Daily State of the Markets 8/20: The First Sign?

Good morning. The impetus behind Thursday's sudden reversal of fortunes was easily identifiable (for a change) as the report from the Philly Fed was nothing short of a debacle. The manufacturing oriented index not only came in well below expectations (-7.7 vs. consensus +7.3), it also fell below zero - a sign that the manufacturing sector in the region is contracting.

The key here is this was the very first sign we've seen of contraction in the economy. While we have had lots and lots of data confirming a slowdown in the rate of growth, up until yesterday morning, there had been zero signs of an actual contraction. As such, the bear were quick to tell anyone willing to listen that the Philly Fed Index was but the tip of the iceberg in terms of bad news yet to come.

While there are virtually no economists calling for the U.S. to slip back into recession at this time, we do have to admit that the numbers from the Philly Fed are disconcerting. Thus, anyone who finds themselves on the fence regarding the macroeconomic outlook suddenly had a reason to do some de-risking on Thursday.

However, before you start stocking up on canned goods and begin preparations for another 6-month stint in the man cave, let's keep in mind that one report does not a recession make. We should also keep in mind that the day got started with some upbeat economic news from across the pond as the Bundesbank upped their forecast for GDP growth in Germany.

As far as the stock market action is concerned, we're going to suggest that although the 145 point decline seen on the Dow was no picnic, it also wasn't too terribly bad. Frankly, given the potential implications of the data, it would not have been surprising to see the indices finish down twice as much.

While days like Thursday are more than a little annoying and it is never fun to watch account values pull back, we will remind everyone that this market remains range bound and driven by news. Therefore, the losses from Thursday could easily be made up when a piece of good news crosses the wires - assuming we get some good news, that is.

Turning to this morning... we do not have any economic data to review before the bell. However, on this options expiration Friday, it appears that the risk aversion trade is back on and stock futures are pointing lower.

Finally, best of luck on this Friday and be sure to enjoy the weekend!
Pre-Game Indicators

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

• Major Foreign Markets:
o Australia: -1.05%
o Shanghai: -1.70%
o Hong Kong: -0.43%
o Japan: -1.96%
o France: -1.32%
o Germany: -0.87%
o London: -0.49%
• Crude Oil Futures: - $0.85 to $73.58
• Gold: - $3.20 to $1232.20
• Dollar: lower against Yen, higher vs Pound and Euro
• 10-Year Bond Yield: Currently trading lower at 2.554%
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
o S&P 500: -8.03
o Dow Jones Industrial Average: -63
o NASDAQ Composite: -8.15

Earnings Before The Bell

Ann Taylor ANN $0.32 $0.32
Corinthian Colleges COCO $0.38 $0.39
Hormel Foods HRL $0.63 $0.60
JM Smucker SJM $1.04 $0.96

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

Upgrades:
• Ternium (TX) - Barclays
• Meadwestvaco (MWV) - Deutsche Bank
• Republic Services (RSG) - Goldman
• Marvell (MRVL) - Estimates and target increased at JPMorgan
• Salesforce.com (CRM) - Target increased at Kaufman Bros.
• Symantec (SYMC) - UBS

Downgrades:
• Aeropostale (ARO) - Cowen & Co.
• McAfee (MFE) - FBR Capital
• Stericycle (SRCL) - Goldman
• Corning (GLW) - Jefferies
• Research In Motion (RIMM) - Morgan Stanley

Long positions in stocks mentioned: none

David Moenning
Main: 630-250-4700
Direct: 303-670-9761
________________________________________
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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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