Wall Street's reverse logic
written @ 8am CET
Yesterday, the reading of the ISM Non-Manufacturing index was weaker than expected @ 57. Generally, this year’s readings are below the readings of 2004 and 2005 (ex. Hurricane data) and are in concordance with a slowdown in growth. So, there was the confirmation of a slowdown and markets rallied. Why? Some buyers saw the end of the Fed rate increase which will stimulate growth and concluded to buy.
There have been many underestimations about future rate hikes in the US and Eurozone around for quite some time causing the whipsaw like currency fluctuations in major FX markets. Eurozone rate hike expectations rose yesterday again after Trichet used the word “vigilance” in his speech. Hence, I am a bit reluctant to forecast a bull market even though valuations are cheap (is the stock market already pricing in a slowdown in growth?) and M&A activity is at records. The 2Y-10Y Treasury Spread is negative and the Fed target rate is approaching 6% slowly but steadily. Both are harbingers of recessions! Current data points to strong growth today but sentiment points to a slowdown. What shall one say when companies are cheap but prospects are perceived to be dim? Since sentiment is already negative, I would put my chips mid-term on the bull case as positive surprises might push markets higher than negative surprises which would push them down but not by so much.
Tobacco
Florida’s higher court ruled that Altria’s Philip Morris USA and other cigarette makers don’t have to pay $145bn to smokers. With a smarket cap of the biggest five companies at $290bn that translates into a pretty convincing trigger for a rally in tobacco stocks.
Yesterday, the reading of the ISM Non-Manufacturing index was weaker than expected @ 57. Generally, this year’s readings are below the readings of 2004 and 2005 (ex. Hurricane data) and are in concordance with a slowdown in growth. So, there was the confirmation of a slowdown and markets rallied. Why? Some buyers saw the end of the Fed rate increase which will stimulate growth and concluded to buy.
There have been many underestimations about future rate hikes in the US and Eurozone around for quite some time causing the whipsaw like currency fluctuations in major FX markets. Eurozone rate hike expectations rose yesterday again after Trichet used the word “vigilance” in his speech. Hence, I am a bit reluctant to forecast a bull market even though valuations are cheap (is the stock market already pricing in a slowdown in growth?) and M&A activity is at records. The 2Y-10Y Treasury Spread is negative and the Fed target rate is approaching 6% slowly but steadily. Both are harbingers of recessions! Current data points to strong growth today but sentiment points to a slowdown. What shall one say when companies are cheap but prospects are perceived to be dim? Since sentiment is already negative, I would put my chips mid-term on the bull case as positive surprises might push markets higher than negative surprises which would push them down but not by so much.
Tobacco
Florida’s higher court ruled that Altria’s Philip Morris USA and other cigarette makers don’t have to pay $145bn to smokers. With a smarket cap of the biggest five companies at $290bn that translates into a pretty convincing trigger for a rally in tobacco stocks.
stxx - 7. Jul, 17:42
