Economic Angst

Daily State of the Markets 
Friday Morning – August 13, 2010  

Another day, another batch of punk economic data – this seems to sum up the mood at the corner of Broad and Wall these days. And while we can easily argue that the news folks are suddenly fretting over isn’t really anything new or even terribly surprising, we do understand that investors may be growing tired of the bad news, the volatility, and the red ink.

Although we were actually heartened by the intraday action in the market on Thursday since, in our humble opinion, it could have been a lot worse; we also recognize that the stock market hasn’t exactly been a bowl of cherries lately. After nearly seven and one-half months, the major indices are still underwater and to hear the bears tell it, things are about to get a lot worse due to the economic angst that appears to be gripping the market.

Thursday’s drubbing was sponsored by Cisco Systems (CSCO) and the weekly report on initial jobless claims. After the close on Wednesday, Cisco reported earnings that were, as expected, above the consensus estimates. But as we’ve learned this earnings season, it isn’t the EPS numbers that count; it’s the revenues and the company guidance that traders are focused on. So, with Cisco’s revenues coming in a little light and then the company agreeing that Ben Bernanke’s “unusually uncertain” reference to the economic outlook was spot on, the bears had all they needed to enjoy a third straight day in the sun.

On the topic of the economy, the fact that initial claims for unemployment insurance rose again to their highest level in six months didn’t seem to sit well with traders Thursday morning. Since the number was yet another surprise (and not the good kind) investors began to worry that maybe the Fed knew something they didn’t. The general feeling seemed to be that the economy was not only slowing faster than anyone had expected, but would soon slip back into recession.

If you gather that all of the above was enough to bring out the sellers on Thursday, go ahead and give yourself a pat on the back. But, before you strain yourself, let’s remember that while the stage appeared to be set for another wipeout, the DJIA only wound up dropping 59 points. It was actually encouraging to see that the dip-buyers appeared within minutes of the opening dive (three minutes, to be exact) and then made their presence felt at least to some degree throughout the rest of the day.

Yes, the bulls were unable to prevail. And no, we can’t even call it a moral victory. However, we can say that we started to hear some talk about values in the market again. We can say that stocks are suddenly oversold from a short-term perspective. And we can say that it was pretty darned encouraging to hear what John Chambers had to say (is there a better corporate cheerleader on the planet?) about his company’s plans to hire a bunch of people (he spoke of increasing payrolls by more than 10% this year) and expand operations. And we can say that bond yields actually rose in the face of all the economic angst Thursday.

So, in light of the fact that, as we’ve been saying, there is no indication whatsoever that the economy is about to slip into recession either this year or next, we are not willing to jump on the doom-and-gloom bandwagon just yet.

Turning to this morning… Stock futures are pointing a little lower after the Bank of England downgraded its outlook for GDP growth going forward.

On the economic front… The Consumer Price Index for July rose by +0.3%, which was a tenth above the consensus for +0.2% and higher than June’s reading of -0.1%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.1%, which was in line with expectations and below June’s +0.2%. Next up, the Commerce Department reported that Retail Sales rose in the month of July by +0.4%. This was below the consensus for +0.5%. When you strip out the sales of autos, sales were up by +0.2%, which was a tenth below the consensus for an increase of +0.3%.

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

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.32%
  • Shanghai: -1.21%
  • Hong Kong: -0.16%
  • Japan: +0.44%
  • France: -0.99%
  • Germany: -0.87%
  • London: -0.54%

   

• Crude Oil Futures: + $0.06 to $75.81
• Gold: + $1.20 to $1217.90
• Dollar: higher against Yen and Euro, lower vs. Pound
• 10-Year Bond Yield: Currently trading higher at 2.715%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -4.80
  • Dow Jones Industrial Average: -26
  • NASDAQ Composite: -10.07  

Wall Street Research Summary

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