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Baked In, Really?

Daily State of the Markets 
Thursday Morning – June 24, 2010

Good morning. Perhaps the most significant aspect of Wednesday's session was that stocks didn't crater on either the report that New Homes Sales hit a record low or the fact that the FOMC admitted that "financial conditions are less supportive of growth" (which is Fed speak for things are going to slow down). While there was a small amount of volatility surrounding both announcements, the bulls argue that the bad news is already baked into the cake at the present time.

Under the category of full and fair disclosure, I am a card carrying member of the glass-is-half-full club when it comes to the outlook for the U.S. stock market. Over the past 25 years, I have learned that while there are indeed times when it pays big to be a "negative Nancy," these periods are usually relatively brief when compared to the times it pays to be upbeat about the prospects for both the U.S. economy and the stock market. But lately, I find it difficult to see the bright side of the story and question the premise that the bad news is already baked into the market's cake.

Maybe this is just a natural response to the seemingly never ending flow of bad news we've been treated to lately. There is the Europe mess, which doesn't seem to have an easy solution, the bubblin' crude flowing into the Gulf, the worries over global growth, concerns that earnings estimates have gotten ahead of themselves, the anti-business regulatory/taxation environment, the potential for housing to experience a double-dip, the lack of improvement in the jobs market, the state of the consumer, and now the Fed saying it sees things slowing down a bit.

Thus, it was actually surprising to see the market hold up rather nicely yesterday when it was reported that New Home Sales in the U.S. fell to an annualized rate of just 300,000 - the lowest level since records began being kept in 1962. Immediately, the phrase "it's not the news, but how the market reacts to the news that counts" jumped into my head as I realized that maybe, just maybe the assumption that housing was heading back into the tank was indeed baked into the cake at this stage. After all, we have seen a correction on the order of -14% over the past two months. Maybe, that's enough, right?

Another REALLY important lesson I've learned over the years is that Ms. Market doesn't give a hoot about what I think should or could happen. Thus, the key consideration at this stage of the game for me and anyone else who may have fallen into the "Debbie Downer" camp is that the market may have already discounted much of the bad news that is out there already. If stocks are able to stabilize and rally from here, this will be all the proof I need in order to slap myself upside the head and start looking at the bright side. However, if the rallies continue to be sold into (especially after the end-of-quarter window dressing period expires), then the current negative state may continue to be warranted for a while.

Turning to this morning... We've got a couple of economic reports, so let's get to them.

First, the Labor Department reported that initial claims for unemployment insurance for the week ending June 19th fell by 19,000 to 457K. The week’s total was below the Reuters consensus for a reading of 462K. Continuing Claims for unemployment for the week ending June 12th were also below consensus at 4.545M vs. expectations for 4.59M.

Next up, the Commerce Department reported that Durable Goods orders declined -1.1% during the month, which was a smidge above the consensus expectations for an drop of -1.2%. When you strip out the volatile orders for transportation, orders in May rose by 0.9%, which was a bit below the consensus for +1.2%.

Looking at the pre-market activity, the futures still point to a lower open at this stage on worries over Europe, but things have improved a fair amount in response to the Durable Goods and Weekly Jobless Claim reports.

Finally, remember to smile at least once before lunch...

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -0.12%
    • Shanghai: -0.12%
    • Hong Kong: -0.59%
    • Japan: +0.05%
    • France: -1.23%
    • Germany: -1.40%
    • London: -0.86%


  • Crude Oil Futures: - $0.63 to $75.72
  • Gold: - $4.40 to $1230.40
  • Dollar: Higher against Yen and Euro, lower vs Pound
  • 10-Year Bond Yield: Currently trading lower at 3.07%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -5.04
    • Dow Jones Industrial Average: +32
    • NASDAQ Composite: -14.02


Wall Street Research Summary


  • Pinnacle West (NYSE:PNW) - Barclays
  • Barrick Gold (NYSE:ABX) - Credit Suisse
  • Agnico-Eagle Mines (NYSE:AEM) - Credit Suisse
  • Eldorado Gold (NYSE:EGO) - Credit Suisse
  • Saks (NYSE:SKS) - Added to Short-Term Buy list at Deutsche Bank
  • PPL Corp (NYSE:PPL) - Added to Short-Term Buy list at Deutsche Bank
  • Progress Energy (PGN) - FBR
  • Health Management (NYSE:HMA) - Leerink Swan
  • Aeropostale (NYSE:ARO) - Oppenheimer
  • J Crew (JCG) - Oppenheimer
  • Pacific sunwear (NASDAQ:PSUN) - Oppenheimer
  • Ross Stores (NASDAQ:ROST) - Oppenheimer
  • TJX Co's (NYSE:TJX) - Oppenheimer
  • Wynn Resorts (NASDAQ:WYNN) - Sterne, Agee
  • CarMax (NYSE:KMX) - UBS



  • Canadian Pacific (NYSE:CP) - BofA/Merrill
  • Aruba Networks (NASDAQ:ARUN) - Barclays
  • Google (NASDAQ:GOOG) - Estimates reduced at Cowen
  • eBay (NASDAQ:EBAY) - Estimates reduced at Cowen
  • Nike (NYSE:NKE) - Removed from Top Pick at FBR
  • Home Depot (NYSE:HD) - Janney Capital
  • Lowe's (NYSE:LOW) - Janney Capital
  • TRW Automotive (NYSE:TRW) - KeyBanc
  • Genzyme (GENZZ) - Leerink Swann
  • American Eagle Outfitters (NYSE:AEO) - Oppenheimer
  • Abercrombie & Fitch (NYSEARCA:AND) - Target reduced at Oppenheimer
  • Noble Corp (NYSE:NE) - Stephens


    Long positions in stocks mentioned: NE

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