David Moenning's Daily State of the Markets: Subtle, Yet Effective

October 12, 2009 9:40 AM EDT

Last week marked the two year anniversary of the Dow and S&P’s all-time highs of 14,164.53 and 1565.15 respectively. If you are interested in such matters, October 9th 2007 was the last time the press was able to crow about the blue chip indices reaching the Promised Land. And while we did read a couple reports suggesting that Friday’s move to a new cycle high in the DJIA was a celebration of sorts, we’re going to stick with the idea that Ben Bernanke’s comments on Thursday night were behind Friday’s gains.

At first blush, Bernanke’s comments didn’t appear to matter all that much as the Fed Chairman said “when the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration.” This was in line with what every other Fed-head has been saying lately and helped to balance out the more aggressive views from Fed Governor Kevin Warsh.

However, the stock market is a fickle beast that often needs a great deal of reassurance in order to continue on its path. And although the Fed Chairman’s comments were indeed subtle, they were effective all the same. Bernanke’s said, “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.” And in short, this statement, although not new, conveyed the idea that the economy is on the mend and that higher interest rates ARE coming – eventually.

Unlike past Fed-heads, this chairman believes in keeping the Fed’s policies transparent. Thus, when assimilating the message from the various speeches of the past couple of weeks, it becomes clear that Mr. Bernanke and friends are currently in the process of laying the groundwork for higher interest rates in the future.

And yet in true Goldilocks fashion, Mr. Bernanke made it clear in the speech that we are not there yet. Bernanke said, “My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

What this means to stock market investors is they can continue to look to better days ahead in terms of both the economy and corporate earnings. Yes, it is true that the proof will be in the pudding at some point. But for now, this market is all about discounting the future and not about judging the economic strength of the future.

On a side note, the Bernanke speech also gave the U.S. dollar a much needed boost as the greenback bounced up off its most recent 14-month lows. However, before we party too hard about the dollar’s newfound strength, we should probably consider that the long weekend in the U.S. as well as the documented dollar intervention in Thailand, Malaysia, Taiwan, Hong Kong, and Singapore might have played a bit of a role as well.

Turning to this morning, we don’t have any economic data to review today. However, we will get reports on September Retail Sales and the CPI this week. And the earnings parade will definitely start to roll later in the week.

Running through the rest of the pre-game indicators, the foreign markets are mixed by region with Asian markets down a bit and European markets up nicely. Crude futures are moving up with the latest quote showing oil trading higher by $1.58 to $73.15. On the interest rate front, we’ve got the yield on the 10-yr trading up to 3.38%, while the yield on the 3-month T-Bill is currently at 0.06%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another up open. The Dow futures are currently ahead by about 40 points; the S&P’s are up about 6 points, while the NASDAQ looks to be about 9 points above fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Sherman-Williams (NYSE: SHW) – Upgraded at BofA/Merrill
Occidental Petroleum (NYSE: OXY) – Downgraded at Citi
Lockheed Martin (NYSE: LMT) – Downgraded at Cowen
MasterCard (NYSE: MA) – Upgraded at Credit Suisse
Visa (NYSE: V) – Upgraded at Credit Suisse
WW Grainger (NYSE: GWW) – Upgraded at Credit Suisse
Dr. Pepper Snapple (NYSE: DPS) – Downgraded at Deutsche Bank
Google (Nasdaq: GOOG) – Estimates increased at Goldman
Estee Lauder (NYSE: EL) – Added to Sell list at Goldman
Johnson Controls (NYSE: JCI) – Removed from Sell list at Goldman
Cameron Intl (NYSE: CAM) – Downgraded at HSBC
Nokia (NYSE: NOK) – Downgraded at HSBC
Sempra Energy (NYSE: SRE) – Upgraded at Jefferies
Symantec (Nasdaq: SYMC) – Upgraded at Jefferies
Citrix Systems (Nasdaq: CTXS) – Upgraded at Jefferies
VMware (NYSE: VMW) – Upgraded at Jefferies
Kroger (NYSE: KR) – Upgraded at JP Morgan
Plum Creek (NYSE: PCL) – Upgraded at JP Morgan
Brocade (Nasdaq: BRCD) – Downgraded at Oppenheimer
NVIDIA (Nasdaq: NVDA) – Downgraded at Pacific Crest
First Solar (Nasdaq: FSLR) – Downgraded at Pacific Crest
American Eagle (NYSE: AEO) – Upgraded at Susquehanna
Amgen (Nasdaq: AMGN) – Upgraded at UBS
SanDisk (Nasdaq: SNDK) – Downgraded at UBS
Coca-Cola (NYSE: KO) – Estimates and target increased at UBS
Advanced Micro (NYSE: AMD) – Upgraded at UBS

Long positions in stocks mentioned: GS, GOOG, OXY, DPS

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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• Credit Suisse
• Deutsche Bank
• UBS
• JPMorgan
• Ben S. Bernanke
• Citi
• Jefferies & Co
• Banc of America
• David Moenning
• HSBC
• Pacific Crest Securities
• Susquehanna International Group of Companies
• Cowen & Co
• Crude Oil

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