David Moenning's Daily State of the Markets: 7/15

Basic Blocking and Tackling

It was widely expected that earnings from Goldman Sachs (GS) would spark the market yesterday. After all, with the Wall Street firms at the epicenter of the credit crisis, word on how they are faring gives investors a feel for how the game is going in this new world. However, after Meredith Whitney effectively stole Goldman’s thunder on Monday, the actual announcement left traders unenthused. So, with a mixed bag of economic indicators and a boatload of earnings reports still on the horizon, the markets wound up doing little yesterday.

According to the company’s CFO, it was “basic blocking and tackling” that got the job done for Goldman to the tune of $4.93 per share, which easily exceeded the Reuters estimate for EPS of $3.48. However, the results were close to the whisper numbers that had been floating around as well as the number that Ms. Whitney had projected on CNBC. As such, the stock wound up doing little on the session and finished with a gain of just $0.22 to $149.66.

While we rarely spend much time on individual stock reports in our morning missive, the Goldman situation is a perfect example of what confuses the average investor about how the game is played on Wall Street. At first blush, earnings that were nearly 42% higher than the estimates would seem to be a good thing and a very good reason for the stock to rally. And yet, GS was effectively flat on the session. To make sense of this we must remember that the game on Wall Street is about expectations versus reality. Thus, in light of the fact that the “earnings beat” was already widely anticipated and that the stock had rallied 8% in the prior three sessions means the news was already priced into the stock.

In addition, a quick glance at the headlines from the earnings report gave traders a reason to worry about the future as revenues from Investment Banking and Asset Management Services were down -15% and -28% respectively while trading revenues were up +93%. Thus, the thinking was that much of the gain would not be repeatable, which makes sense – except for the fact that Goldman seems to find a way to repeat this every quarter.

But enough about “Goldmine” (oops, I mean Goldman Sachs), the other reason that stocks wound up only slightly higher on Tuesday had to do with the conflicting data on the economic front. It was definitely good news that the advance report on Retail Sales came in above expectations at +0.6% vs. +0.4%, which was the biggest increase in 5 months. However, the fact that much of the gain came from an increase in gasoline prices put a damper on the report. You see, ex-gasoline, building materials, and autos, the so-called “core” retail sales actually fell by -0.1%. The report also highlighted the fact that the PPI came in double expectations, which was due in large part to – yep, you guessed it – higher oil prices. And this, of course, fueled the usual concerns about stagflation in the future.

The bottom line is the bulls were able to put a little more space between them and the dreaded head-and-shoulders neckline. And with Intel (INTC) reporting a big earnings beat (well, before that big EC fine is included) after the bell, it looks like our heroes in horns might have a shot at enjoying a third straight day in the sun.

Turning to this morning, we’ve got some more inflation data to look at. The CPI for June came in at +0.7% versus +0.6% while the core CPI increased by +0.2%. On a year-over-year basis, the CPI actually fell -1.5%. Next, up the Empire Manufacturing Index came in at -0.55, which was better than the expectations for a reading of -5.0.

Running through the rest of the pre-game indicators, the major overseas markets are higher across the board after Intel’s earnings. Crude futures are moving up with the latest quote showing oil trading higher by $0.88 to $60.40. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.51%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 80 points; the S&P’s are up by about 10 points, while the NASDAQ looks to be about 21 points above fair value at the moment.

Today’s Earnings Before the Bell

Abbott Labs (NYSE: ABT) – Reported $0.89 vs. $0.89
Gannett (NYSE: GCI) – Reported $0.46 vs. $0.37
WW Grainger (NYSE: GWW) – Reported $1.21 vs. $1.14
Worthington (NYSE: WOR) – Reported -$0.02 vs. -$0.03

Upgrades/Downgrades/Brokerage Research:

Companhia Vale do Rio Doce (Nasdaq: VALE) – Upgraded at BofA/Merrill
Owens-Illinois (NYSE: OI) – Upgraded at BofA/Merrill
Sonoco Products (NYSE: SON) – Upgraded at BofA/Merrill
Alcatel-Lucent (NYSE: ALU) – Upgraded at BofA/Merrill
Plum Creek (NYSE: PCL) – Downgraded at BofA/Merrill, Upgraded at Credit Suisse
IntercontinentalExchange (NYSE: ICE) – Upgraded at Barclays
Cisco Systems (Nasdaq: CSCO) – Initiated Buy at Citi
Juniper Networks (Nasdaq: JNPR) – Initiated Buy at Citi
Coca-Cola Enterprises (NYSE: CCE) – Upgraded at Credit Suisse
Altera (Nasdaq: ALTR) – Upgraded at Goldman
Mariner Energy (NYSE: ME) – Removed from Conviction Sell list at Goldman
PPD Inc (Nasdaq: PPDI) – Downgraded at Goldman
Total System (NYSE: TSS) – Added to Conviction Sell list at Goldman
Intl Game Technology (IGT) – Upgraded at Janney Montgomery Scott
Moody’s (NYSE: MCO) – Upgraded at Jefferies
CNOOC (NYSE: CEO) – Upgraded at Morgan Stanley
Sinopec (NYSE: SNP) – Upgraded at Morgan Stanley
PetroChina (NYSE: PTR) – Downgraded at Morgan Stanley
Goldman Sachs (NYSE: GS) – Estimates increased at Rochdale
Intel (Nasdaq: INTC) – Target increased at UBS

Long positions in stocks mentioned: PTR, CSCO

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.TopStockPortfolios.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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