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The Big Question

Daily State of the Markets 
Monday Morning – August 23, 2010

Good morning. The big question facing investors these days is if the global economy in general and the U.S. economy in particular is merely seeing a "soft patch" right now, which is completely normal after a quick rebound out of recession, or if a double-dip recession is in the cards. Make no mistake about it; THIS is the name of the game at the present time.

If you happen know the answer to this question, feel free to invest accordingly. However, until this issue is resolved (and it may be a while), we are likely in for a market that tends to react violently (in either direction) to any piece of news that is out of the ordinary.

The current obsession with the macroeconomic outlook is not the normal fare for stock investors. Normally, traders, 401(k) investors, and even mutual fund managers don't need to concern themselves with whether the economy is going to grow at a rate of 3.0% or 2.4%. Generally speaking, this matters little in terms of stock selection. No, usually the trick is to find good companies that are growing and growing rapidly.

However, currently there are at least a couple of reasons why investors are fixated on the economic outlook around the globe. First, since investors are VERY good at planning for what just happened, just about every hedge fund and individual trader on the planet is on the lookout for another recession, another crisis, and another market collapse. Never mind the fact that all of the above are rare indeed. The fact is that managers have a "won't get fooled again" mentality at the present time.

Next up is the issue of valuation. If the economy is going to grow, then earnings can continue to grow as well. If this is the case, then stock prices are relatively cheap when comparing valuations over the last 10-15 years. As such, investors can't be blamed for looking ahead to brighter days. However, if the economy is about to reenter the recession zone, then all bets on growth are off and the bottom line is that stock valuations are rich.

So, when we get a day like Friday - a summer Friday in August, that just happens to also be an options expiration event, with no news to speak of - it is little wonder that investors turn to the big picture for guidance. And while stocks did give up a little ground, it definitely could have been worse because the little news that was released wasn't great.

Although it was not widely publicized, there were growing fears on Friday that Greece was about to make some noise again - and not in a good way. With German bund yields hitting all-time lows and Credit Default Swap spreads widening again on Greek debt, renewed talk of sovereign default returned to the forefront. As Peter Bockval of Miller Tabak put it, "People are worried that Greece is going to pull 'an Argentina'" (by simply announcing a restructuring of their debt). And this was the primary reason for the sloppy action.

So... in light of the fact that the jury is still out on the macroeconomic picture, the market is likely to remain news-driven and range bound. Thus, it is probably best to buckle up and prepare for the ride.

Turning to this morning... M&A activity both at home and across the pond is helping the mood in the early going.

On the economic front... The Chicago Fed reported that their National Activity Index came in at 0.00 in July, which was above the revised June reading of -0.70. The index projects "average" growth going forward.

Finally, consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather...

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -0.04%
       
    • Shanghai: -0.11%
       
    • Hong Kong: -0.44%
       
    • Japan: -0.68%
       
    • France: +0.89%
       
    • Germany: +0.49%
       
    • London: +0.94%

     

  • Crude Oil Futures: + $0.47 to $74.29
     
  • Gold: + $1.00 to $1229.80
     
  • Dollar: higher against Yen and Pound, lower vs Euro
     
  • 10-Year Bond Yield: Currently trading higher at 2.627%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +4.91
       
    • Dow Jones Industrial Average: +33
       
    • NASDAQ Composite: +12.60

       

Wall Street Research Summary

Upgrades:

  • United Stationers (USTR) - FBR Capital
     
  • Lowe's (NYSE:LOW) - Goldman Sachs
     
  • JM Smucker (NYSE:SJM) - Estimates increased but target reduced at JPMorgan
     
  • Varian Medical (NYSE:VAR) - Mentioned positively at Soleil Securities
     
  • Microchip (NASDAQ:MCHP) - Estimates increased at Soleil Securities
     
  • Bank of America (NYSE:BAC) - Standpoint Research
     
  • First Solar (NASDAQ:FSLR) - UBS

     

    Downgrades:

  • Nokia (NYSE:NOK) - Mentioned cautiously at Citi
     
  • Baidu (NASDAQ:BIDU) - Deutsche Bank
     
  • Corinthian Colleges (NASDAQ:COCO) - Target reduced at FBR Capital, Downgraded at ThinkEquity
     
  • Genuine Parts (NYSE:GPC) - Goldman Sachs

     

    Long positions in stocks mentioned: none

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

     


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