Everything’s Fine Now, Right?

Daily State of the Markets 
Tuesday Morning – August 16, 2011

Good morning. It’s always fun to watch the moods of commentators shift in the wind with whatever the market is doing at the time. In short, during a third straight day of green screens, the sentiment seen on the business news shows had gone from “the sky is really falling this time” to “everything’s fine now – what were we worried about?” Never mind the fact that the market is doing exactly what it usually does during a waterfall decline. Never mind that the indices remain down on the year. A third straight up day appeared to mean that happy days are here again.

While there had certainly been a fair amount consternation with regard to the S&P downgrade of the U.S. credit rating and the battle over the debt ceiling in Washington, the attitude displayed on Monday was, “Who cares – nothing bad happened and rates have actually declined! Everything will go back to normal now, right?”

A similar attitude of “What me worry?” was being displayed across the pond. Yield spreads and CDS’s hadn’t widened in two whole days, an EU official publically proclaimed that neither France, Spain, or even Italy was going to need any assistance from the ESFS bailout fund because everything is fine here in the EU, and the discussion of an EU bond offering was suddenly being seen as an afterthought. So, “Party on Wayne!”

Heck, the new ‘tude even reached as far east as Japan, where stock traders cheered the news that things were better than they thought. Well, OK, things – meaning the country’s GDP – actually weren’t as bad as had been feared, anyway.

And then closer to home, the mood had suddenly improved as well. Commentators could be heard wholeheartedly embracing the idea that the economy was not in recession right now. In addition, the argument was made that since Google was willing to plunk down $12.5 billion in cold-hard cash to buy Motorola’s dying mobile phone handset business meant that stocks are bargains at current prices.

If you have detected the hint of sarcasm that has been intended here this morning, give yourself a gold star. The bottom line is it never ceases to amaze me how the sentiment can change so quickly with the people in front of the T.V. cameras.

Setting aside the pom-poms for a moment, we believe the real key here is that the market is keeping to the waterfall decline script right now. Of the 10 waterfall declines seen since 1929, it is important to recognise that the average “eye-popping bounce” following the initial emotional low tends to move the market up about +10%. So, given a closing low of 1119.46 on August 8th, a move up to 1231 would be expected right about now.

However, what the all-too giddy folks reading their scripts from the teleprompters don’t seem to be talking about is that the vast majority of the time, the market tends to make new lows after a waterfall decline occurs. In fact, the good folks at Ned Davis Research tell us that the market has gone to new lows following the traditional “big bounce” off of the initial emotional low in 73% of the waterfall declines. Don’t believe it? Go look at how 1974 played out… and 1987… and 2002… and 2008. Yep, if the market didn’t move to a new low after a quick blast, it came darned close.

So, the key here is to try and determine if anything has changed during the current joyride to the upside that might cause the market to deviate from the script. So, I ask you, have any of the reasons that caused the market to suddenly fall off a cliff in August been reversed since Thursday?

Turning to this morning… Below consensus GDP reports from Germany and the Eurozone have put the focus back on the state of the economy this morning, which has created a fair amount of red ink in the overseas markets.

On the Economic front… Housing Starts fell back 1.5% in July to an annualized rate of 604K. This was above the consensus for 597K and June’s 629K. Building Permits for July fell 3.2% to a rate of 597K. This was below the consensus of 603K and last month’s reading of 612K.

The government reported that Import Prices for the month of July rose by +0.3%, which was above the consensus for an decline of -0.1%. Export prices fell by -0.4%, which was below last month’s revised level of +0.1%.

Thought for the day… As the Great One said, “You miss 100% of the shots you don’t take”…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets: Australia: -0.68% Shanghai: -0.71% Hong Kong: -0.24% Japan: +0.23% France: -1.57% Germany: -2.74% Italy: -2.72% Spain: -2.12% London: -1.36%
  • Australia: -0.68%
  • Shanghai: -0.71%
  • Hong Kong: -0.24%
  • Japan: +0.23%
  • France: -1.57%
  • Germany: -2.74%
  • Italy: -2.72%
  • Spain: -2.12%
  • London: -1.36%
  • Crude Oil Futures: -$1.38 to $86.50
  • Gold: +$23.70 to $1781.70
  • Dollar: higher against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.269%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -18.99 Dow Jones Industrial Average: -142 NASDAQ Composite: -29.82
  • S&P 500: -18.99
  • Dow Jones Industrial Average: -142
  • NASDAQ Composite: -29.82

Wall Street Research Summary


  • VMware (VMW) – Barclays
  • Watsco (WSO) – BB&T
  • Polaris (PII) – BMO Capital
  • Estee Lauder (EL) – BMO Capital
  • Motorola Mobility (MMI) – BMO Capital
  • Allergan (AGN) – Credit Suisse
  • Gilead Sciences (GILD) – Target upped at Deutsche Bank
  • Edison International (EIX) – Goldman Sachs
  • Alnylam Pharmaceuticals (ALNY) – Piper Jaffray
  • Toll Brothers (TOL) – Stifel Nicolaus


  • Motorola Mobility (MMI) – Argus, Goldman Sachs, MKM Partners, UBS
  • Applied Materials (AMAT) – Estimates and target cut at Citi
  • Time Warner (TWC) – Macquarie Research
  • Albemarle (ALB) – Oppenheimer
  • Research In Motion (RIMM) – Societe Generale

Long positions in stocks mentioned: none

For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com


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