Market Lab Report - Premarket Pulse 11/4/15

Published : November 4 2015 at 8:24 ET
Major averages rose yesterday on higher volume but closed well off of their intraday peaks. Yesterday. European Central Bank's president Mario Draghi pledged to continue the ECB's easy money policies to avert deflation and stimulate growth. As mentioned in prior reports, this ties together other central banks into also keeping interest rates at historically low levels.

Meanwhile, renowned bond fund manager Bill Gross warned that the US Federal Reserve should do the opposite of Operation Twist, an easy money policy measure implemented in 2011 where the Fed sold shorter-dated Treasury notes to buy longer-dated government debt. This move drove yields lower on 10-year Treasurys which helped push down other interest rates. Indeed, six years of easy money has yielded only anemic GDP across the board.

Gross says lower rates and a flatter yield curve by keeping money easy is the wrong move. According to Gross, "It would seem that lower borrowing costs in historical logic should cause companies and households to spend more. The post-Lehman [Brothers] experience, as well as the lost decades of Japan, however, show that they may not, if these longer term yields are close to the zero bound." When a flatter yield curve squeezes banks’ net-interest margins, “overall corporate profits are squeezed as well."

The last two times the yield curve flattened were in 2001 and 2008, prior to severe market corrections. Today, it is flattening again. Gross argues that a steeper yield curve is needed, but knows the Fed won't listen as they believe that easy money will eventually stimulate growth. That said, recent history has shown ultra-cheap money does not always create growth but has the tendency to instead reduce profit margins which put a brake on the recovery.

Wholesale food distributor Performance Food Group (PFGC) had a pocket pivot yesterday. Earnings are soaring, group rank 5. They report earnings before the open today.

Interactive entertainment software maker Take-Two Interactive (TTWO) had a pocket pivot yesterday. Institutional sponsorship has grown over the last 6 quarters, pretax margin 27%, ROE 32.1%, group rank 20. They report earnings on Thursday after the close.

Tesla Motors (TSLA) illustrates why we do not advocate playing "earnings roulette" by holding stocks, long or short, through earnings. In the case of TSLA, members who might have been holding a short position from the 50-day moving average where we last recommended the stock as a short on October 1st, had some cushion to sit through earnings. This morning, the stock is set to gap up above the 220 level, which is still well below the 200-day moving average in the 230 price area. A continued rally into the 200-day line could set up a new short-sale entry point for the stock, and should be watched for.

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