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Has Hooverphobia Set In?

Daily State of the Markets 
Wednesday Morning – June 23, 2010

Good morning. One of my favorite rules in the stock market is as follows: Things don't matter until they do - and then they matter a lot! As a matter of explanation, the idea is that a particular "issue" or theme may be in place and readily available to investors for a long time, yet it isn't until an issue becomes the focal point of the market that it becomes truly important.

Classic examples of my little rule include the extreme undervaluation of stocks in 1982 (check out the PE's back then - now THAT's value), the technology bubble in 1999 (did it matter to you that you could buy almost every company in the DJIA with the valuation of Cisco Systems (NASDAQ:CSCO) at that time or that a company didn't need no stinkin' earnings in order to have a multi-billion dollar market cap?), the housing market in 2007 (who cares if your house is going up $100K a year in value, it's all good - and likely to continue, right?). And fast-forwarding to the here and now, perhaps it's the issue of too much debt that just might be coming home to roost.

In each and every example of this rule, a condition existed for a very long time before it finally "mattered" to the market. But as history shows, once things "matter" to Ms. Market, they do seem to matter an awful lot!

So, while the issue of sovereign debt has been around for a very long time, it may (and I repeat, MAY) be becoming an issue that traders suddenly care about. What proof do I have and why now, you ask? As to the first question, all I've got is some anecdotal evidence to offer up and there is a VERY strong chance that I'm off base here - or VERY early. However, given the fact that I've heard more mentions of the country's 31st President over the last few days than in the last 30 years combined, I'm beginning to get the idea that traders are worried that there is no way out of the current combination of too much debt and not enough income for many countries around the globe.

If you will recall, Herbert Hoover was the President of the United States during the peak of the Great Depression. Unfortunately, history shows that it was his policies (or the lack thereof) that turned an ordinary recession into the greatest economic debacle in our country's history. And in short, it is the fear that we are seeing a repeat of Hoover's bad decisions that has gripped the market over the past few days.

Wanna be scared about debt? Forget Greece, Portugal, Italy, Spain, Ireland, and Dubai. Take a look at the debt-to-GDP ratios of the good 'ol USofA. According to the Federal Reserve, the Gross Federal Debt plus State and local government debt plus the debts of a couple little companies affectionately referred to as Fannie and Freddie currently adds up to 154% of the country's GDP. And for those of you keeping score at home, this total is a bit higher than Greece and Italy's 115%, France's 77.6%, Germany's 73.2%, and the UK's 68.1%.

The problem is that the rest of the world seems to be trying to tighten their spending belts while our administration is trying to "spend our way back to prosperity." And while the European solution may be viewed as Hooveresque, as it almost guarantees that slow economic times lay ahead, the solution here at home has "issues" of its own.

So, which are traders more worried about these days? Frankly, with all of the "Hoover-speak" occurring these days, it sounds like the market is concerned about a slowdown in Europe spreading around the globe. And while I have positively no proof of this theory and even less conviction that the current market downturn will go past lunch on Wednesday, given the lack of catalysts seen for the sudden pullback, the worry about the "austerity movement" in Europe, and the "debt policies" here at home (all at a time when it looks like the economy could, or may be currently slowing down), I wanted to bring it to your attention BEFORE it starts to "matter."

Sorry for the early morning big-picture ramble. We now return you to your regularly scheduled program...

Turning to this morning... Once again, we don't have any economic news to review before the bell today but we will get a report on New Home Sales for May at 10:00 am eastern. The focal point of the session will likely be the Fed statement, scheduled to be issued at 2:15 pm.

In the pre-market, it appears that traders are preparing for a bounce at the open. However, based on the fact that stocks have enjoyed just such an early bounce during each of the past two days, it will be interesting to see if this one can stick around more than 15 minutes.

Finally, regardless of the colors on the screens, make the decision to have a great day...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -1.57%
       
    • Shanghai: -0.73%
       
    • Hong Kong: +0.18%
       
    • Japan: -1.87%
       
    • France: -0.28%
       
    • Germany: -0.17%
       
    • London: -0.37%

     

  • Crude Oil Futures: - $0.21 to $77.64
     
  • Gold: + $3.10 to $1243.90
     
  • Dollar: Higher against Yen, lower vs Euro and Pound
     
  • 10-Year Bond Yield: Currently trading higher at 3.18%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +4.49
       
    • Dow Jones Industrial Average: +41
       
    • NASDAQ Composite: +6.6

       

Wall Street Research Summary

Upgrades:

  • Holly Corp (HOC) - BofA/Merrill
     
  • Precision Drilling (NYSE:PDS) - Canaccord Genuity
     
  • Con Edison (NYSE:ED) - JPMorgan
     
  • SanDisk (NYSEARCA:SDK) - Estimates and target increased at JPMorgan
     
  • Monster Worldwide (NYSE:MWW) - Openheimer
     
  • PPL Corp (NYSE:PPL) - Soleil Securities
     
  • Zymogenetics (ZGEN) - UBS

     

    Downgrades:

  • Goldman Sachs (NYSE:GS) - Targed reduced at Barclays
     
  • Edwards Lifesciences (NYSE:EW) - Goldman Sachs
     
  • Domtar (NYSE:UFS) - Removed from Conviction Buy at Goldman Sachs
     
  • Adobe Systems (NASDAQ:ADBE) - Target reduced at ISI Group

     

    Long positions in stocks mentioned: none

    For more "top stock" portfolios and research, visit TopStockPortfolios.com

     


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