David Moenning's Daily State of the Markets: 2/20

Does Oil Matter?

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

For the past three years, the bears have been yammering on about the idea that the dramatic increase in the price of oil would eventually come home to roost with the consumer, and in turn, the U.S. economy. However, thus far at least, U.S. consumers have pretty much taken the big move in oil prices in stride. So, while the big bump in oil has certainly been annoying, people don’t appear to have really changed their behavior much in response to gasoline prices pushing $3 per gallon.

However, we all know that there is a line in the sand somewhere that when crossed, WILL cause consumers to sit up and take notice. And given the dive in stock prices yesterday afternoon, oil’s move over $100 may have crossed that line.

At this time yesterday, stock market investors were looking forward to decent gains in response to buoyant overseas markets and solid earnings reports from the likes of OfficeMax (OMX)and Wal-Mart (WMT). And although neither company had anything terribly soothing to say about the future, the fact that Wal-Mart’s earnings were better than expected seemed to take some of the edge off the argument that the consumer was in dire straits.

And for a while, Tuesday's session appeared to be going according to plan, well, until oil pushed above $100 that is. But, to be fair, we really can’t blame the 200 point dive entirely on oil. And although we did get our daily dose of subprime news from UBS, we can’t pin the big drop on the credit crisis either. No, yesterday’s swing was tied to a ferocious rally in commodities as the CRB index posted its biggest one-day gain in two and one-half years. And given the move seen in commodities lately, this is really saying something.

With just about everything used to produce any kind of goods going up, the natural response was to worry about inflation. At issue yesterday was the fact that China reported consumer prices rose to an 11-year high in January. Then there was word that Asia’s leading steelmakers had agreed to a 65% increase in iron ore prices with Brazil. Thus, it didn’t take a PhD in economics to recognize that there might just be a problem with the assumption that inflation is going to moderate going forward.

While oil got the headlines yesterday for closing at $100.01, one could argue that crude futures basically went along for the ride. Sure, there are concerns about political instability in Venezuela (btw, is there really ever political stability in Venezuela?), the explosion at a refinery here in the U.S., and the talk that OPEC might be tempted to cut production. However, it is the rise in the rest of the commodities that really gave investors pause yesterday.

So, instead of the bulls talking about a breakout to the upside, we are now back to hearing about the retest to the downside. The bears’ current argument is that if the economy was on the brink of recession with oil at $85, oil prices over $100 might just tip us over the edge.

Turning to this morning, inflation is back in focus as the government just released the statistics on inflation for January. The latest data on CPI data shows that prices increased by +0.4% last month, which was a tenth above expectations. And when you strip out food and energy, you get a core rate increase of +0.3%, which was also a tenth higher than the consensus.

Running through the rest of the pre-game indicators; the overseas markets are lower across the board this morning. Crude futures are moving lower with the latest quote off $0.74 to $99.27. Interest rates are moving up with the 10-yr trading at a yield of 3.93% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a weak open. The Dow futures are currently off by about 90 points; the S&Ps are down by 13 points, while the NASDAQ looks to be about 5 points below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:
Hewlett Packard (NYSE: HPQ) – Reported $0.86 vs. $0.81
Whole Foods (Nasdaq: WFMI) – Reported $0.28 vs. $0.36

Today’s Earnings Before the Bell:
Garmin (Nasdaq: GRMN) – Reported $1.39 vs. $1.11
Host Hotels & Resorts (NYSE: HST) – Reported $0.75 vs. $0.68
Cimarex Energy (NYSE: XEC) – Reported $1.54 vs. $1.17

News, Upgrades/Downgrades/Brokerage Research:
PPG Industries (NYSE: PPG) – Downgraded at Citi
Coca Cola Femsa (NYSE: KOF) – Downgraded at Citi, Deutsche Bank
Lukoil (Nasdaq: LUKOY) – Upgraded at Citi
Comcast (CMCSA) – Downgraded at Credit Suisse
Verizon (NYSE: VZ) – Downgraded at Credit Suisse
AT&T (NYSE: T) – Downgraded at Credit Suisse, RW Baird
Rio Tinto (NYSE: RTP) – Target increased at RW Baird
JC Penney (NYSE: JCP) – Target increased at Morgan Stanley
Whole Foods (Nasdaq: WFMI) – Target reduced at Piper Jaffray
Keycorp (NYSE: KEY) – Downgraded at RBC Capital

Mr. Moenning holds Long positions in stocks mentioned: WMT

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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