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More Questions Than Answers

Daily State of the Markets 
Thursday Morning – July 1, 2010

Good morning. With the month of June going out on a sour note (can you say window "undressing"?), investors are basically left with more questions than answers. Hopefully, the reading of our daily missive has helped to identify the primary drivers of the current decline, which include worries over sovereign debt in Europe and more recently, worries that the major economies of the globe may be slowing down sooner and more rapidly than had been expected.

However, the primary question continues to be: When will it end? (The selling, that is.) It seems that each and every day, there is a reason to sell, regardless of the news. And while our HFT friends with their shiny new computers are definitely playing a role, it is important to realize that there seems to be a distinct lack of buyers willing to step in and take the other side of the trade these days.

While we can make estimates of when the selling will likely stop based on projections from chart formations and valuation considerations, we must remember that Wall Street tends to overdo just about everything - in both directions. So, as Yogi Berra so famously said, "it ain't over 'till it's over." And from where we sit, until the news environment improves and/or the "de-risking" in the hedge fund community is completed, we might as well recognize that we're seeing very bearish action right now.

The primary problem is that investors are beginning to recognize that the bulls' run for the roses that began on March 10, 2009 may have ended (or is in the process of ending). Investors are beginning to question if the current decline is merely a meaningful correction or the start of a new "mini bear" which could produce additional losses. Investors aren't sure about the appropriate level of "discounting" that should be applied to a case of an economic rebound that might be stalling out just after it got started. Thus, as we stated above, it appears that there are plenty of unanswered questions at this stage of the game.

The big news yesterday brought about another question regarding Spain. While the market appeared to be happy doing little while waiting for Friday's jobs report, the Moody's announcement that it was placing Spain on "watch" for a possible downgrade put the sellers back on high alert. And although the market did not react immediately to the news, it did cause anybody thinking about doing some buying into the end of the quarter to rethink their plans. As such, the guys running the "seek and destroy" programs at the end of the day found that the path of least resistance was to the downside.

Turning to this morning... All eyes were on the Far East overnight as Japan's quarterly Tankan survey came in better than expected while China's PMI (Purchasing Managers' Index) confirmed the "slower growth" theme in what many consider the most important economy in the world at the present time. And then this morning in Europe, we learned that the PMI's of the Eurozone, UK, Germany, and France show that their economies are not falling off of a cliff. With the end result being a modestly lower stock market here in the pre-market.

On the economic front, the Labor Department reported that initial claims for unemployment insurance for the week ending June 26th rose by 13,000 to 472K - above the Reuters consensus for a reading of 455K. Continuing Claims for unemployment for the week ending June 19th were also above consensus at 4.616M vs. expectations for 4.52M.

Finally, despite the chaos in the markets, make every effort to enjoy the day...

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -1.44%
       
    • Shanghai: -1.02%
       
    • Hong Kong: -0.59%
       
    • Japan: -2.04%
       
    • France: -1.87%
       
    • Germany: -0.81%
       
    • London: -1.03%

     

  • Crude Oil Futures: - $0.91 to $74.72
     
  • Gold: - $4.30 to $1241.60
     
  • Dollar: HIgher against Yen, Euro and Pound
     
  • 10-Year Bond Yield: Currently trading lower at 2.93%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -5.16
       
    • Dow Jones Industrial Average: -34
       
    • NASDAQ Composite: -10

       

Wall Street Research Summary

Upgrades:

  • Home Depot (NYSE:HD) - BMO Capital
     
  • Lowe's (LOE) - BMO Capital
     
  • Janus Capital (NYSE:JNS) - Citi
     
  • Weingarten Realty (NYSE:WRI) - Citi
     
  • Apple (NASDAQ:AAPL) - Added to JPMorgan Focus List
     
  • Aflac (NYSE:AFL) - Keefe, Bruyette & Woods
     
  • AMeriCredit (ACF) - Keefe, Bruyette & Woods
     
  • Dopminion (NYSE:D) - Morgan Stanley
     
  • Lululemon (NASDAQ:LULU) - RW Baird
     
  • Piedmont (NYSE:PNY) - RW Baird
     
  • Xcel Energy (NYSE:XEL) - RW Baird
     
  • FedEx (NYSE:FDX) - UBS
     
  • UPS (NYSE:UPS) - UBS
     
  • Dell (DELL) - UBS
     
  • Tenet Healthcare (NYSE:THC) - Wells Fargo

     

    Downgrades:

  • Constellation Energy (NYSE:CEG) - Barclays
     
  • Lions Gate (LGF) - Jeferies
     
  • Hawaiian Electric (NYSE:HE) - RW Baird
     
  • Wisconsin Energy (NYSE:WEC) - RW Baird
     
  • KB Home (NYSE:KBH) - Estimates and target reduced at UBS

     

    Long positions in stocks mentioned: AAPL

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

     


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Disclosure: AAPL