Time For The White Horses?

Daily State of the Markets 
Wednesday Morning – August 3, 2011

Good morning. For the better part of the last eighteen months, the pullbacks and corrections in the stock market have followed a now-familiar pattern. First there is the worry. Then the big dive, which is accompanied by lots of fear and the general feeling that its 2008 all over again. And then, just when it feels like the sky is actually going to fall, the Fed, EU, ECB, and/or IMF rides in on a white horse to save the day. So, based on where the indices closed Tuesday and the pervasive doom that is developing, it looks as if it might be time for the white horses to arrive again.

There were probably a fair number of investors assuming that the passage of the debt-ceiling bill might also fall into the category of a knight riding in on a white horse. This is certainly understandable given the brinkmanship displayed in Washington and the fact that the stock market appeared to be on the edge of the a cliff. However, just before Congress finally stopped acting like 8-year olds, traders were treated to a stunning GDP report and some not-so positive action in the debt markets across the pond. And because of this, the celebration on Wall Street over the debt-ceiling bill lasted less than 10 minutes.

In short, since Congress mounted up what it thought was a white horse, things have gotten downright ugly in the stock market. The dance to the downside was furthered Tuesday by word that the consumer has decided to take a step back and spend less lately, something that the economy can ill afford at this stage of the game. This, when combined with the surprisingly weak ISM Manufacturing data caused traders to go into sell-first-and-ask-questions-later mode. And if you are looking for confirmation that people are actually worried out there, take a peek at the price of gold and the action in the 10-year T-Bond. Yep, it would appear that the fear trade is definitely back on at the present time.

The reasoning behind all the concern is actually fairly straightforward this time around. Although the Fed and the EU/ECB/IMF have been riding their fair-haired stallions regularly of late, the state of the economy remains an increasingly large question mark. Then when you consider that the government no longer has the ability or even the political will to provide additional stimulus and that the Fed may not be able to jump on its QE horse again due to a nagging inflation issue, well, there may actually be reason to be concerned from a macroeconomic perspective.

Then there is the incessant debt problem in Europe. While the lunch-is-long-term crowd takes the view that everything is fine each and every time the EU/ECB/IMF rides in, there are many deep-thinkers out there who believe that this problem (a) is just getting started as Italy and Spain appear to be lining up to ask for help and (b) doesn’t really have an easy solution.

The bottom line is the recent data showing that the U.S. economy may be much weaker than expected and the idea that the soft patch may stick around for a while has put traders and investors alike in a defensive state. And until we see a string of data ride in on a white horse and dispel the fear that the economic malaise could linger, traders may be looking to sell any and all rallies for a while. As such, we’ll be watching the intraday action closely for signs of more de-risking from the big global macro boys.

Turning to this morning… The confirmation from Moody’s and Fitch that the credit rating in the U.S. remains Triple-A has improved the mood a bit before the open. In addition reports in Europe and China on the Services Sector PMI has helped the futures in the U.S. move in the right direction this morning.

On the Economic front… Challenger, grey and Christmas reports that there were 66,414 planned job cuts announced in July, which was much higher than June’s 41,432.

Next up, ADP reported that the private sector job market expanded by 114K jobs during the month of July, which was above the consensus expectations for a gain of about 95K. However, June’s report was revised downward to 145K from 157K.

Thought for the day… Never forget that the first rule of life, medicine, and money management is to do no harm…

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: -2.26% Shanghai: -0.03% Hong Kong: -1.91% Japan: -2.11% France: -0.31% Germany: -0.66% Italy: +1.23% London: -0.72%
  • Australia: -2.26%
  • Shanghai: -0.03%
  • Hong Kong: -1.91%
  • Japan: -2.11%
  • France: -0.31%
  • Germany: -0.66%
  • Italy: +1.23%
  • London: -0.72%
  • Crude Oil Futures: -$0.39 to $93.40
  • Gold: +$20.40 to $1664.90
  • Dollar: higher against the Yen, lower vs Pound and Euro
  • 10-Year Bond Yield: Currently trading at 2.611%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +4.3 Dow Jones Industrial Average: +38 NASDAQ Composite: +9.50
  • S&P 500: +4.3
  • Dow Jones Industrial Average: +38
  • NASDAQ Composite: +9.50

Wall Street Research Summary

Upgrades:

  • Allscripts Healthcare (MDRX) – Auriga, Piper Jaffray
  • Tanger Factory (SKT) – BofA/Merrill
  • Leap Wireless (LEAP) – Barclays
  • Rowan Companies (RDC) – Credit Suisse
  • Choice Hotels (CHH) – Credit Suisse
  • Rock-Tenn (RKT) -Deutsche Bank
  • Fiserv (FISV) – RW Baird
  • Patterson-UTI (PTEN) – Wells Fargo
  • Vera Bradley (VRA) – Wells Fargo

Downgrades:

  • Gaylord Entertainment (GET) – BofA/Merrill
  • Host Hotels (HST) – BofA/Merrill
  • Marriott (MAR) – BofA/Merrill
  • Boyd Gaming (BYD) – BofA/Merrill
  • Amerigroup (AGP) – BofA/Merrill
  • Molson Coors (TAP) – BofA/Merrill
  • Marathon Oil (MRO) – Credit Suisse
  • BHP Billiton (BHP) – Credit Suisse
  • Republic Airways (RJET) – Goldman Sachs
  • Allstate (ALL) – Goldman Sachs
  • Overseas Shipholding (OSG) – Jefferies
  • Virgin Media (VMED) – Jefferies
  • AMR Corp (AMR) – JPMorgan
  • Parker-Hannifin (PH) – JPMorgan
  • analogue Devices (ADI) – Sterne, Agee
  • Leap Wireless (LEAP) – RW Baird
  • MetroPCS Communications (PCS) – RW Baird

 

Earnings Yesterday’s After The Bell
Company

Symbol

EPS
Reuters
Estimate
Big 5 Sports BGFV $0.14 $0.10 Bio-Rad Laboratories BIO $1.41 $1.47 CBS Corporation CBS $0.58 $0.45 Cephalon CEPH $1.62 $2.08 Charles River Laboratories CRL $0.70 $0.61 Harris Corp HRS $1.24 $1.22 Hertz Global HTZ $0.26 $0.22 World Fuel Services INT $0.70 $0.58 j2 Global JCOM $0.65 $0.58 Lincoln National LNC $1.09 $0.94 Allscripts Healthcare MDRX $0.22 $0.22 Peet’s Coffee PEET $0.38 $0.32 Boston Beer SAM $1.09 * $1.20 Stone Energy SGY $1.17 $0.94 Tanger Factory SKT $0.32 * $0.33 Sonus Networks SONS ($0.02) $0.01 Unum Group UNM $0.75 $0.72 ValueClick VCLK $0.21 * $0.19 WebMD Health WBMD $0.22 $0.28 XL Group XL $0.75 $0.48
Earnings Before The Bell
Company

Symbol

EPS
Reuters
Estimate
Allergan AGN   $0.95 Agrium AGU $4.56 $4.20 Constellation Energy CEG $0.76 $0.85 Comcast CMCSA $0.42 $0.41 Devon Energy DVN $0.71 $1.54 El Paso Electric EE $0.78 $0.63 Frontier Communications FTR $0.06 $0.07 NICOR GAS $0.42 $0.44 IntercontinentalExchange ICE $1.69 $1.67 Lincoln Educational LINC $0.22 $0.17 MasterCard MA $4.76 $4.22 Marsh & McLennan MMC $0.50 $0.48 Molex MOLX $0.44 $0.46 Owens Corning OC $0.61 $0.58 Public Service PEG $0.59 $0.55 Par Pharmaceutical PRX $0.84 $0.77 Quanta Services PWR $0.16 * $0.15 RR Donnelley RRD $0.53 $0.51 Spectra Energy SE $0.42 $0.38 TRW Automotive TRW $1.99 $1.71 Time Warner TWX $0.60 $0.56 Ternium TX $1.01 $1.02 Wellcare Health Plans WCG $1.77 $0.95 Aqua America WTR $0.25 $0.24* Report includes items that make comparisons to the consensus estimate questionable

Long positions in stocks mentioned: none

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

 

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