Tuesday, August 3, 2010

Action Very Constructive All Things Considered

There were some weak earnings in some larger companies more tied to the U.S. consumer this morning, along with a slew of disappointing economic data.  While it caused a minor selloff to S&P 1117, the key 1114 level held (200 day moving average - simple) and we've cleared 1120 as of this writing.   When the market ignores bad news that is constructive.  I also am advancing the cause that we might be back to 2009 thinking where bad news = good news.  Bad news - more easy money policies from the Fed and to Wall Street that matters more than the economy.  That would take us back to the "heads you win, tails you still win" market of summer 2009 through spring 2010.  I am still looking for this (long awaited) clearance of S&P 1130 to get fully on board with Kool Aid cooler in hand.

That thesis of bad news = good news was true in China overnight, as I was scratching my head why the weak PMI news was greeted so happily.  Apparently the Wall Street logic is the weaker data from China means the government will back off on the tightening policies they have advanced to burst a real estate bubble.   So they have now bestowed the Larry Kudlow "Goldilocks" theme circa US 2005-2007 to China.  5 men (and a baby) will be able to control the 2nd largest economy on Earth and softly guide it wherever they need in near perfect formation.  How convenient.  And these are "free market" advocates who populate Wall Street?

So in a perverse way the Chinese market has been hammered the past 3 months as economic data was "too good" (leading to inflation fears).  Now that the data is weaker, that is better.  While I understand it, I sort of laugh a little inside.

Either way we have jam packed data in the week ahead - ISM Services Wednesday, employment data Friday and now the Fed meeting where instead of telling us the exact same thing they might be changing the language to get even EASIER... this of course in relation the easiest levels of monetary policy in our lives.  (p.s. where are all those folks who told me 7-8 months ago that the big uptick in temporary workers ALWAYS presages big employment gains?  It *is* different this time comrade)  Oh wait, time to roll out the 17th month of "it's a lagging indicator" excuse.  [Feb 16, 2010: USA Today - Use of Temps to Fill Jobs May No Longer Signal Permanent Hiring].

In relation to the market, I want to see how the market reacts to more bad news - in the past few weeks, the bad news has been ignored or embraced.  Today as well.  Hence, I'd like to see a bad report Friday with employment to see if the reaction is aggressive buying after the knee jerk reaction.  If so, we are all back on the Ben Bernanke train of (even more) free money as far as the eye can see.  And we should expect the dollar short trade to be back on.

Caption: Bernanke thinks I am toilet paper.

If this is green shoots, I'd hate to see brown.  But as we saw in 2009 through early 2010 when the Fed shoots a trillion+ into the banks, who use it to buy Treasuries and risk assets (since there is little end demand in the 'real economy'), you don't want to fight it.  I tried for 6 weeks in spring/early summer 2009 and I got Bernanke'd.

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