Traders Need New Strategies
Unfortunately, a short-covering rally in Japanese equities does not mean thenuclear crisisthere is over.
However, traders this morning are trying to look down the road. Simply put: chaos means dislocations.
"If you would have told me a few months ago that there would be shooting in Bahrain, and in Japan they would be trying to extinguish a nuclear reactor with a water cannon that is used to quell riots, I would have told you the market would be down over 500 points," one trader said to me this morning.
But it's not. Because traders—burned badly earlier in the week because many were long stocks while at the same time hedging by being long gold and oil (ouch!) and are regrouping by looking at a new, two-pronged strategy: 1) buy energy, and 2) start looking closely at infrastructure. But carefully.
So commodities are up this morning, and there are modest gains in big cap energy stocks. Some infrastructure plays like Caterpillar are also up fractionally.
Expect strategists to begin revising global growth and GDP assumptions. It's not that anyone thinks events in the Middle East and Japan aren't going to matter. I have seen many different back-of-the-envelope guesses for U.S. GDP growth this year, but typically some think recent events will cut a half-percent off the GDP.
As for earnings, instead of, say, $96 in earnings for the S&P 500, some may cut the estimates to $94 or even $90. Some may cut the multiple from 15x forward earnings to 13x forward earnings.
What does that mean? It means there is a high likelihood that strategists may soon begin to lower target prices: instead of 1,450-1,500 on the S&P, where many strategists are right now, that may go down to 1,300 or so—not far from the 1,281 level we closed at yesterday.
1) Ugh! Lousy housing and inflation! Housing and PPI were disappointments—heck, New Home Sales for February was a huge miss: instead of 575,000 starts expected, we got 479,000, a drop of 22 percent, the lowest since April 2009 and the largest monthly decline since March 1984 (!).
Headline for the Producer Price Index for February was up 1.6 percent, well above the 0.6 percent expected. Higher food and energy prices were the culprit; the core figure which excludes food and energy was up 0.2 percent, in line with expectations.
2) ETFs - a leading indicator. Japan's Nikkei 225 rebounded 5.7 percent today, but that's not giving a boost to the big iShares MSCI Japan ETF this morning. The ETF is actually down 1.5 percent pre-open.
Why the disparity? As Nikkei futures rose during U.S. trading hours yesterday, so did the Japanese ETFs. The EWJ fell 8 percent at its lows yesterday, but closed down just 0.2 percent. Yesterday's intraday rise PRECEDED the jump over in Japan today.
That's one of the "miracles" of ETFs - giving ordinary investors access to trade a market even when that market is closed (think Egypt, and now Japan). In the old days, only traders with futures accounts would have been able to profit from the move in Nikkei futures.
3) In a SEC filing Weatherford slashed its Q1 guidance to $0.18 from $0.27. Shares fall 2 percent as that outlook is now below Street estimates of $0.24. The oil services firm also warns that it cannot provide full-year guidance because of the uncertainty in the Middle East and North Africa, where political instability has "led to substantial volatility in oil and natural gas commodity prices." Also negatively impacting activity levels - severe weather-related disruptions, particularly in Australia.
4) Steakhouse Morton's Restaurant Group announced it is exploring strategic alternatives, including a possible sale of the company.
5) Ann Taylor has changed its name to Ann Inc., effective today. The store names--Ann Taylor and Loft—will remain.
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