Tuesday, October 20, 2009

Dollar Strength, PPI Weigh Against Strong Earnings

Typically, during earnings reporting season (now), traders mostly ignore external economic details in favor of focusing on individual companies, but on Tuesday, the opposite occurred as FIVE Dow components posted better-than-expected earnings reports prior to the opening bell.

At 8:30 am, however, the monthly PPI figures were released, stunting what appeared to be a blossoming rally. September PPI figures showed a decline of 0.6%, indicating that pricing power in the production cycle was feeling a bit of a deflationary tinge. Stripping out food and energy, core PPI came in slightly negative, at 0.1%.

Why such a small change would influence the entire market, considering how much business done by US corporations is outside US borders, is something of a puzzle, and may not have had the overall effect of dampening down expectations as did the strength in the dollar, which gained against the Euro, Pound, Yen and other major currencies. The dollar index gained strength from 9:00 am until Noon EDT, precisely the time period in which stocks were suffering their worst declines.

While there is certainly a throng of economists who believe some dollar strength is healthy - and possibly essential - to America's long-term prospects as a world-leading economy, Wall Streeters apparently do not agree. The dollar and PPI data are the only cogent explanation for a decline in stocks on a day in which Pfizer (PFE), Caterpillar (CAT), United Technologies (UTX), DuPont (DD) and Coca-Cola (KO) all beat earnings estimates, but were mostly hammered by eager sellers. Of the five, only Caterpillar finished the session on positive ground.

Adding to the confusion was Apple's (AAPL) blowout quarter, which sent shares of the computer and personal hardware maker up nearly 5%, reaching a new 52-week high and all-time high for the stock.

So, maybe it wasn't the dollar or the PPI which sent stocks down all day on each of the major indices. Maybe the market is just a bit tired, and any little bit of bad news prompts enough potential sellers to pull the trigger. The market has been ablaze since March with hardly a hiccup. To take a small decline - even in the midst of hearty earnings - might be what's best for the overall health of the market. It's quite extended and some say over-extended, and due for a pull-back. What was witnessed today was about all the give-back that there is going to be, unless some titan company - say Cisco, McDonald's, Microsoft or Boeing - completely misses their numbers for the quarter.

This little foray into the dank downside concluded about as abruptly as possible when the Dow sank below 10,000 for two brief moments during the noon hour. The afternoon session was mostly sideways to up, ending closer to the highs of the day than the lows. Taking 50 points off the top of the Dow wasn't as much of a big deal as the S&P failing to break 1100 yesterday and sinking well below that level today. The late-day recovery leaves open the potential for a gap up above 1100 at the open, since it's only 9 points away and there is still a ton of money sitting on the sidelines.

What could trigger an opening rally are earnings reports from the likes of Freeport-McMoRan (FCX), Northern Trust (NTRS), Boeing (BA) or Wells-Fargo (WFC), all scheduled to report before the opening bell. The best bet would be a blowout quarter from FCX and Wells-Fargo combined, boosting two separate sectors (basic materials and financial) and offsetting the effects of Boeing, which is widely expected to show a large loss.

Dow 10,041.48, -50.71 (0.50%)
NASDAQ 2,163.47, -12.85 (0.59%)
S&P 500 1,091.06, -6.85 (0.62%)
NYSE Composite 7,158.27, -63.94 (0.89%)

On the day, simple indicators were in line with the poor overall showing, perhaps amplifying that with breadth. Losers beat gainers by a wide margin, 4487-1996, better than 2-1, while new highs beat new lows, 491-60, those results due primarily to easy year-ago comparisons, when stocks were mostly in free-fall. The paucity of new lows, even on a down day, is an encouraging sign for market bulls, however. Volume recovered significantly from yesterday's unusually-low level, back to standard.

NYSE Volume 6,047,379,500
NASDAQ Volume 2,136,783,250

Commodities felt the heat of a higher dollar, mostly trending lower. Oil lost 52 cents, to $79.09; gold was up 50 cents, to $1,058.60; silver lost 17 cents, to $17.56. It's become fairly clear from the commodity and forex markets that there isn't going to be any major economic disruptions any time soon. The dollar isn't going to fall over a cliff, oil isn't going back over $100, inflation isn't about to reappear any time soon, to the great chagrin of the horde of gold-bugs in the world (mostly detached from reality).

Sanity has been restored in the land of fiat-funny-money, at least for the time being. The apple cart will not be upturned and the rally will resumed in short order.

Well, just after I posted the above missive, Yahoo (YHOO) announced 3rd quarter earnings of 13 cents, blowing away estimates of .07. Can you say, Yip-yip-Yahoo!?

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