Market Preview: Reality Check

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NEW YORK (TheStreet) -- That oversold bounce didn't last long now, did it?

Tuesday was a fairly ho-hum affair for U.S. stocks. The early strength was mostly based on what wasn't happening scary headlines from Europe than what was a good but not great read on existing home sales in April. So when Lucas Papademos, Greece's former prime minister, reminded Wall Street that the possibility of the country leaving the eurozone was real, the market reacted.

Now it wasn't a deep or disorderly selloff. This wasn't some big revelation. More of a reminder of what's really driving the action these days. In other words, it's prudent not to get too jazzed if the major U.S. equity indices start to claw back some of May's losses unless the impetus is real progress in Europe.

What form "real progress" would take is the best question. The idea of shared debt, eurozone bonds, is starting to get some attention but it's hard to see Germany getting on board with that. We'll know more soon with Europe's leaders set for their latest in a long line of summits on Wednesday but those waiting for definitive action are likely to be disappointed in whatever of platitudes come out of the confab.

Indeed, Credit Suisse offered some observations earlier Tuesday that underline what a big role politics are playing in the markets these days and why that's problematic. The firm held its 2012 Global Macro Investors Conference in New York last week, and came away with this insight.

"Politics was seen as the key element in the European debt crisis," the firm said. "We think this insight holds more generally: whether it is the US fiscal cliff and the required debt ceiling rise in January 2013, the leadership change in China or the Euro, political risks dominate much of the macro analysis. This is why markets trade cheaply. Investors are not political analysts."

Based on its own survey of conference participants, Credit Suisse said 29% of investors expect Greece to exit the eurozone by the end of this year, and that 42% of this group believe Greece's departure would spell the end of the single-currency bloc. The firm, which places a 10% probability on the end of the euro as we know it, also found a few contradictory opinions out there.

"Surprisingly, 29% of investors thought European assets provide the best risk return trade-off over the next decade relative to current expectations, so investors can see opportunities," Credit Suisse wrote. "Yet, nearly everyone is negative on peripheral European debt (88%) and nearly everyone we spoke to was underweight Europe with the hedge funds being almost totally absent (except on the short side)."

There was also a lot of confidence in stocks, just not right now.

"88% of respondents thought equities would be the best performing asset class over the next 10 years -- and 59% saw it as the best performing asset class over the next year," the firm said. "Clearly, investors want to be bullish over the long term, but recognize the near-term political risks. The longer the time horizon, the more bullish investors are! This underlying bullish consensus view on equities is in sharp contrast with all the short- and long-term positioning data (US pension fund equity weightings versus bond weightings are close to 30-year lows)."

One rather surprising revelation was that a majority of investors -- nearly 60% -- think the United States will slip back into recession within the next two years.

"We find this surprisingly bearish, given the robustness of the U.S. growth indicators (housing, employment, loan growth, car sales) and given that 47% of investors believed that over the next decade the US was the economy that was most likely to surprise positively on the back of the housing recovery, on-shoring and low energy costs in particular," Credit Suisse wrote. "Clearly, investors' longer term optimism is tempered by the fiscal situation."

Coincidentally, the Congressional Budget Office weighed in on the so-called fiscal cliff on Tuesday, estimating that if the current policy isn't changed, the U.S. economy will contract at an annual rate of 1.3% in the first half of calendar 2013 before expanding at a 2.3% rate in the second half, arriving at 0.5% growth in real gross domestic product for the year.

Of course, changing the policy likely means kicking that proverbial can down the road a bit, taking on more debt in order to sustain growth.

As for Wednesday's scheduled news, Dow component Hewlett-Packard reports after the closing bell, and the PC and printer giant is expected to announce a restructuring plan that could include the elimination of as many as 30,000 jobs.

Given the weak results and outlook from Dell after Tuesday's closing bell, there can't be a lot of optimism out there that HP is going to be able to buck the "challenging" market conditions that Dell and Cisco complained of, especially why the company is still in a transitional phase. HP shares lost 2% in extended trading following Dell's bad news.

The average estimate of analysts polled by Thomson Reuters is for HP to report earnings of 91 cents a share in its fiscal second quarter ended in April on revenue of $29.92 billion. Credit Suisse is a penny below consensus with its profit view but it sees upside on the top line, projecting revenue of $30.38 billion.

"With continuing headwinds across HP's portfolio -- Services, IPG Imaging and Printing Group, PSG Personal Systems Group, and ESSN Enterprise Servers, Storage and Networking -- and limited visibility on any near term improvement, we maintain our Neutral rating and $30 target price," the firm wrote. "We look for signs of stabilization in operations before assigning risks to the upside."

HP shares are cheap, trading at just 5X forward earnings and down 15% so far in 2012 with the 52-week low of $21.28 coming last week, but Credit Suisse said the poor fundamentals warrant the low multiple.

The majority of the sell side is in agreement that CEO Meg Whitman will need to start showing some progress on her turnaround plans before HP shares can make a meaningful move higher. Of the 28 analysts covering the stock, 13 are at hold and five are at underperform vs. six strong buys and five buys. The median 12-month price target of $28.50 is more optimistic, implying potential upside of 30%-plus from Tuesday's close at $21.78.

Check out TheStreet's quote page for Hewlett-Packard for year-to-date share performance, analyst ratings, earnings estimates and much more.

Other quarterly reports to keep an eye out for ahead of the opening bell include American Eagle Outfitters , Bank of Montreal , Big Lots , Family Dollar Stores , Genesco , Hormel Foods , LTX-Credence Corp. , Sycamore Networks , Toll Bros. , and Zale Corp. .

The late roster includes NetApp , Pandora , Phillips-Van Heusen , Semtech , Sigma Designs , and Synopsys .

Wednesday brings more insight on the housing market with the Mortgage Bankers Association's weekly application index due at 7 a.m. ET; new home sales for April and the Federal Housing Finance Agency's housing price index for March at 10 a.m. ET; and weekly crude inventories data at 10:30 a.m. ET.

And Facebook will again be a stock to watch on Wednesday as the bad news continued to pile up for the social networking giant. Media reports late Tuesday said lead underwriter Morgan Stanley has received a subpoena related to its involvement in the IPO as reports that the firm quietly lowered its revenue estimates for the company in the days leading up to the offering are indicative of a potential conflict of interest.

In addition, the Form 4 filings have started to roll in and it turns out CEO Mark Zuckerberg sold 30.2 million shares on Tuesday at $37.58 each. Whether the sale was planned ahead of this amazingly underwhelming IPO or not, the timing is poor to say the least, and the anger with how badly this offering has played out is becoming palpable.

--Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.

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