Daily State of the Markets 09/28: Second Thoughts?

Good morning. The current 'September to remember' rally, which even after Monday's sloppy finish has produced a gain of nearly +9% (+8.85% to be exact), has been sponsored in large part by the realization that the sky is not falling and that the current soft patch may turn out to be short-lived. And then, in more recent days, it has been the concept that Mr. Bernanke might soon fire up the helicopter and drop money from the sky in order to keep the economy growing that has given the bulls a raison d'etre.

However, despite some encouraging signs on the M&A front Monday, the bulls acted like they may be having second thoughts about their thesis. And as the saying goes, a market that can't go up on good news may be in trouble. Well, okay, that may be a little overdramatic for the current situation, but the fact that the bulls got almost nothing out two M&A deals (and talk of a couple more) was a little surprising.

Yes, we recognize that the Chicago Fed National Business Activity Index (catchy title, eh?) was a little disappointing. It turns out that none of the four categories provided a positive contribution to the index and the current trend of the index isn't a pretty picture. In short, this is yet another report that projects sluggish, below trend, growth for the economy going forward.

Sovereign debt worries were also back in the mix on Monday as Moody's downgraded Anglo Irish Bank by not one, not two, but three notches. Then there was a fair amount of talk/angst over whether or not the Eurozone banks would pass an important refinancing test on Thursday, when 442 billion Euros must be rolled.

However, from where I sit, the bigger problem that market may be facing right is one of expectations. While we're not sure how it happened, the market seems have come to the conclusion that the Fed will, without a doubt, launch the QE II in the near future. This, according to folks like David Pepper and Goldman Sachs, will surely be good for stocks. Thus, those that see the glass as at least half full are able to buy stocks in anticipation of the Fed's announcement.

The only problem with this concept is that the Fed has stated publically that they aren't quite sure what the program will look like, what would trigger it, how big it would be, or how long it would last. Thus, it will suffice to say that there might be some discussion yet to come (and likely, some additional economic weakness) before the FOMC starts buying up bonds in order to stuff dollar bills directly into the banking system. But I guess the mere discussion of the idea that Bernanke & Co. was about to get busy was good enough to start buying the rumor.

Don't get me wrong, I'm just as much in favor of the "close your eyes and keep buying" approach as the next trend follower. But, it is worth noting that the current joyride to the upside has become more than a little extended. And with the earnings parade about to roll again in a couple weeks, well, I'm sorry to say that just might some folks out there thinking about taking some profits.

Turning to this morning... Stock futures in the U.S. are modestly higher in the early going. This despite a rather sour day in Asia and ongoing worries in Europe regarding the cost of bailing out Anglo Irish Bank as well as expectations for an imminent downgrade of Spain.

On the economic front... There is no economic data before the bell but we will get the Case-Shiller Home Price Index at 9:00 am eastern and then the Richmond Fed and Consumer Confidence numbers at 10:00 am.

Finally, consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

• Major Foreign Markets:
  
  • Australia: -0.11%
    
  • Shanghai: -0.63%
    
  • Hong Kong: -1.03%
    
  • Japan: -1.12%
    
  • France: +0.05%
    
  • Germany: +0.13%
    
  • London: -0.29%
• Crude Oil Futures: - $0.57 to $75.95
  
• Gold: - $7.70 to $1290.90
  
• Dollar: higher against the Yen and Pound, lower vs. Euro
  
• 10-Year Bond Yield: Currently trading higher at 2.540%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: +2.09
    
  • Dow Jones Industrial Average: +23
    
  • NASDAQ Composite: +6.56

Wall Street Research Summary

Upgrades:
Pulte Home (NYSE: PHM) - Goldman Sachs
Greenbriar Companies (NYSE: GBX) - Morgan Keegan
Intuit (Nasdaq: INTU) - Target increased at Oppenheimer

Downgrades:
Windstream (NYSE: WIN) - Argus Research
Alberto-Culver (NYSE: ACV) - BMO Capital
Edwards Lifesciences (NYSE: EW) - Canaccord Genuity
Hospira (NYSE: HSP) - Citi
Target (NYSE: TGT) - Credit Suisse
KB Home (NYSE: KBH) - Goldman Sachs
Dolby Laboratories (NYSE: DLB) - Goldman Sachs
Aqua America (NYSE: WTR) - Janney Capital
Air Tran Holdings (NYSE: AAI) - JPMorgan, UBS
Seagate Technology (NYSE: STX) - Estimates and target reduced at RBC Capital
Newmont Mining (NYSE: NEM) - Stifel Nicolaus

Long positions in stocks mentioned: none

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