Worse Than We Thought?

Daily State of the Markets 
Friday Morning – August 5, 2011

Good morning. With the stock market in an out-and-out freefall lately, the question on everyone’s mind can be summed up in one word: Why? Why has the S&P fallen almost 11.5% since early July? Why is the index back to the levels seen before QE 2 was announced? Why are stocks diving when earnings are so good? And why is the dive so darned violent?

The answer to almost all of the questions posed above is the simple fact that things are now worse than we had thought previously. As such, prices are being adjusted downward to reflect the new reality. And since there are lots of computers and fast-money types involved who are bound and determined not to get fooled again by a crisis of any shape, size, or colour, the attitude is: sell first and ask questions later.

But from a bigger picture standpoint, the current waterfall decline is really all about things suddenly being worse than the expectations. For example, we found out last Friday that the U.S. economy is in far worse shape than economists had thought as Q1 GDP was cut to just +0.4% from something closer to 2.0% (+1.9% to be exact). And in looking ahead, economists and Wall Street banks have been busy lately cutting their estimates for growth in the second half of the year. Yes, this was the very same part of the year that, if you recall, was supposed to contain a strong rebound.

Next up is Europe. The bottom line here is that things are indeed worse that we thought. Heck, Jean-Claude Trichet and the ECB admitted as much on Thursday. Up until just recently Trichet had been talking about the ECB’s exit strategy and championing the bank’s plans to fight the good fight against inflation. But given that Trichet & Co. felt it necessary to start buying bonds on the open market again (although clearly not the right bonds) yesterday – after a four-month hiatus – makes it is clear that the ECB felt it needed to do something to keep the credit contagion from getting worse. Because after all, even the mighty ECB can’t afford to bailout Spain and/or Italy.

Speaking of buying bonds across the pond, apparently investors had to be bribed with higher yields in order to lend money to Spain yesterday. As we reported, the yields on 3- and 4-year bonds soared with some yields on the curve hitting record highs after the auction. The key here is that Spain’s bond auction was, yep, that’s right, worse than expected. In fact, the rates were so high that Spain officials decided to just cancel the rest of their auctions scheduled for August. And again, it looks as if this situation is rapidly becoming worse than we thought.

Returning to things closer to home, there is also fear that all the talk recently in Washington about debt, deficits, default, and downgrades may have spooked the consumer. Recent reports show that the consumer was already spending less time at the malls before the politicians starting biting, scratching, kicking, and pulling each other’s hair. So, as you might be able to guess by now, the real concern is that things might get worse on the consumer front going forward. And this is especially true now that the stock market is back in the news – and not in a good way.

So, the question now becomes: How much downside discounting is necessary/enough to reflect this new environment, where things are worse than we thought? To be sure, we don’t have the answer to this question. But I will foster a guess that we are about to find out in the coming weeks.

In closing, I have one final thought on this Friday morning. If I were a knight dressed in white and it was my job to save the day before another meltdown really gets rolling, I might be inclined to have my stable boy saddle up that white stallion – in a hurry! Therefore, it might be a good idea to keep an ear to the ground for the white horses riding to the rescue as you double up on that short bet.

Turning to this morning… As one might have expected, the foreign markets followed Wall Street lower overnight. And the ECB is back in the European bond market this morning (and being criticised heavily for buying the wrong stuff). However, today is all about the jobs report, so let’s get to it.

On the Economic front… The labour Department reported that Nonfarm Payrolls, which is one of the most closely followed gauges regarding the state of the economy at the present time, rose in the month of July by 117,000. This was above the consensus estimates for an increase of 77,000 and June’s unrevised total of 46K (revised upward from 18K). The private sector (aka the household survey) showed gains of 154K jobs, which was also below the estimates. Finally, The nation’s Unemployment Rate fell to 9.1%, which was better the expectations for a reading of 9.2%.

While definitely not a strong report, it may be enough to dispel some of the fear that the U.S. is heading directly into a recession at the present time. Or, perhaps the report will at least be enough to encourage the shorts to cover on a summer Friday.

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: -4.21% Shanghai: -2.15% Hong Kong: -4.29% Japan: -3.72% France: -0.23% Germany: -1.98% Italy: +0.85% London: -2.13%
  • Australia: -4.21%
  • Shanghai: -2.15%
  • Hong Kong: -4.29%
  • Japan: -3.72%
  • France: -0.23%
  • Germany: -1.98%
  • Italy: +0.85%
  • London: -2.13%
  • Crude Oil Futures: +$0.59 to $87.17
  • Gold: +$2.60 to $1661.60
  • Dollar: lower against the Yen, higher vs Pound and Euro
  • 10-Year Bond Yield: Currently trading at 2.443%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +13.80 Dow Jones Industrial Average: +114 NASDAQ Composite: +18.70
  • S&P 500: +13.80
  • Dow Jones Industrial Average: +114
  • NASDAQ Composite: +18.70

Wall Street Research Summary


  • Seaspan (SSW) – Cantor Fitzgerald
  • Brooks Automation (BRKS) – Citi
  • Mohawk (MHK) – Credit Suisse
  • HeartWare (HTWR) – Credit Suisse
  • Dean Foods (DF) – Credit Suisse
  • CenterPoint (CNP) – Deutsche Bank
  • PG&E (PCG) – Deutsche Bank
  • Citrix Systems (CTXS) – Evercore Partners
  • Symantec (SYMC) – FBR Capital
  • Mettler-Toledo (MTD) – Goldman Sachs
  • Boyd Gaming (BYD) – Goldman Sachs
  • Pall Corp (PLL) – JPMorgan
  • Coinstar (CSTR) – JPMorgan
  • U-Store-It (YSI) – RW Baird
  • Nasdaq OMX Group (NDAQ) – Susquehanna
  • Lear Corp (LEA) – Mentioned positively at UBS
  • Salesforce.com (CRM) – Wells Fargo
  • VMWare (VME) – Wells Fargo
  • MDC Holdings (MDC) – Wells Fargo


  • WMS Industries (WMS) – Credit Suisse
  • Petrohawk Energy (HK) – Credit Suisse
  • Exterran Holdings (EXH) – Credit Suisse
  • LinkedIn (LNKD) – Evercore Partners, Morgan Stanley
  • Blue Coat (BCSI) – FBR Capital
  • Hologic (HOLX) – Goldman Sachs
  • Illumina (ILMN) – Goldman Sachs
  • Waters (WAT) – Goldman Sachs
  • DIRECTV (DTV) – Goldman Sachs
  • Nalco Holding (NLC) – RW Baird
  • First Solar (FSLR) – ThinkEquity
  • Bank of America (BAC) – Wells Fargo
  • Comerica (CMA) – Wells Fargo


Earnings Yesterday’s After The Bell


AIG AIG $0.69 $0.88 CF Industries Holdings CF $6.75 $5.88 Con-way CNW $0.52 $0.51 Dolby Laboratories DLB $0.65 * $0.55 EOG Resources EOG $1.11 $0.79 Fluor FLR $0.94 $0.81 First Solar FSLR $0.70 $0.92 Microchip MCHP $0.55 $0.53 Blue Nile NILE $0.19 $0.21 Pitney Bowes PBI $0.52 $0.52 priceline.com PCLN $5.49 $4.89 Rackspace RAX $0.13 $0.12 SandRidge Energy SD $0.00 $0.03 Sunoco SUN $0.40 $0.45
Earnings Before The Bell


AES Corp AES $0.28 $0.27 Procter & Gamble PG $0.84 $0.82 PPL Corp PPL $0.45 $0.45 Viacom VIA.B $0.99 $0.85 Warner Chilcott WCRX $0.94 $0.89 Windstream WIN $0.19 $0.19* 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


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.