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What the Market Wants: You Can Fool Some of the People Some of the Time . . .

Posted on the 19 April 2011 by Phil's Stock World @philstockworld

What the Market Wants:  You Can Fool Some of the People Some of the Time . . .But apparently, you can’t fool Standard & Poor’s.

Today, S&P announced that it was lowering its long-term outlook for the federal government’s fiscal health from “stable” to “negative.” Granted, the U.S. credit rating is AAA and remains AAA, but the announcement was a shot across the bow.

It is not clear, however, that the warning shot is being heeded. The Assistant Secretary for Financial Market, Mary Miller, issued a statement this morning welcoming S&P’s affirmation of its AAA rating and offered the following assessment:

S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program — combined with meaningful steps toward implementation by 2013,’ but we believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.

Are you kidding?

Does that statement represent what we’ve been hearing from Washington for the past six months? Did we not go to the brink of shutting down the government just last week? What is this “coming together of America’s leaders” that she refers to?  

While Ms. Miller apparently was speaking for the President, she considerably underestimates the will of S&P. To quote S&P credit analyst Nikola G. Swann:

Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years . . . The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.

As reported by Reuters, top White House economist Austan Goolsbee on CNBC called S&P’s downgrade a political issue, saying,

What the S&P is doing is making a political judgment and it is one that we don’t agree with.

C’mon . . . does anyone seriously believe that McGraw-Hill, the owner of S&P, aligns itself with right-wing conservatism?

The underlying meaning of the announcement was enough to push the market over the cliff, with the S&P 500 Index opening down about -2% and falling further before a late rally brought it to a close, down more than -1%.  It didn’t help that there were pre-market jitters over Sunday’s announcement from China’s that its inflation was higher than expected and could result in more interest rate increases.

At any rate, it was certainly a reversal of recent bullish enthusiasm, which had already cooled a bit, with the S&P 500 down -0.6% last week.

Market stats. Last week, every cap/style was negative except for Mid-cap Growth, which was up +0.16% for the week. Small-cap Value was the worst cap/style, down -1.08%. Small-cap Growth remains the best performer over every period from the past 1 to 12 months.

In an unusual departure from the previous few weeks, sector performance did not resemble last week’s Sabrient SectorCast outlook. SectorCast expected Energy to be in the #2 slot, but the rather sharp drop in oil prices (down about -4%) pushed Energy to the bottom of the list.

Inexplicably, Consumer Non-durables led the sectors, up 2.2%. Health Care, in a likely flight to safety, was second with an increase of 1.6%, and Transportation, which has lagged all sectors for some time, jumped to the third spot, up 0.66%, buoyed no doubt by the sharp drop in oil prices.

Basic Industries, which SectorCast projected to be No.1, was second from the bottom, despite a strong industrial production report (+0.8% versus an expected +0.6%) and against last month’s increase of +0.1%.  An increase in industrial production is usually predictive of future growth in the industrial sector.

Basic Industries’ poor performance also runs counter to the improved capacity utilization, which rose to 77.4%. Another piece of good news that the market ignored last week was the University of Michigan consumer sentiment report, which rose to 69.6%.

The chief downer for the week was initial jobless claims jumping back over the 400,000 mark, after falling to 385,000 the week before. This week’s claims were 412,000 versus the expected 380,000.

The dollar declined slightly for the week, with at least some hint of inflation from the core PPI (producers price index), which came in at 0.3% instead of 0.2%, while the core CPI (consumer price index) did the opposite, coming in at 0.1% vs. the expected 0.2%. What this means, essentially, is that excluding gasoline and food, there was virtually no inflation at the consumer level, but the manufacturing level is seeing higher commodity prices, which will eventually trickle down as higher prices to consumers.

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