David Moenning's Daily State of the Markets: 11/13

Is The Worst Priced In Yet?

Now it gets interesting. This is not to say that the past few days have not been interesting. However, once the major indices broke through last Thursday’s short-term support level, it was pretty much clear sailing for the bears until they got to the old lows as the word “retest” has been all anybody who ever read “Technical Analysis for Dummies” can talk about lately.

But now that we’ve arrived at the lows for the year, with the S&P 500 down -12% for the month and -42% year-to-date, we have to ask ourselves one question: Has the worst been priced in at these levels?

On October 9th, the market made what most analysts believe to be an “emotional low” and then bounded off the bottom to finish with a classic “key reversal” day. And while history tells us that bear market lows often come after such an event – and at lower levels – the key thing to remember is that on October 9th, stocks were pricing in financial Armageddon. So, are things worse now in terms of expectations than they were then? If not, given that (1) the average bear market that is also accompanied by a recession sees losses of -42.5% and (2) the S&P has fallen -45.6% from its high, the bulls will argue that the ultimate low of this bear may be close at hand.

Sure, the news is bad. And yes, the media is using comparisons to 1929 with regularity these days. In fact, yesterday’s carnage was sponsored by another onslaught of bad news. But, again, doesn’t a decline of -45% discount an awful lot of bad news?

The answer, in short, is yes it does. However, what the current decline does NOT factor in is the deleveraging process that continues in Hedgieland. In English, this means that the hedge fund industry is catching its comeuppance right now for employing entirely too much leverage and then forgetting the cardinal rule of running big money: Sell when you can, not when you have to. You see, right now, there are simply too many funds being forced to dump assets and too many margin clerks doing the dumping. So, until the exodus from hedge funds is complete, the question of how much discounting of the future is enough is moot, because those that have to sell will continue to do so.

So, when you combine the news flow, which seems to get worse every day as evidenced yesterday by Best Buy (BBY), Macy’s (M), and Intel (INTC), with the economic data, the continued production cuts in the steel sector, the uncertainty over what the TARP is or will be, the global slowdown worries, and a consumer that seems to be at wits end, it is little wonder that we’re back down here at the lows wondering how much is enough?

To sum up, a decline of -46% has historically been enough to discount just about anything short of the Great Depression. And we do know that most bear markets usually head a little lower after a panic low is seen. So, with the news scaring people silly and the hedge funds continuing to dump assets on the market involuntarily, the odds favor some more downside testing before something good happens to send this thing bouncing higher again.

Turning to this morning, the economic news is discouraging once again as weekly Jobless Claims came in at 516,000, which is much higher than the expectations for 480,000. And despite big declines in Asia, a surprise negative preannouncement from Intel (INTC) and Wal-Mart (WMT) reducing guidance, the markets are relatively calm this morning.

Running through the rest of the pre-game indicators, the major overseas markets are a mixed bag. Crude futures are up with the latest quote showing oil trading higher by $0.39 to $56.55. On the interest rate front, we’ve got the yield on the 10-yr currently trading at 3.73% while the yield on the 3-month T-Bill is at 0.14% and overnight LIBOR is at 0.40% which is up again from Wednesday’s 0.38%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a mild decline at the open. The Dow futures are currently off by about 30 points; the S&P’s are down about a point, while the NASDAQ looks to be about 17 points below fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Applied Materials (Nasdaq: AMAT) – Reported $0.18 vs. $0.14
Crocs (Nasdaq: CROX) – Reported -$1.79 vs. $0.02
Computer Sciences (NYSE: CSC) – Reported $0.72 vs. $0.75
NetApp (Nasdaq: NTAP) – Reported $0.28 vs. $0.27


Today’s Earnings Before the Bell:

New Jersey Resources (NYSE: NJR) – Reported -$0.39 vs. -$0.40
Urban Outfitters (Nasdaq: URBN) – Reported $0.35 vs. $0.35
Wal-Mart (NYSE: WMT) – Reported $0.77 vs. $0.76

News, Upgrades/Downgrades/Brokerage Research:

Las Vegas Sands (NYSE: LVS) – Upgraded at Bank of America
Dell (Nasdaq: DELL) – Downgraded at Goldman, Added to Conviction Sell list
General Motors (NYSE: GM) – Downgraded at JP Morgan
Banco Santander Chile (NYSE: SAN) – Downgraded at Merrill
JC Penney (NYSE: JCP) – Downgraded at Morgan Stanley
Sprint Nextel (NYSE: S) – Estimates reduced at Oppenheimer
Microsoft (Nasdaq: MSFT) – Estimates reduced at UBS
Constellation Brands (NYSE: STZ) – Upgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: WMT

Note: All earnings reports compared to Reuter’s consensus estimates

** For More of David Moenning’s Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopGunsTrading.com

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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