BAM MARKET WRAP - THREE DOWN, ONE BIG ONE TO GO

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SO FAR SO GOOD

The markets surged today as the European Central Bank's Mario Draghi provided enough fodder for the markets to get excited about.  While the ECB did not announce anything much different than what had already been discussed, the markets obviously liked what they heard and were pleased to see the ECB taking some action to forestall the Euro Zone crisis.  It also didn't hurt that the ADP payroll report came in much hotter than expected.  ADP reported 201,000 new jobs.  Attention will now turn to tomorrow morning's government payroll report.  The ADP report can be a harbinger of the government number but can also be significantly different.  Last months numbers were very close but in June the ADP report came in at 172,000 versus the government number of 73,000.  Needless to say, expectations have been raised for tomorrow morning.  A reading equal to the ADP number would provide support and additional fuel for today's rally.  A disappointment in the government's number could result in giving back some of today's gains. 

The rally today forged new highs for the year and broke significant resistance so the bulls will look to fight hard to keep the gains.  The German Constitutional Court meets next week and could throw a wet blanket over Draghi's comments.  The Fed is also lurking next week and the good data would make another round of easing harder to justify.  Then again, better economic data would be the best of all worlds though Fed intervention would lead to more of a sugar-rush type of gain.  Tomorrow's report takes added importance with today's solid ADP report.  Conflicting data would only make the Fed's job harder (as if it wasn't hard enough).  We'll see what tomorrow brings and will post further updates as warranted by the markets or the economic news. 

HERE IT COMES

While trading volume in August was the lowest in 5 years, September promises much more volume and volatility.   Kids are back in school and traders have taken the last of their summer vacations.  Combine that with the huge market making events over the next few days and the stage is set for  a make or break moment in this enduring Summer rally.  The key dates over the next couple of weeks are:

• September 6 - The European Central Bank meets in Frankfurt, Germany.  The markets are expecting a few more details of Mario Draghi's promise of a couple of weeks ago to do whatever it takes to save the Euro.  We'll see.
• September 7 - The August Non Farm Payrolls and Unemployment report is released.  Strength or weakness here will be evaluated to determine the likelihood of further easing by the Federal Reserve.  A weak report will likely give the Fed cover to announce more easing.  A strong report will be good for the economy and will likely preclude Fed action.  Either of these two would produce positive results for the markets.  In this case, the worst case would be a jobs report that is neither too cold or too warm - the Fed probably would not act and the markets would not get excited about the future prospects.  
• September 12 - The German Constitutional Court meets to determine the constitutionality and legality of the European Stability Mechanism (ESM).  This will be a very significant conclusion as the ESM is key to the possibility of a European solution to their debt crisis.
• September 12-13 - The Federal Reserve meets to determine if the US economy is poor enough to justify another round of quantitative easing or some other fiscal stimulus.  The announcement will come the afternoon of the 13th and it is widely expected that the Fed will act.  Any disappointment will lead to a sell-off in the markets.

As you can see, the next two weeks hold the key to the remainder of this year (maybe longer).  Hopefully, we will begin to get some clarity over the next 10 days.  Hold on - things are about to get interesting!

ON A KNIFE EDGE

The markets sold off today on some less than inspiring economic news and lowered expectations of what Ben Bernanke may or may not say tomorrow.  The Dow sold off to the psychologically important 13,000 level and the S&P fell to the 1200 level.  The 1200 level is both psychologically and technically important.  A breach below this level would set the stage for lower prices.  The low volatility that has characterized this market over the last couple of weeks was interrupted today and we may well have another volatile day tomorrow as Bernanke provides clues as to the Fed's thinking.  While many expect nothing to be done tomorrow, the contrarian in me wonders...  We'll know tomorrow.  Bernanke may well want to wait to survey the upcoming jobs report before the next scheduled FOMC meeting in two weeks.  If the Fed is going to announce any new measures, the September meeting would be the logical time as October gets even more politicized.  Again, we'll see.  We are watching closely and will make appropriate portfolio adjustments as the market dictates.

BAM MARKET WRAP - BREAKOUT OR FAKEOUT?

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HO HUM

The markets continued their meandering ways today with the S&P barely moving above the flat line.  Over the last 6 trading days the S&P is up .3% with extremely low volatility.  With options expiring Friday and more earnings after the bell today, volatility could pick up.  Volume has been anemic, which is typical of this time of year, which can make for sudden moves either way.  Certainly volatility will pick up significantly with the Fed's meeting at the end of this month and the European Central Bank's meeting in early September.  It is no secret that the market is betting on either Bernanke (Fed) or Draghi (ECB) coming to the rescue in the next month.  A disappointment from either could start a significant sell-off as the market doesn't like surprises and at least some of the potential accommodative policies have been baked into stock prices.  Bernanke is in a bit of a hard place.  He knows that Wall Street is largely expecting him to act in two weeks but while the economy is struggling it is showing slow improvement.  Additionally, with a 1.5% economic growth rate the market is already ahead of itself by many measures and any Fed easing would only serve to further the over-reach.  Finally, Bernanke has made a point to try and separate politics from his job function and the closer we get to the election the more it looks like any move is politically motivated (whether true or not).  Draghi has his own challenges in trying to pull together consensus from all of the Euro Zone members and getting Germany to sign off on any new plan.  All in all, risk remains high in our way of thinking. 

There are currently a number of conflicting signals.  Bond yields have gone up significantly in the last week (indicating money coming out of bonds) and yet stock prices have remained relatively flat.  Generally, rising bond yields (especially from the low levels of today) would indicate a major shift from bonds to equities but we are not seeing a commensurate rise in equities one would expect from such a large move in yields.  Something will have to give soon - either stocks will rise in conjunction with yields or yields will turn down again and stock prices will follow.  The Vix is also a little confounding here.  The Vix measures the volatility in the market and a low Vix usually indicates higher prices while a higher Vix usually indicates higher risk and lower prices.  Currently the Vix is very low by historical standards and reflects a measure of complacency and/or expectation of still higher prices.  This may be a reflection of the market's expectation of Fed action that puts a floor on just how low this market could potentially go.  In any event, the declining Vix is not consistent with the stock market action of the last week or two.  This market is acting very strange which causes us to take note and wonder what is going on behind the scenes.  We have many more thoughts but this post is already longer than usual.  We will have more to say in our next newsletter and, hopefully, a little more information to sift through.

BAM MARKET WRAP -THIS TIME IT'S DIFFERENT - OR IS IT?

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