David Moenning's Daily State of the Markets: 7/1

Will the Real Consumer Please Stand Up?

Stocks limped home yesterday as the second quarter drew to a close. However, with the best quarterly gains in more than a decade, no one in the bull camp was terribly upset with the result. After all, the S&P saw a gain of +15.22% during the April through June period while the Dow rose +11.01% and the NASDAQ soared an impressive +20.05%.

Tuesday’s decline was fueled largely by the unexpected drop in the Consumer Confidence index. The confidence index fell 5.5 points to 49.3 in June from 54.8 in May, which was well below the consensus expectations for an increase of 1.1 points. And with this market being largely dependent on the data, the ensuing selloff wasn’t exactly surprising.

However, yesterday’s report on consumer confidence was in stark contrast to Friday’s University of Michigan Consumer Sentiment report, which came in much better than expected. If you will recall, the UofM index gained 2.1 points to 70.8, which was the largest jump since February 2008. And more importantly, the expectations component, which, as you might guess, is designed to signal how consumers are feeling about the future, was the major driver behind the increase.

The problem is the conflicting data doesn’t do much to settle the argument about the outlook for the consumer. The bears contend that the consumer is tapped out and in debt up to their eyeballs, so there is no reason to expect the coming economic rebound to be fueled by mom and pop’s desire to buy that boat or head to Hawaii on vacation. Yet on the other side of the aisle, our heroes in horns suggest that while the consumer is unlikely to return to the free spending days of the last decade, they ARE returning to the restaurants, the ballparks, and the malls for the occasional purchase-to-perk-me-up.

So, I guess we should chalk up the contradiction to the current “messy” phase of the economic recovery. While many of the indicators are indeed pointing in the right direction in terms of the economy, the degree of damage inflicted by the crisis means that we aren’t likely to see a “V” bottom. So, while we’re waiting for the “real” consumer to stand up, we should keep in mind that the batches of conflicting data are likely to continue for some time.

Turning to this morning and speaking of the data, it is the economic data that continues to be in focus with the ADP Employment report garnering a great deal of attention. The June report came in worse than expected as employment in the private sector fell by 473K, which was well below the consensus estimate for a drop of 395K. However, May’s figures were revised higher to -485K from -532K. In addition, Challenger reported that US planned job cuts for June were down -33% and that the total planned job cuts for June were the lowest since March 2008.

As a reminder, with the market closed on Friday, we will get the Big Kahuna of economic reports – the June Employment Report – tomorrow morning at 8:30 am.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region with Asia down and Europe up more than 1%. Crude futures are moving up again after yesterday’s drop with the latest quote showing oil trading higher by $1.21 to $71.10. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.595%, 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 modestly higher open. The Dow futures are currently ahead by about 37 points; the S&P’s are up about 4 points, while the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks “In Play” This Morning:

Upgrades/Downgrades/Brokerage Research:

Cooper Tire (NYSE: CTB) – Upgraded at BofA/Merrill
TRW Automotive (NYSE: TRW) – Upgraded at BofA/Merrill
Walt Disney (NYSE: DIS) – Estimates reduced at Barclays
Choice Hotels (NYSE: CHH) – Downgraded at Barclays

Marriott (NYSE: MAR) – Downgraded at Barclays
Starwood Hotels (NYSE: HOT) – Downgraded at Barclays
Morgan Stanley (NYSE: MS) – Estimates reduced at Credit Suisse
YUM! Brands (NYSE: YUM) – Upgraded at Goldman
Altera (Nasdaq: ALTR) – Estimates reduced at JP Morgan
Marvel Entertainment (NYSE: MVL) – Upgraded at JP Morgan
Werner Enterprises (Nasdaq: WERN) – Upgraded at JP Morgan
Myriad Genetics (Nasdaq: MYGN) – Downgraded at Oppenheimer, RBC Capital
Covance (NYSE: CVD) – Downgraded at Piper Jaffray

Long positions in stocks mentioned: none

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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