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Cloudy With a Chance of Disappointment

Daily State of the Markets 
Tuesday Morning – August 10, 2010

Good morning. Although stocks finished up nicely on Monday and the indices did their darndest to try and break on through to the other side of the near-term resistance that I've been yammering on about lately, it was actually a relatively worrisome day. While the price action was pretty good we are more than a little concerned that the market may now be set up for disappointment.

I'm not exactly sure how traders got it into their A.D.D.-affected brains that the Fed is about ready to unveil plans for what is affectionately referred to as QEII (i.e. a second round of quantitative easing), but that seems to be the discussion on Monday. There are several points to this argument, but the bottom line is the stock market could be a loser regardless of which way Bernanke and company leans this afternoon.

Getting directly to the point, if the Fed were to announce at 2:15 eastern time that they are about ready to start buying bonds again in the open market as a way to stimulate money supply growth, stocks could get hit hard in reaction to the idea that the economy is so bad as to need such actions. And if Mr. Bernanke tells traders today that the economy is still growing (albeit slowly) and that therefore, the FOMC is going to stay the course, we could very easily see an HFT-induced temper tantrum in response to traders not getting their way.

Perhaps the most disturbing part of this debate is the thought that Ben Bernanke, whose Fed has done a wonderful job with transparency, would even be considering springing such an announcement on the market. From where we sit, we see absolutely no justification for the FOMC to change their tune and to restart a program it had only recently ended. Remember, quantitative easing isn't like the Fed lowering Fed Funds a couple basis points. No, the only other time in recent history the Fed has used the QE tool was in response to the very real possibility that the banking system might find itself in real trouble. As such, QE is likely viewed as a very powerful tool that is to be used only in the case of emergencies.

So, is this just such an emergency? Is the economy about to fall off of a cliff? Is our banking system in trouble again? Are there companies about to blow up that will pose such systemic risk that the U.S. needs to be rescued? In a word, no.

Sure, it would be politically expedient if the administration could find a way to get the unemployment rate to drop a tenth or so before November. But, at what cost?

Let's not forget that the Fed has nearly tripled its balance sheet since 2008 and that the government has spent a couple bucks here and there trying to keep the sky from falling. The problem is that these "bullets" have been spent and given the now-worldwide concern about debt, it would be very unpopular (and very risky) if the U.S. effectively stood up and said, "the rest of you can cut back if you want, we are just going to keep borrowing money."

So, while we would love to be reading this situation completely wrong, we remain a little concerned not only about what the Fed will or won't say, but also how the market reacts. Up to this point, it has felt like stocks are heading higher. But, we'll be watching closely today at 2:15 eastern.

Turning to this morning... A combination of trepidation in front of the Fed meeting and trade data out of China that shows demand may be slowing domestically is giving markets pause this morning ahead of the opening bell.

On the economic front... The government reported U.S. Nonfarm Productivity in the second quarter fell by -0.9%, which was well below the consensus for +0.2% and Q1’s revised level of +3.9 (from +2.8%). This was the first drop in productivity since Q4 2008.

Finally, try doing something nice for someone today (for no reason at all)...

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -1.14%
    • Shanghai: -2.89%
    • Hong Kong: -1.50%
    • Japan: -0.22%
    • France: +0.42%
    • Germany: +0.29%
    • London: -0.69%


  • Crude Oil Futures: - $1.44 to $80.04
  • Gold: - $7.60 to $1195.00
  • Dollar: lower against Yen, higher vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading lower at 2.81%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -11.49
    • Dow Jones Industrial Average: -96
    • NASDAQ Composite: -18.53


Wall Street Research Summary


  • Alletheny Technologies (NYSE:ATI) - BofA/Merrill
  • Macy's (NYSE:M) - BofA/Merrill
  • Macerich (NYSE:MAC) - Deutsche Bank
  • EOG Resources (NYSE:EOG) - Added to Conviction Buy at Goldman
  • Dover Crop (NYSE:DOV) - Added to Conviction Buy at Goldman
  • Akamia (NASDAQ:AKAM) - Goldman Sachs
  • Whole Foods (WFMI) - UBS
  • ArcelorMittal (NYSE:MT) - UBS



  • JC Penney (NYSE:JCP) - BofA/Merrill
  • Autoliv (NYSE:ALV) - Deutsche Bank
  • BorgWarner (NYSE:BWA) - Deutsche Bank
  • TRW Automotive (NYSE:TRW) - Deutsche Bank
  • Northrop Grumman (NYSE:NOC) - FBR Capital
  • Best Buy (NYSE:BBY) - Goldman Sachs
  • Nuance Communications (NASDAQ:NUAN) - Goldman Sachs
  • Johnson & Johnson (NYSE:JNJ) - Morgan Stanley


    Long positions in stocks mentioned: None

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