Daily State of the Markets
Tuesday Morning – October 25, 2011
Good morning. At lunchtime on October 4th, the general consensus was that Europe was doomed, the U.S. was heading back into recession, and China had sent its economy crashing through the windshield by slamming on the brakes too darned hard. To put it mildly, hope was in short supply. In all honesty, it felt like we were watching the global economy’s funeral procession pass by in slow motion. But just about the time everyone became convinced that we were on our way to another Great Recession, somebody somewhere called the whole thing off.
While I am still a bit dazed and confused by ‘the great save’ that occurred with 40-five minutes to go in the session on October 4th, there is no denying that the market action ever since then is much improved. Sure, we all complained about the lack of volume during the initial phases of the current advance. But the bottom line is this rally has been better than anything we’ve seen in months. And it just might mean something that the bulls were able to not only break on through to the other side of the trading range on Friday, but also able to pad their gains on Monday.
Don’t get me wrong, I am not donning my bull horns here. No, I believe there are very large macro issues that could take a long time to work through. But even in bear markets, the bulls are able to put together a very nice run every once in a while. And from where I sit, this one appears to be sponsored by some improvement on all of the major fronts of this battle.
First and foremost is Europe. To be sure, there are no easy fixes to the rather simple problem of too much debt and not enough income. As my father taught me, if your outflow exceeds your income, then your upkeep will be your downfall! And then when you run out of people to borrow money from, well, you’ve become Greece (and Portugal and Ireland).
So, why should stocks go up in the face of some pretty major macro issues, you ask? Because, in short, we need to remember that investors tend to overdo EVERYTHING (in both directions) when playing the stock market game. And unless we’re talking about Greek banks, companies with decent earnings can only go down so far before the value players step in.
For example, Germany is the strongest economy in Europe and does NOT have a sovereign debt problem (well, not yet, anyway). And yet, if my calculation is correct, the ETF representing the German stock market (EWG) fell by nearly -40% between the end of April and the beginning of October. So, unless the German economy is about to head into a depression, one could certainly make the argument that enough is enough already.
The same can be said for the U.S. stock market. While the S&P 500’s decline has paled in comparison to Germany’s, history shows that without a recession, a decline of -19% is usually an adequate discounting of an economic slowdown. So, with earnings and the economy still growing (albeit more slowly than anyone would like) it might be difficult for the bears to push things down too much farther without any new rationale.
The point is that the funeral for the global economy appears to have been postponed. And if the leaders of the Eurozone can come up with a plan that is robust enough to satisfy the markets (in other words, if they can kick the can down the road far enough to allow for the economies of Europe to get back on a growth path), then the date of the funeral might be put off indefinitely. Of course, the key word here is ‘might’.
As for the question of how far this little joyride to the upside can go, the bears will suggest that the move is already pushing the limits. A quick perusal of the charts makes it very clear that there is significant resistance overhead at 1265 on the S&P 500 and around Dow 12,000. Thus, it will be very interesting to see if the bulls can find something to help them push on. And if they fail, we will want to see how the indices act during the inevitable retest of the breakout zone. So stick around, this is about to get interesting.
Turning to this morning… Rising rates at Spain’s T-Bill auction and trepidation in front of the EU summit on Wednesday is keeping pressure on European markets. U.S. futures have moved lower on the back of 3M’s report with management saying things are tough out there.
On the Economic front… We’ll get the Case-Shiller Home Prices report at 9:00 am and then Consumer Confidence and FHFA House Price Index at 10:00 am.
Thought for the day… Will you make time for you today?
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -0.60% Shanghai: +1.66% Hong Kong: +1.05% Japan: -0.92% France: -0.21% Germany: +1.50% Italy: -0.03% Spain: -0.19% London: +0.24%
- Australia: -0.60%
- Shanghai: +1.66%
- Hong Kong: +1.05%
- Japan: -0.92%
- France: -0.21%
- Germany: +1.50%
- Italy: -0.03%
- Spain: -0.19%
- London: +0.24%
- Crude Oil Futures: +$2.60 to 93.87
- Gold: +$2.60 to $1656.30
- Dollar: lower against the Yen, higher vs. Euro and Pound
- 10-Year Bond Yield: Currently trading at 2.248%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -3.44 Dow Jones Industrial Average: -50 NASDAQ Composite: -4.47
- S&P 500: -3.44
- Dow Jones Industrial Average: -50
- NASDAQ Composite: -4.47
Wall Street Research Summary
- Darden Restaurants (DRI) – Target increased at Citi
- Royal Gold (RGLD) – HSBC
- California Water (CWT) – Janney
- Lowe’s (LOW) – Janney
- JA Solar (JASO) – Piper Jaffray
- Texas Instruments (TXN) – Target increased at UBS
- Forest Labs (FRX) – Argus
- Central European Distribution (CEDC) – Bank of America Merrill Lynch
- Netflix (NFLX) – Citi, Goldman, Janney, JPMorgan, Susquehanna, Target cut at Barclays
- Healthways (HWAY) – Barclays
- AT&T (T) – Bernstein
- Verizon (VZ) – Target cut at Bernstein
- Hub Group (HUBG) – RW Baird, Stifel Nicolaus
- Landstar System (LSTR) – RW Baird
- Heartland Financial (HTLF) – Stifel Nicolaus
- Ventas (VTR) – Stifel Nicolaus
- Dow Chemical (DOW) – Target cut at UBS
Yesterday’s Earnings After The Bell
Estimate Aaron’s AAN $0.36 $0.38 Advent Software ADVS $0.22 $0.20 Albemarle ALB $1.28 $1.19 Amgen AMGN $1.40 $1.29 Crane CR $0.89 $0.88 Health Management HMA $0.19 $0.17 Hexcel HXL $0.34 $0.27 Masco MAS $0.08 $0.08 Netflix NFLX $1.16 $0.95 Plum Creek PCL $0.31 $0.30 ResMed RMD $0.33 $0.35 STMicroelectronics STM $0.09 $0.13 Texas Instruments TXN $0.60 $0.58 Unisys UIS $1.63 * $0.70 Veeco Instruments VECO $1.33 $1.13 Volterra Semiconductor VLTR $0.35 $0.32 Zions Bancorp ZION $0.40 * $0.34
Today’s Earnings Before The Bell
Estimate AGCO Corp AGCO $0.87 $0.75 TD Ameritrade AMTD $0.29 $0.31 Anixter AXE $1.53 $1.42 Peabody Energy BTU $0.87 $0.85 Boyd Gaming BYD $0.05 * $0.01 Celanese CE $1.27 $1.09 CIT Group CIT ($0.08) * ($0.12) Cummins CMI $2.35 $2.25 Centene CNC $0.55 $0.54 Coach COH $0.73 $0.70 Columbia Sportswear COLM $1.98 $1.60 Delta Air Lines DAL $0.91 $0.93 DuPont DD $0.69 $0.55 Quest Diagnostics DGX $1.18 $1.11 W.R. Grace GRA $1.16 $1.06 Illumina ILMN $0.22 $0.23 Imation IMN ($0.18) ($0.03) Illinois Tool ITW $1.00 $0.98 Lexmark LXK $0.95 * $1.02 3M MMM $1.52 $1.61 Molex MOLX $0.46 $0.42 National Oilwell Varco NOV $1.26 $1.15 Nu Skin Enterprises NUS $0.72 $0.61 Omnicare OCR $0.52 $0.53 Office Depot ODP $0.28 * $0.01 PACCAR PCAR $0.77 $0.70 Ryder System R $1.09 $1.02 Reynolds American RAI $0.70 $0.73 Regions Financial RF $0.08 $0.04 Rayonier RYN $0.71 $0.59 Sherwin-Williams SHW $1.71 $1.69 Sigma-Aldrich SIAL $0.96 $0.92 Simon Property SPG $1.71 $1.66 Tellabs TLAB ($0.01) ($0.02) T. Rowe Price TROW $0.71 $0.73 Under Armour UA $0.88 $0.83 UPS UPS $1.06 $1.05 Wabtec WAB $0.96 $0.87 Waters WAT $1.14 $1.13 Waddell & Reed WDR $0.46 $0.50 Weatherford International WFT $0.26 $0.26 U.S. Steel X $0.72 $0.52 Xerox XRX $0.26 $0.25* Report includes items that make comparisons to the consensus estimate questionable
Long positions in stocks mentioned: NUS, UA
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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