Beat Goes On

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The market picked up right where it left off Thursday and opened higher, reaching its peak in the first hour of trading. The Russell 2000 (small cap) index and the tech heavy NASDAQ outpaced the S&P 500 and Dow today. 

The risk on trade again was in favor. Economically sensitive issues led the way higher. Policy measures form the European Central Bank sparked a rally of 100 points on the S&P 500 over the past few weeks prior to the rally yesterday when our Fed joined in with further accommodative action. There have now been 259 stimulative initiatives announced globally over the past year. While I am sure there are several debates going on about the long-term impact of these moves; in the short run they have sparked a rally that has brought all the major indexes to multi-year highs.

Financial stocks climbed again today. The yield curve has steepened considerably over the past several weeks. Banks borrow short term from their clients (CD's, money markets etc.) and loan longer term. The wider the spread between short term and long term rates the bigger the margin for banks. Banks continued higher today. Word that the Fed will aggressively buy mortgage-backed bonds made investors more optimistic that banks will be more willing to lend as there is now an awfully large buyer of mortgages on the other side of the trade.

Telecom was a particular area of weakness. A major brokerage firm downgraded the space today. There were also concerns that subsidies for the new iPhone would be larger than expected. The iPhone represents a loss leader for the telecom service providers early on as they subsidize or outright buy phones for new subscribers. They will offset, hopefully, these costs through the ongoing service contracts of the new subscribers.

The University of Michigan Consumer Sentiment Index for September came in at 79.2 versus a consensus estimate of 73.5. This was a catalyst for buyers in the early going this morning. 

Retail sales figures for August were misleading. The reported number was +0.9%. When you eliminate the impact of higher gas prices the number was far more muted. If you take out autos, gas and building materials the core number was down 0.1%. Over the last six months that core number has risen by a paltry 1.6% annual rate. 

Commodities continued to work higher to finish the week. Gold, copper, crude and grains traded higher while silver was lower. 

European stocks continued their advance in overnight trading. Stocks across the continent rose by better than 2% with basic materials leading the way followed by continued strength in financials. 

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About Thomas J Smith CFA

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