After the big slippage on Monday, Tuesday saw another pause. The market is sure moving in fits and starts – between “green shoots” and the negative outlook of a very slow recovery. There was an interesting article in the Economist (an outside editorial) about the “double dip” recession in the 1930s. It seemed in 1933 that the government stimulus was working, unemployment had drop from the 20s into the low teens. They saw “green shoots”, but in a couple of years the Federal Reserve had switched from an easing to a contracting fiscal policy. The guest editorial (Christina Romer) goes on to explain that the government should continue the stimulus ( “print money”) until we reach full employment, so we don’t have a double dip recession. I am not totally buying that argument, simply because we can (if we have not already) crossed a point of no return. She (as many others) seem to overlook a huge difference between the 1930’s New Deal policies and those of today – we are now a GLOBAL economy using a FIAT currency. That means that protectionism, which worked exceedingly well in the 1930s as well as the building of infrastructure. We had our OWN energy, manufacturing, commodities, etc. We didn’t rely on imports and we were an EXPORT nation. That simple realization in my mind is why a return to New Deal policies can be our downfall. Additionally – the New Deal spending went right to the bottom line (roads, dams, bridges, buildings, etc.) – so far the nation has spent trillions of dollars on NOTHING (just paying off other companies losses). The money the government is spending is NOT going to any bottom line or building anything. It is just going to shore up GM, Chrysler, AIG, Freddie, Fannie, Banks. And it has saved nothing, we have poured money into a system and it didn’t keep these companies from shedding thousands of jobs, it didn’t keep them from going bankrupt, it did little other than restore confidence. We just spent trillions on a giant marketing “Confidence and Hope” campaign with nothing to show for it. At the end of the day we still rely on foreign nation for food, energy, and goods – that is a core component that our government has not calculated into their plans. http://www.economist.com/businessfinance/displaystory.cfm?story_id=13856176
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Durable Goods
We got a injection of good news – Durable Goods orders unexpectedly jumped in May – showing a signs of the recession easing. Again – another story of “green shoots”. It is certainly good news, but a 1.8% gain is paltry (really showing a stabilization) in the overall scheme of things. The excitement is that it is positive, as economist expected a drop of .9%. I am not trying to knock the news – but I think it shows that we are very close to a bottom, but it doesn’t change the longer term forecast of very slow growth.
GE’s Vice Chairman, John Rice, said “I am not particularly of the green shoots group yet, I have not seen it in our order patterns yet.” That is an interesting view, GE being a large conglomerate with global and domestic market share. Another economist on Bloomberg this morning pointed to the volatility in the numbers – that might not reflect a true reflection of growth or contraction. He pointed out that the bankruptcies of Chrysler and GM is injecting volatility into the numbers additionally some of the order for larger goods, such as aircrafts can push orders back-n-forth between months. Concluding that looking at a larger average, rather than a month-to-month, will smooth out the volatility and give better resolution as to whether we are growing or contracting. http://www.bloomberg.com/apps/news?pid=20601087&sid=apkAeuPJBaJw
The market unlike any time in recent history is really hanging on every number that comes out and then responds in a knee jerk reaction. Again, it’s good news (on a month over month basis) – looking at revisions and closer at the numbers reviles some volatile concerns.
Futures had a decent spike to the upside after the news came out.
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ORACLE driving higher
Oracle, like Microsoft, has a dominate market share in their sector of the market. Their acquisitions (which seems year after year) of competitors or companies that can expand market share or introduce new vertical markets has expanded the company into the forefront. Their reoccurring contractual obligations (licensing of software) is a brilliant business model, as it creates long-term commitments by clients to continue to update their user licenses. Managing data is crucial for every single business in the world and Oracle has put themselves in that sweet spot. They reported a fourth quarter profit that exceeded analyst expectations and the stock is now up $1 in the pre-market.
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Futures Pre-market
The futures are driving higher after Oracle news and Durable Goods showing the recession is coming to a close. The spread is in, expect a gap up at the opening.
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Support / Resistance
Is this a short-term support and buying opportunity?
INDU 8250 / 8500 (We were pretty flat yesterday – we a good sell off that rebounded into the close. The news today could drive us back up.)
NDX 1425 / 1450 (We are right at that 1425 number – which is short-term support.)
SPX 900 (We closed just below it, but up on the day. Watch the close to see if we close above it.)
RUT 500 (We are still looking below it in the pre-market, but closing above it would build confidence.)
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Conclusion
This week we are seeing a huge amount of treasuries being sold (over $100 billion) as we chip away at that $3 trillion deficit. All eyes will be on the Fed and how much they will take down – which could create concern and more volatility in the market. We saw the dollar drop yesterday against foreign currency and there is a story about the Swiss Franc being weak this morning http://www.bloomberg.com/apps/news?pid=20601110&sid=aY93d1pbmed8 , however we are already seeing more pressure on the dollar this morning – watch those auctions.
The Durable Goods number has the “Green Shoot” talk covering the financial airways this morning, the question is how much will that impact the market. The opening is looking higher on that news – but I think we could see some volatility depending on how those treasury auctions pan out.
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