Monthly Archives: January 2010

Markets betting on Brown

U.S. Financial Markets rallied Tuesday on speculation that Republican Scott Brown would win the late Senator Ted Kennedy’s vacant seat. A Brown win could cause potential problems for Democrats and those in favor of President Obama’s health care plan. As a result, the health care index ($HCX) closed up 2.04% while the hospital index ($RXH) closed up only 0.61%. The hospital index opened lower, but traded higher throughout the day as the rest of the market rallied.

The markets began pricing the Republican win early in the trading session. The U.S. Dollar and equity markets rallied on the speculation that a Republican win in Massachusetts would help to bring Washington closer to normalcy. However, Brown’s victory may have some serious economic implications that many have not considered. Scott Brown’s victory implies less stimulus money, lower expected future inflation, and a reduced likelihood of a tax increase.

Brown’s victory reduced the likelihood of a tax increase which can explain much of today’s rally. The first two implications are related since a decrease in our current level of deficit spending will in turn decrease expected future inflation. However, lack of necessary stimulus could result in a serious problem. For the record, I disagree with deficit spending, particularly when the intent is to influence the business cycle. With this in mind, reducing or eliminating the current stimulus policy will cause us to fall into a Depression. The government cannot stop stimulating this economy without certainty that we are recovering. Notice I said CERTAINTY and RECOVERING.

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Intel Corp. (INTC) and J.P. Morgan Chase & Co. (JPM) Follow-Up

Both Intel Corp. (INTC) and J.P. Morgan Chase & Co. (JPM) beat analyst estimates as well as Whisper Number expectations last week[1]. Both companies also traded lower on Friday with heavy volume[2]. This negative response to “positive” news suggests negative sentiment among traders, both professional and retail, and is in line with my expectation and forecast that this earnings season will bring the markets closer to reality.

Citigroup Inc. (C) and IBM (IBM) report Tuesday. Worse than expected results will provide more ammunition for the bears and potentially the first 2 day loss for the indices since early December [3].

[1] INTC $0.30 Analyst Estimate vs. $0.33 Whisper Number Expectation vs. $0.40 Actual
JPM $0.62 Analyst Estimate vs. $0.66 Whisper Number Expectation vs. $0.74 Actual
[2] INTC traded on 1.31 times previous day’s volume, JPM traded on 1.84 times previous day’s volume
[3] December 7 and December 8

Intel Corp. (INTC)

Intel Corp. (INTC) will report after market close today. Intraday INTC is up about 2%[1]. Analyst estimate $0.31 EPS compared to a slightly higher Whisper Number[2]. If earnings are in-line with analyst estimates, I expect to see a decent sell-off. A broad market sell-off will follow tomorrow if comfort cannot be found in J.P. Morgan Chase & Co. (JPM) earnings results.

INTC Intraday

INTC Last 6 month

[1] +$0.45 (2.13%) to $21.42 at 2:26 EST
[2] Whisper Number can be found at http://www.whispernumber.com

What January Effect?

The markets experienced a modest 6 day rally[1] to begin 2010 in what many are calling a continuation of the current up trend. Although the markets have rallied nicely from the November lows and finally broke out above December’s resistance levels, this rally is lacking significant substance. Market Fallacy has been bearish for some time now. While not all data has conclusively supported this rally, the important indicators continue to suggest a future decline. Sadly, the brilliant talking heads on CNBC are calling for a “bigger event” to act as a catalyst for this market. Unemployment (although a lagging indicator) has been 10% for two consecutive months[2], today’s retail sales numbers[3] were much worse than expected and Alcoa severely missed analyst expectations[4]. If this any indication on how earnings season might go: here is the BIGGER EVENT.

SPX Last 9 Months

[1] Approximately 2.86%
[2] November Consensus 10.2% vs. Actual 10.0%, December Consensus 10.1% vs. Actual 10.0%
[3]  Consensus 0.4% vs. Actual -0.3%
[4]  Analysts Estimate 0.6 vs. Whisper Number 0.07 vs. Actual Earnings of 0.01

Market Fallacy 2.0

Market Fallacy is back with a new and improved format. Sign up for the Market Fallacy Newsletter at http://www.marketfallacy.com to receive insight into our proprietary approach. Stay tuned in to our blog to receive full market commentary. Market Fallacy will no longer give explicit buy/sell recommendations, but will instead provide a framework for understanding our proprietary analytics.

Look for a follow-up to the Summer Stock Picks, Earnings Season Coverage and Market Analysis