How to Interpret the Market’s Mixed Signals

by Dan Wiener | October 31, 2011 2:16 pm

question button[1]If anyone doubted that the stock markets around the globe have been moving almost solely on the ins and outs of the negotiations over Greece’s debt and the recapitalization plans for the euro banks, I hope last week’s market moves have quelled those thoughts.

A 50% haircut on Greek bonds and “happy talk” about repairs for the rest of the euro zone got markets moving around the globe Thursday. Japan’s Nikkei ended with a 2.0% gain, and Hong Kong moved up more than 3.2%. London’s FTSE was up 2.9%, German’s DAX gained more than 5.3%, and in France the CAC 40 was up almost 6.3%.

With those kinds of numbers, our own markets’ gains look tame. The Dow ended Thursday’s session with a 2.9% rise, the S&P 500 Index was up almost 3.5% and the small-stock Russell 2000 index was up over 5%. All major U.S. stock indices, except for the Russell 2000, are in positive territory year to date.

Bonds took it on the chin. Wednesday’s 2.2% yield on the 10-year Treasury turned into a 2.4% yield as investors sold. Extended-Duration Treasury ETF (AMEX:EDV[2]), the longest Vanguard bond fund, fell 5.6% Thursday. About the only government bonds gaining ground Thursday were Greek, Italian and Spanish bonds. New Zealand’s bond market was flat.

Looking homeward, though, I believe that lost in the minutiae surrounding Greece and the euro bailout was this question: What does the announcement by the government of a plan to make it easier to refinance Freddie or Fannie mortgages at lower rates (assuming you are current on your existing mortgage) do to that market? I don’t see how it doesn’t raise prepayment risk and, on Friday, mortgage bonds sold off more than their brethren.

With GDP coming in at a preliminary 2.5% growth rate for the third quarter, mergers continuing apace with both Oracle (NASDAQ:ORCL[3]) and Cigna (NYSE:CI[4]) and earnings growth continuing, I’m not surprised that consumer confidence is at a low last seen at the bottom of the last recession.

Why? Because consumer confidence numbers, for all their headline-grabbing, don’t do a very good job of predicting economies or markets. They just don’t. In particular, at some of the nadirs for the consumer confidence index, you’d have been particularly smart to have bet on the consumer, rather than against them. As I said a couple of months ago, follow what consumers do, not what they say. Retail sales are up and running at their highest levels ever.

Why else would FedEx (NYSE:FDX[5]) have announced that it will hire 20,000 temporary workers (about 3,000 more than they hired last year) for the holiday season? Economic slowdowns seldom are accompanied by increased shipping demand. Oh, and UPS (NYSE:UPS[6]) chimed in with a more muted expectation for growth, but more growth nonetheless, in the months ahead.

Finally, manufacturing continues in slow-growth, not no-growth mode as the September durable goods report showed continued strength despite a decline in aircraft orders, which was expected because of a burst of buying in August. All in all, it was a good report.

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  2. EDV:
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  4. CI:
  5. FDX:
  6. UPS:

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