David Moenning's Daily State of the Markets: 8/28

August 28, 2008 9:42 AM EDT

Not Dead After All?

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

Despite the recent rally off the July lows, the bear case has been fairly prevalent lately. You all know the story; the credit crisis just won’t go away, banks are failing, Fannie (FNM) and Freddie (FRE) are doomed, the housing market isn’t improving, inflation is becoming a problem, and the economy appears to be stagnating. And because these arguments have been so pervasive, the rally based on the idea that we’d seen the worst, has been fizzling fast over the past three weeks.

However, the bulls received a boost or three yesterday as the economic news wasn’t half bad, Fannie and Freddie rallied for a third straight day, and even a hurricane approaching the gulf couldn’t keep the screens from turning green. And while the glass-is-half-empty gang will scoff and say that yesterday’s move higher occurred on light volume, the point is the session showed that the bulls, as well as the economy, may not be dead after all.

Speaking of the economy, yesterday’s Durable Goods report was a breath of fresh air amongst the economic doom and gloom that has prevailed of late. Orders for stuff that is supposed to last at least a couple of years came in surprisingly strong, sporting an increase of +1.3% when the analysts trying to predict such things had expected a drop of -0.4%. Digging a little deeper, we find that when you take out the 20% drop in defense orders, durable goods orders increased an impressive +2.8%. And finally, the all-important Orders for Nondefense Capital Goods Ex-aircraft, which is a measure of business investment, or capex, as it commonly called, advanced a healthy +2.6%.

Next up, Fannie Mae and Freddie Mac enjoyed yet another nice day yesterday. FNM jumped +15% while FRE popped up almost +20%, bringing the weekly gains to 30% and 44% respectively. The story here is aggressive traders are continuing to place bets on whether or not a government bailout is imminent and what the fate of the stockholders will be if and when Uncle Sam does step in.

On the anecdotal evidence front, it was modestly positive the PIMCO, which is the world’s largest manager of bonds, announced it would buy up to $5 billion in mortgage backed debt in its Distressed Senior Credit Opportunities Fund. This is a very modest sign that perhaps there is indeed some value to be found out there in the credit markets these days.

Turning to this morning, we’ve got some economic data to sift through, so let’s get to it. The government has just announced that GDP for the second quarter increased by +3.3%, which was much better than the expectations for an increase of +2.7% and up from the initial guesstimate of +1.9%. The report also showed that Personal Consumption came in at 1.7% versus 1.6%. The Price Index, which is a measure of inflation, was a tenth higher than expectations at 1.2% while the Core PCE was in line with expectations.

Running through the rest of the pre-game indicators, the foreign markets are mixed. Crude futures are moving up again with the latest quote showing oil trading higher by $1.51 to $119.66. Interest rates are moving up on the better-than expected economic data with the yield on the 10-yr currently trading at 3.81%. And finally, with about 60 minutes before the bell, stock futures in the U.S. have improved and are now pointing to another higher open. The Dow futures are currently ahead by about 45 points; the S&P’s are up by about 6 points, while the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks “In Play� This Morning:


Today’s Earnings Before the Bell:

Brown-Forman (NYSE: BF.B) – Reported $0.86 vs. $0.89
Energen (NYSE: EGN) – Reported $0.08 vs. $0.07
Sears Holdings (Nasdaq: SHLD) – Reported $0.21 vs. $0.33
Tiffany’s (NYSE: TIF) – Reported $0.63 vs. $0.55
Vimpel Communications (NYSE: VIP) – Reported $0.46 vs. $0.53

News, Upgrades/Downgrades/Brokerage Research:

Coca Cola (NYSE: KO) – Downgraded at Credit Suisse
China Mobile (NYSE: CHL) – Downgraded at JP Morgan
Gilead Sciences (Nasdaq: GILD) – Downgraded at Lehman
Amylin Pharmaceuticals (Nasdaq: AMLN) – Upgraded at Merrill
Energen (NYSE: EGN) – Upgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: GILD

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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• Credit Suisse
• UBS
• JPMorgan
• Pacific Investment Management Company, LLC (PIMCO)
• David Moenning
• Crude Oil

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