I got a call from a long-time client on Friday. I hadn’t spoken to Bob for perhaps a year but since we have a history, he didn’t mince words once I answered the phone.
After exchanging pleasantries, Bob cut right to the chase. “So, tell me something good, Dave.” He then paused and waited patiently, and anxiously I might add, for his response.
I knew what Bob wanted, so I decided to play him along a little. I told Bob that my youngest was starting college in less than three weeks, that my oldest had just celebrated her one-year anniversary with her new husband, that my little lawn here in Colorado was benefitting from all the rain, and that our trip to France was out of this world.
I then paused with a fairly big smile on my face, waiting for his head to explode. I quickly took pity on him and added, “Oh, you mean ‘something good’ about your investment accounts – ahh… sorry.” We both got a little laugh out of my game, but I thought Bob was going to come through the phone and hug me when I told him what he wanted to hear; that his account had been in the relative safety of the money market fund since the morning of August 1st.
And while I assured my retired client that the market WILL bounce at some point and that not all the portfolios we manage were completely in cash, he quickly cut me off and said, “I don’t care about a bounce, I just don’t want to go through that again.”
By “that,” I am assuming he meant the debacle that was 2008. Frankly, I think Bob’s last comment may resonate with a great many investors these days. I’m of the mind that after Greece, Portugal, Ireland, and now Spain/Italy, the debt-ceiling brawl, and now the downgrade from S&P; most individual investors may be far more concerned with the return OF their money than the return on it.
To a small degree, this thought process is likely part of the reason behind the plunge seen over the past few days as the public is likely clicking the reallocation button on their 401(k) websites with regularity. And in all honesty, I can’t blame anyone for wanting to get the heck out of the game right now. While the talking heads all seem so darned sure about what is going to happen next (and by the way, if the market drops another 1,000 Dow points AFTER you pronounce that stocks must bounce, you aren’t “right”!)
I must say that this market is unlike anything I’ve seen in my 25 years in the biz – with the exceptions of 2008 and 1987, of course. To be sure, there are lots of reasons to be worried and at least a handful of reasons to be de-risking. But the bottom line is we don’t normally see declines of 2,000 Dow points in 12 trading days. We just don’t get drops of -24.1% in smallcaps, -23.4% in midcaps, and -17.2% in the S&P over a month’s time very often – well, not without a darned good reason, anyway. Thus, I will opine that there is something else going on here.
First, I believe that the “boys and their toys” are responsible for a fair amount of the intense dance to the downside seen recently. I know that I tend to blame a lot on the black boxes so many of the hedge funds use. However, if you can find the time, read “The Quants” by Scott Patterson and you’ll likely begin to appreciate the power of the computers (and learn who REALLY caused the disaster in the markets during 2008). Next up, there is the issue of margin calls and the chance that a fund or two might be being forced to sell positions. Then there’s the issue with Bank of America, yesterday’s OECD global growth numbers, talk of Unicredit (Italy’s largest bank) and Lehman in the same sentence, the President’s “more of the same” pitch, and word that some of the big macro players actually do believe that the global economy is headed for another recession.
And finally, some have opined that the -16.7% drop in the S&P over the past 11 days is the market’s way of getting the attention of the powers-that-be. Like a 4-year old that wants that candy in the checkout lane at the grocery store, it would appear that traders are demanding that Mr. Bernanke tell them something good this afternoon.
Turning to this morning…Overnight markets have been exceptionally volatile with the DJIA futures trading in a 600 point range (currently higher by about 100 points). Stocks initially sank as China’s inflation numbers were hotter than expected, thus cooling expectations that the tightening cycle would be coming to an end. However, it would appear that the violent reversal off the lows are in anticipation of the Fed saying something (and preparing to do something) supportive.
On the Economic front… The NFIB Small Business Optimism Index fell for the fifth straight month. UK Manufacturing Production was below expectations. And finally, the government reported U.S. Nonfarm Productivity in the second quarter fell by -0.3%, which was above the estimates for reading of -0.7%. On the inflation front, Unit labour Costs were reported to have risen +2.2% versus the expectations for +2.3%. Thought for the day… Regardless of the colour on the screens, try embracing an “attitude of gratitude” today…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: +0.99% Shanghai: -0.03% Hong Kong: -5.66% Japan: -1.66% France: +0.63% Germany: -1.36% Italy: +0.30% London: +0.22%
- Australia: +0.99%
- Shanghai: -0.03%
- Hong Kong: -5.66%
- Japan: -1.66%
- France: +0.63%
- Germany: -1.36%
- Italy: +0.30%
- London: +0.22%
- Crude Oil Futures: $1.45 to $82.81
- Gold: +$34.90 to $1748.10
- Dollar: higher against the Yen, lower vs. Pound and Euro
- 10-Year Bond Yield: Currently trading at 2.394%
- Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +13.74 Dow Jones Industrial Average: +123 NASDAQ Composite: +36
- S&P 500: +13.74
- Dow Jones Industrial Average: +123
- NASDAQ Composite: +36
Wall Street Research Summary
- CBS Corp (CBS) – Argus Research
- Berkshire Hathaway (BRK.B) – Barclays
- Chubb (CB) – Barclays
- Progressive (PGR) – Barclays
- Wynn Resorts (WYNN) – Citi
- Mead Johnson (MJN) – Deutsche Bank
- Wells Fargo (WFC) – FBR Capital
- American Capital (ACAS) – FBR Capital
- Union Pacific (UNP) – Goldman Sachs
- Norfolk Southern (NSC) – Goldman Sachs
- AmersourceBergen (ABC) – Goldman Sachs
- Humana (HUM) – Goldman Sachs
- Tyco (TYC) – Goldman Sachs
- McDonald’s (MCD) – Goldman Sachs
- Merck (MRK) – Jefferies
- Rackspace (RAX) – Piper Jaffray, RBC Capital
- MGM Resorts (MGM) – Susquehanna
- Mariott (MAR) – Susquehanna
- Church & Dwight (CHD) – Wells Fargo
- Clearwire (CLWR) – BofA/Merrill
- Canadian National Railway (CNI) – Goldman Sachs
- Medtronic (MDT) – Goldman Sachs
- Zimmer Holdings (ZMH) – Goldman Sachs
- Becton Dickinson (BDX) – Goldman Sachs
- CR Bard (BCR) – Goldman Sachs
- Henry Schein (HSIC) – Goldman Sachs
- Parker-Hannifin (PH) – Goldman Sachs
- United Technologies (UTX) – Goldman Sachs
- Illinois Tool (ITW) – Goldman Sachs
- Advanced Auto Parts (AAP) – UBS
Yesterday’s Earnings After The Bell
Estimate CareFusion CFN $0.52 $0.50 Kindred Healthcare KND $0.53 $0.51 MGM Resorts MGM ($0.08) ($0.13) 99 Cents Only NDN $0.25 $0.27 Salix Pharmaceuticals SLXP $0.54 $0.49 Hanover Insurance Group THG ($0.70) ($0.80)
Earnings Before The Bell
Estimate AOL AOL ($0.11) * $0.09 Beazer Homes BZH ($0.75) * ($0.42) Dish Network DISH $0.75 $0.79 Fossil FOSL $0.80 $0.76 International flavours IFF $0.97 $0.96 Ralcorp Holdings RAH $1.15 $1.15 Scripps Networks Interactive SNI $0.78 $0.72* Report includes items that make comparisons to the consensus estimate questionable
Long positions in stocks mentioned: MCD
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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