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How Much Is Enough?

Daily State of the Markets 
Friday Morning – July 2, 2010

Good morning. Stocks fell again on Thursday as traders were treated to bad news early and often. The negative news flow started in China, flowed through Europe, and then made its presence felt here at home in the good 'ol USofA. However, for the first time in the last nine trading sessions, the bulls actually tried to make a stand. We're not completely sure they were successful, but we've got to give our heroes in horns credit for finally trying to get back in the game.

The day's news started very early as China's Purchasing Managers Index, which indicates the state of the manufacturing sector, came in below expectations. Although the index clearly showed the sector to still be in a growth mode, the words "slower" and "growth" were not expected to be applied to China these days. The concept of an economic slowdown seemed to be the theme of the day as reports on Weekly Jobless Claims, the U.S. ISM Index (Institute of Supply Managers), and Pending Home sales all supported the idea.

Which brings us to the point. We are of the opinion that stocks are currently discounting the slowing of the economy here in the U.S. and around the world. Thus, the question becomes one of trying to determine how much discounting (e.g. selling) is enough? On April 23rd, the S&P 500 closed at 1217.28. As an aside, at that time, traders were busy "discounting" the upside potential of the economy and celebrating another strong earnings parade. Getting back to the point, on Thursday, the S&P closed at 1027.37. Thus, as of this writing, traders have knocked 15.6% worth of value out of the stock market - with 8.1% of that decline coming in the last nine trading days.

The problem is that traders are basically trying to quantify an unknown. In short, nobody knows for sure if or by how much the economy's growth rate will slow. Nobody really knows if the problems in housing, Europe, etc. will lead to just a slowdown or an actual recession. With the attitude and expectations of the economy and the stock market shifting rapidly and the scary dives in the market scaring consumers, we just don't know how bad things will be going forward.

So, what's an investor to do? It is fairly obvious that fund managers are continuing to "de-risk" their portfolios. And while we are starting to hear rumblings about all the "great values" there are to be found in the market, if "de-risking" continues to be the game plan, then there is probably some additional discounting to come.

From a short-term perspective though, this market is all about this morning's jobs report. Two weeks ago, traders might have expected this report to have been strong. However, expectations have been ratcheted down so far that anything short of Armageddon might actually be positive enough to produce a much deserved relief rally. Fingers crossed...

Turning to this morning... the Big Kahuna of economic data has just been released, so let's get to it. The Labor Department reported that Nonfarm Payrolls, fell in the month of June by 125,000. This total was a bit below the consensus estimates of economists surveyed by Dow Jones for a decrease of 110,000. The government reported that the census was responsible for 225K job cuts during the month. The nation’s Unemployment Rate fell 0.2% to 9.5%, which was below expectations for a reading of 9.8 and May’s level of 9.7%. The rate of unemployment is the lowest since June 2009.

Finally, best of luck on this Friday and be sure to enjoy the long holiday weekend!

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: +0.05%
    • Shanghai: +0.38%
    • Hong Kong: -1.11%
    • Japan: +0.13%
    • France: +1.00%
    • Germany: +0.57%
    • London: +1.01%


  • Crude Oil Futures: - $0.91 to $72.04
  • Gold: - 1.20 to $1205.50
  • Dollar: Higher against Yen, Lower vs Euro and Pound
  • 10-Year Bond Yield: Currently trading lower at 2.92%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -0.12
    • Dow Jones Industrial Average: -1.5
    • NASDAQ Composite: -2.5


Wall Street Research Summary


  • Home Properties (NYSE:HME) - Citi
  • Portugal Telecom (NYSE:PT) - Citi
  • Fortune Brands (FO) - Citi
  • BJ's Wholesale (BJ) - Goldman Sachs, Jefferies
  • Central European Distribution (NASDAQ:CEDC) - JPMorgan
  • Rowan Companies (NYSE:RDC) - Macquarie Research



  • Garmin - BofA/Merrill
  • Southwestern Energy (NYSE:SWN) - Barclays
  • UDR Inc (NYSE:UDR) - Citi
  • Equity Residential (NYSE:EQR) - Citi


    Long positions in stocks mentioned: None

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