David Moenning's Daily State of the Markets: 5/27

May 27, 2008 10:23 AM EDT

Something Has To Give

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

After a one-day reprieve, oil returned to its winning ways on Friday; rising another $1.38 to close at $132.19 per barrel. And as had been the case all last week, stocks fell in response as the Dow dropped another 146 points on Friday, bringing the damage for the week up to 508 points.

The problem right now is that, as long-time investors know, something has to give here. You simply can’t have oil continuing to rise and expect the stock market to turn the other cheek and rise right alongside it. Nor can you expect the Fed to even consider doing anything more to help the economy, which, of course does not bode well for the consumer.

So, with the summer driving season upon us and the national average for gasoline now either pushing or exceeding $4.00 per gallon, it is a safe bet that Mr. & Mrs. John Q. Public are not dreaming about new ways to spend money this summer. Instead, the conversation around the dinner table is more likely to center on the myriad of ways to cut back on the family budget. And as we all know by now, the consumer is responsible for more than two thirds of the country’s GDP. So, if the public is spending less, well, you can take it from there.

Although many believe that crude oil is currently the latest bubble that will soon burst, others argue that the long-term supply/demand situation means the price increases are warranted. But getting back to the short-term situation, Friday’s gains in crude were driven by concerns over a more active hurricane season and another round of dollar weakness.

Stocks attempted to rebound after the report on Existing Home Sales came in slightly better than expectations. Sales of existing homes fell by just 1% in April, which was a bit better than the drop of 1.4% that had been expected. But the good news ended there as inventories of homes for sale ballooned by 10.5%, which sent the months of available supply to a new high of 11.2. In addition, the median price of homes sold was down -8.0% from a year ago.

Now factor in comments from Ford’s (F) Chairman that the consumer’s recent shift away from trucks is “fundamental� as well as weaker results from Dillard’s (DDS) and it is easy to see why stocks fell hard again on Friday. In short, the worry is that oil prices will indeed begin to hurt that economy and given the inflationary aspect of the situation, there isn’t a darn thing the Fed can do to help.

Turning to this morning, Former Fed Chairman Alan Greenspan says that there is still a greater than 50% chance of a recession in the U.S, but that the chances for a severe recession have actually come down markedly. But with no economic news due out before the bell and oil continuing to rise, it looks like the song will remain the same in the early going on Wall Street.

Running through the rest of the pre-game indicators; the foreign markets are split by region with Asia advancing and Europe falling. Crude futures are moving up with the latest quote showing oil trading higher by $0.33 to $132.52. Interest rates are moving up as the yield on the 10-yr is currently trading at 3.87%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to another down open at the moment. The Dow futures are currently lower by about 23 points; the S&P’s are down by about 5 points, while the NASDAQ looks to be about 3 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Goldman Sachs (NYSE: GS) – Estimates reduced at Bank of American, Bernstein
Lehman Bros (NYSE: LEH) – Estimates reduced at Bank of American, Bernstein
Morgan Stanley (NYSE: MS) – Estimates reduced at Bank of American, Bernstein
American Axle (NYSE: AXL) – Upgraded at Citi
General Motors (NYSE: GM) – Downgraded at Citi
AGCO (NYSE: AG) – Upgraded at Credit Suisse
Anheuser Busch (NYSE: BUD) – Downgraded at Deutsche Bank
Exelon (NYSE: EXC) – Upgraded at Goldman Sachs
China Mobile (NYSE: CHL) – Downgraded at Goldman Sachs
Marvell Technology (Nasdaq:MRVL) – Downgraded at Goldman Sachs
Unilever (NYSE: UL) – Upgraded at Merrill Lynch
Lam Research (Nasdaq:LRCX) – Upgraded at Merrill Lynch
Baker Hughes (NYSE: BHI) – Upgraded at Merrill Lynch
Darden Restaurants (NYSE: DRI) – Upgraded at Merrill Lynch
Knight Transportation (NYSE: KNX) – Upgraded at Wachovia
Arkansas Best (Nasdaq: ABFS) – Downgraded at Wachovia

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

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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: DMoenning@HeritageCapitalManagement.com

Related Categories

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Stocks Mentioned

Related Entities

• Credit Suisse
• Deutsche Bank
• Existing-Home Sales
• Goldman Sachs
• Citi
• Morgan Stanley
• Merrill Lynch
• Lehman Brothers
• Wachovia

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