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Problem(s) Solved

Daily State of the Markets 
Wednesday Morning - February 2, 2011

Good morning. In a way, it's laughable the way the market has acted over the last three days. One minute the sellers are crying wolf and hitting the market with every sell program they can find because of the powder keg in the Middle East (and for the record, when isn't the Middle East a powder keg waiting to explode at any moment?) and the next, oh, that's right, the market is closing at new highs for the bull market cycle.

On one hand, we are pleased that we went on record as saying that Friday's action was at least partially artificial and related to fear of what could have happened over the weekend. But on the other hand, as participants in the game, I'm here to say that it is no fun being whipped around like this. And given the head-shaking action we've seen since 10:00 am Friday morning, it is little wonder that the most popular question in my email inbox was something on the order of "What the heck?"

Putting emotion aside, it is fairly easy to see what is going on. At least a portion of Friday's rout was driven by the worry over what appeared to be a developing problem in Egypt. Don't forget that the most popular question being bandied about on Friday wasn't "Who is gonna win the Super Bowl?" but rather, "Is Egypt the next big problem?"

Experience teaches us that the market's reaction to geopolitical problems is usually the same. First there is an issue that is basically ignored by the markets. Then something occurs that grabs people's attention and fear starts to mount. Then there is some sort of a trigger that creates a selling panic. Next is the continuation of that fear/selling as everyone begins to extrapolate what will happen in the future. And then finally, there is the solution, which, is generally accompanied by a furious rally.

If any of this is starting to sound familiar, give yourself a gold star. In short, what we have seen since Friday afternoon is a condensed version of what is generally referred to as a "bad news panic" scenario. First the riots were ignored for three days. Then things got ugly and traders started hitting the sell button early and often. But instead of the problem being strung out for a while (during which time, the bears usually gain some significant ground), this time, the problem got solved in a big hurry as President Mubarak appears to be bowing to the pressure of the people.

So, with the Egypt problem getting solved - well, at least as far as Wall Street is concerned - traders decided it was time to cover their shorts. And then as the technical levels were breached (this time to the upside), the stops were hit and people piled on the buy orders. Now toss in the fact that it was the first day of the month and you've got a recipe for a triple-digit advance.

Speaking of problems and their solutions, lost in the stock market shuffle Tuesday was word out of Europe that the ECB/EU was preparing to buy up a bunch of Greek debt and extend the terms of other Greek issues out to 30 years. In addition, Germany was proposing a change in the EU constitution to put a limit on debt/GDP ratios and to coordinate corporate tax rates, among other things. Thus, I argued to a colleague yesterday that we can probably make a checkmark in the "problem solved" box next to the heading of European Debt Crisis.

And lest we forget, the bears like to yammer on about how the economic recovery in the U.S. is doomed, or at the very least, won't last long. However, yesterday's ISM readings both here and abroad would beg to differ as the reports on the state of manufacturing was once again better than expected. Thus, we should probably recognize that the economic problem that plagued the market last summer has also been solved for a while now.

So, where to from here, you ask? Well, in light of the fact that there were some gaps created by yesterday's excitable open, we wouldn't be surprised to see some backing and filling. But, we must also recognize that the melt-up could very well pick up where it left off from last Thursday - especially now that all of those problems are solved!

Turning to this morning... Although Asian markets followed Wall Street higher, European bourses are mixed at the moment and stock futures in the U.S. are slightly below fair value after S&P downgraded Ireland. However, the ADP report seems to have lifted the spirits a bit.

On the Economic front... Challenger, Gray and Christmas reports that there were 38,519 planned job cuts announced in January which was up 20% from December’s 32,004 but down 46% from year ago levels. The planned job cut total for the month of January was the lowest seen in the month since Challenger started keeping records in 1993.

Next up, ADP reported that the private sector job market expanded again during the month of January. The report shows that private sector jobs rose by 187K jobs during the month, which was above the consensus expectations for a gain of about 147K. December’s report was revised lower to a gain of 247,000 jobs from the initial report of 297K.

Thought for the day: Never forget the first rule of life, medicine, and money management: Do no harm...

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: +0.95%
    • Shanghai: +0.31%
    • Hong Kong: +1.81%
    • Japan: +1.78%
    • France: -0.23%
    • Germany: -0.02%
    • London: +0.62%


  • Crude Oil Futures: -$0.12 to $90.65
  • Gold: -$1.60 to $1338.70
  • Dollar: lower against the Yen and Pound, higer vs Euro
  • 10-Year Bond Yield: Currently trading at 3.443%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -1.99
    • Dow Jones Industrial Average: -17
    • NASDAQ Composite: -3.30


Wall Street Research Summary


  • RBC Bearings (NASDAQ:ROLL) - BofA/Merrill
  • Hexcel (NYSE:HXL) - BofA/Merrill
  • Anadarko Petroleum (NYSE:APC) - Canaccord Genuity
  • Walgreens (WAG) - Citi
  • Quest Software (NASDAQ:QSFT) - Goldman Sachs
  • Eagle Materials (NYSE:EXP) - Jefferies
  • Helix Energy (NYSE:HLX) - Morgan Stanley
  • UPS (NYSE:UPS) - Target increased at RBC
  • Thomson Reuters (NYSE:TRI) - Target increased at RBC
  • Manitowoc (NYSE:MTW) - RBC



  • Kennametal (NYSE:KMT) - BofA/Merrill
  • Activision Blizzard (NASDAQ:ATVI) - BofA/Merrill
  • Big 5 Sports (NASDAQ:BGFV) - Deutsche Bank
  • Dollar General (NYSE:DG) - Deutsche Bank
  • Wal-Mart (NYSE:WMT) - Deutsche Bank
  • Bemis (NYSE:BMS) - Deutsche Bank
  • Nuance Communications (NASDAQ:NUAN) - Goldman Sachs
  • Orexigen (NASDAQ:OREX) - Jefferies
  • Harte-Hanks (NYSE:HHS) - JPMorgan
  • Energizer (NYSE:ENR) - Morgan Stanley
  • Landstar (NASDAQ:LSTR) - Piper Jaffray
  • Dollar Tree (NASDAQ:DLTR) - Piper Jaffray


Yesterday's Earnings After the Bell



Aflac AFL $1.33 $1.35
Broadcom BRCM $0.58* $0.73
Boston Scientific BSX $0.20* $0.10
C.H. Robinson CHRW $0.62 $0.63
Electronic Arts ERTS $0.59 $0.56
Leggett & Platt LEG $0.21 $0.23
MEMC Electronic Materials WFR $0.25* $0.34

Earnings Before The Bell



Cameron International CAM $0.69 $0.67
Genworth Financial GNW -$0.33* $0.16
Hospira HSP $0.77 $0.93
Hershey HSY $0.59 $0.61
Mattel MAT $0.89 $0.86
Nasdaq OMX Group NDAQ $0.55 $0.51
Thermo Fisher Scientific TMO $1.00 $0.95
Time Warner TWX $0.67 $0.62
Wisconsin Energy WEC $1.06 $1.01
Whirlpool WHR $2.11 $2.26

* Report includes items that make comparisons to the consensus estimate questionable

Long positions in stocks mentioned: none

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