David Moenning's Daily State of the Markets: 9/3

Slowdown Going Global

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

Yesterday's session may have left many investors frustrated and scratching their heads as a quick 246 point gain turned into a big disappointment by the time the closing bell rang. One might have thought with Gustav causing little in the way of damage to the Gulf Coast and oil plunging to its lowest levels in almost five months that stocks would have rallied furiously. And in fact, this was the case just after the opening bell rang. Before you could do the math on what a $7 drop in oil prices meant in percentage terms, the Dow was up more than 200 points and it looked like the bulls had found some rhythm.

However, the tide soon turned and oil was once again at the center of the discussion. While most media outlets were talking about oil falling because the energy installations in the Gulf of Mexico had been spared by the storm, in reality, oil was falling in response to a much bigger concern – an economic slowdown that appears to have gone global.

Since we live on the other side of the world, most investors in the U.S. may not be aware of all the gory details, but it turns out that China’s economy is indeed slowing down. Just today, we saw a report from China’s Purchasing Mangers which showed quite clearly that China’s manufacturing sector is contracting and is now at its lowest level in almost four years. Thus, it is fairly easy to make the case that like the U.S. and Europe, China may soon slip into recession.

So, with one of the main drivers of the oil story now faltering, it is little wonder that oil fell hard yesterday. But unfortunately, the decline in crude didn’t help the stock bulls much at all. You see, while falling oil prices are definitely a plus from the consumer’s point of view, the reason prices are falling is another story altogether.

Between the report from China, the first rate cut in Australia in seven years, word that the UK economy might be facing its toughest conditions in 60 years, a reduction in steel prices, and Morgan Stanley’s Steven Roach saying that the credit crunch is far from over, the issue of a global slowdown suddenly became very real. And while we can argue that the stock market may have fully discounted the U.S. credit crisis as well as the spike in oil prices, we cannot say the same about the idea of a global slowdown.

So, with a new and very large-scale problem to fret about, traders quickly cashed in the early gains from the Gustav bounce and continued to sell throughout the day. In short, the dramatic reversal turned a happy morning into a relatively miserable afternoon as volume picked up on the decline.

Will the selling continue? Only time will tell for sure. But the technicians tell us to take solace in the facts that (1) the selling smelled a little like a hedge fund blow-up and (2) there were no important support zones violated – and as such, the bulls may live to fight on another day.

Turning to this morning, worries about the outcome of the Lehman (LEH) saga are escalating on word that a major hedge fund, of which Lehman is an owner, is being forced to close its doors after dropping 27% in August. In short, this puts fresh concerns about Lehman’s ability to raise new capital, which appears to be necessary if the firm is to continue.

Running through the rest of the pre-game indicators, with the exception of Japan, the foreign markets followed Wall Street lower. Crude futures are moving down again with the latest quote showing oil trading lower by $1.44 to $108.27. Interest rates are moving down with the yield on the 10-yr currently trading at 3.73%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing lower. The Dow futures are currently off by about 50 points; the S&P’s are down by about 5 points, while the NASDAQ looks to be about 9 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Joy Global (Nasdaq: JOYG) – Reported $0.81 vs. $0.88
Staples (Nasdaq: SPLS) – Reported $0.21 vs. $0.21

News, Upgrades/Downgrades/Brokerage Research:

Time Warner (NYSE: TWX) – Downgraded at Bernstein
Goldman Sachs (NYSE: GS) – Estimates reduced at Credit Suisse
VF Corp (NYSE: VFC) – Upgraded at Credit Suisse
Tenet Healthcare (NYSE: THC) – Upgraded at Deutsche Bank
McAfee (NYSE: MFE) – Downgraded at Freidman Billings
Monsanto (NYSE: MON) – Removed from Conviction Buy list at Goldman
BP (NYSE: BP) – Upgraded at Goldman
Linear Technology (Nasdaq: LLTC) – Downgraded at Goldman
Conagra (NYSE: CAG) – Downgraded at JP Morgan, Merrill Lynch
United Technologies (NYSE: UTX) – Upgraded at UBS
JC Penney (NYSE: JCP) – August same store sales -4.9% vs. -5.9%
Kohls (NYSE: KSS) – August same store sales -5.8% vs. -7.3%
Walgreen (NYSE: WAG) – August same store sales 0.9% vs. 2.2%

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

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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