Day Ahead: Cheers to Ripping Your Face Off!

 | Sep 07, 2012 | 7:48 AM EDT
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"You want it? Put your name on it." Somehow, I fancy, Rihanna was not referencing anything on the topic of stocks in her "Birthday Cake" song.

Wait, you weren't aware I was a DJ in those precious three hours on a Saturday night not devoted to equities analysis, market analysis and life analysis? Right. Listen here, Rihanna succinctly makes a good point: you want to be a gunslinger then put your name (buy stocks) on nicely marked-up stocks from Wednesday. As for DJ Soz, I am supremely comfortable with placing the silver barrels back in the holsters and using today and the weekend to reassess the voluminous amount of info we have been force fed.

Should you prefer to acknowledge the internal panic that developed post Draghi Bonanza, cheers to ripping your face off and entering the weekend conflicted, with tail wagging dog.

Your personal challenge: Is the ECB news the best thing since sliced bread?

Not too long ago I was a 100% believer in the market drilling beneath the surface and computing every possible outcome. Now, I am unable to express that confidence as the market only seems to demand its pound of flesh to satisfy, or disprove, consensus opinions. The problem is that Mr. Market returns with a more refined understanding days later, which starts to chip away at its initial assessment. On Thursday, stocks zoomed higher as Draghi showed his well-played hand to the world (or those that realize the market is open daily). He leaked news beforehand so as to eliminate the surprise factor and soothe any market concerns and then whack, he hit the masses with a 2x4 in the form of an attack plan that never really was in doubt. Pardon me if I have a couple questions.

  1. Does a lower yield on a piece of Spanish paper meet the fullest extent of market expectations in a country with 20% unemployment that, based on my observations, is structural in nature?
  2. Does the plan "address severe distortions" in the market, as Draghi stated in his FedSpeak moment? Or does it create a bunch of new distortions? As part of this plan, the ECB will publish how much it spends per week on bonds (each week the market will gauge whether the combo of a plan and verbal jawboning is sticking), the average duration of the bonds (why not also focus on longer-term debt and really go all out is a question likely to be asked) and the national breakdown (we will see the countries that continue to be stressed, which again raises questions on the survivability of the euro).

Three words for ya: CAN OF WORMS.

Amidst the insanity, German Chancellor Angela Merkel had perhaps had the most epic comment, that the ECB's decision "cannot replace political action."  You tell 'em sister, go snag that reelection. To be completely rid of the EU debt disease, troubled sovereigns have to implement growth plans. But a visit to the ECB honeypot begins with austerity to reduce deficits and keep the meddlers (IMF, whatever they do) at bay. Hence, it remains hard for me to proclaim the rally on Draghi Day is the foundation for a durable, consistent march higher in stocks. If anything, it could be characterized as a drop of water poured into a wheelbarrow holding 10 pounds of dry concrete: a decent, but important, first step towards a conclusion.

Barroom Bullets

  • Disturbing that the ECB is opening itself up this type of program and not gaining seniority in the debt hierarchy. Where is the penalty for excessive risk taking of yesteryear?
  • Hovnanian (HOV), wow, banging gross margin expansion and home values/orders. Looks as if housing's share of GDP will remain on the mend.
  • A warning from footwear manufacturer Wolverine Worldwide (WWW), related to European market struggles, is concerning for a Nike (NKE), but also a Starbucks (SBUX).
  • August 2012 employment report has an odd feel to it. Here is where my head is at:
  1. Sub 100,000 headline: Entire Fed goodie package on the table and Bill Clinton's speech loses luster, Romney snags a bump in the polls on economic worries assuming front stage, again.
  2. No-man's Land headline of 125,000-150,000: Fed in the mix, but only with a partial goodie bag (think more precise language on rate direction, no bond buying plan). Not sure if market embraces it from a political viewpoint.
  3. Above 150,000 on the headline: Bye-bye Fed easing of any form at the next gathering, hello waiting game (and tiredness on verbal backstop) and hello near-term market disappointment (especially if market tosses Hatorade on ECB's plan). Hey, we invest on the central bank, no? Forget (said tongue in cheek) stronger job growth "transmitting" to FedEx (FDX) in the holiday quarter and driving a Santa Clause Rally, provided election outcome brings clarity on fiscal cliff.



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