Editor’s Note: While Sam Collins is on vacation, we’ve asked Nick Atkeson and Andrew Houghton, editors of Big Money Options, to provide you with a comprehensive market outlook and a trade of interest until Sam returns June 1.
The S&P 500 (SPX) withstood a new record low in housing starts Tuesday only to roll over in the last half hour of the trading day and close slightly down 0.15%. The Dow (DJI) was down about 28 points (0.34%) and the Nasdaq (NASD) ended the day up almost half a percent. Treasuries continued to sell off — a bullish indicator as investors begin to exit the safe trade and buy higher risk corporate bonds and other assets.
The CBOE Volatility Index (VIX) closed below 30 for the first time since Sept. 12, the same day the S&P 500 closed just north of 1,251. Investor fear is subsiding and we are returning to normalized market conditions. The VIX could continue its downtrend all the way to 20 or lower before we would become concerned about widespread complacency.
The real market news yesterday was in the bond markets. Since the Chrysler bankruptcy, when the legal rights of lenders withstood the tremendous pressures of government intervention, private market participants have been increasingly returning to the debt markets. We saw a noticeable jump in credit buying. Free-flowing private-sector capital flows in the credit markets is a critical component of a turnaround.
Three month LIBOR-two-year credit saw swap spreads were down again and reached levels not seen since early 2007, which saw one of the highest liquidity times of all times.
The dry bulk index continues its breakout and was up 150 basis points last night. It is now about 50% off the most recent lows.
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What the Markets Are Saying
Equities, options, Treasuries and the corporate debt markets are all singing the same tune for the first time in a long time. They are saying to get long.
First Call’s earnings estimate revisions index is a remarkably good coincident indicator — and it has risen quite a bit lately. We believe the major surprises to the market will be on the upside versus the downside.
One possible positive surprise for the struggling auto makers is a rising likelihood that Congress may pass a “cash for clunkers” bill that will provide consumers with financial incentives for replacing the old car with a more fuel efficient, cleaner new car.
Well before the stock market peaked in October 2007, the credit markets were unraveling and screaming that trouble was ahead. And well before stocks dropped off a second precipice in October 2008, the debt market was giving every indication that stocks were about to go a lot lower.
Now, equities have rallied but the debt market is telling us they could go even higher. Borrowing rates are coming down, funds are flowing at an increasingly rapid clip and the appetite for risk continues to expand.
Today’s Trading Landscape
Hewlett-Packard (HPQ) reported in-line EPS and slightly less than expected sales and reaffirmed full-year EPS guidance of $3.78 to $3.88. Analysts’ consensus earnings estimates for the year is $3.72. Overall, the quarter looks solid and should not be a major market driver.
Bank of America (BAC) raised about $13.47 billion by selling 1.25 billion shares at an average price of $10.77. Although this capital raise came on the same day Goldman Sachs (GS) upgraded the stock and gave it a $15 price target (feels like the good old days of stock research), it does help to fill an equity hole in the balance sheet.
Today, we will hear earnings reports from (before market open) Ann Taylor, BJ’s Wholesale, Brady, Columbus McKinnon, Cato Corp, Deere & Company, Elbit Systems, Eaton Vance, Melco Crown Entertainment, Target, Tween Brands and (after market close) Advance Auto Parts, Computer Sciences, Citi Trends, Gymboree, Hot Topic, Intuit, Limited Brands, NetApp, Netease.com, PetSmart, Semtech, Synopsys and Westell Technologies.
On the economic front, the Federal Open Market Committee (FOMC) meeting minutes will be released today and we will see MBA Mortgage Applications statistics.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
