David Moenning's Daily State of the Markets: 06/09

A Lethal Combination

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Stocks were hammered for huge losses on Friday in response to the lethal combination of a new record high for crude oil and the worst jump in the unemployment rate in 22 years. The Dow dropped 395 points or 3.13% and the rest of the major indices followed suit with losses at or around 3%.

Stocks plunged out of the gate after the Labor Department reported that the unemployment rate popped up to 5.5% in May, which was a 3 standard deviation event and obviously a tad higher than the consensus estimates for an increase to 5.1%. You have to go back to February 1986 to find the last time we saw a move of this magnitude.

Although seasonal adjustments probably played a big role in the pop higher, the number of unemployed jumped by 861,000 which was the largest increase on a percentage basis since January 1975. This increase reflected a combination of a rise in layoffs as well as an increase in the number of those now actively looking for a job.

The team at Ned Davis Research tells us that we should expect the unemployment rate to continue to rise. NDR says the number of those unemployed has risen by 26% so far from the lows of this cycle. The bad news is that the smallest increase seen during a recession has been 43% and the median is right at 80%. So, if history repeats, the unemployment rate will continue to rise and we could be looking at a rate of 6.2% before this bout with economic weakness ends.

The other really big problem on Friday was the record one-day gain of $10.75 in oil. Crude futures closed at a new high of $138.54 a barrel on a multitude of factors. First, we had Morgan Stanley come out with a prediction that oil would hit $150 a barrel by the fourth of July. Morgan pointed to their analysis of where oil is being shipped as the reasoning for the projection. Morgan says shipments to our area of the world are on the decline and rising strongly in Asia. Next up, the weak economic news sent the dollar back into a freefall. Then there was the news that the demand for oil in China continues to rise. And finally, Israel brought the term “geopolitical risk” back into play by suggesting that there could be a confrontation with Iran in the near future.

So with evidence that the economic slowdown may be worse than we thought, oil rising to record highs, and something traders call “weekend risk” (meaning that there was a risk of something bad happening over the weekend), the bottom line is that buyers disappeared on Friday and let the bears do their thing.

Turning to this morning, Saudi Arabia's Oil Minister says the increase in the price of crude is "unjustified" and that the gain is being driven by non-fundamental factors. This comment seems to be pushing oil a little lower and stocks a little higher so far this morning. In addition, we got the latest update to the Lehman (LEH) saga this morning as the company reported a loss of $5.14 for the quarter and announced they are going to raise $6 billion.

Running through the rest of the pre-game indicators; the foreign markets are moving as you’d expect. Japan was down while Europe is hovering around breakeven. Crude futures are moving down so far with the latest quote showing oil trading lower by $1.80 to $136.74. Interest rates are down a bit this morning as the yield on the 10-yr is currently trading at 3.93%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a modestly higher open at the moment. The Dow futures are currently higher by about 35 points; the S&P’s are up by about 2 points, while the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Lehman Brothers (NYSE: LEH) – Reported ($5.14) vs. ($0.38) – Announces $6B capital raise

News, Upgrades/Downgrades/Brokerage Research:

Hewlett Packard (NYSE: HPQ) – Mentioned positively at Bank of America
Potash (NYSE: POT) – Target increased at Goldman
Nalco (NYSE: NLC) – Downgraded at Goldman
Mosaic (NYSE: MOS) – Target increased at Goldman, Added to Conviction Buy list
Investment Technology Group (NYSE: ITG) – Upgraded at Goldman
Frontier Oil (NYSE: FRO) – Downgraded at Goldman
Murphy Oil (NYSE: MUR) – Upgraded at Goldman, – Downgraded at JP Morgan
Hess Corp (NYSE: HES) – Added to Conviction Buy list at Goldman
Eaton (NYSE: ETN) – Downgraded at JP Morgan
Bank of America (NYSE: BAC) – Estimates reduced at Lehman
McDonald’s (NYSE: MCD) – Reports global same store sales of +7.7% vs. StreetAccount +3.2%

Disclosure: Mr. Moenning and/or related firms hold long positions in: MOS

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: [email protected]

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