Market Overview: Apogee Of Spin Or Dose Of Reality?

Stocks kept their rally shoes on last week, and on the second attempt traders managed to close the S&P 500 above 1500. It was largely for the sake of its own momentum, as equity traders and prices are wont to do.

The Russell 2000 also managed to clear its magic round number of 900, leaving the Dow looking up at 14,000 as the last major enchanted tree to climb (some cynics might wonder if $400 for Apple’s stock price (AAPL) should be included). The MDY, or mid-cap ETF, closed Friday just short of $200 ($199.64), so perhaps it will join the other faeries Monday morning.

A disconnect between the real economy and the stock market isn’t new, nor is the phenomenon of the latter casting a rosy glow over the former when the latter is rising. The new year usually starts out with a wave of calendar enthusiasm – in 2011, markets were still riding the “sugar high” of QE-2 from August 2010. In 2012, markets rode the wave of the post-Thanksgiving rebound and the inflated data of one of the warmest winters ever, in the warmest year on record, to post the warmest first quarter for prices on record.

Now we are riding the first quarter wave again, this time launched by the last-minute aversion of the fiscal cliff, cheered on by the usual gang of suspect narratives, and sustained by behavioral trading programs programmed to buy the first quarter until proven guilty, with high-frequency trading programs (HFT) front-running everything. Keep in mind an enduring truth of every momentum wave – no matter the direction – that any and all news will get sucked into the vortex of the wave and recast in its image. The routine shall become dramatic, and the dramatic shall be trivialized as necessary.

A good case in point is the over-the-top fanfare over some European banks repaying €137 billion (around $180 billion) from the European Central Bank’s (ECB) LTRO (long-term repurchase operation) program – paying it back early! Naturally, European financial ministers sat up and crowed, and naturally, trading programs reflexively bought the euro. Europe’s banking system is healed!

Reality is a bit different. What it really reflects is that one, many of the banks involved are losing money on the program by borrowing at 0.75% and depositing it at their central bank for nothing. Two, they’re not lending out money, or they wouldn’t be repaying it. Three, there’s still the little matter of the rest of the €1 trillion program, and four, they can always get more money from the ECB, as the following chart from the Econoday website to advise forgetting all the other regional data. Maybe, but the Markit number is still quite new and has run well ahead of the national ISM number every month but one. The latter comes out next Friday, after the jobs report.

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Weekly retail sales data has been running weak all month. The Leading Indicators seemed to report an increase of 0.4% for December, but when factoring out the Hurricane Sandy effect on weekly claims data, it was only up 0.1%. Yet the headlines continue to report over-hyped numbers, driven in part by the over-hyped stock market advance. I don’t usually cite the Bloomberg Consumer Comfort index, but it did fall to a three-month low this week, which seems at odds with the glow coming from the press.

I fear we are doomed to another first-quarter batch of excess optimism, fed by a circle of program buying and erroneously adjusted data. There are glowing reports about the improvement in PMI (purchasing manager) surveys around the globe, when nearly all of them are still negative, just not quite as negative in some areas. The small monthly incremental gains in China coincide with the accession of the new leadership, and the numbers themselves are barely above neutral.

Next week will be either the apogee of the spin, or a dose of reality. December durable goods orders are due on Monday, and a good increase should be expected because of the usual year-end rush to use up budgets along with the possibility that the 50% bonus depreciation tax provision would expire. But will it really be more than a blip? Fittingly enough, Caterpillar (CAT) will report before the open, and its December monthly results were disappointing. The Dallas Fed manufacturing survey later on Monday and the Chicago purchasing survey on Thursday are the last two regional results before the national number on Friday.

Tuesday brings consumer confidence in the morning and Amazon (AMZN) earnings after the close. Wednesday has the latest Fed meeting and announcement. The committee will no doubt be influenced by the morning’s release of the first estimate for fourth quarter GDP, which is estimated at 1.2% (annualized). The governors will probably want to be cautiously optimistic, which reminds me uncomfortably of 2007, but the GDP number could throw a wrench in their plans.

Thursday brings December personal income and spending, which should be boosted by dividend payouts, and perhaps a sharply higher claims number (easily dismissed, if need be). Friday will add construction spending to the jobs data and the ISM number. Exxon (XOM) and Chevron (CVX) both report earnings that morning.

Written By: Kevin Flynn