David Moenning's Daily State of the Markets: 8/20

Too Many Bad Numbers

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

Stocks tanked again yesterday as just about every number that came across the wires was just plain bad. The PPI report was bad. The earnings from Saks (SKS) were bad. Lehman’s need to raise a large amount of capital is bad. Mortgage rates are bad. And the yield demanded by the market for Freddie Mac’s (FRE) $3 billion note auction was nothing short of awful. The result was a second straight triple digit loss for the Dow and a couple technical breaks for the blue chip indices.

The session started off on a bad note when the report on Producer Prices was, well, in keeping with our theme – pretty miserable. To review, the PPI rose 1.2% in July, which was more than double the expectations. And when you look out over the past year, producer prices have increased by a breathtaking 9.8%, which is the fastest pace since June 1981! And if you are inclined as to eliminate those pesky items such as food and energy from the equation, the Core rate shot up +0.7% last month, which was well above the estimates for an increase of +0.2%. So, no matter how you slice it, the outlook for the inflation pipeline continues to be ominous.

The next set of disturbing numbers came from Freddie Mac’s auction of $3 billion in 5-year notes. Under normal circumstances, the yield on this type of offering would be similar to that of treasuries. After all, the debt is considered to be backed, at least to a certain degree, by the U.S. Government. However, with all the talk about Fannie, Freddie, and friends needing to be nationalized, the yield on yesterday’s bond auction came in 113 basis points (1.13%) higher than Treasuries. To put this into perspective, this is 15 basis points above where the debt of Bear Stearns was trading right before the firm collapsed.

Speaking of numbers, the average rate for a 30-year mortgage is currently at 6.52%. While this may not sound too bad, it is interesting to note that rates are roughly at the same spot they were a year ago, which helps explain why housing hasn’t gotten any better. The bottom line is if financing continues to be tough to come by, prices may continue to fall.

The good news is that (a) things could have been worse and (b) the old lows on all the major indices are still a ways away. So, in light of the fact that none of the bad numbers really represented anything “new” in terms of data points, the technicians are now arguing that we’ve got a prototypical retest of the lows on our hands after the recent breakout fakeout.

Turning to this morning, energy prices are back in focus as Goldman Sachs has renewed their call for oil to trade at $149. This, coupled with the fact that another large energy trading firm – which was presumably short oil – was reclassified as a speculator is putting a bid under oil at the moment.

Running through the rest of the pre-game indicators, the foreign markets are mostly higher. Crude futures are moving up with the latest quote showing oil trading higher by $1.81 to $116.34. Interest rates are down a smidge this morning with the yield on the 10-yr currently trading at 3.81%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to modestly higher open. The Dow futures are currently ahead by about 27 points; the S&P’s are up by about 2 points, while the NASDAQ looks to be about 9 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Analog Devices (NYSE: ADI) – Reported $0.44 vs. $0.45
Hewlett Packard (NYSE: HPQ) – Reported $0.86 vs. $0.84

Today’s Earnings Before the Bell:

BJ’s Wholesale Club (NYSE: BJ) – Reported $0.58 vs. $0.57


News, Upgrades/Downgrades/Brokerage Research:

Lehman (NYSE: LEH) – Estimates reduced at Bernstein, Goldman
Goldman (NYSE: GS) – Estimates reduced at Bernstein
Morgan Stanley (NYSE: MS) – Estimates reduced at Bernstein, Goldman
Dish Network (Nasdaq: DISH) – Downgraded at Bernstein
Intel (Nasdaq: INTC) – Mentioned cautiously at Goldman
Macy's (NYSE: M) – Downgraded at Goldman
Kohls (NYSE: KSS) – Downgraded at Goldman
Analog Devices (NYSE: ADI) – Removed from Conviction Buy list at Goldman
JP Morgan (NYSE: JPM) – Estimates reduced at Goldman
Citigroup (NYSE: C) – Estimates reduced at Goldman
Merrill Lynch (NYSE: MER) – Estimates reduced at Goldman
Union Pacific (NYSE: UNP) – Mentioned positively at Merrill

Disclosure: Mr. Moenning and/or related firms hold long positions in: GS, UNP

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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