Market Summary - February 6th, 2012

The markets fought hard today, and I think the bull market is fully intact.  I expect momentum to continue in the short term.  The S&P 500 finished basically flat on the day after opening .5% lower.  Throughout the day you saw strength in the markets even with the Iran and Greek headwinds.  The yield curve slightly tightened today with the 30 year rallying 2.3 bp, the 10 year 1.6.  In commodity news, Oil is a good choice to pick up right now as the US put new sanctions on Iran today in freezing all real estate assets owned by Iran in the US.  I also think that continued strength in the US should drive prices higher.  China and India, although slowing, are still heavily increasing their appetite for oil as well.  I think the natural gas contract is cheap as well and should rally into the storage number being reported on Thursday.  One option is to load heavy now, and close it Wednesday night or early Thursday morning, the other is to buy a small portion now, either make money on a lower storage number, or add on an excess number.  Either way, I think we will all look back and wonder why we didn't get in on NG as it trades around $2.50.  Gold sold off today as the dollar denominated asset struggled as the dollar strengthened.  I think this will reverse on positive news with Greece.  Oats were also a big mover increasing 4.06% on the day.

I was excited to see the jobs number last Friday, but after further viewing, I am somewhat concerned.  It was great to see the increase, but how the number is calculated makes me question how accurate it was.  Further, the "drop" in unemployment is largely due to the 1.2 million people who have stopped looking, a staggering number.  Don't get me wrong, I am excited to see jobs being created, and I speak only on what investments I plan to make.  I am personally going to ride this jobs number into the next report as I expect the markets to rally, but when the next number is going to be printed, I am going to hedge with some short term puts.  This of course all depends on the implied vol baked into the pricing.  I think the 17 reading that we have right now on the VIX is low and makes for some cheap hedging against headwinds going forward.  With that being said, the markets are emotional and as the old adage goes "The trend is your friend."  So don't fight it!

First, I think Greece will get aid and the markets will rally.  On top of this, I think anywhere around here is a good time to consider a Euro position.  Germany needs the Euro right now.  They benefit greatly from having these weaker countries as they are an exporter and the currency would be strong without all the concerns.  This makes them more competitive than they would be otherwise (without the Euro).  I would get in slowly though, because I agree with speculation that Portugal is next up and could drag the Euro lower short term.  If you want to take a spot, I would recommend slowly adding to a position.

Stock Picks:
LAD: Oregon micro cap dealership and auto repair company.  They are in the auto business and if you look at the SAAR on a Bloomberg terminal since 1950, you will notice well defined and large trends.  We are escaping a trough in the trend and I expect F and GM to continue to report blowout numbers.  LAD also isn't heavily reliant upon only auto sales as they obtain a good portion of profit from their auto body business. With that being said, autos are selling at record high price, which is favorable for dealerships with inventory.  From a valuation standpoint, the company trades at 13.8x trailing and 11.8x forward earnings.  On top of that, they are growing dealerships and revenue while managing costs.  They also yield 1.12%, which is over half the 10 year treasury.

Great day in the markets

The S&P 500 roared 1.46% on an incredible jobs report.  Consensus called for 135,000 jobs added. Actual number: 243,000!  Unemployment dropped to 8.3% and it looks like the recovery is moving ahead full steam.  The prior number of 200,000 was also revised up to 203,000, a number which most people thought would be revised down.  Total November and December revisions totaled a whopping 60,000, another surprise from the back end.  On top of this, the ISM non manufacturing index roared with a reading of 56.8 from a consensus of 53.3.  December was also revised up .4 points following the employment survey.  Factory orders also rose 1.1% with inventories rising only .1%, and a .7% rise factory orders and a 1.4% rise in backlog order.

Rates on 30 year bonds sold off 11.6 bp to rise to 3.12% and the 10 year rates rose 10.1 bp to 1.92% causing a slight steepening of the curve.  If employment continues to heat up, the fed may have to rethink policy of not raising rates until the end of 2014 if inflation picks up.  Generally, the best predictor of inflation is caused from wage inflation, which is directly correlated with the unemployment rate. Next week should be interesting as the Greek situation winds down.  The EUR/USD should strengthen and I recommend picking up the micro futures contract as a play on this.  I would sell into the rumor as once a deal is done as Portugal may be the next player to have issues and potentially need a deal similar to Greece.  The real question is how well the financial system and levered banks can manage such a shock as a haircut on two sovereigns.  I still think the system is unsustainable in the long run and this will be an issue we revisit sooner rather than later. 

Stock's picked up and on the radar:

MITK - Company allows you take a picture of a check and deposit it instantly.  Think checks are gone? How do you pay your rent? How about your mortgage?

LIFE: Life is a play off the recent bid from Roche for Illumina.  Life, a more diversified biotech, should be priced fairly at $60 on a takeover given the premium that was placed on Illumina.