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Short-sellers get squeezed on Thursday

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Prior to Thursday’s opening bell, developments in foreign markets were unremarkable. Italy had a successful bond auction, although the yield jumped to 3.89 percent – a rate significantly higher than anticipated economic expansion. Britain’s trade deficit widened in February as a result of declining machinery and automobile exports to the United States, China and Russia. In France, consumer prices rose 0.8 percent month-over-month in March, and annual core inflation climbed 1.6 percent. In Japan, the Nikkei 225 Stock Average ended an eight-day losing streak following a pledge by Bank of Japan Governor Masaaki Shirakawa to continue the nation’s monetary stimulus program. China’s Shanghai Composite Index advanced by 1.82% to 2,350 following a rise in the nation’s foreign exchange reserves to a record $3.31 trillion.

At 8:30, the anxiously-awaited weekly report on initial unemployment claims was released by the Department of Labor. After last week’s disastrous non-farm payrolls report, pundits were waiting with abated breath to learn whether the unemployment rate could be headed back above 9 percent. Once again, the Labor Department’s press release was a huge disappointment. Although surveys of economists’ expectations did anticipate an increase in claims, the figures discussed ran from 355,000 – 359,000 new claims. Unfortunately, those expectations undershot the actual headline number by more than 21,000 – with the weekly total at 380,000 new claims. In fact, last week’s “advance figure” of 357,000 was revised to 367,000 – a number which exceeded expectations for the current increase by 8,000. In other words, the unemployment situation is worse than imagined.

Despite the awful news on jobless claims, the stock market got off to a decent start, with the Dow Jones Industrials up 22 points (0.18%) to 12,827 at the opening bell. The S&P 500 advanced by 0.19% to 1,371 and the Nasdaq Composite started the day up 0.30% to 3,025. By 10:40, the Dow Jones Industrial Average was up 109 points (0.86%) to 12,915. The S&P 500 advanced by 0.93% to 1,381. The Nasdaq Composite rose by 1.05% to 3,048. Miami-based corporations were similarly performing as though there had been no disappointing macroeconomic news.

I was surprised to see that the irrational exuberance continued until the closing bell. The Dow Jones Industrial Average closed at 12,986 with a fat gain of 181 points (1.41 percent). Think about that: The Dow almost made it back to 13,000 on a “bad news” day. The S&P 500 advanced by 1.38 percent to finish at 1,387. The NASDAQ Composite rose by 1.30 percent to end the day at 3,055.

Miami-based corporations had an outrageously successful day on Thursday. Lennar (LEN) led the group with a gain of 2.91% to close at 26.50. Royal Caribbean (RCL) rose by 2.29% to finish at 27.73. Ryder System (R) advanced by 1.19% to close at 51.00. Carnival Cruise Lines (CCL) rose by 0.59% to end the day at 31.44.

To make sense of why the stock market behaved as though initial unemployment claims were falling rather than increasing by 21,000 more than expected, I turned to my favorite source for such an explanation: the Zero Hedge website. As I had suspected, the disappointing unemployment report re-ignited an epidemic of magical thinking, as visions of a third round of quantitative easing danced in the heads of the hope fiends. The tsunami of “buy” orders pushed the short-sellers off their positions, forcing them to cover their sales at inflated prices for steep losses amid the buying frenzy.

The following companies will be playing “beat the number” on Friday, with the release of their quarterly earnings reports: JPMorgan Chase (JPM) and Wells Fargo (WFC). Good luck!

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