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How Much Is Enough?

Jun. 09, 2011 8:56 AM ET
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David Moenning's Blog
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Daily State of the Markets 
Thursday Morning - June 9, 2011

Good Morning. With the stock market having fallen six days in a row and now sporting a decline of -6.14% from the April 29th high, the question of the day is how much downside is enough to discount the current economic soft patch? Is -5% enough? How about -7.5%? Or is -10% the ultimate target the indices must reach before the value hunters start to step in?

Although the declines seen Wednesday weren't dramatic, the fact that stocks once again failed to bounce, let alone rally, cements the fact that this corrective phase may be something more than your run-of-the-mill pullback. In short, Wednesday afternoon's comments from Fed Chairman Bernanke, coupled with the ongoing question of whether or not there will be a "credit event" (I.E. a default - technical or otherwise - that triggers credit default swaps) in the Eurozone, Moody's warning that the UK could lose their 'AAA' rating if they aren't careful, and another drama-filled OPEC meeting, all helped traders continue to lean toward the sell side again yesterday.

A discussion I had with a colleague really sums up the current issue in the market. One of my co-workers suggested that the decline was getting "stupid" due to the fact that the economic data hasn't been "that bad," that GDP is still growing and not likely to "double dip," and that earnings are still better than they were earlier in the year. My response was fairly straightforward as I opined that while all of these points were valid, the market simply doesn't work that way.

I argued that unless there is some new development on the news front, the stock market usually doesn't give a hoot about what is currently happening in terms of the economic data or earnings. No, the key point to remember is that the market is a discounting mechanism and most of the time (but clearly not all of the time) the action in the major indices is a reflection of what is expected to happen in the future.

Thus, my position in our in-house discussion was that the stock market is currently attempting to discount/guess what the economic and earnings pictures will look like six months down the road. And this is where the fun starts, as well as the question of how much is enough?

It is during times like these when investors tend to get themselves into trouble by taking a stance and getting stubborn with it. The key here is that nobody knows how much of a discount needs to applied. After a 6.1% decline, some in the glass-is-half-full camp are likely to argue that the current correction is more than sufficient to discount a temporary soft patch and that we're good to go. However, those folks dressed in their bear costumes are apt to disagree - and THIS is what makes the world go 'round in the stock market.

Whenever I find myself in doubt on a question relating to the economy, I like to look to the bond market for clues. I'm of the mind that the folks in the bond pits tend to be more focused on far fewer issues and as such, oftentimes present a clearer message as to what the markets are anticipating.

If we look at a chart of the U.S. 10-year bond yields, the message is pretty obvious. With yields having taken a dive from 3.6% to 2.96% since mid-April and now sitting at the lows for the year, it is fairly easy to see that the bond market is concerned about something. But given the fact that the FOMC is still in this market buying almost on a daily basis, some will argue that the yields are artificially low. So, I decided to check in with the High Yield bond market as well. And while many consider junk bonds to be "stocks in drag," a quick peek at a chart of the JNK or HYG ETF's shows that this market also may be concerned about the state of the economy.

So, how much is enough? To be sure, I don't know. But frankly, I don't care to even hazard a guess. As I've said a time or twenty, this game isn't about "being right" and I learned a long time ago that Ms. Market doesn't give a hoot about what I think ought to be happening. In my humble opinion, this game is about being on the right side of what IS happening in the market. So, my job is to identify what the market's focus is and to try and stay in tune with the primary trend.

Turning to this morning... The bull camp continues to look for the elusive bounce that most traders would expect from an oversold condition. And while things can change quickly, it appears that the bulls may attempt another try (modest as it may be) in the early going.

On the Economic front... Initial Claims for Unemployment Insurance for the week ending 6/4 rose by 1,000 to 427K. This was above the consensus estimate for 421K and above last week’s total of 426K. Continuing Claims for the week ending 5/28 came in at 3.676M vs. 3.696M and last week’s 3.747M.

In addition, the U.S. Trade Deficit fell in April to $43.68 billion, which was below than the consensus estimate for a deficit of $48.7 billion. The March reading was revised lower to $46.82 billion from $48.18 billion.

Thought for the day... Resist the temptation to tell people only what they want to hear...

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: +0.28%
    • Shanghai: -0.71%
    • Hong Kong: -0.23%
    • Japan: +0.19%
    • France: +0.26%
    • Germany: +0.22%
    • London: +0.01%

  • Crude Oil Futures: +$0.65 to $101.39
  • Gold: -$2.00 to $1536.70
  • Dollar: lower against the Yen, Euro and pound
  • 10-Year Bond Yield: Currently trading at 2.935%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +3.24
    • Dow Jones Industrial Average: +32
    • NASDAQ Composite: +1.4


Wall Street Research Summary


  • Safeway (SWY) - Barclays
  • Macy's (M) - Barclays
  • Old Dominion (ODFL) - Citi
  • UnitedHealth (UNH) - Target increased at credit Suisse
  • Apollo Group (APOL) - Target increased at Goldman Sachs
  • DeVRY (DV) - Target increased at Goldman Sachs
  • ITT Educational Services (ESI) - Target increased at Goldman Sachs
  • Strayer Education (STRA) - Target increased at Goldman Sachs
  • Sealed Air (SEE) - Jefferies
  • IDEX Corp (IEX) - Mentioned positively at Oppenheimer
  • Biogen Idec (BIIB) - Mentioned positively at UBS
  • Lorillard (LO) - Added to Key Calls at UBS



  • BJ's Wholesale (BJ) - Barclays
  • Hanesbrands (HBI) - Barclays
  • Research In Motion (RIMM) - Citi
  • PF Chang's (PFCB) - Estimates cut at Cowen
  • Investment Technology Group (ITG) - Wedbush


    Long positions in stocks mentioned: None


    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 TopStockPortfolios 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.

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