David Moenning's Daily State of the Markets: 09/06

Incrementally Weaker?

After rallying for much of the past two weeks, stocks pulled back yesterday for two reasons. First, while it may sound surprising, stocks had become overbought on a short-term basis. And second, the data released yesterday sparked concerns that the economy may be weaker than expected.

To be fair though, we can’t blame yesterday’s drop entirely on the economic data because the futures were down sharply prior to the opening bell. It appears that European bankers are much more concerned about the credit situation than the talking heads here in the U.S., and so, it was ongoing worries over the credit crisis in commercial paper that got things heading south in the early going.

But make no mistake about it, the economic data released yesterday did not provide much in the way of good news. For starters, the ADP Employment report put a damper on the upcoming Jobs report. ADP said payrolls increased by just 38,000 in August, which was well below the consensus estimate for 80,000 jobs and the lowest number since June 2003.

Next, we got more bad news on the housing front. The report on Pending Home Sales showed that homes already on the market crumbled in July and fell by a record 12.2%. And given that conditions definitely worsened in August, it is now obvious that we may be a long way from the bottom in the housing market. And this, of course, leads analysts to voice concerns about the overall economy becoming incrementally weaker.

On that note, the Fed’s Beige Book, which isn’t really used much by the Fed in its decision making, reported that the upheaval in the credit markets has worsened the housing slump but that the economy as a whole has not been widely harmed.

However, one look at the bond market may provide a slightly different view on the topic. In short, bond prices rallied strongly yesterday, pushing the yield on the 10-year to its lowest close since December 5th of last year.

The bottom line here is that stocks are looking for an equilibrium point right now as investors try to game the probability of a Fed rate cut and the economic impact of the situation. Thus, any data that suggests things becoming incrementally weaker is going to be met with some selling.

Turning to this morning, we’ve got some interest rate news and some economic data to deal with before the bell. First, China announced it is raising the reserve requirement again, this time by 50 basis points effective September 25th. Next, both the Bank of England and the European Central Bank decided to leave rates unchanged this morning.

On the economic front, Q2 Non-Farm Productivity came in a bit better than expected at 2.6%, which was above the consensus estimate for a reading of 2.3%. In addition, Unit Labor Costs rose by just 1.4%, which was better than expectations for an increase of 1.6%.

Running through the rest of the pre-game indicators, the overseas markets were mostly lower overnight. Crude futures are up once again, this time by $0.67 with the latest quote at $76.40. Interest rates are a little higher with the 10-yr is trading at a yield of 4.49% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open on the flat side. The Dow futures are currently ahead by about 30 points; the S&Ps are up by almost 2 points, and the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Rio Tinto (NYSE: RTP) – Upgraded at Bernstein
Anglo American (Nasdaq: AAUK) – Upgraded at Bernstein
Lexmark (NYSE: LXK) – Upgraded at Bernstein
Marathon Oil (NYSE: MRO) – Upgraded at Bernstein
Valero (NYSE: VLO) – Upgraded at Bernstein
Tesoro (NYSE: TSO) – Upgraded at Bernstein
Sunoco (NYSE: SUN) – Upgraded at Bernstein
Pactiv (NYSE: PTV) – Upgraded at Citi
SL Green Realty (NYSE: SLG) – Downgraded at Lehman
Tibco Software (Nasdaq:TIBX) – Downgraded at Merrill
Apple (Nasdaq: AAPL) – Piper Jaffray says price cuts on iPhones is a positive
Dicks Sporting Goods (NYSE: DKS) – UBS initiates coverage with Buy
General Mills (NYSE: GIS) – Upgraded at UBS

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