David Moenning's Daily State of the Markets: 6/27

June 27, 2008 9:11 AM EDT

Will They Ever Walk The Walk?

Here's a link to listen to an Audio Version of the report: 

The major news outlets ran all sorts of headlines yesterday telling us that it was weak economic data that caused Thursday’s 358 point thrashing. But in reality, nothing could be farther from the truth. Sure, we got some weak data from the home sales report. And yes, the government’s third stab at the first quarter's GDP number did cause a bit of a stir on the inflation front. But, the real key to the day’s troubles can be tied to oil and the U.S. dollar.

Over the past couple of weeks, we’ve seen a host of people in and around Washington D.C., including both Treasury Secretary Paulsen and Fed Chairman Bernanke, trying to talk up the U.S. dollar. The idea here is that if the powers-that-be could find a way for the dollar to start going up – or at the very least, stop going down – then oil would have one less reason to keep rising. And since there doesn’t seem to be much of anything that anybody can do about the rude run in crude, you’ve got to at least give these guys some credit for trying.

The problem however, is that after Wednesday’s non-move by the Fed, the inflation hawks are beginning to cry foul in a rather boisterous fashion. In reading through the Fed statement, it becomes clear that Mr. Bernanke knows darn well that he can’t raise rates right now even if he wanted to. Now couple this with the idea that the ECB may raise their rates and you’ve got a recipe for another decline in the dollar. And as we all know by now, any decline in the dollar is accompanied by a corresponding increase in the price of oil.

Thus, without some sort of intervention by central bankers – and this IS going to require some help from our friends across the pond if it is going to succeed – those evil speculators will continue to take the dollar lower and oil higher.

Speaking of oil, crude futures spiked to another record yesterday sporting an increase of $5.09 to $139.64. Reasons for the pop higher included: (1) Comments from OPEC’s President that oil could hit $170 if the ECB raises rates. (2) Libya threatened to reduce production if the U.S. doesn’t drop lawsuits which supposedly are intended to intimidate OPEC (huh?). And (3) the geopolitical risk premiums continue to edge higher.

So, let's add it up and see what we’ve got. We’ve got inflation rising in the U.S. alongside a weakening economy and big problems in the financial system. We’ve got a Fed with at least one hand and maybe even two hands tied behind their back. We’ve got the ECB threatening to raise rates. We’ve got Israel making noise about bombing Iran’s nuclear facilities. We’ve got shortages of more kinds of crops than I can count. And we’ve got the gentlemen in Libya threatening to cut off oil to the U.S.

So I ask you, are you interested in buying stocks in this environment? And frankly, therein lays a big part of the problem. For example, I’m a guy that likes to buy when there’s pain in the market. But, in this market the only thing that feels right is raising cash and sitting on the sidelines. So with problems aplenty and nobody terribly interested in doing much buying, it looks like we’ve got a breakdown in the Dow and a good old fashioned retest of the lows in the S&P 500.

Turning to this morning, oil continues to be the story and another new high in oil means lower prices for stocks in the early going. On the economic front, we got some good news this morning as May’s Personal Income increased by 1.9%, which was much higher than expectations for +0.4%. Spending came in a tenth above the consensus and the PCE Deflator was also a bit better.

Running through the rest of the pre-game indicators; foreign markets are lower across the board this morning. Crude futures are moving up again this morning with the latest quote showing oil trading up by $1.21 to $140.85. Interest rates are down this morning with the yield on the 10-yr currently trading at 4.01%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a modestly lower open. The Dow futures are currently off by about 10 points; the S&P’s are down by about 2 points, while the NASDAQ looks to be about 4 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Mylan (NYSE: MYL) – estimates increased at Bank of America
Bristol Myers (NYSE: BMY) – Upgraded at Bernstein
AMR Corp (NYSE: AMR) – Target reduced at Citi
Jet Blue (Nasdaq: JBLU) – Target reduced at Citi
Southwest Air (NYSE: LUV) – Target increased at Citi
Forest Oil (NYSE: FST) – Upgraded at Deutsche Bank
Taiwan Semiconductor (NYSE: TSM) – Downgraded at Goldman
Brinker Intl (NYSE: EAT) – Downgraded at Goldman
Novell (Nasdaq: NOVL) – Upgraded at Jefferies
Merrill Lynch (NYSE: MER) – Estimated writedowns increased at Lehman
China Mobile (NYSE: CHL) – Downgraded at Merrill
MGM Mirage (NYSE: MGM) – Estimates reduced at Morgan Stanley
Intl Game Tech (NYSE: IGT) – Downgraded at Morgan Stanley
American Eagle Outfitters (NYSE: AEO) – Downgraded at Oppenheimer
Zimmer Holdings (NYSE: AMH) – Downgraded at Thomas Weisel

Disclosure: Mr. Moenning and/or related firms hold long positions in: none

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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: DMoenning@HeritageCapitalManagement.com

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