Daily State of the Markets 
Wednesday Morning – September 2, 2009  

You have to figure that things might have been getting a little uncomfortable in the bear camp lately. Try as they might, our furry friends had been unable to do anything with an almost textbook setup for a decline. Well, until yesterday that is.

Despite an overbought condition, too much optimism, and a calendar that was about to turn in their favor, the bears just couldn’t seem to get anything started as the dip-buyers emerged each and every time stocks went down. Bad news didn’t do the trick. And lethargic action on good news didn’t really help either. So, as a last ditch effort, the bears turned to an oldie but a goodie: Worries about the banking sector.

Although there was no official catalyst for Tuesday’s dive, rumors of a big bank default started making the rounds about an hour into the session. With stocks having already given up a nice gain on the back of some solid economic news both here and overseas, the bears appeared to be primed and ready. Remember, it’s not the news; it’s how the market reacts to the news that counts. So, when the bulls fumbled the ball after the Chicago Purchasing Managers Index moved into the expansion zone for the first time since June 2007, our furry friends didn’t hesitate.

The action among the dip buying crowd has been interesting. It seems that as long as the news relates to the economy, almost all news is good news. However, with cash in mutual fund coffers starting to dwindle a bit, talk of the bad old days in the banking sector was enough to cause any well-intentioned dip-buyer to sit on their hands yesterday.

The rumors may have stemmed from CIT Group (CIT) giving notice that they were going to defer interest payments on subordinated debt, which is a legal way of saying they can’t make the payments. While we’re just speculating here, it isn’t much of a leap from there to the rumor that “a big bank was about to default.”

Although everybody knows that things are not exactly hunky dory in the banking sector and that the problems in commercial real estate as well as the next round of interest rate resets in home mortgages are likely to negatively impact earnings going forward, this issue has been largely ignored lately as investors have preferred to focus on the economic recovery. And while there is no way of telling if these concerns will stick around a while, the problems in the banking sector may be just what the doctor ordered for the glass-is-half-empty crowd.

It also didn’t help that one of the most respected hedge fund managers in the business proclaimed yesterday that the current run for the roses in the stock market is simply a “bear market rally” and that there are big problems still do deal with. In a letter to its clients Tudor Investment Corp said that a weak consumer will make any chances for economic recovery difficult.

Finally, we should note that despite the fact the fact that it is still vacation season on Wall Street, the volume on yesterday’s selloff was NOT at all light. And the bears remind us that increasing volume on declining prices is never a good thing.

Turning to this morning, the ADP Employment report, which focuses on the change in the private sector, came in a bit below expectations at -298K vs. the consensus for -250K. However, this was the least number of jobs lost since September 2008. In addition, Q2 Nonfarm Productivity was reported at 6.6%, which was above the consensus for a reading of 6.4% and Unit Labor Costs (a measure of inflation) came in at -5.9% vs. -5.8%

Running through the rest of the pre-game indicators, with the exception of Shanghai, the major overseas markets are down across the board with Asia faring worse than Europe. Crude futures are moving up with the latest quote showing oil trading higher by $0.24 to $68.29. On the interest rate front, we’ve got the yield on the 10-yr trading down to 3.36%, while the yield on the 3-month T-Bill is trading at 0.13%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 17 points; the S&P’s are down about 3 points, while the NASDAQ looks to be about 4 points below fair value at the moment.

Today’s Earnings Before the Bell:

Brown-Forman (BF.B) – Reported $0.81 vs. $0.62 Joy Global (JOYG) – Reported $1.21 vs. $0.96

Upgrades/Downgrades/Brokerage Research:

Genzyme (GENZ) – Initiated Buy at BofA/Merrill Gilead Sciences (GILD) – Initiated Buy at BofA/Merrill Amgen (AMGN) – Initiated Neutral at BofA/Merrill Celgene (CELG) – Initiated Neutral at BofA/Merrill Biogen Idec (BIIB) – Initiated Underperform at BofA/Merrill Cooper Industries (CBE) – Upgraded at Citi Rockwell Automation (ROK) – Downgraded at Citi BJ Services (BJS) – Upgraded at Credit Suisse Amkor (AMKR) – Upgraded at Credit Suisse Smith Intl (SII) – Downgraded at FBR Capital Textron (TXT) – Upgraded to Conviction Buy at Goldman Valspar (VAL) – Removed from Conviction Buy list at Goldman FLIR Systems (FLIR) – Estimates increased at JP Morgan Ryland Group (RYL) – Downgraded at UBS DR Horton (DHI) – Downgraded at UBS

Long positions in stocks mentioned: none

Best wishes for a pleasant day 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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