At the Open: Stocks Wait on Washington; China Boosts Resource Plays

If yesterday was a market for the amped up sounds of contemporary top-40 pop, today is a day for Bedhead.

AP

Who’s Bedhead? Back in the 1990s, when people still played music on guitars, a genre of indie rock known as slowcore popped up, that consisted of playing music, really, really slowly. And when done well, it combined beauty and tension into an almost mystical sound. Bedhead did it well and in the aftermath of yesterday’s rally, they’re the perfect sound track for today. (Don’t believe me? Cilck here.)

Why? Because now we wait. Yesterday’s rally was driven by hopes that the Republicans and Democrats would hash out a deal that would avoid a debt-ceiling showdown–and we’re still waiting for such a deal to emerge. The two sides are still talking, however, which I suppose counts as progress but there’s still tension as the market hopes and prays that the talks don’t fall apart.

As a result, the S&P 500 has gained 0.1% to 1,693.64 today, while the Dow Jones Industrials have risen 0.1% to 15,146.11.

Miller Tabak’s Andrew Wilkinson brings us up to date:

The way things were left after an hour-and-a-half of opening dialogue on Thursday was that "the President didn't say 'yes' nor he didn't say 'no'" to the Republican offer to vote on a six-week debt ceiling increase. The government shutdown would remain intact and is to be used as a bargaining tool over healthcare reform in budget negotiations during that period. Things look somewhat less messy as a result of the agreement to talk, but it is too early to tell whether substance will materialize.

Markets [remain] optimistic that resolution can be found before the nation reaches its debt limit by next Thursday. Following the strongest showing since the first day of the year, also marked by relief over the fiscal cliff, stocks look set to
pause…

MRB Research Partners explains why investors are right to look past the noise in Washington:

One could argue that investors are now complacent, having seen this sort of political paralysis in recent years, i.e. they have decided to maintain positions awaiting the inevitable compromise. Voter anger has predictably escalated, and business support for the Republican party is retreating quickly, as fears of economic damage mount. To the extent that there has been some increase in borrowing costs and widespread forecasts of steep equity market losses, we expect political leaders (undoubtedly prodded behind the scenes by Fed Chairman Bernanke) to bend before the economy breaks.

Growth prospects were on the upswing before this month's paralysis hit and we are still banking on a resolution before market rioting becomes severe. Importantly, the business sector and voters in general are now escalating their demands for a compromise.

The ugliness in Washington is sure having an impact on consumer confidence. The Lindsey Group’s Peter Boockvar explains:

The preliminary UoM consumer confidence figure for October, a timely measure in light of the political noise in DC as the phone interview was done within the past few days, was 75.2, the lowest since January, down from 77.5 in September but was in line with the estimate. Current Economic Conditions were little changed, up .2 but the Economic Outlook fell 3.9 pts to 63.9, the weakest since December 2012. Also, one year inflation expectations gave back the inexplicable jump in September by falling to 2.9% from 3.3% as gasoline prices are at the cheapest level since January as while UoM doesn't break out this factor, it certainly is a high profile price tag that consumers see every day.

Bottom line, granted the government shutdown likely impacted consumer confidence but it also runs deeper than that as confidence has fallen for the 3rd straight month also due to still sluggish income and job growth and that impact is also being felt in many areas of retail that are seeing softer traffic and sales trends.

As if to drive that point home, the Gap (GPS) is getting hammered–its shares have dropped 6.6% to $36.89 today– after its same store sales fell 3%, below analyst forecasts for a gain of 1.6%. Ethan Allen (ETH), meanwhile, has fallen 4.3% to $26.32 after the retailer said earnings would come in between 30 cents and 32 cents, below forecasts for 40 cents.

Sometimes we forget that it’s not just what’s happening here that matters. Case in point: Cliffs Natural Resources (CLF) has gained 4.1% to $21.52 after China’s prime minister said his nation’s economy grew by more than 7.5% during the first nine months of the year. Refiners, too, are rallying today, with Tesoro (TSO) up 4.3% to $45.39 and Valero Energy (VLO) up 3.2% to $36.71.