Friday, June 15, 2012

The Equity Markets Have already Begun to Thank the Central Banks!

Well, as we mentioned a couple of times since end of May (5/31/12 and 6/7/12), with so many disappointing economic data coming in, along with the fear of the upcoming Greece elections, it appears that the market has already begun to price in some monetary policy to be implemented by the ECB and/or the Fed.  It is amazing that the market and its participants have not recognized the diminishing marginal returns, in terms of duration of a jump in the stock market and real economic recovery, of the various QE's, twists, central bank policy rumors, political statements, etc.

More indications of the not-so-great recovery came out this week.  They included disappointing retail sales, initial jobless claims (of which the previous week's number was revised up again), core PPI and core CPI, Empire (NY) manufacturing, industrial production, capacity utilization, and the University of Michigan / Reuters consumer confidence.  All indicators mentioned above were disappointing.  When better than expected MBA Mortgage index came out, the S&P futures actually dipped a bit, as the better the economy is, the less likely Bernanke will reach out and help the market; and excluding a Bernanke helping hand, the market is more than fairly valued. 

We must note that with the market withstanding the potential economic and EZ risks, it actually may be reducing chances of any pro-risk news coming out of next week's FOMC.  Although the language is likely to be very positive, and pro-risk and pro-market (in terms of the Fed being ready to pull the QE trigger once again), we believe the recent market jump will likely force the Fed to stick merely with the language and actually not take any actions.  Of course, this may change depending on how disappointing the elections in Greece turn out to be.  And by disappointing, we are referring to the US, big banks, and the equity markets' disappointment, and not necessarily the Greeks themselves.  These days, democracies and/or the way they are structured are not good or 'morally acceptable' unless they meet the US 'criteria'.  We certainly would not be surprised if we heard about various US banks, corporations, consulting firms, and/or 'pro-democracy' groups aggressively campaigning for/against political parties that stand for Greece to remain/exit the EZ and accept/reject the latest bailout plans.

The sector performance update for this week is provided below.  Have a great weekend.  We'll be watching and rooting for Germany to beat Denmark this Sunday, and we'll certainly be keeping our eyes on Greece's elections.

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