Portfolio Manager's Commentary on Investing and Trading in the U.S. Financial Markets
Monday, February 09, 2009
Stocks Mostly Lower into Final Hour on Low Volume Consolidation of Recent Gains
BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs, Financial longs, Internet longs and Education longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is below average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is rising .76% and is very high at 43.70. The ISE Sentiment Index is about average at 144.0 and the total put/call is below average at .66. Finally, the NYSE Arms has been running around average most of the day, hitting 1.04 at its intraday peak, and is currently .83. The Euro Financial Sector Credit Default Swap Index is falling 2.41% today to 107.66 basis points. This index is up from a low of 52.66 on May 5th, but down from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling 3.66% to 186.40 basis points. The TED spread is falling 1.88% to 95 basis points. The TED spread is now down 372 basis points in under four months. The 2-year swap spread is falling 5.22% to 59.0 basis points. The Libor-OIS spread is falling 2.48% to 95 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 18 basis points to 1.38%, which is down 132 basis points in under seven months. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .28%, which is up 1 basis point today. Given last week’s big stock gains, today’s low volume consolidation is a positive. Market-leading stocks are very strong again today, substantially outperforming the broad market. There still appears to me to be a large consensus among hedge fund managers that stocks will see a “sell the news” reaction to any stimulus passage and Geithner’s new financial rescue plan. I still suspect any short-term weakness in US stocks will be relatively mild and short-lived. The North American Investment Grade Credit Default Swap Index is now at the lowest level since November 5th of last year. It is also noteworthy that gold is falling 2% today despite a weaker US dollar and rising inflation expectations. A fraction of the “fear premium” in gold is likely dissipating. As well, oil continues to trade very poorly given recent potential positive catalysts. Nikkei futures indicate an +215 open in Japan and DAX futures indicate a -6 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, diminishing financial sector pessimism, falling credit market angst and less extreme economic pessimism.
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