Daily State of the Markets 12/14: Weak Link?

Good morning. Stocks gained ground for a third straight day on Friday on the back of a couple of better-than expected economic reports and some additional positive news out of China. Well, actually, the Dow and S&P enjoyed a third consecutive gain, but the same cannot be said for the NASDAQ and the Russell 2000. The bottom line is that while the S&P is inching its way back toward the recent high water mark and the Dow is within a fraction of the Promised Land, there was never any real threat of either index breaking on through to the other side of the current trading range.
Although the news of the day centered around economic reports both here and abroad, TARP repayments, and more talk about sovereign debt, the real story of the day was the fact that both stocks and the U.S. dollar went up on the same day.

Up until Friday, we were becoming more than a little concerned about the conundrum that seemed to be developing with regard to the inverse relationship between the dollar and the market. In short, if an improving dollar meant more selling of stocks, commodities, and emerging markets (aka ‘risk assets’), it was getting tough to see how stocks were going to be able to advance. The way the game was being played, any improvement in economic data would mean a corresponding advance in the dollar, which, of course meant an unwind of the dollar-carry trade, and, in turn, more selling of stocks.

So, if good economic news was going to be bad for stocks because of the dollar-carry trade situation and bad economic news was going to be bad because, well, it always is, then how exactly were the bulls supposed to get anything going to the upside?

As we mentioned last week, we did expect that the linkage between the greenback and the stock market would weaken at some point and when that occurred, the game would make a bit more sense again. Thus, it is indeed good news that on Friday we saw the dollar and the stock market go the same direction.

However, in light of the fact that one day does not a trend make, we will remain a wee bit cautious on the outlook for the linkage to be either weakening or broken.

The reasons behind the move higher in the blue chips on Friday were fairly straightforward. First we got word that Retail Sales rose by 1.3% in November, which was ahead of the consensus expectations for a smaller increase of 0.6%. And even when you strip out autos and gasoline, the sales totals were fairly broad-based. In addition, the University of Michigan’s Confidence Index improved nicely to a reading of 73.4 in December, which was also well above the estimates for a reading of 68.8 and November’s 67.4. So, maybe, just maybe, the consumer isn’t dead after all.

Turning to this morning, we don’t have any economic data to review today but we do have a fair amount of market-moving news to work with. First, Abu Dhabi surprised investors by injecting $10 billion into Dubai; the first $4.1billion of which will be used to cover a debt payment due today. In addition, Citi has reached an agreement to repay $20 billion and get out from under the TARP.

Running through the rest of the pre-game indicators, with the exception of Japan, which basically broke even, overseas markets are higher across the board on the Dubai news. Crude futures are lower with the latest quote showing oil trading down by $0.62 to $69.25. On the interest rate front, we’ve got the yield on the 10-yr trading up to 3.54%, while the yield on the 3-month T-Bill is currently at 0.02%. In addition, gold is moving up by $4.60 and the dollar is higher against the Yen, but lower against the Euro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 55 points; the S&P’s are up about 8 points, while the NASDAQ looks to be about 10 points above fair value at the moment.

Wall Street Research Summary

Upgrades:
# AutoZone (AZO) – Argus Research
# Newfield Exploration (NFX) – Barclays
# Radio Shack (RSH) – Barclays
# Public Storage (PSA) – Citi
# Weingarten Realty (WRI) – Citi
# Illinois Tool (ITW) – FBR Capital
# Philip Morris (PM) – Added to Conviction Buy at Goldman
# VimpelCom (VIP) – Goldman
# Palm (PALM) – Jesup & Lamont
# Teradyne (TER) – Piper Jaffray
# Visa (V) – RW Baird, Estimates increased at William Blair
# Autoliv (ALV) – RW Baird
# Exxon Mobil (XOM) – Societe Generale
# New York Community Bancorp (NTB) – Stifle Nicolaus
# Expeditors Intl (EXPD) – UBS
# MasterCard (MA) – Estimates increased at William Blair

Downgrades:
# PMC Sierra (PMCS) – Barclays
# Research in Motion (RIMM) – Mentioned cautiously at Bernstein
# MEMC Electronic Materials (WFR) – Target reduced at Citi
# Kimco Realty (KIM) – Citi
# Meritage Homes (MTH) – Removed from Conviction Buy at Goldman
# Mosaic (MOS) – Estimates reduced at Soleil
# Potash (POT) – Estimates reduced at Soleil
# Plum Creek (PCL) – UBS
# Potlatch (PCH) – UBS

Long positions in stocks mentioned: V

Don’t let success go to your head or defeat into your heart, and until next time, “may the bulls be with you!”

David D. Moenning
Founder TopStockPortfolios.com

For more "top stock" portfolios and research, visit www.TopStockPortfolios.com

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