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Fearing the Worst?

Daily State of the Markets 
Monday Morning - May 3, 2010

Good morning. Just about the time traders may have assumed that all was right with the world again and that stocks were ready to resume their nearly three-month old joyride to the upside, fear returned to the corner of Broad and Wall on Friday. The goal of this daily market missive is to determine what is driving the market to do whatever it is doing at the present time. And in looking at the headlines on Friday, the reason - or reasons - behind the triple-digit dive were not immediately obvious.

For just the second time in the last twelve weeks, stocks finished lower on the week; in large part due to Friday's spirited dance to the downside. However, the normal drivers of the market's daily activity didn't seem to provide justification for a big drop. Earnings were good, the headlines out of Greece all suggested a deal would get done by Monday morning, the GDP report was a little weak but showed growth in the consumer sector, the Chicago Purchasing Managers Index was well ahead of consensus, and the Confidence index out of the University of Michigan came in better than expected.

However, there were a couple of things to place in the minus column on Friday. First there was word that the Fed's might charge Goldman Sachs (NYSE:GS) with criminal securities fraud. This created some new uncertainty about what will happen to the financial sector in general and the investment banks in particular. And then the semis got hit - and hit hard - on the report out of Samsung that inventories might begin to grow in the second half of the year. So, with two of the market's biggest sectors under pressure, it is little wonder that stocks didn't fare well.

However, in our humble opinion, neither of the entries in the negative side of the ledger were worthy of the -1.5% to -2.9% shellacking that the major indices took on Friday. No, the action felt more like what we saw during the credit crisis as fear (and the consistent application of sell programs) seemed to take over.

We could blame the action on the fact that the market remains overbought and that sentiment measures have reached extreme levels - a combination that usually leads to a pullback of sorts. However, given that the bulls have been able to do no wrong for nearly three months, that explanation seems a little "off" to us.

So, in noodling on the subject for a few minutes on Friday afternoon, the concept of "event risk" leapt to mind. In short, we're going to bet that traders who had access to those nifty computer-driven trades that move the markets in a swift fashion wanted no part of the potential event risk over the weekend. Sure, most casual observers expected the Greece deal to get done by Monday. But what if it didn't? Can you say "sell 'em?" And the same idea can be applied to the potential criminal charges at Goldman. Thus, we'll suggest that it was fear of what could happen while the markets were closed that was the cause of Friday's rather intense selling.

How will we know if we were right, you ask? Today's action should provide us with plenty of clues. If event risk was the key to Friday's selling, we'll expect to see a nice rebound. However, if the selling resumes during the day, then we'll have to assume the trend is at risk.

Turning to this morning... Greece agreed to a deal with the EU/IMF on Sunday and China raised bank reserve requirements by 50 bp for the third time this year.

On the economic front, Personal Incomes were rose by +0.3% in March, which was in line with the consensus expectations for an increase of +0.3%. February’s reading was revised upward to +0.1% from unchanged. Personal Spending was also higher, increasing by +0.6%, which was spot on with the expectations of +0.6%. February’s reading for spending was revised up to +0.5% from +0.3%. On the inflation front, the PCE Core rose by +0.1 in March while the PCE Deflator was up 2.0% over the past year.

Running through the rest of the pre-game indicators, the major overseas markets are mixed. Crude futures are up $0.16 to $86.31. On the interest rate front, the yield on the 10-yr is currently trading at 3.71%. Next, gold is up $0.80 to $1181.50 and the dollar is lower against the Yen but higher against the Euro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a rebound at the open. The Dow futures are currently ahead by about 38 points; the S&P’s are up by about 4 points, while the NASDAQ looks to be about 9 points above fair value at the moment.

Finally, try embracing an “attitude of gratitude” today...

Earnings Before The Bell



Berkshire Hathaway BRK.A $2222.00 $1102.33
Clorox CLX $1.16 $1.08
NICOR GAS $1.33 $1.34
Loews L $1.99 $0.96
Sysco SYY $0.42 $0.40
Valeant Pharmaceuticals VRX $0.64 $0.59

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

Wall Street Research Summary


  • Tesoro (TSO) - BofA/Merrill
  • Clean Harbors (NYSE:CLH) - Credit Suisse
  • Ingram Micro (NYSE:IM) - Goldman Sachs
  • Pinnacle Entertainment (NYSE:PNK) - Janney Capital
  • NII Holdings (NASDAQ:NIHD) - JPMorgam
  • Intuit (NASDAQ:INTU) - Morgan Stanley
  • Rockwell Automation (NYSE:ROK) - Societe Generale
  • Intel (NASDAQ:INTC) - Mentioned positively at Sterne, Agee
  • Anadarko Petroleum (NYSE:APC) - SunTrust Robinson Humphrey



  • Northern Trust (NASDAQ:NTRS) - BofA/Merrill
  • Pulte Group (NYSE:PHM) - Citi
  • Realty Income (NYSE:O) - Credit Suisse
  • Goldman Sachs (GS) - Keefe, Bruyette & Woods
  • Martin Marietta Materials (NYSE:MLM) - UBS
  • Vulcan Materials (NYSE:VMC) - UBS


    Long positions in stocks mentioned: VRX, INTC

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Disclosure: VRX, INTC