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Lots of Excuses, But...

Daily State of the Markets 
Monday Morning - January 31, 2011

Good morning. The question I heard over and over again on Friday was if Egypt is likely to be the next big problem for the markets. It seems that the national pastime of U.S. investors these days is to make sure they don't get fooled again by something that comes out of the blue. However, as I've pointed out many times in the past, it isn't a matter of identifying problems (there are ALWAYS lots of problems in the world) but rather figuring out when an issue might matter to the market. Remember, in the stock market, things don't matter until they do - and then they matter a lot.

I recognize that I may be guilty of beating this issue to a pulp, but given that (1) Wall Street spent most of the first quarter of 2000 figuring out new, creative ways to value companies with no earnings (remember the introduction of the price-to-sales ratio?) (2) few, if any, individual investors gave the mania that was occurring a second thought ("It's a new era"), and (3) ditto on that for the mortgage/credit crisis (which took more than a year to develop, by the way), I'm not terribly convinced that the public is going to see the next big thing coming. Thus, I prefer to let the market "tell me" what's important and what isn't.

On the topic of what the market is "saying" lately, it is quite clear that negative news has not been important. It appears that investors have been on a mission to get money put back into the stock market. After all, the powers that be on the street have ordained that stocks are heading up something on the order +20% this year (well, okay, maybe everyone isn't saying +20%, but a +10% gain seems to be universal lock according to the talking heads). As such, you can't really blame the average Joe for suddenly deciding that the stock market is a great idea for 2011.

So, is Egypt suddenly "important"? Is the rioting in the Middle East (remember, there's a lot more than just Egypt involved here) the new focal point? Are we going to spend the next three months worrying about what might happen next over there?

While anything can capture the market's attention for a short period, I don't believe that Egypt is the next big thing. In my humble opinion, there were lots of excuses for Friday's selling and the bottom line is that the buyers simply stood aside during the news- and program-driven selloff.

Here's a list of excuses traders might have espoused on Friday to support the selling of anything and everything.


  • Earnings: Not one, not two, but three big names failed to meet expectations (Ford, Microsoft, and
  • GDP Report: The headline number was below expectations and while the consumer spending component was considered positive, the report was widely viewed as a modest negative.
  • The Big Round Numbers: The market's focal point up until about 10:00 am Friday had been the Dow 12K and S&P 1300 levels. The consensus was that another failure at these levels would bring in selling, while a breakout would trigger buy stops.
  • Unrest in Egypt: Video clips of the rioting in Egypt were everywhere you turned.
  • Time For a Pullback: With an extended trend and sentiment overly optimistic, just about everybody in the game has been bracing for a pullback.


But, what is so interesting to me about all of the above is that everything on that list was all available to traders BEFORE the market opened. The riots in Egypt had been going on for days and had followed rioting in other spots. The GDP report had been released an hour earlier and the futures had had actually rallied on the news. So, when the stock market headed higher during the first 20 minutes of Friday's session it appeared that none of the things the popular press blamed for the day's decline mattered.

Here's my take on the real story. During the first 20 minutes of trading, there was a glitch at the NASDAQ. While the S&P and Dow were at or very near new 52-week highs, the NASDAQ index was being reported as unchanged. Then there was word that the NASDAQ was actually trading lower before they fixed the problem. So, what would any self respecting computer-driven trader do in that situation? Yep, you guessed it - lock in the spread!

There is little doubt in my mind that the initial sell programs were run to work some arbitrage angle on the differing price levels on the indices. Then, when the programs started to see little resistance, others piled on. And from there, you can probably extrapolate what happened as the sell programs fed on one another. Now let's toss in the following: (1) The fact that the indices appeared to be failing badly at those big, round numbers, (2) he news was all about rioting and the potential for disaster in the Middle East, (3) traders didn't want the "headline risk" over the weekend, and (4) any self respecting buyer likely decided to "stand down" on a Friday.

So there you have it; lots of excuses for sell programs, taking profits, not buying, etc. And while Egypt could very easily become the market's focal point, I'd be willing to bet that this turns out to be "the little pullback" that most of us have been expecting for some time now.

Turning to this morning... With no major negative surprises or developments out of Egypt over the weekend, traders appear to be covering some shorts in the early going. Thus, it will be interesting to see if the buyers return today. If the rebound attempt fails early, look for the pullback to continue on for a while.

On the Economic front... Personal Incomes rose by +0.4% in December, which was below the consensus expectations for an increase of +0.5%. The November level was revised higher to +0.4% from +0.3%. Personal Spending (now called “Consumption”) for the month rose by +0.7%, which was above the expectations of +0.6% and the November reading of +0.4%.

Thought for the day: Keep in mind that not every opinion is worthy of your attention...

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: -0.46%
    • Shanghai: +1.35%
    • Hong Kong: -0.72%
    • Japan: -1.18%
    • France: -0.12%
    • Germany: -0.20%
    • London: -0.27%


  • Crude Oil Futures: +$0.45 to $89.79
  • Gold: -$10.20 to $1331.50
  • Dollar: lower against the Yen, Pound and Euro
  • 10-Year Bond Yield: Currently trading at 3.359%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +4.70
    • Dow Jones Industrial Average: +40
    • NASDAQ Composite: +6.25


Wall Street Research Summary


  • Delta Air Lines (NYSE:DAL) - BofA/Merrill
  • Thomson Reuters (NYSE:TRI) - CIBC
  • Advanced Micro (NASDAQ:AMD) - Mentioned positively at Citi
  • Cheniere Energy (NYSEMKT:LNG) - Citi
  • Intergrys Energy Group (NYSE:TEG) - Citi
  • Pall Corp (NYSE:PLL) - Credit Suisse
  • Home Depot (NYSE:HD) - Goldman
  • Ingram Micro (NYSE:IM) - Added to Conviction Buy at Goldman
  • Oshkosh (NYSE:OSK) - JPMorgan
  • Quest Diagnostics (NYSE:DGX) - Morgan Stanley
  • National Oilwel Varco (NYSE:NOV) - Sterne, Agee



  • CVS Caremark (NYSE:CVS) - Bernstein
  • Rubicon Technology (NASDAQ:RBCN) - Canaccord Genuity
  • Southwest Gas (NYSE:SWX) - Citi
  • UGI Corporation (NYSE:UGI) - Citi
  • Apache (NYSE:APA) - Removed from Conviction Buy at Goldman
  • Lowe's (NYSE:LOW) - Goldman
  • Aqua America (NYSE:WTR) - HSBC
  • Stanley Black & Decker (NYSE:SWK) - KeyBanc
  • Penn National Gaming (NASDAQ:PENN) - KeyBanc
  • Synovus (NYSE:SNV) - Morgan Keegan
  • Noble Corp (NYSE:NE) - Sterne, Agee
  • Willis Group (WSH) - UBS
  • Ciena (NASDAQ:CIEN) - UBS


Earnings Before The Bell



Check Point Software CHKP $0.73 $0.69
Gannett GCI $0.83 $0.80
Illinois Tool ITW $0.79 $0.80
Roper Industries ROP $1.10 $0.99
Waddell & Reed WDR $0.54 $0.50
Exxon Mobil XOM $1.85 $1.63

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

Long positions in stocks mentioned: none

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