poor consumer sentiment is expected given the unending headlines suggesting a double dip recession is all but inevitable and the European debt crisis will usher in a more and painful leg of this downturn, perhaps worse than the experience of fall 2008/winter 2009.

As penned many times I believe the economy may continue expand at a rate greater than expected, the result of record cash balances of S & P 500 companies and robust earnings. [Note:  GDP is expected to expand 3.2% this year, the greatest expansion since 2004] 

As discussed many times, productivity is surging because of lack of hiring thus permitting analysts to increase their earnings estimates.  As per Bloomberg profit estimates have climbed by the greatest amount this quarter than any other quarter since 2004, the inception date of this statistic.

Recent estimates now suggest second quarter profits should rise by 33.7%, up from 28.6% at the end of March.  The S & P is currently trading at 13.2x 2010 estimated profits, compared with an average of multiple of about 16.4 since 1954 as per Bloomberg. 

Following 2010 32% profit growth, 2011 earnings are projected to rise by 17%, capping the largest two year advance since the period ended in 1995 (Bloomberg).  Wow!

Today the private sector ADP Employment survey is released.  This influential survey is suggesting the private sector added 68K jobs in June, the fifth consecutive monthly increase and the largest since December 2007.  Will this data point be the catalyst for an oversold advance?  Or will all wait until Friday’s inclusive BLS report before altering any strategies?

Last night the foreign markets were mixed. London was up 0.59%, Paris up 0.61% and Frankfurt up 0.61%.  Japan was down 1.96% and Hang Sang down 0.59%

The Dow should open moderately higher as the ECB signaled funding pressures for lending was easing. Perhaps this lower than expected demand for cash from the ECB coupled with employment data that matches expectations amplified by profit optimism could be the catalyst that permits equities to advance from their lowest level since October.  Ultimately it is profits—the ultimate gauge of increasing inherent shareholder wealth—that boosts prices. The 10-year is off 7/32 to yield 2.98%.