Tuesday, June 1, 2010

Irrational Pessimism

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Irrational Pessimism:
The stock market is now clearly headline driven and a lot of the news continues to be negative. Although today's May ISM report was positive, there continues to remain so much noise in the market, high frequency trading and extreme short term outlooks.
The markets are so focused on a possible slowdown that has yet materialize. Instead of focusing in on interest rates at record lows at least on the short end. Corporate profits might very well be at two-year highs this year. With the Euro declining, you don't want it to collapse, but a gradual decline...which is pro growth. Lower interest rates are pro growth. Is the Federal Reserve about to tighten any time soon? I don't believe so. Is China going to tighten now? No. So we could be looking at an extended period where there is no monetary tightening and maybe a possibility of quantitative easing.
So, does this present an environment that is necessarily bad for equities? NO!
Everyone is so short term focused that they neglect the fact that ten years ago, equity valuations were much higher and there was less anxiety and fear and with a balanced budget. But what has happened over the past decade has been a 50% contraction in p/e multiples for the S&P500. We've gone from 26 times earnings to 13 times, creating real value in the market.
There's so much fear out there that the fundamentals are being ignored. But when push comes to shove, it all boils down to the basics. Earnings, dividends, interest rates, inflation and p/e multiples. Itz Stock Chartz has always looked at technical's, fundamental as well as sentiment indicators. The metric to watch will be this weeks Jobs report on Friday. The real significant number will be the 'Private' sector jobs number, if it come in above 200,000, that should be positive for equities.

Dennis Gartman, founder of The Gartman Letter, shares his outlook on the energy market and the effect of the oil spill in the Gulf of Mexico.

Forecasters warn the oil spill in the Gulf of Mexico could threaten the Mississippi and Alabama coasts as early ask this week. John Hofmeister, former CEO of US operations at Shell, shares his insight.

Coal mining stocks tumbled on Tuesday and analysts attributed it to a slide in natural gas prices, along with a weaker euro and concerns about a slowing Chinese economy. Asian shares fell sharply after purchasing managers’ data indicated that China’s manufacturing output slowed in May. A similar survey in Europe showed that eurozone manufacturing activity lost momentum during the month, having expanded in April at the fastest pace since June 2006. Here in the U.S. data showed that the ISM Manufacturing Index for May hit 59.7, which is a bit better than the 59.4 that had been widely expected. Moreover, construction spending for April surged 2.7%, which easily surpassed the 0.1% monthly increase had been widely anticipated, to make for the best monthly increase since 1998.

Walter Energy took it on the chin with an 11% decline, having entered just last month at $75. Similar chart pattern to the $SPX & FXI with support @ $65.

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