Stocks Continue Mid May 2012 Slide As Facebook IPO Barely Breaks Even:

U.S. equities fell in an accelerated fashion towards the end of the session and the week as Facebook’s highly hyped initial public offering failed to impress.

No new economic data was important as stocks from all sectors led by the financials came closer to being flat for the year.  The S&P 500 is approaching quickly nearing zero returns for the year and is erasing gains rapidly.  Stocks that were market leaders, are leading the decline with once held gems appearing like dusty stones.

Facebook’s highly anticipated IPO opened at $38 per share and closed at $38 after peaking at 45.  This may not help the average retail investor have confidence in the markets so we don’t expect them to return to trading anytime soon. There could be an inquiry into how shares traded and why there was no halt of trading after the late open when imbalances may have kept new money from coming in.

Unfortunately for Facebook they priced shares at the highest level of the range.  Shares were expected to open between $34-38 and came out on the top of the range at $38 as if a crowd could be disappointed.  In the end if still looks like a good by for the small investor- they got the same shares as the big guys- if they want them…isn’t that how it’s supposed to work?  This definitely was no Baidu- this could mean “bear market” and no hope for the bulls medium run.

Markets Continue Slide As Investors Await Fed QE3, May 12 2012 Jobless Claims, Philly Fed Weak:

U.S. equities continued to slide as more economic bad news came in with no reassurance from the Fed they might extend monetary policy to keep markets afloat and stimulate investment toward risky assets.  The S&P 500 took a drubbing today as news about JP Morgan losing an additional $1 billion dollars on supposed “hedging” made headlines.

Jobless Claims Weak

Jobless claims remained at a seasonally adjusted 370,000 which was more than expected by economists.  Jobless claims for the week ended May 12, 2012 suggest the jobs market isn’t making a comeback and we expect the monthly jobs report to be lackluster.  April unemployment came in at 115,000 new jobs while the prior month’s unemployment growth was 120,000 jobs.

Philadelphia Fed May 2012 Manufacturing Survey Negative For First Time In Eight Months

The Philly Fed confirmed weakness in the overall economy.  The Philadelphia Fed monthly manufacturing survey was negative for the first time in eight months.  The manufacturing survey reading was -5.8 compared to 8.5 last month.

The general weakness in the market was overshadowed by Facebook’s upcoming IPO and no news from the ECB or the Fed today gave investors no assurances that bidders could return.  Greece looks more likely to leave the EU and global equities markets are in a downtrend with support levels far below current trends.

We expect the jobs data for May 2012 to be weak and the U.S. 10 year note yield closed at an all time low of 1.702 percent.  If the Fed wants investors to assume more risk, it isn’t happening right now.

Greek Bank Headlines May 2012 Add To New Global Quantitative Easing Speculation:

The U.S. stock market continued to fall after Greece debt crisis news made headlines and commodities continued to fall out of favor with investors.  The S&P 500 fell to 1324.80, down .44 percent.  The downside risks to the economy based on news about the global banking sector kept some investors staying clear from international banks for the long-run.  Volatility rose sharply over 2.50 percent as traders got less confident about short-term price movements.

The odds the Fed as well as global central banks will add more liquidity have risen and excerpts from the Fed’s April 24-25, 2012 meeting minutes show some members believe more stimulus is necessary to help alleviate the problems caused by weakness in Europe as well as higher unemployment in the U.S.  The Fed’s meeting minutes did little to erode concerns that Greece leaving the euro could cause contagion effects for the U.S., the dollar is strong and the euro is going through its first real test as a currency against the greenback.  The dollar has had 13 straight positive days versus the euro.

Various commodities, gold and oil have been down in recent weeks which could make U.S. equities more attractive medium-term.  Expectations of more easing by global banks or a new styled “operation twist” have risen since inflation is low and decreased wealth effect risks are heightened due to Europe’s debt crisis, China slowing and mixed economic data in the U.S.

S&P 500 May 2012 U.S. Performance Closing In On Flat For Year, Home Builder Sentiment Hits 5 Year High:

U.S. housing data didn’t help equities much today as investors ignored this information and maintained concerns about Greece leaving the euro and trades at JP Morgan.  The trading day got worse when news was revealed late in the day that more negative information was released about Greece.

Home Builder Sentiment Hits 5 Year High

The National Association of Home Builders/Wells Fargo index of home builder sentiment was released today and it rose to the highest level in 5 years.  While the data came in higher than expected, the reading is still well below the 50 mean that suggests expansion and the traders largely ignored this key piece of economic data.

The downward trend in U.S. equities had already begun earlier in the day and no strong buys seemed interesting although JP Morgan was up after falling since the announcement it lost $2 billion in 6 weeks.  The increase did little to help the overall sector with the financial ETF $XLF continuing to decline today. The Dow Jones Industrial average is up around 2.5 percent for the year with the S&P 500 now up slightly over 5 percent.  The S&P 500 is flat at .33 percent in the last 3 months.

Positive economic news is secondary to headlines from Europe and the eventual breakup that is set to occur.  We believe longer term, the regional decoupling will make it easier for capital to discern between good and band national economies which lets capital avoid risk.  Short-term pressure keeps hitting the overall market with the S&P 500 hitting negative in the last 3 months while market leaders fall further.

Jobless Claims Watch May 2012

Reaction to negative sentiment related to Europe, and initial jobless claims on Thursday will help determine which direction the market could be moving in medium term.  The downward trend in U.S. equities may give way to near-term rangebound trading after gold and commodities find support levels.

Financials Get Hit Based On JP Morgan May 2012 Headline Risk, Europe and China:

The JP Morgan Effect May 2012 Keeps Investors Away From Financials.

The U.S. stock market fell sharply today as investors kept away from key sectors like the financials in anticipation equities prices could fall further.  Investors may be waiting for another shoe to drop since JP Morgan announced Thursday after the close of trading that the company had lost $2 billion in 6 weeks.

Headlines from Europe didn’t help traders have buying gumption today as Greece draws closer to ultimately leaving the euro as a standard currency.  China’s economic data has been weak recently and PIMCO today estimated the China could grow at its lowest rate in 13 years with growth possibly occurring in the mid 7 percent range.

Bullish investors haven’t had much good news in the last few trading days and the XLF finance ETF lost over 0.02 percent today led by weakness from Wells Fargo, JP Morgan and Citigroup.  Some investors are on the sidelines waiting for the Facebook IPO this Friday but the overall market trends based on commodities, technical analysis and economic fundamentals globally continue to look weak short-term without a new catalyst to change sentiment.

Technical Analysis – The S&P 500 Gained Only 0.18 Percent In The Last 3 Months Ended May 11, 2012 As Jobs Data Weakened:

Is It Time To Get In Or Remain On The Sidelines? Technical Analysis May 13, 2012: A New Bear Market?

Price action can help investors gauge the likelihood the market is discounting future events or adding a premium to the outlook on equity valuations.  U.S. equities fell sharply in the last two months after jobs data from March 2012 came in weak at 120,000 new jobs added.  The negative trends were confirmed when April 2012 levels came in lackluster at 115,000.  May 2012 initial jobless claims have been marginal on average and don’t suggest expansion much different than at the current rate.

Stocks have reacted to the economic data by moving downward after what started as a correction came close to making a comeback, muddled along for a couple of weeks.  The S&P 500 showed a peak was clear around April 6 when the March 2012 jobs number was released and the follow through was to the downside. Thoughts of a new “bear market” have been largely ignored as investors sit back and look for new entry points.

The JP Morgan Effect 2012

Small cap stocks have slacked along with financials, especially after the new revelations from JP Morgan that the company lost $2 billion in 6 weeks.  Although it’s only a small portion of the bank’s yearly earnings, it doesn’t take much for a cascading effect to occur in an industry that insures other people’s money.

Monitoring financials, tech and the S&P 500 in the past few weeks, we’ve seen a lack of support for some recent prices.   Dodd-Frank and Volcker rule concerns may have a short-term negative impact on investor sentiment related to banks which could spread to other industries and usher in a hesitant investing environment.

The EU Is Getting Worse

The European Union just downgraded its 17 member nations and added more negative sentiment to an already dull market.  Unemployment is expected to rise by 10 percent in the region.

The S&P 500 has lost much of the gains year to date and has about zero growth in the last 3 months.

1. S&P 500 Year To Date +6.36 percent.
2. S&P 500 Last 3 Months +0.18 percent.

Top Story May 12, 2012 – European Union Downgrades Forecasts:

The Impact On U.S. Growth and Concurrent Unemployment Weakness -

Europe doesn’t seem to be getting better anytime soon.  The European Union’s own data shows their economy is slowing and it’s possible the member countries will face contagion effects from slow growth with a common currency.

Unemployment in the euro zone is set to rise and this is occurring at the same time when economic data trends in the U.S. are moving below trend, while negative wealth effects from the stock market correction are keeping some investors on the sidelines.  The European Commission forecasts published yesterday show the 17 member block nations averaging roughly 11 percent unemployment.  The increase year over year is roughly 10 percent and the renewed concerns about political economy issues related to Greek changing its political makeup along with France switching from Zarkozy to Hollande are having a dampening effect on certainty in the region.

It’s A Europe, China, U.S Thing?

Several countries in the euro zone are officially in recession and the headline risk from abroad is heightening, including slowing China GDP growth.  To add to the current negative sentiment, the U.S. seems to be slowing its steady pace of growth that seemed to help 2012 begin with good economic data reports and positive forecasts.  Jobs growth based on initial jobless claims and monthly government unemployment reports in the last two months have been lackluster.  March unemployment decreased by 120,00 while April unemployment levels fell by a slight 115,000 in an economic environment that was due for a snapback.

Retailers have already suffered from European slow growth perceptions in May 2012 ($XRT) and U.S. banks have been labeled after JP Morgan announced it lost $2 billion in 6 weeks on a trade that could get even uglier.  We’ve been watching financials along with tech and these sectors are no longer market leaders.  Economic fundamentals are mixed and some top stocks haven’t regained strength such as Apple although some claim the overall market is dipping as investors rotate portfolios to leave room short-term for the Facebook IPO.

Stay tuned for technical analysis notes tomorrow.

JP Morgan Claims $2 Billion In Losses, Dodd Frank – Volcker Rule Speculation Rises:

JP Morgan chief executive officer Jamie Dimon revealed to the press yesterday that the company would be taking deep losses in the next quarter due to errant trading that cost the company billions.  Investors were caught off guard when JP Morgan announced the news after trading hours Thursday and Dimon claimed the company was “stupid”, language often not heard on Wall Street from company execs.

JP Morgan’s earnings were released just 2 weeks ago and Dimon appeared on CNBC with a positive attitude about the future of the company and his overall outlook.  Financial stocks fell in sympathy with the JP Morgan news in the after hours session and investors may decrease their appetite for equities short term based on perceptions other financial firms have unbalanced books or trading losses.

The bigger issue regarding JP Morgan’s reported $2 billion dollar losses, for a company that makes $19 billion yearly, are the political economy issues related to the Dodd-Frank bill and the Volcker rule which seek to curb bank trading activities.  JP Morgan’s trading losses could reach the $4 billion dollar mark or more and it’s unclear how oversight for this occurred for the company that created the “credit default swap” that helped usher in the 2007-08 financial crisis.

The intermediate likelihood that Dodd Frank, Volcker Rule legislation occurs has increased and will rise if other firms claim losses.

The new regulations for financial firms could cut risky behavior on the part of banks and keep them from trading with their own assets.  After the last banking crisis, skepticism has increased that banks are still making bad bets that may cost the tax-payer and classic economics theories of moral hazard expressed by the likes of Hank Paulson were warranted.  Paulson was more Schumpeterian than his colleges with a ‘let them fail’ approach and leaned towards a no “too big to fail” doctrine.

While its too early to tell if risks are systematic, it’s another reason why sentiment towards how finance is done in a political year could swiftly change momentum.  If bailouts and the repercussions of bank failures, and rogue trading become a focal point in November, this could be negative for the industry for years to come.  Financial stocks and home builders should be monitored medium-run and our overall outlook on the U.S. economy has been lowered.

Jobless Claims Data Suggests May 2012 Monthly Unemployment Report Could Be On Par With April:

Initial jobless claims data fell marginally according to the government today and the slight decrease has investors worried that job trends are getting worse.  Initial claims for unemployment benefits fell 1,000 to a seasonally adjusted 367,000 while the prior week’s jobless claims figure was revised upward from 365,000 to 368,000 the Labor Department said today.

The four-week moving average for new jobless claims, a less volatile measure of labor market trends dropped 5,250 to 379,000 but this didn’t encourage traders much as economic data continues to show the U.S. economy is sluggish.  April’s monthly unemployment report of 115,000 jobs added continued the negative trend from the prior month when only 120,000 jobs were added and early optimism about the economy that started this year has waned.

We have changed our economic outlook on the U.S. economy to mixed.  Several data points show the economy is trending negatively.  Earlier today, Citi confirmed they saw weakness and encouraged central banks around the world to become more innovative in their approach to solving the global slowdown.  We couldn’t agree more and based on the initial claims data coming in, there is a high probability May 2012 monthly unemployment figures could remain low around 150,000+- 25,000.  This would be a strong negative for U.S. equities related to housing and financials medium-run without some action to stimulate investor sentiment as well as jobs growth – a new catalyst is needed.

Tory Capital U.S. Economic Outlook:

• Positive
• Mixed Positive
• Mixed - Current Tory Capital Economic Outlook
• Mixed Negative
• Negative

Markets Take Drubbing As European Headline Risk May 2012 Increases:

U.S. equities markets tanked today as investors re-evaluated the economic situation in Europe with Greece and Spain leaving the European Union becoming a stronger possibility.  Major sectors such as tech, financials, and energy fell below key technical price levels as traders rushed to get out of long positions in anticipation of more bad news coming out of the EU.

In the current environment, U.S. equities look cheap but could remain bargains until “safe haven” trades are abandoned and more investment capital from Europe hits the shores.  The key question is “where to invest now”?  Gold? Bonds? BRIC? PIIGSs? Asia? None of these choice look attractive in the medium run compared to sectors in the U.S. that are poised for growth.

Global money flows will be important to monitor in the next few weeks which would be a boon to under performing U.S. sectors.  European risk will not abate anytime soon so it may be useful to have cash ready while watching for sideways action with some buying on dips when appropriate.

Economic fundamentals also look weak along with soft technical patterns and increased Europe stress syndrome which could make market moves choppy for in the short run.