The Mughal's nature is such that they demand miracles, but if a miracle were to be performed by some upright follower of our religion, they would say that it had been brought about by magic and sorcery.
They would strike him down with spears or would stone him to death.
Antonio Monserrate
The stock market continues to endure its toughest week of the year with intermittent flashes of resolve, even as the economic backdrop is proving too difficult sledding. When a rally is as hated as this one has been any signs of weakness creates its own kind of optimism. Yes, the market is up more than 100% from the low of a few years ago, a move that if asked at the time virtually everyone would have said impossible. If you told investors back then the Dow and S&P would rally back to reach new all-time highs this fast they would have had a one word answer: miracle.
That was then and this is now and the rally has been impressive, but that one word answer has changed, and the selection now includes magic and sorcery and some words I can't type out loud. Because of the palpable disdain for the rally, this week's stumbles have actually elicited joy. I think it's a huge mistake and urge anyone that had their nose pressed against the window on the outside looking in - don't go away.
You missed a lot, but it's not over, so be ready to step up this time.
The Dilemma
Economies are in a bind. Europe remains a mess and the best cautionary example of why its nuts to remain on this crazy path that has the administration so enamored. But we are on this shaky path that will see new regulation including the healthcare law upset economic progress. Already we hear more and more businesses talk about the new definition of "full time" employment, and it ain't good. Because the most onerous aspects of Obamacare kick in at 30 hours a week, more and more people are going to be pared back, and already some are saying take this job and shove it.
Essentially what's going to happen is a lot of people already struggling with low wages will have to accept a little more than 25% pay cut because their hours will be cut a little more than 25%.
Making Stuff
We've been promised a manufacturing miracle, but it hasn't materialized yet, and most gains have come as a result of a weaker dollar or higher wages in places like China. Turning that manufacturing corner continues to be as daunting as an Olympic ice skating maneuver. Yesterday was a spill from the Philly Fed survey reading of 1.3 that came up well below consensus of 4.0 and down from the 2.0 reading in March. I could find only a single silver lining amongst these disappointing trends:
* New Orders -1.0
* Prices Paid +3.1
* Prices Received -7.5
* Number of Employees -6.8
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The telling thing about the reaction of the Philly Fed was the market ignoring the would-be silver lining and dealing with the numbers as presented. The ability for the market to rally on low expectations has been critical, and I suspect that's fading except when it comes to employment data where numbers over 200,000 could provide periodic sparks.
So, this takes us back to the notion this market is ready to be struck down by spears and stones The fundamentals of individual companies that make up the market are firm and well-anchored. I still like the global story even though there are typical ups and downs and growing pangs. (I was checking out a chart of Mexico (EWW) versus S&P 500 (SPY) since 1997, the former is up 757% while the latter is up 167%, but all Americans know are those awful drug wars and dead bodies.)
Valuations are nowhere near outrageous. In fact they're reasonable considering earnings trends. And while there have been earnings disappointments, including IBM's first miss since 2005, the building blocks of a great economy look fantastic. Natural gas is soaring and that should pressure the administration to be smart about Keystone, drilling on public lands and expediting the ability to export the stuff. I think coal has hit rock bottom (pun intended) after closely reading comments in the past week from Walter Energy (WLT), Union Pacific (UNP) and Peabody Energy (BTU).
Key Support Points
The market continues to flirt with technical levels that need to hold or could trigger emotionally-based selling. I have to be honest, while holding is more desirable, if there was a way to quickly shake out all the weak sisters even if it meant swiftly swooning, I wouldn't mind seeing that happen. Note: I used exponential moving averages and support numbers are based on where indices close.
Dow Jones Industrial Average
> 14,500 key support
> 14,300 must hold support
S&P 500
> 1540 key support
> 1450 must hold support
I realize our present day Mughal is fighting against the miracle of America in an effort to create a society where underachievers are coddled and rewarded and overachievers stoned through rhetoric and higher taxes. It's a tough backdrop, and the main reason so many people missed the rally in the first place (along with legitimate cynicism toward Wall Street), but you essentially are betting against great American companies and innovation and determination when you stop breathing heavily on the window and go back to your bunker.
The market is pulling back, and this is actually another invitation to walk through the door and take control of your life and future even in the most contradictory of climates.
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