David Moenning's Daily State of the Markets: 09/21

September 21, 2007 9:45 AM EDT

The Buck, Bonds, Bernanke (and Crude)

Given that stocks had surged more than 400 points since the Fed cut rates on Tuesday afternoon, it wasn’t exactly a surprise to see stocks pull back a bit yesterday. However, what was surprising was the fact that the damage on the Dow was limited to just 49 points. After all, with stocks overbought, crude and the dollar breaking records in different directions, bond yields spiking on inflation fears, and testimony from both Bernanke and Paulson attracting attention, no one could have argued with the idea of stocks giving up some more ground.

While the bulls have to be pleased with the end result of the session, the fact that oil has continued to move higher is a bit disconcerting. Crude futures closed at $83.32 after flirting with $84 on an intraday basis, which was another record on both accounts.

At least part of the problem with the rude price of crude is tied to the dollar’s ongoing plunge. Since oil is priced in dollars, the fact that the dollar is falling makes oil more expensive in other currencies. And speaking of the dollar falling, it should be noted that the greenback closed yesterday at its lowest level since 1992 and at a record low against the Euro.

This situation highlights the fact that a declining dollar is inflationary. And given that Mr. Bernanke had just told us on Tuesday that the Fed was putting inflation on the back burner for now, the falling dollar, as well as increases in other commodity prices, definitely raises an eyebrow or two right now.

Speaking of raised eyebrows, the bond market has definitely attracted some attention this week. Although the Fed has finally gotten on board with the bond market’s directive, bond yields have spiked higher since the rate cut on Tuesday. After hitting a low of 4.30% on September 10th, the yield on the 10 year has moved steadily higher and closed yesterday at 4.67%.

But in the plus column, the fact that the debt being used to finance the buyout of First Data Corp was actually oversubscribed by $2 billion yesterday shows that liquidity is definitely improving. Although FDC had originally been looking to finance $14 billion, the fact that buyers were lining up to plunk down cash is a positive.

It was also positive yesterday that the Philly Fed General Business Activity Index rebounded in September and came in above expectations. And while the prices paid component was annoyingly high, this is yet another sign that the economy is not headed straight into the dumpster.

At the end of the day, it is apparent that stock investors are simply ignoring the negatives such as the drop in the dollar, the signs of inflation, and the rise in bond yields. But after the recent correction where the bears had us convinced that the world was coming to an end, I guess we can allow the bulls an opportunity to bask in the glow of the rate cut for a while longer.

Turning to this morning, it’s a “quadruple witch” expiration Friday so anything can happen. But in the early going, it appears that traders are encouraged by the earnings reports from both Oracle and Nike.

Running through the rest of the pre-game indicators, the overseas markets are mostly higher. Crude futures are down a little so far this morning with the latest quote off $0.33 to $81.45. Interest rates are moving up again this morning and the 10-yr is trading at a yield of 4.68% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open a little higher. The Dow futures are currently ahead by about 50 points; the S&Ps are up by about 7 points, and the NASDAQ looks to be about 10 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings Before the Bell:

Nike (NYSE: NKE) – Reported $0.92 vs. $0.87
Oracle (Nasdaq: ORCL) – Reported $0.22 vs. $0.21
Tektronix (NYSE: TEK) – Reported $0.40 vs. $0.39

News, Upgrades/Downgrades/Brokerage Research:

Brocade Communications (Nasdaq: BRCD) – Mentioned positively at Bear Stearns
Circuit City (NYSE: CC) – Downgraded at Bear Stearns
Mosaic (NYSE: MOS) – Upgraded at Citi
Nasdaq Stock Market (NDAQ) – Downgraded at Friedman Billings
Volvo (Nasdaq: VOLV)– Upgraded at Goldman Sachs
Medco Health (NYSE: MHS) – Removed from Focus List at JP Morgan
Catalina Marketing (NYSE: POS) – Downgraded at JP Morgan
Citigroup (NYSE: C) – Estimates reduced at Lehman
Bank of America (NYSE: BAC) – Estimates reduced at Lehman
Barrick Gold (NYSE: ABX) – Downgraded at Merrill
Agnico Mines (NYSE: AEM) – Downgraded at Merrill
Wells Fargo (NYSE: WFC) – Downgraded at Merrill
Mattel (NYSE: MAT) – Upgraded at Oppenheimer
Apple (Nasdaq: AAPL) – Estimates increased at WR Hambrecht

Mr. Moenning holds Long positions in stocks mentioned: MER, MOS, MHS, AAPL

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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