Daily State of the Markets 8/17: Do Bonds Have It Right?
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Good morning. Although there were several pieces of economic data from around the globe to review, some new M&A activity, an improvement in the charge-off numbers at the credit card companies, and a few more earnings reports, we're going to suggest that Monday's market was still all about the rather shocking action in the bond market.
In case you don't spend your days watching the ticks of various investment classes, the stock market appears to be following the bond market around like a little puppy dog these days. And while the action in the stock market was certainly constructive at times during Monday's session, each new low in the yield of the 10-year bond was accompanied by a bout of selling in the stock market.
The bottom line appears to be that stocks will not be able to make any significant upside progress until/unless bond yields stop going down the drain. To put the action into perspective, the yield on the 10-year T-Note closed Monday at 2.575%. This is the lowest yield on the 10-year since March 18, 2009, which was a mere seven trading days after the low of the Credit Crisis Bear Market.
Thus, if we listen to conventional wisdom, the bond market would appear to be telling us that the prospect for the economy is not meaningfully better than it was just one week after Jamie Dimon informed us that his bank was making a little money. Yep, that's right, the yield on the T-Note is now back to the levels seen when most stock market analysts thought the world was coming to an end.
While I certainly understand that stock market logic can differ quite substantially from what the rest of the world might view as normal, does this sound right to you? Is the outlook for the economy really no better than it was during those dark days in the spring of 2009? And is the bond market telling us to prepare for Armageddon II?
Quite honestly, we can't buy into this argument. We are of the mind that the economy has hit a normal "soft patch" after the initial rebound. And although growth may slow and the job market may continue to be a problem (which isn't exactly a new thought, by the way), unless things slow down rather dramatically, the chances of a recession are not particularly high right now.
So, is the bond market trying to tell us something else? Is there a reason that investors appear to be panicking into U.S. Government bonds? While we have our opinions on the subject, we are leaning toward the idea that there is something else going on in the bond market. But, regardless of whether we are right or wrong, this is a situation that definitely bears watching.
Turning to this morning... Solid auctions in both Spain and Ireland as well as talk of stimulus in Japan has traders in a better mood and bond yields on the rise.
On the economic front... Housing Starts rose 1.7% in July to an annualized rate of 546K, which was below the consensus for 557K. Building Permits for July fell by 3% to 565K. This was below the consensus of 574K and the June reading of 583K.
Next up, the Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for July rose by +0.2%, which was in line with the consensus estimate for +0.2% but above June’s unrevised -0.5% (May’s reading was -0.3%). When you strip out food and energy, the so-called Core PPI came in up +0.3%, which above the consensus for +0.1% and June’s +0.1% (May was +0.2%).
Finally, just for tun, try smiling at everyone you meet today...
Pre-Game Indicators
Here are the important indicators we review each morning before the opening bell...
Major Foreign Markets:
Australia: +0.85%
Shanghai: +0.38%
Hong Kong: +0.12%
Japan: -0.38%
France: +0.78%
Germany: +1.06%
London: +0.79%
Crude Oil Futures: + $0.86 to $76.11
Gold: + $1.10 to $1227.30
Dollar: higher against Yen and Pound, lower vs. Euro
10-Year Bond Yield: Currently trading higher at 2.614%
Stocks Futures Ahead of Open in U.S. (relative to fair value):
S&P 500: +8.13
Dow Jones Industrial Average: +59
NASDAQ Composite: +11.99
Earnings Before The Bell
Company
Symbol
EPS Reuters
Estimate
Abercrombie & Fitch ANF $0.22* $0.15
Home Depot HD $0.72 $0.71
TJX companies TJX $0.73 $0.73
Wal-Mart WMT $0.97 $0.96
* Report includes items that make comparisons to the consensus estimate questionable
Wall Street Research Summary
Upgrades:
Target (TGT) - BofA/Merrill
CF Industries (CF) - Goldman Sachs
Honeywell (HON) - JPMorgan
Agrium (AGU) - JPMorgan
Downgrades:
Corinthian Colleges (COCO) - Barclays
ITT Educational (ESI) - Barclays
Lincoln Educational (LINC) - Barclays
Questar (STR) - BMO Capital
3M (MMM) - JPMorgan
Mosaic (MOS) - JPMorgan
Dollar Tree (DLTR) - JPMorgan
Research in Motion (RIMM) - Wedbush Securities
Long positions in stocks mentioned: none
For more "top stock" portfolios and research, visit www.TopStockPortfolios.com
The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
The information contained in our websites and TopStockPortfolios publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.
Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.
In case you don't spend your days watching the ticks of various investment classes, the stock market appears to be following the bond market around like a little puppy dog these days. And while the action in the stock market was certainly constructive at times during Monday's session, each new low in the yield of the 10-year bond was accompanied by a bout of selling in the stock market.
The bottom line appears to be that stocks will not be able to make any significant upside progress until/unless bond yields stop going down the drain. To put the action into perspective, the yield on the 10-year T-Note closed Monday at 2.575%. This is the lowest yield on the 10-year since March 18, 2009, which was a mere seven trading days after the low of the Credit Crisis Bear Market.
Thus, if we listen to conventional wisdom, the bond market would appear to be telling us that the prospect for the economy is not meaningfully better than it was just one week after Jamie Dimon informed us that his bank was making a little money. Yep, that's right, the yield on the T-Note is now back to the levels seen when most stock market analysts thought the world was coming to an end.
While I certainly understand that stock market logic can differ quite substantially from what the rest of the world might view as normal, does this sound right to you? Is the outlook for the economy really no better than it was during those dark days in the spring of 2009? And is the bond market telling us to prepare for Armageddon II?
Quite honestly, we can't buy into this argument. We are of the mind that the economy has hit a normal "soft patch" after the initial rebound. And although growth may slow and the job market may continue to be a problem (which isn't exactly a new thought, by the way), unless things slow down rather dramatically, the chances of a recession are not particularly high right now.
So, is the bond market trying to tell us something else? Is there a reason that investors appear to be panicking into U.S. Government bonds? While we have our opinions on the subject, we are leaning toward the idea that there is something else going on in the bond market. But, regardless of whether we are right or wrong, this is a situation that definitely bears watching.
Turning to this morning... Solid auctions in both Spain and Ireland as well as talk of stimulus in Japan has traders in a better mood and bond yields on the rise.
On the economic front... Housing Starts rose 1.7% in July to an annualized rate of 546K, which was below the consensus for 557K. Building Permits for July fell by 3% to 565K. This was below the consensus of 574K and the June reading of 583K.
Next up, the Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for July rose by +0.2%, which was in line with the consensus estimate for +0.2% but above June’s unrevised -0.5% (May’s reading was -0.3%). When you strip out food and energy, the so-called Core PPI came in up +0.3%, which above the consensus for +0.1% and June’s +0.1% (May was +0.2%).
Finally, just for tun, try smiling at everyone you meet today...
Pre-Game Indicators
Here are the important indicators we review each morning before the opening bell...
Major Foreign Markets:
Australia: +0.85%
Shanghai: +0.38%
Hong Kong: +0.12%
Japan: -0.38%
France: +0.78%
Germany: +1.06%
London: +0.79%
Crude Oil Futures: + $0.86 to $76.11
Gold: + $1.10 to $1227.30
Dollar: higher against Yen and Pound, lower vs. Euro
10-Year Bond Yield: Currently trading higher at 2.614%
Stocks Futures Ahead of Open in U.S. (relative to fair value):
S&P 500: +8.13
Dow Jones Industrial Average: +59
NASDAQ Composite: +11.99
Earnings Before The Bell
Company
Symbol
EPS Reuters
Estimate
Abercrombie & Fitch ANF $0.22* $0.15
Home Depot HD $0.72 $0.71
TJX companies TJX $0.73 $0.73
Wal-Mart WMT $0.97 $0.96
* Report includes items that make comparisons to the consensus estimate questionable
Wall Street Research Summary
Upgrades:
Target (TGT) - BofA/Merrill
CF Industries (CF) - Goldman Sachs
Honeywell (HON) - JPMorgan
Agrium (AGU) - JPMorgan
Downgrades:
Corinthian Colleges (COCO) - Barclays
ITT Educational (ESI) - Barclays
Lincoln Educational (LINC) - Barclays
Questar (STR) - BMO Capital
3M (MMM) - JPMorgan
Mosaic (MOS) - JPMorgan
Dollar Tree (DLTR) - JPMorgan
Research in Motion (RIMM) - Wedbush Securities
Long positions in stocks mentioned: none
For more "top stock" portfolios and research, visit www.TopStockPortfolios.com
The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
The information contained in our websites and TopStockPortfolios publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.
Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.
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