Will It Be Different This Time?

Daily State of the Markets 
Friday Morning – August 19, 2011

Good morning. It is said that one of the fastest ways to lose money in the markets is to utter the words “But this time it’s different.” While I am both cognisant and respectful of this adage, I also think it is important to recognise that times change and that as investors, we must be able to adapt to the changes. And perhaps the biggest change we’ve seen in the markets over the past few years is the explosion of HFT (high frequency trading).

Say what you will about proponents of the practice of scalping fractions of a penny millions of times a second or the strategy of trying to influence the bid/ask by flooding the system with orders that are never intended to be executed. We could also argue until the cows come home about the validity of the idea that HFT actually “provides liquidity” to the markets (except when it doesn’t, of course). But the bottom line is that EVERYTHING in the markets moves faster these days.

Information is available on your cell phone, your pager, your tablet, computer, car, TV, radio, etc. And with all of this information, comes faster and faster reactions. Computers now are programmed to mine data and react to headlines faster than we mere mortals can even read, let alone interpret, the news. The key is to recognise that the American consumer also reacts increasingly faster to changes in the economic landscape – regardless of whether or any adjustments in behaviour are intended.

My point is simple. With everyone know having access to news on any number of devices and the media falling all over themselves trying to capture those precious eyeballs, the public is now kept amply abreast of the state of the economy. And with 401(k) plans now the key to the average American’s retirement, interest in the markets is now higher than ever.

This brings me to the question I’ve been noodling on lately, “Is this waterfall decline different?”

It is important to recognise that there is an emotional or human element behind most chart patterns seen in the market. With a waterfall decline, the thinking goes as follows. First there is the big drop, which is usually based on some sort of event or catalyst. Next comes the panic low where everyone is convinced that the sky is indeed falling. Then there is the “big bounce,” which is driven largely by a sigh of relief, short-covering, and some bargain hunting. This move usually convinces investors that they’ve seen the worst. But next comes the “retest” as the reason(s) for the initial decline resurface and the selling resumes. And then finally – usually after a couple months of basing action – the fear recedes and stocks embark on a meaningful advance.

What concerns me at the present time is that the current decline isn’t being driven by an event such as the coll ape of LTCM, Russia’s default on sovereign debt, a war (or two) in Iraq, the bursting of the tech bubble, or the credit markets freezing. No, this time around, the selling is based on the fear of what could happen next with regard to the dynamic duo of the debt crisis in Europe and the slowing of economic growth around the globe.

I might go so far as to argue that the waterfall decline should be viewed as a discounting of future expectations – only with computers involved this time around. The current environment can also be described as a period of “price discovery,” during which, investors of all colours, shapes, and sizes adjust their thinking about the price they are willing to pay for earnings given the new environment.

Normally, this is a process that takes time. But with the massive amount of money involved with global macro hedge funds that tend to be heavily leveraged and the velocity with which the markets now move, it looks to me like the discounting process is happening at light-speed right now.

And now for the final question/point. Given that I believe we are in the “price discovery” phase of the market’s discounting of the future, a future that, at best, involves significantly slower growth and very low job growth, can we really expect the bulls to resume their upward climb once this volatile period ends? What will drive the growth? Fiscal stimulus programs? Uh, no. The Fed? Maybe, but Mr. Bernanke will have to come up with something new (and like QE, unproven). Higher profits? Perhaps, but won’t an economic slowdown eventually show up in EPS?

This is not to say that we won’t see stellar rallies over the next year, we always do. But for those of you who think that this is like March 2009 and will prove to be a great time to buy, you’d best have a very long-term time horizon (perhaps 3-5 years) – because, in my humble opinion, this waterfall decline may indeed be different.

Turning to this morning… Stocks are weak around the globe again this morning on continued worries about funding problems for European banks and growth expectations out in front. In addition, Citi cut its growth estimates for U.S. GDP as well as their projected EPS for the S&P 500.

On the Economic front… The economic calendar is quiet today with nothing scheduled for release before the opening bell.

Thought for the day… Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: -3.41% Shanghai: -0.98% Hong Kong: -3.08% Japan: -2.45% France: -3.24% Germany: -3.68% Italy: -2.95% Spain: -3.06% London: -2.42%
  • Australia: -3.41%
  • Shanghai: -0.98%
  • Hong Kong: -3.08%
  • Japan: -2.45%
  • France: -3.24%
  • Germany: -3.68%
  • Italy: -2.95%
  • Spain: -3.06%
  • London: -2.42%
  • Crude Oil Futures: -$0.68 to $81.70
  • Gold: +$30.90 to $1852.90
  • Dollar: higher against the Yen, lower vs Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.076%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -10.70 Dow Jones Industrial Average: -95 NASDAQ Composite: -10.28
  • S&P 500: -10.70
  • Dow Jones Industrial Average: -95
  • NASDAQ Composite: -10.28

Wall Street Research Summary


  • Lululemon (LULU) – Barclays
  • Cerner (CERN) – Cowen
  • Genpact (G) – Janney Capital
  • Research In Motion (RIMM) – Jefferies
  • Genesee & Wyoming (GWR) – JPMorgan
  • Coach (COH) – KeyBanc
  • The Buckle (BKE) – Sterne, Agee


  • Tiffany & Company (TIF) – Berenberg
  • Gaylord Entertainment (GET) – FBR Capital
  • Cree (CREE) – JMP Securities
  • Lululemon (LULU) – KeyBanc
  • Motorola Mobility (MMI) – Oppenheimer
  • Hewlett-Packard (HPQ) – RW Baird, UBS
  • LDK Solar (LDK) – ThinkEquity
  • Principal Financial Group (PFG) – Estimate and target cut at UBS

Long positions in stocks mentioned: none

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


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