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Daily State of the Markets |
After weeks of economic data and earnings reports being adorned with the words “better than expected,” it appears the tide has turned lately as the preface to the majority of data over the past couple weeks has been just the opposite. In other words, just about the time investors became convinced that the economy was indeed improving and that the letter best used to describe the rebound was a “V,” the data turned punk; raising questions about the recovery, the holiday shopping season, and the outlook for earnings going forward.
After Tuesday’s disappointing drop in Consumer Confidence, the bulls were looking to the report on New Home Sales to get the momentum moving back in their direction. However, this one also came in well below expectation as sales of new homes unexpectedly fell -3.6% in September, when analysts had expected to see an increase of +2.6%. Speaking of surprises, it was the first decline in six months, and the the prior two months were downward.
In short, the consistency of which the data has surprised to the downside lately has put a question mark on the outlook for the future. It was less than two weeks ago that the bulls were sitting pretty with the Dow having pushed through the magical 10,000 level (again), but that was before the dollar rally, the return of the ‘risk aversion trade,’ and the breakdown of important technical levels on the charts.
While it is true that the rise in the dollar over the past five sessions has definitely created some selling pressure due to the programs tied to the technical levels in the greenback, it is disconcerting to see the damage done to the major indices during this pullback. So far, the S&P has fallen -5.03% from its October 19th high while the NASDAQ is off -5.4%, and the Russell 2000 has gotten smoked for a loss of -9.23%.
However, it isn’t just the amount of the decline or the snapping of the important moving averages that worries us. No, it is more the internal weakness and the sudden dive in our momentum indicators that has us thinking that after five pullbacks that were “short and shallow,” this one just might be different (after a requisite bounce, of course).
Given the relationship of the decline in stocks to the rise in the dollar, the bulls will argue that this too shall pass. Our heroes in horns argue that dollar is simply enjoying a bounce in a bear market and since the fundamentals aren’t exactly positive for the greenback, it will resume its slide soon enough. This will help the reflation trade and once again, everything will return to normal.
While we do expect to see an upside bounce in stocks in the near term to test what will now be resistance zones, we should also point out that the ‘risk aversion’ trade is making a comeback. For example yesterday’s T-Note auction saw the second highest bid-to-cover ratio on record and direct participation in the auction of “safe” investments was more than 7.5 times normal. This is something to watch going forward.
Turning to this morning, we’ve got a decent batch of economic data to deal with as the Government reported that the third quarter GDP in the U.S. rose by 3.5%, which was above the expectations for a gain of 3.2% and last quarter’s drop of -0.7%.
Personal Consumption came in at 3.4% vs. consensus 3.1%. The GDP Price Index (a measure of inflation) was +0.8% vs. consensus +1.4% and Core PCE was in line with the consensus estimate at 1.4%.
In addition, Initial Claims for Unemployment Insurance for the week ending 10-17 were reported 530K; above the expectations for 525K and down 1K from the prior week’s reading of 531K. Continuing claims came in at 5.797M versus the consensus estimate of 5.905M and the prior week’s revised total of 5.945M.
Running through the rest of the pre-game indicators, the foreign markets are mostly lower. Crude futures are moving up with the latest quote showing oil trading up by $1.09 to $78.55. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.48%, while the yield on the 3-month T-Bill is currently at 0.06%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 75 points; the S&P’s are up by about 9 points, while the NASDAQ looks to be about 10 points above fair value at the moment.
| Yesterday’s Earnings After The Bell | |||
Company |
Symbol |
EPS |
Reuters Estimate |
| Aflac | AFL | $1.25 | $1.20 |
| Assurant | AIZ | $1.07 | $0.93 |
| AvalonBay | AVB | $1.09 | $1.08 |
| CB Richard Ellis | CBG | $0.08 | $0.10 |
| Cerner | CERN | $0.57 | $0.57 |
| Dun & Bradstreet | DNB | $1.13 | $1.09 |
| Equity Residential | EQR | $0.53 | $0.52 |
| Express Scripts | ESRX | $0.81 | $0.80 |
| Flowserve | FLS | $2.07 | $2.00 |
| FMC Corp | FMC | $0.89 | $0.89 |
| First Solar | FSLR | $1.79 | $1.71 |
| Kirby Corp | KEX | $0.65 | $0.65 |
| Lincoln National | LNC | $0.84 | $0.76 |
| LSI Corp | LSI | $0.18 | $0.04 |
| Realty Income | O | $0.47 | $0.46 |
| Owens-Illinois | OI | $0.95 | $0.93 |
| O’Reilly Auto | ORLY | $0.63 | $0.56 |
| Ryland Group | RYL | -$1.20 | -$0.95 |
| Questar | STR | $0.60 | $0.50 |
| Symantec | SYMC | $0.36 | $0.33 |
| Teradyne | TER | $0.14 | $0.12 |
| Torchmark Corp | TMK | $1.48 | $1.49 |
| Companhia Vale do Rio Doce | VALE | $0.32 | $0.31 |
| XL Capital | XL | $0.89 | $0.63 |
| Today’s Earnings Before The Bell | |||
Company |
Symbol |
EPS |
Reuters Estimate |
| Barrick Gold | ABX | $0.54 | $0.46 |
| American Electric Power | AEP | $0.93 | $0.85 |
| Aetna | AET | $0.69 | $0.66 |
| Autonation | AN | $0.36 | $0.34 |
| Apache | APA | $1.58 | $1.64 |
| Airgas | ARG | $0.68 | $0.67 |
| AVon Products | AVP | $0.36 | $0.39 |
| Allegheny Energy | AYE | $0.45 | $0.55 |
| Ball Corp | BLL | $1.24 | $1.17 |
| Colgate-Palmolive | CL | $1.12 | $1.11 |
| CME Group | CME | $3.35 | $3.31 |
| Eastman Kodak | EK | -$0.41 | -$0.19 |
| Iron Mountain | IRM | $0.21 | $0.24 |
| Kellogg | K | $0.94 | $0.84 |
| Lancaster Colony | LANC | $1.01 | $0.83 |
| Lubrizol | LZ | $2.52 | $2.52 |
| Moody’s | MCO | $0.43 | $0.38 |
| Motorola | MOT | $0.02 | $0.01 |
| Monster Worldwide | MWW | $0.01 | $0.00 |
| Mylan | MYL | $0.32 | $0.27 |
| Noble Energy | NBL | $1.10 | $0.82 |
| Newmont Mining | NEM | $0.79 | $0.54 |
| Nu Skin Enterprises | NUS | $0.41 | $0.41 |
| Office Depot | ODP | -$0.08 | -$0.09 |
| Procter & Gamble | PG | $1.06 | $0.98 |
| Sprint Nextel | S | -$0.17 | -$0.10 |
| Smith Intl | SII | $0.07 | $0.15 |
| Snap-On | SNA | $0.44 | $0.27 |
| Strayer Education | STRA | $ 1.21 | $1.15 |
| Ventas | VTR | $0.66 | $0.63 |
| Waste Management | WM | $0.54 | $0.54 |
| Xcel Energy | XEL | $0.48 | $0.51 |
| Exxon Mobil | XOM | $0.98 | $1.03 |
| Olympic Steel | ZEUS | $0.06 | $0.24 |
Wall Street Research Summary
Upgrades:
Genworth Financial (GNW) – BofA/Merrill Biomarin Pharmaceutical (BMRN) – Credit Suisse Boston Properties (BXP) – Deutsche Bank Petroquest Energy (PQ) – JP Morgan Human Genome (HGSI) – JP Morgan URS Corp (URS) – Morgan Joseph Plains Exploration (PXP) – Morgan Stanley ConocoPhillips (COP) – Societe Generale ArcelorMittal (MT) – Societe Generale Urban Outfitters (URBN) – Thomas Weisel
Goodyear Tire (GT) – BofA/Merrill First Solar (FSLR) – BofA/Merrill Agnico-Eagle Mines (AEM) – Credit Suisse RRI Energy (RRI) – Removed from conviction buy list at Goldman Activision Blizzard (ATVI) – Piper Jaffray PPD, Inc (PPDI) – Wells Fargo Gannett (GCI) – Wells Fargo
Long positions in stocks mentioned: GS, CERN, ESRX, LZ, MWW
Be sure to take time to breathe and until next time, “may the bulls be with you!”
David D. Moenning
Founder TopStockPortfolios.com
For more “top stock” portfolios and research, visit TopStockPortfolios.com
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