How to Interpret the Market’s Mixed Signals

If anyone doubted that the stock markets around the globe have been moving
almost solely on the ins and outs of the negotiations over Greece's debt and
the recapitalization plans for the euro banks, I hope last week's market moves
have quelled those thoughts. A 50% haircut on Greek bonds and happy talk about
repairs for the rest of the euro zone got markets moving around the globe
Thursday. Japan's Nikkei ended with a 2.0% gain, and Hong Kong moved up more
than 3.2%. London's FTSE was up 2.9%, German's DAX gained more than 5.3%,
and in France the CAC 40 was up almost 6.3%. With those kinds of numbers, our
own markets' gains look tame. The Dow ended Thursday's session with a 2.9%
rise, the S&P 500 Index was up almost 3.5% and the small-stock Russell 2000
index was up over 5%. All major U.S. stock indices, except for the Russell 2000,
are in positive territory year to date. Bonds took it on the chin. Wednesday's
2.2% yield on the 10-year Treasury turned into a 2.4% yield as investors sold.
Extended-Duration Treasury ETF (AMEX: EDV ), the longest Vanguard bond fund,
fell 5.6% Thursday. About the only government bonds gaining ground Thursday were
Greek, Italian and Spanish bonds. New Zealand's bond market was flat. Looking
homeward, though, I believe that lost in the minutiae surrounding Greece and the
euro bailout was this question: What does the announcement by the government of
a plan to make it easier to refinance Freddie or Fannie mortgages at lower rates
(assuming you are current on your existing mortgage) do to that market? I
don't see how it doesn't raise prepayment risk and, on Friday, mortgage
bonds sold off more than their brethren. With GDP coming in at a preliminary
2.5% growth rate for the third quarter, mergers continuing apace with both
Oracle (NASDAQ: ORCL ) and Cigna (NYSE: CI ) and earnings growth continuing,
I'm not surprised that consumer confidence is at a low last seen at the bottom
of the last recession. Why? Because consumer confidence numbers, for all their
headline-grabbing, don't do a very good job of predicting economies or
markets. They just don't. In particular, at some of the nadirs for the
consumer confidence index, you'd have been particularly smart to have bet on
the consumer, rather than against them. As I said a couple of months ago, follow
what consumers do, not what they say. Retail sales are up and running at their
highest levels ever. Why else would FedEx (NYSE: FDX ) have announced that it
will hire 20,000 temporary workers (about 3,000 more than they hired last year)
for the holiday season? Economic slowdowns seldom are accompanied by increased
shipping demand. Oh, and UPS (NYSE: UPS ) chimed in with a more muted
expectation for growth, but more growth nonetheless, in the months ahead.
Finally, manufacturing continues in slow-growth, not no-growth mode as the
September durable goods report showed continued strength despite a decline in
aircraft orders, which was expected because of a burst of buying in August. All
in all, it was a good report.