Comment by phil

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phil
June 18th, 2013 at 9:51 am

Good morning!  

News was once again terrible this morning, especially out of China and I could have written a whole post on that but thought it was a good time for a macro point about why we should be concerned about the market in any event.  

I'm getting into a lot of silly conversations with people about value lately and I'm being lectured on how value doesn't matter if the market doesn't agree and we should just follow the "wisdom" of the crowd.  This is exactly the kind of BS we often hear at market tops and I'm not against a little momentum trading BUT, when people do it too often for too long – they tend to get it mixed up with their long-term premise and then they tend to bend their minds around to justify their decisions after the fact.  As Wikipedia notes:  

There are two self-justification strategies: internal self-justification (IS) and external self-justification (ES).^[5]

Internal self-justification refers to a change in the way people perceive their actions. It may be an attitude change, trivialization of the negative consequences or denial of the negative consequences. Internal self-justification helps make the negative outcomes more tolerable and is usually elicited by hedonistic dissonance. For example, the smoker may tell himself that smoking is not really that bad for his health.

External self-justification refers to the use of external excuses to justify one's actions. The excuses can be a displacement of personal responsibility, lack of self-control or social pressures. External self-justification aims to diminish one's responsibility for a behavior and is usually elicited by moral dissonance. For example, the smoker might say that he only smokes socially and because other people expect him to.

That's the crux of the crowd-following arguments.  Everyone is doing it, so how bad can it be?  Well, it can be 2008 bad, is my answer.  And I'm not trying to come across all doom and gloom but I do tend to get more negative when I feel our Members may be getting too  positive (and vice-versa when too gloomy) to try to inject a bit of balance into the conversation.  

We are in no better shape today than we were when I called for cashing out long positions at the end of last month.  We're using the same bounce levels we set on the 6th, when we first bottomed out and EXPECTED a bounce.  The whole point of the bounce levels is that we're either going to have weak ones, which keep us bearish, or strong ones, which make us neutral until either the 50% lines cross or the weak bounce lines fail to hold up.  

• Dow 15,108 (weak bounce) and 15,216 (strong bounce)
• S&P 1,622 and 1,634
• Nasdaq 3,420 and 3,440
• NYSE 9,280 and 9,360
• Russell 975 and 981.40

As I noted yesterday, when things were looking up, we also have to cross our 50% lines at 15,270, 1,640, 3,460, 9,400 and 985 and, at noon yesterday, only the NYSE and the Dow were red.  Now, it's just the RUT that's green and the S&P is right on the line (so we'll watch 1,640 very closely).  

Also, as noted in the morning's news reading, 80% of the 107 S&P companies that have provided guidance updates for Q2 have LOWERED their outlook.  That's vs 62% "normally" (as the main reason people do pre-announce is to warn, of course).  Materials (of course), IT and Industrials are hardest hit, which makes the Dow a good short again as it attempts to get back over 15,200.  

On the other hand, expectations are now so low, they'll be hard to miss with the S&P 500 now averaging 1.1% earnings growth (below the rate of buy-backs!), down from 4.3% on 3/31.  Keep in mind that the overall market is up 4% since 4/1 so there's a pretty big disconnect between the run-up we've had and the reality we're running headlong into!

Oil hit $98.50 again on the usual 9am pump and, of course, it's a short again.  That's on /CL by the way, which is now /CLQ3 (Aug) in TOS, the old /CLN3 contract (July) also hit $98.50 already and dropped like a rock to $98.15.  

Copper is melting down at $3.15 as this China thing is SERIOUS (and it's also serious when there's so many bad things to talk about that I don't have time to go over them all in one day!).  Nat gas is $3.90, gasoline is $2.88, gold is $1,378 and silver is $21.70.  

The Dollar is 81.05, Euro $1.335, Pound $1.558 and 95.50 Yen to the Dollar with the Nikkei flying at 13,400 – that's up 300 since the index closed flat for the day.  

The VIX i8s at 16.69 and TLT is 112.75 so no one seems very worried – but I still am.  

Rumors that Bernanke is stepping down are gathering steam.  He wasn't scheduled to go to Jackson Hole since last year (a big deal was made about it then but it's some sort of personal conflict) but that won't stop people from "discovering" it now.  

Hopefully, the Fed will give us a bit of clarity tomorrow but, even as I write that, I'm laughing…

At the open: Dow +0.2% to 15211. S&P +0.13% to 1641. Nasdaq +0.21% to 3459.

Treasurys: 30-year -0.23%. 10-yr -0.15%. 5-yr -0.1%.

Commodities: Crude +0.39% to $98.41. Gold -0.73% to $1372.95.

Currencies: Euro -0.06% vs. dollar. Yen +1.13%. Pound +0.91%.

Market preview: U.S. stock futures and European shares are flat-to-higher after U.S. CPI comes in slightly below expectations and as the FOMC meets on the first day of a two-day policy meeting. The S&P Mini is flat. "Today should be quiet, as people are only asking about tomorrow," says economic strategist Andrew Wilkinson. Sony is +4.25% after Dan Loeb ups the ante over a spin-off for the company's entertainment division. Ongoing: Paris Air Show 

"The biggest contrarian play in the market today is assets linked to China (FXI, CAF)," says Michael Hartnett, summarizing BAML's latest Fund Manager Survey, which shows money flowing out of commodities (DBC) and emerging markets (EEM, DEM, VWO). Where's the money going? The eurozone and the U.S. Where it's not going is fixed-income (AGG, BND) – 50% of managers say they're now underweight bonds as opposed to 38% last month.

May Housing Starts: 914K vs. 950K forecast, 856K previous (revised from 853K).

More on Housing Starts: Total starts were up 6.8% from April, up 28.6% from a year ago. Single family starts in were about flat M/M. Total building permits of 974K fell 3.1% M/M, and gained 20.8% Y/Y. Single family permits rise 1.3% M/M. (full report) 

May Consumer Price Index: +0.1%;vs. +0.2% expected, -0.4% prior. Core CPI +0.2%; in-line with expectations, +0.1% prior.

The FOMC will be able to chew on inflation data for May when it meets today, with the reading due out this morning.Economists expect that CPI rose 0.2% on month after sliding 0.4% in April, driven up by slightly higher food and gasoline costs. "Inflation is low in the U.S. at the moment, giving the Fed more room to wait for improvement in employment before it starts tapering," say analysts at Danske Daily.

ICSC Retail Store Sales: +0.3% W/W, vs. -2.7% last week.+2.5% Y/Y vs. +2.2% last week. 

More on ICSC Retail Sales: The retail sector put in a mixed week with department stores, electronics store chains ([[RSH[[, BBY), and drug stores (CVS, WAG, RAD]]) strong for the period, but sales at dollar stores (DG, DLTR, FIVE, FDO) and wholesale clubs (COST,PSMT) notably weak. After last week's drop in sales cut into forward progress, the year-over-year gain in retail chain store sales stands 2.5% higher after threatening a 3% pace earlier in the year. 

Redbook Chain Store Sales: +2.9% Y/Y vs. +2.8% last week. 

MSCI's reclassification of Greece to emerging market is a yawner as far as ETFs go, writes Dennis Hudachek, as the country's presence in the EFA is less than 0.10%. With Coca-Cola Hellenic (CCHBF.PK) no longer part of the MSCI Greek Index, the country's addition to the EEM will be of minimal effect. 

China's determination to reign in the rapid growth of credit is being tested by a short-term credit squeeze at banks, with rates in the interbank funding market soaring and foreign-capital inflows slowing. The banks want the People's Bank of China to inject liquidity by cutting the reserve-requirement ratio, but so far the PBOC is holding firm and maintaining the tight conditions. 

A nasty bout of late-session selling sends Thai shares (THD-3.4%) plunging nearly 3%, bucking a generally positive regional trend. Philippine stocks (EPHE +2.3%) rise 2.83% in Manila while shares in Indonesia (IDX +1%) and Singapore (EWS +0.9%) post solid gains.

FU Oppenheimer!  Oppenheimer lifts its price target on SodaStream (SODA) to $85 following the company's intriguing deal with Whirlpool to jointly develop a home carbonation system. SODA +1.5% premarket to $72.05. 

The rumored iWatch will be more "hobby" than major product line for Apple (AAPL), says Jefferies' Peter Misek. Likely not having a cellular chip, the iWatch would need to be paired with an iPhone for full functionality. Starting with some pricing assumptions and then slapping a 5% penetration on the installed iPhone base of 250M would move the EPS needle by only about 1%.