Daily State of the Markets 09/27: When Tepper Talks?

Good morning. The popular press credited the better-than-expected report on Durable Goods as the reason behind Friday's impressive near-200 point rally in stocks. And to be fair, the idea that business spending actually picked up last month was certainly a positive. After all, it is hard to be overly negative on the outlook for the economy if capital expenditures are on the rise.

However, it should be noted that the gains in capex merely reversed part of July's decine. In addition, you had to dig into the report to locate the good news as the headlines showed orders for long-lasting durable goods actually fell by 1.3% in August. And while this was a bit better than the consensus estimate for a drop of 1.4%, it is hardly the stuff that big rallies are born of. So, as a card-carrying member of the There Has To Be A Reason Why Things Happen club, we figured something else was going on.

It turns out that an interview on CNBC with respected hedge-fund manager David Tepper (whose hedge fund was up something like +132% last year) turned some heads in the early going and may have been responsible for the rather swift change in the market's mood. In short, Tepper said that this is a win-win environment for stocks. To paraphrase, Tepper said that if the economy weakens further, the Fed will step in with QE II. And, in Mr. Tepper's opinion, this would be a win for, well, just about everything - including stocks. And if the economy manages to improve, you ask? Tepper says, you've got to own stocks in this scenario as well.

Was this a dawning moment of comprehension for traders? Did everybody on the street suddenly shake their head and collectively say, "Hey, he's right - we'd best start buying with both hands!" Frankly, I doubt either was the case. More likely, the bears saw the up open and decided to close out their shorts before the weekend. And since the computers tend to be in control of the trading these days, the break above the Monday's closing high may have added some additional buy (or short-covering) orders to the mix.

This brings up an interesting point (well, interesting to me, anyway). One of my favorite Wall Streetisms is, "It isn't a breakout if you're the one breaking it out." So, since the machines may have been buying on purely technical action, does it really count? I'm just saying...

From a big picture standpoint, we have to say that the environment has improved dramatically over the past month. And while (a) the trading range appears to have been resolved to the upside and (b) the Fed appears to be on the case, we should remember that this remains a news-driven environment. Thus, until the bulls can prove that they can handle some bad news, we're going to continue to keep our enthusiasm curbed at the present time and maybe even lock in some profits.

Turning to this morning... Things are fairly quiet so far. Asian markets followed Wall Street higher while European bourses are down a smidge. There is some M&A activity for traders to discuss but nothing that is having much of an impact at the moment.

On the economic front... The Chicago Fed reported that their National Activity Index came in at -0.53 in August, which was below the downwardly revised July reading of -0.11 (from 0.00). Readings above zero mean the economy is growing at above normal or "trend" levels.

Finally, choose to have a mind that is open to anything...

Pre-Game Indicators

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

• Major Foreign Markets:
  
  • Australia: +1.52%
    
  • Shanghai: +1.41%
    
  • Hong Kong: +1.00%
    
  • Japan: +1.39%
    
  • France: -0.21%
    
  • Germany: +0.01%
    
  • London: -0.11%
• Crude Oil Futures: + $0.31 to $76.80
  
• Gold: + $2.60 to $1300.70
  
• Dollar: higher against the Yen, lower vs. Pound and Euro
  
• 10-Year Bond Yield: Currently trading lower at 2.549%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: +0.50
    
  • Dow Jones Industrial Average: +3
    
  • NASDAQ Composite: +0.21

Wall Street Research Summary

Upgrades:
Arkansas Best (Nasdaq: ABFS) - BofA/Merrill
Franklin Resources (NYSE: BEN) - FBR Capital
Becton Dickinson (NYSE: BDX) - Goldman Sachs
King Pharmaceuticals (NYSE: KG) - Target increased at Jefferies
DryShips (Nasdaq: DRYS) - Morgan Stanley
Nuance Communications (Nasdaq: NUAN) - UBS

Downgrades:
Nike (NYSE: NKE) - Argus
JB Hunt Transport (Nasdaq: JBHT) - BofA/Merrill
Werner Enterprises (Nasdaq: WERN) - BofA/Merrill
Zimmer Holdings (NYSE: ZMH) - Goldman Sachs
Express Scripts (Nasdaq: ESRX) - Goldman Sachs
Medco Health (NYSE: MHS) - Removed from Conviction Buy at Goldman Sachs

Long positions in stocks mentioned: KG

For more "top stock" portfolios and research, visit TopStockPortfolios.com

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