The afternoon ramping of the major stock indices on Monday and Tuesday inspired more than a few really lame explanations for the bullish trading activity. Monday’s afternoon rally was supposedly the result of generally “good feelings” about the European economic situation. Tuesday’s closing rally was attributed to Italian Prime Minister Silvio Berlusconi’s announcement that he would retire from office when the Italian Parliament approves austerity measures. The vote is planned for next week.
In fact, the ugly truth about Italy’s economic situation was the subject of a November 8 report from Barclays Capital entitled, “Big Trouble in Big Italy”. The Zero Hedge website provided this summary of the Barclays report:
1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math–growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger: high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out–policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12) At the moment ECB remains unwilling to be lender last resort on scale needed
13) But frankly will have hand forced by market given massive systemic risk
This situation underscores the absurdity of the process employed by pundits for explaining stock market movement. As economist Dean Baker once said:
Reporters should be given 40 lashes when they tell us that some specific event explains a movement in stock prices. The reality is that the reporter does not know what caused a movement in stock prices, all they can do is speculate.
Felix Salmon provided this critique of the obsession with closing levels:
Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day. The single most reported statistic with regard to the stock market is where it closed, today, compared to where it closed yesterday. It’s an utterly random and pointless number, but because the media treats it with such reverence, the public inevitably gets the impression that it matters.
It matters because this data is used to manipulate the suckers into buying stocks at time when they shouldn’t. Consider this observation from the latest Weekly Market Comment by economist John Hussman of The Hussman Funds:
While Wall Street continues to celebrate the fact that coincident indicators such as the ISM survey and weekly unemployment claims have not worsened from a dead-stall, the global economy is already showing overt signs of a new downturn.
* * *
As Pimco’s Mohammad El Erian said last week, “The big exposure to Americans is the general exposure to the equity market. You cannot be a good house in a bad neighborhood, that’s just a fact. The equity market is the house, and the global economy is the neighborhood. So if the global economy takes a leg down, the equity market is going to take a leg down too.”
The Dow Jones Industrial Average jumped by 101 points on Tuesday, to close at 12,170 for a gain of 84 basis points (0.84 percent). The S&P 500 advanced by 1.17 percent to finish at 1,275. The NASDAQ Composite gained 1.20 percent to end the day at 2,727.
With the exception of Royal Caribbean (RCL) Miami-based corporations had a great day on Tuesday. Lennar (LEN) led the group with a gain of 3.09% to close at 18.03. Carnival Cruise Lines (CCL) advanced by 1.33% to finish at 34.40. Ryder System (R) picked up 1.21% to close at 51.68. Royal Caribbean (RCL) sank by 69 basis points (0.69%) to end the day at 28.89.
The following companies will be playing “beat the number” on Wednesday, with the release of their quarterly earnings reports: Abraxas Petroleum (AXAS), Acadia Pharmaceuticals (ACAD), Arena Pharmaceuticals (ARNA), Ashland Inc (ASH), Capstone Turbine (CPST), CISCO Systems (CSCO), Dean Foods (DF), Fuel Systems Solutions (FSYS), General Growth Properties (GGP), General Motors (GM), Green Mountain Coffee Roasters (GMCR), Harvest Natural Resources (HNR), Lightbridge (LTBR), LIZ Claiborne (LIZ), Macy’s (M), OM Group (OMG), Ralph Lauren (RL), Wave Systems (WAVX) and Wendy’s (WEN). Good luck!