The Day Ahead: Fork in the Road

 | Apr 03, 2012 | 8:30 AM EDT  | Comments
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The weather in the Northeast was darn sweet in March -- and, lucky for us who live in the region, April began on the same foot. As I was doing a bit of writing in the park yesterday (doc has suggested to put the coffee away and get some air), this random line from Justin Bieber's new song "Boyfriend" surfaced in my head: "Baby, take a chance or you'll never ever know."

I would bet the farm that Biebs knows zilch about the stock market, but that line does offer a link to the crossroads presented to investors this first week in April. On the one hand, investors could opt to "take a chance" that the slew of economic releases Monday was in fact truly positive, and that they can safely forget roughly two weeks of negative surprises. If so, faced with an unemployment report and earnings season, they'd wage accordingly. (Positive surprises, if you'll remember, were a facilitator of the rally that started in August 2011.)

On the other hand, investors could change the station to a throwback Michael Jackson tune -- "Beat It" -- remaining unconvinced by Monday's global manufacturing releases. This side would argue that there were soft underbellies, and they'd be unwilling to disregard the culprits for the profit-taking that ensued at the end of March.

Personally I, too, have a tough decision to make. Since the point at which negativity began to appear in my daily assessments, about two weeks ago, the market has managed to recoup its losses.

With all that in mind, let's recap the evidence supporting each side of the argument.

The Chance-Takers

• China purchasing managers index: Showed the strongest reading in a year -- bye-bye to hard-landing talk?

• Institute for Supply Management manufacturing survey: Hiring and production components struck a good chord, and the headline above consensus -- bye-bye to negative surprises in domestic data?

• Priced-paid component of ISM manufacturing: The number was subdued. Why, hello, extra puzzle piece in the never-ending puzzle that is the Federal Reserve's quantitative easing programs.

• Sentiment: The Street seems to be jawboning expectations lower on Friday's employment report. Will that bring a setup in which more moderate month-on-month employment growth will beat a lower hurdle bar, and serve as a positive catalyst to stocks?

The "Beat It" Club

• China PMI: No hard landing means no aggressive easing of the reserve requirement ratio (or "Triple R" for you abbreviation lovers). If I remember correctly, the expectation of further easing was a reason for the reversal in risk appetite late last week.

• ISM manufacturing soft spots: New orders fell, export growth slowed for five consecutive months and prices paid were unrepresentative of what's in store for the bills arriving at manufacturing plants in future months. Further, customer inventories were cited as too low. Why is this the case in a "recovery?" It can't all be related to new machines allowing for extra efficient production schedules.

As for the new orders reading, fewer companies stated this figure improved month-to-month, and 53% said trends were consistent, up from 45% in February. This doesn't exactly set the groundwork for the resumption of strong economic surprises.

• Construction spending: This was a headline miss and prior numbers were negatively revised. Homebuilder stocks got whacked, and ditto for Home Depot (HD) and Lowe's (LOW).

Conclusion

To sum up here, I'll just say this: Yours truly is a hip fella who's been known to cruise the road with a Bieber tune pumping. But that "Beat It" cut, should it get airtime, will always take precedent over the king of teen haircuts. In other words, I remain skeptical.

Tuesday Notepad

• The decline in the 10-year Treasury yield Monday, against a backdrop of higher stock prices, was slightly misleading. In front of the week, the Fed has been quite active in removing supply from the market.

• Familiarize yourself with the term "Operation Torque," compliments of Morgan Stanley (MS). Apparently, this is when the Fed pulls out a double-barrel shotgun from its safe and conducts "sterilized mortgage-backed securities and Treasuries purchases." Umm, yeah -- feel free to shoot me an email for more color on this one. I'll be happy to help.

• Following the China news Monday, steel stocks did not put in a convincing move higher. China worries have lately led such stocks as ArcelorMittal (MT), AK Steel (AKS) and U.S. Steel (X) shy of their 52-week highs, with the latter having been the relative outperformer. I am thinking steel stocks will have to gain consistent ground if they're to support the idea that the China growth slowdown was overblown in the middle of March.

• Life was spotted in consumer staples stocks, most notably in Kimberly Clark (KMB), Campbell (CPB) and General Mills (GIS). I was surprised by the action in the latter two names following the surge in corn prices after the crop report. Finally, here's a major high five to Helene Meisler for mentioning Clorox (CLX) to me on Twitter. The stock saw saw good action Monday and has a worthwhile chart to study.

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