David Moenning's Daily State of the Markets: 6/11

June 11, 2009 9:55 AM EDT

Will the Headwinds Matter?

The stock market stall continued yesterday as the indices finished relatively unchanged for a fourth straight day. The problem appears to be the ongoing argument over whether or not the headwinds that are beginning to blow actually matter at this stage of the game.

The bulls seem to have an answer to all the negative issues at the moment as higher interest rates are simply an indication of an improving economy and will help spur people to make decisions on whether or not to buy that house; the rise in commodity prices is also a good thing due to the concept of increasing global demand; and finally, the consumer is resilient and isn’t likely to be deterred by a modest increase in oil prices.

On the other side of the aisle, the bears are less forgiving in their view of the issues. Our furry friends argue that higher interest rates will put the kibosh on the miniscule rebound that may or may not be occurring in housing and squish any of those green shoots we’ve heard so much about. The bears go on to espouse the idea that the falling dollar, the massive debt, and rising commodities are inflationary, and that Mr. and Mrs. John Q. Public are likely to remain in their foxhole for the foreseeable future.

Yesterday’s session was a microcosm of this bigger picture argument as stocks started off to the upside on the back of a nice rally across the pond. However, the fun quickly faded after the first 5 minutes as some of the headwinds began to blow a bit harder. While most believe that the worry about the Chinese diversifying away from the dollar or deciding not to buy U.S. Treasuries is simply unrealistic, yesterday’s announcement by the Russian Central Bank that the Russians would begin to reduce their holdings in Treasuries brought the macro concerns about the administration’s strategy of bail, borrow and print back into focus.

So, with the Dow down about -125 and the results of the Treasury’s auction of $19 billion in 10-year notes coming in on the disappointing side due to the higher rate (the 10-year flirted with 4% after the auction) and the 4 basis point “tail,” it looked like the bears had an opportunity.

However, just about the time the bears appeared to have the game in hand, the trading equivalent of a costly turnover allowed their opponents to come roaring back. Perhaps it is the dip buyers that are keeping the market from breaking down here. Maybe the headwinds are merely a gentle breeze right now. Or maybe, the end-of-quarter window dressing is getting started early. But in any event, what we’ve got right now is an even tighter trading range that appears to have been plopped on top of May’s range.

So, as we enter today’s contest, the teams appear to be evenly matched at the moment and the question of which way this little range will break seems to hinge on the question of whether or not the headwinds of the debt, the dollar, higher rates, and rising commodity prices are going to matter to traders.

Turning to this morning, U.S. Retail Sales for May came in a little better than the consensus at +0.5% vs. +0.4%. When you strip out auto sales, the numbers were even better with May’s totals increasing by +0.5% versus +0.2%. And finally, Initial Unemployment Claims came in at 601,000, which was below the consensus estimates for 615K and last week’s reading of 625K.

Running through the rest of the pre-game indicators, the major overseas markets are fractionally mixed. Crude futures are moving higher again with the latest quote showing oil trading up $0.52 to $71.85. On the interest rate front, we’ve got the yield on the 10-yr trading at another new cycle high at 3.97%, 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 rather flat open. The Dow futures are currently ahead by about 15 points; the S&P’s are about even, while the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks “In Play” This Morning:

Upgrades/Downgrades/Brokerage Research:

Palm (Nasdaq: PALM) – Target increased at BofA/Merrill
Avis Budget Group (NYSE: CAR) – Upgraded at Barclays
Fifth Third Bancorp (FITB) – Upgraded at Goldman
Regions Financial (NYSE: RF) – Upgraded at Goldman
BB&T Corp (NYSE: BBT) – Upgraded at Goldman
Huntington Bancorp (HBAN) – Upgraded at Goldman
Great Plains Energy (NYSE: GXP) – Upgraded at Goldman
FedEx (NYSE: FDX) – Estimates and target reduced at JP Morgan
Bank of America (NYSE: BAC) – Upgraded at Keefe, Bruyette & Woods
Jones Apparel Group (NYSE: JNY) – Upgraded at Morgan Stanley
Phillips Van Heusen (NYSE: PVH) – Upgraded at Morgan Stanley
GlaxoSmithKline (NYSE: GSK) – Upgraded at Morgan Stanley
UnitedHealth Group (NYSE: UNH) – Downgraded at Oppenheimer
Ericsson (ERIC) – Upgraded at Societe Generale
Southwestern Energy (SWN) – Target increased at UBS
Temple Inland (TIN) – Downgraded at UBS

Long positions in stocks mentioned: JPM, BAC

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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