Thursday July 21st, 2011

On Monday, I suggested that given the calendar, we could potentially put the uncertainty of the European sovereign debt crisis and the crashing of the U.S. debt ceiling behind us.  I would argue that while the risk from both still shrouds the market with fear and caution, the key players have taken major advances in resolving each situation constructively.  If investors were to perceive that these two binary events have taken the first steps on the path toward long term stability, then they would comfortably shift their focus away from the beta of the machinations of the macro environment toward the alpha of individual stock picking.  Doing so, they would be only encouraged based on the early results from the reporting season.

European leaders arrived in Brussels today for a much ballyhooed summit in an attempt to prevent rapid contagion arising from a potential meltdown in Greece.  Among the seventeen heads of state participating, none carry more clout than French President Nicolas Sarkozy and German Chancellor Angela Merkel.  Word spread late last night that after being locked in a room all day along and receiving guidance from Jean-Claude Trichet, these two political juggernauts have reached an agreement in principle in how to handle the crisis.  The Euro and S&P futures modestly popped in optimism on the announcement.  

Details of the plan will be revealed at the summit later today, but one can only surmise that the fine print will demand a stronger reaction from the Common Currency and U.S. equities.  I base my thesis purely on logic, for Mr. Sarkozy has more time in his pocket if needed before he completely sells out the masses.  He assuredly made some concessions to allow Ms. Merkel to represent her constituency in good faith while governing with an aim to aid the welfare of most others.  In addition, the presence of the ECB President, who has remained fully transparent on the requirements for the future acceptance of Greek debt as collateral, suggests a positive outcome as well despite somewhat ambiguous remarks this morning from Luxembourg Prime Minister Jean-Claude Juncker that traders have taken to foreshadow an acceptance of a possible selective default for Greece.

Similarly, the Tea Party activists can applaud the efforts of their Congressional leaders as the House passed a bill late Tuesday night that proposes a massive deficit slashing exercise while reducing the top income tax bracket to 29%.  Despite Obama’s certain veto let alone almost definite failure in the Senate, the dozens of freshman representatives now have cover to hide under when the bipartisan deal authored by the “Gang of Six,” which continues to gain momentum, finds its way to the President’s desk.

Thus, with most fund managers sitting on the sidelines waiting for the “all clear” to sound on the macro landscape, earnings season has flown well under the radar.  In deference to those who have not given the attention it deserves, I will let them in on the secret that those who follow such trivial things as quarterly announcements already know — the numbers largely across the board have been fantastic.  With nearly 15% of the S&P 500 already reported, 88% have beat bottom line expectations by an average of 8% while 75% have exceeded top line consensus by 3%.  Every day, estimates for 2012 continue to creep higher.  MS and T will release this morning while tech giant MSFT steps up after the Bell.  

After GE announces tomorrow morning, nearly all of the most influential companies will have closed the books on Q2 which will mitigate the risk of traders having to endure a difficult earnings season despite the roughly 75% of America’s publicly traded corporations who will have yet to release.  Consequently, the closer we arrive at resolutions to the aforementioned macro sticking points, the greater the urge among investors to return to the markets with cash ready to be put to work.  Given the positive movement on all fronts this week, the 75bps gain in the S&P 500 since last Friday represents woeful underperformance.

Since today marks the third Thursday of July, we receive the Philly Fed along with Jobless Claims this morning.  The former has tracked the Empire Manufacturing survey quite closely the past several months which suggests a modest disappointment for the 10AM announcement.  I remain a bit more optimistic, however, for the ISM and Chicago PMI rebounded sharply to suggest the disruption in the supply chain resulting from the Japanese earthquake has largely moved through the system.  

The 8:30 AM employment data will draw attention as it teeters on dropping below 400K.  The seasonal adjustments, albeit not as favorable as last week’s report, do positively shift up the headline number for one last time before switching signs over the next few months.  Though likely to be dwarfed by the Philly Fed released concurrently, the Leading Economic Indicators will grab my attention the most among the various data points.  I discussed the implications from last month’s heroic and nearly unprecedented print in the LEI that suggested a sharp turn upward in the recovery may be upon us.  I do not expect such miracles today, yet anything that releases in line or better should give me comfort that perhaps the economy has found its giddy up once again.


S&P 500 SEP E-Minis Key Technical Levels

Support:  1310.25/1308.25/08.00, 1300.50, 1291.25, 1278.00, 1261.75/61.25, 1257.00

Resistance:  1326.00/26.75/27.75, 1329.25, 1344.25, 1352.75, 1356.25/57.25, 1367.00, 1370.00



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