David Moenning's Daily State of the Markets: 03/19

The Cavalry's Not Coming

Good morning. Friday's update on the CPI put a damper on Wall Street's mood as it became clear that the Fed is not likely to cut rates any time soon. We’re not completely sure how the idea got started that the Fed was going need to come to the rescue in response to the subprime lending situation. However, last week's higher than expected inflation data should put a nail in the coffin of any further rate reduction talk.

While inflation is hardly spinning out of control at the moment, there were some disconcerting signs in the CPI numbers. For example, energy costs rebounded by almost 1%, food prices rose by 0.8%, which was the most since April 2005, and the cost of renting an apartment remains worrisome. And on a year-over-year basis, both the CPI and Core Rate continue to remain above the Fed stated target levels.

So, while the growth rate of the economy is likely to continue to slow and the subprime problem may cause some ongoing concerns, the current levels of inflation means that Mr. Bernanke and Co. aren’t likely to mount up their white horses any time soon. And frankly, unless the subprime problem simply explodes, there is really no need to cry for the Fed's assistance at this stage.

This realization alone was probably enough to cause stocks to pull back on Friday. In addition, the quadruple-witch expiration probably added a little fuel to the fire. However, so far at least, the bears have been unable to push prices beyond the recent lows, which according to the bulls, is a good thing.

From a big-picture standpoint, the two questions the market has to wrestle with at the moment are if the subprime mortgage problems will spill over into the economy and whether or not the indices have priced in the 33% possibility of a recession this year. And while we don’t have answers to either question at the moment, it does always help to know what the questions are.

Looking to the week ahead, with the exception of the Fed meeting, the economic calendar is fairly light this week. We will get more data on the housing market this afternoon as the NAHB updates their Housing Market Index. On Tuesday, we’ll get the latest Housing Starts numbers. On Wednesday, we’ll hear from Mr. Bernanke at 2:15pm EDT. On Thursday, the Index of Leading Economic Indicators will be released. And on Friday, we’ll hear how sales of Existing Homes are going.

Turning to this morning, the mood on the Street has turned upbeat as the overseas markets are all up nicely. The impetus for the advance seems to have originated in China and Japan. The Chinese markets took news of a surprise rate increase in stride and the Yen’s slide is helping put aside worries of the carry trade for now.

Running through the pre-game indicators, the gold futures are trading off by $0.20 this morning to $653.70. In the oil pits, crude futures are lower by $0.35 this morning and the latest quote is at $56.76. Interest rates are moving a little higher this morning, with the yield on the 10-year currently trading at 4.57%. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open nicely to the upside. The Dow futures are currently ahead by about 54 points; the S&P’s are up by about 7 points, while the NASDAQ looks to be about 10 points above fair value at the moment.

Stocks "In Play" This Morning:

Ryder Systems (NYSE: R) – Mentioned positively in Barron’s
Saks (NYSE: SKS) – Mentioned positively in Barron’s
Textron (NYSE: TXT) – Mentioned positively in Barron’s
Freeport McMoRan (NYSE: FCX) – Upgraded at Bear Stearns
Fairchild Semiconductor (NYSE: FCS) – Upgraded at Bear Stearns
Cerner Corp (Nasdaq: CERN) – Downgraded at Bear Stearns
Deutsche Bank (NYSE: DB) – Upgraded at Credit Suisse
Sepracor (Nasdaq: SEPR) – Downgraded at Friedman Billings
Daimler Chrysler (NYSE: DCX) – Upgraded at Goldman Sachs
Walgreen (NYSE: WAG) – Upgraded at JP Morgan
Ann Taylor (NYSE: ANN) – Upgraded at Piper Jaffray
Kraft (NYSE: KFT) – Upgraded at Prudential
H&R Block (NYSE: HRB) – Upgraded at Thomas Weisel
BEA Software (Nasdaq: BEAS) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: BSC, GS

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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