Oil is a Coiled Spring

Stocks were following the game plan nicely yesterday. The dollar was down against the euro, and stocks and commodities were rallying nicely.  

 

It all fell apart when European Central Bank president Jean-Claude Trichet called the inclusion of the IMF in the Greek bailout plan “very bad.”   

 

I see his point – this was a great opportunity for Europe to come together and handle the Greek debt matter in-house. Of course, we know Germany was resisting. And in the end, Germany got its way. 

Germany and the euro

The S&P 500 moved back down for retest of 1,165 support/resistance point yesterday. That important level held, but it’s interesting to see what lead to the retest.   

 

Basically, yesterday’s decline was the result of currency values. The U.S. dollar rose against the euro as more signs of dissension in the European Union add uncertainty to the future of the euro.  

 

The root cause of the dissension, the ongoing debt issues in Greece and now in Portugal, is somewhat irrelevant. Greece will get the bailout loans it needs. And whether they come cheaply from the IMF or a bit more expensive from the EU central bank, they will come.   

 

The overriding issue is that Germany is demanding IMF involvement. Other European countries see this as an internal matter for the EU to solve. From that perspective, we can see the Greek debt solution as a chance for the EU to demonstrate its cohesion.  

 

And Germany is throwing a monkey wrench into the whole thing. 

50% Off

That was quite a show Maguire Properties (NYSE:MPG) put on yesterday after it reported 4th quarter earnings. It opened down, around $2.50 a share, and then marched steadily higher for the rest of the day to close at $3.54.   

 

Maguire’s cash reserves are rising after it walked away from a few underwater properties and sold a couple others. Investors seem to be saying the stock is on more solid ground now – volume was monstrous.  

 

While I’d love for Daily Profit readers to have participated in yesterday’s gains, I stand by my recommendation to take your profits on the stock before earnings. Earnings are a big uncertainty. Maguire could just as easily have dropped yesterday. There’s always risk when investing, and perhaps more so with a stock like Maguire. It would have been irresponsible of me not to have you take profits before earnings. 

Health Bill Profit Opportunity

Yesterday morning was the bears’ big chance. Futures were down, resistance at S&P 500 1,165 had held and there was a steady stream of seemingly negative news. Greece was still a question mark, trade relations between the U.S. and China was getting tense, and the controversial health care bill had just passed. There was enough uncertainty in the air to drive the S&P 500 to an early test of support at 1,150.   

 

That was the moment. 1,150. And the sellers couldn’t take it lower. In fact, the bulls took control and pushed the S&P 500 back above 1,165. As I wrote last week, there is very little resistance between 1,165 and 1,200. I think the odds are good that we see S&P 500 1,200 in the near future.   

 

Now, I want to switch gears and discuss the Nasdaq a little, because it’s been outperforming the other major indices by a wide margin. The S&P 500 is up 2.8% for the year. The Nasdaq, on the other hand, is up 4.3%. 

Google and China

The financial media is jumping to the conclusion that recent weakness for stock prices is related to the ongoing Greek bailout saga. But considering that Greece would prefer to have the IMF involved in its bailout plans because emergency loans would be cheaper, I’d suggest we need to look elsewhere for the real cause of the recent mini-sell-off.  

 

The Indian rate hike is certainly a more likely candidate. Not because India’s economy is driving the global economy, but because this move is another sign that central banks around the world are ending their stimulus policies.   

 

India’s move comes a full month ahead of the next scheduled central bank meeting. The timing suggests that perhaps inflation is becoming problematic. And it also raises the possibility that India will hike rates again when it meets next month.   

 

Don’t underestimate the significance of Google’s (Nasdaq:GOOG) possible exit from the Chinese market. 

New Highs Coming?

Today is March options expiration, so don’t expect a lot of action. Options expiration days (the third Friday of the month) tend to be pretty dull.  

 

Still, it’s been a pretty good week for stocks. The S&P 500 moved up through two important resistance points – 1,150 and 1,165. 1,165 is a post-crisis high. And if you check a chart, you have to go back to late-2005 to find the next resistance point at 1,200. (The S&P 500 attempted to find support at 1,200 during the crash in 2008, but I don’t see that as particularly significant – investors were literally grasping at straws then.)  

 

Ironically, individual investors aren’t on board. Total inflows into diversified equity funds for U.S. stocks were negative in February. Bond funds and foreign funds showed gains.  

 

Also, ETFs had a positive inflow of $5 billion. That suggests that investors may be taking matters into their own hands and opting for a lower cost investment vehicle. 

S&P Resistance

The S&P 500 is trying to push past a key resistance point at 1165. The Consumer Price Index was unchanged for February. The lack of pricing pressure supports the Fed’s monetary stance. As the Nomura Securities chief economist David Resler told Bloomberg, “Inflation is certainly no imminent threat to the U.S. economy…We see the Fed on hold through this year.”   

 

Resler’s expectation for interest rates is a bit of a departure. Most economists think rates will rise later in the year. But any interest rate hikes will be dependent on jobs growth. Unemployment claims fell by 5,000 last week. That’s an improvement, but we still need to see payrolls increases. We won’t get that number for a couple of weeks.   

 

The dollar is stronger against the euro today as the bailout plan for Greece takes another turn. An agreement seemed to have been made a couple days ago. Greece was even taken of credit watch by ratings agencies. 

Happy St. Patrick’s Day

Happy St. Patrick’s Day! In honor of the holiday, the stock market is in the green. The Fed reiterated its pledge to keep interest rates low for an extended time. The promise of cheap money is clearly helping to support stock valuations.

Also helping move prices higher, and supporting the Fed’s stance, is the 0.6% drop in the Producer Price Index. The drop was led by food and fuel prices. Excluding those, the so-called "core" rate climbed 0.1%.

You wouldn’t know fuel prices were lower looking at the price for a barrel of oil. Despite the relative strength of the U.S. dollar, oil has staged a month long rally that’s got it within spitting distance of its 52-week highs. And I expect we’ll be seeing those highs in the very near future.

What About Ethics?

Senate Banking Chairman Christopher Dodd is all set to put his latest banking regulation bill up for a vote. The bill would put an end to proprietary trading, lend transparency to hedge fund trading and derivatives, and give the Federal Reserve the power break up companies if they pose a “grave threat” to the economy.  

 

Dodd’s proposal would also create a nine-member “Financial Stability Oversight Council” of regulators, led by the Treasury Secretary. According to Bloomberg, “…the council can make recommendations to the Fed to impose “strict” rules for capital, leverage, liquidity and risk management to make it difficult for firms to grow so big and complex that they endanger the financial system. It could require the Fed to regulate non-bank financial firms that threaten financial stability, ensuring that “the next AIG would be regulated” by the Fed…”   

 

It’s clear what Dodd is trying to accomplish here. He’s trying to make it so that financial firms can’t engage in trading activities that could ultimately destabilize the entire economy. I’m not sure these proposals, as I understand them, accomplish the objective. 

Sovereign Wealth Fund and Commercial Real Estate

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   

 

In my opinion, this line of thinking is completely unrealistic.   

 

China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.  

 

China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM)