Pure, Unadulterated Fear

Daily State of the Markets 
Wednesday Morning – August 25, 2010  

As I’ve mentioned a time or two over the past 12 years, the goal of my morning missive is to identify the primary drivers of the market on a daily basis. The thinking is that if we can stay in tune with what is moving the indices each day, we just might be able to avoid being surprised by shifts in the market’s focus over a period of time.

So, what’s the driver of the current market action, you ask? Pure, unadulterated fear. In short, those traders still at their desks at this time of year appear to be more than a little concerned that the economy is falling apart at the seams and that a double-dip is suddenly a question of not if, but when.

While the institutional research firms we respect continue to suggest that the chances for the economy slipping back into recession this year or next are modest at this stage, the street seems to be assuming that the recent weak data will continue. For example, yesterday’s Richmond Fed index definitely displays a trend. In January the index was -2. Then February was +2, March: +6, April: +30, May: +26, June: +23, July: +16, and August came in at +11. Thus, traders are projecting that the current trend will continue and that the index will soon turn negative again – suggesting a contraction in economic activity. Oh, and by the way, the Services Sector Revenues component of the Richmond Fed Index actually did slip into contraction mode in August.

The data from the housing market didn’t really help much either yesterday. Although we can make the case that (a) nobody in their right mind expects housing data to be upbeat at this time given the end of the home-buyer tax credit and (b) the housing market hasn’t contributed much to the economic recovery thus far, the numbers were mind numbingly weak and provided a good reason to run some sell programs. After all, since existing home sales fell 27.2% in July, which was a record amount, it doesn’t take much imagination to assume that things are getting bad out there in the economy.

Unfortunately, there were a few other reasons for traders to be fearful yesterday. First, while you may never have heard of the company and it didn’t get much press, CRH PLC (CRH) issued a profit warning based on “heightened recovery risks in the U.S.” Next, Goldman Sachs (GS) was out with a report stating that the forecasting community hasn’t caught up to the deterioration in the economic data. Then the WSJ’s cover story on the infighting at the Fed raised some concerns about the gang steering the ship. And finally, the ongoing dive in bond yields both here and abroad (German and UK yields hit record lows yesterday) is hard to ignore.

On a chart basis, while the action was u-g-l-y yesterday, the decline didn’t change the picture to any great degree as the indices remain in a trading range. So, from where I sit, stocks remain in a difficult, news-driven environment. The problem is that the news is ALL bad at the present time. But, experience tells me that just about the time you assume that nothing good is ever going to happen again, something comes along that causes everyone to stop and think for a minute. So, with the market having been down 9 of the last 11 days, the odds seem to favor something coming out of the woodwork to suggest that the odds of a recession are not exactly 100%.

Turning to this morning… S&P’s downgrade of Ireland has kept a lid on any optimism so far as the foreign markets are red across the board. And unfortunately, the fear trade apears to be continuing unabated with bond yields hitting new cycle lows and gold rising.

On the economic front… The Commerce Department reported that Durable Goods orders increased +0.3% in July, which was well below the consensus expectations for an increase of +2.8%. June’s reading was revised higher to -0.1 from -1.2%. When you strip out the volatile orders for transportation, orders fell by -3.8%, which was below the consensus for +0.5%. However, it is worth noting that the Nondefense capital goods ex-aircraft number, which is a proxy for business investment, fell hard and was down -8% on the month.

Finally, regardless of the colors on the screens, make the decision to have a great day…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -1.40%
  • Shanghai: -2.03%
  • Hong Kong: -0.11%
  • Japan: -1.66%
  • France: -0.84%
  • Germany: -0.26%
  • London: -0.58%

   

• Crude Oil Futures: – $0.14 to $71.49
• Gold: + $1.10 to $1234.50
• Dollar: lower against Yen, higher vs Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 2.439%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -8.02
  • Dow Jones Industrial Average: -62
  • NASDAQ Composite: -15  

Wall Street Research Summary

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