David Moenning's Daily State of the Markets: 08/17

Less is More - But For How Long?

Good morning. Stocks roared higher for a second straight day yesterday on the back of a tame reading from the CPI and a couple more economic reports that came in weaker than expected. While the CPI data was simply in line with expectations and thus, was not nearly as positive as Tuesday�s PPI surprise, the report nonetheless suggested to traders that the Fed will be able to stay off the hiking trail for a while.

Investors seem to be breathing a sigh of relief right now that this week�s inflation data was not the big bad event it could have been. The inflation reports, when coupled with the weaker than expected economic data, appears to have confirmed that the Fed did the right thing by pausing, which gives Mr. Bernanke and company a much needed boost of confidence.

All three reports on the state of the economy came in below the consensus expectations yesterday. Housing Starts were soft, Industrial Production came in 0.2 below estimates, and the Capacity Utilization numbers were also below what economists had projected.

So with confirmation that inflation remains in check and the data supporting the idea that the economy is indeed moderating, traders are beginning to get the impression that the Fed may be out of the way for a while. In response, the bulls have been able to throw a party for the last two days without those annoying bears ruining their fun. Shorts have definitely been covering, bargain hunters have been buying, and traders have been putting on some trades in the hope that buying strength will pay off this time.

The bond market seems to be confirming the view that inflation is not a problem and the economy appears to be slowing. The yield on the 10-year finished the session at 4.87%, which was the best level since mid-April.

This was also about the time that the worry about the Fed �going too far�
really got rolling, so we can assume that bond traders agree with their stock trading brethren on the idea that the Fed is done for now.

The major stock indices also finished at their best levels in three months and appear to have broken out of the malaise that has kept stocks in a tight range since May. However, the REAL question at hand now becomes: How long will the idea that �less is more� continue to be good news on the economic front?

Currently, traders are celebrating all weaker-than-expected data due to the fact that it keeps the Fed from becoming the enemy. But let�s keep in mind that if the economy weakens too much, then the worry will turn from the Fed overdoing it to concerns over the economy tipping into recession.
While this is definitely NOT an issue at the present time, it IS something to keep in mind as we go forward.

Turning to this morning, strong earnings from Hewlett Packard (HPQ) seems to be helping the tech sector once again, however the futures in general appear to suggest a rather flat open at the present time.


Stocks �In Play� This Morning:

Hewlett Packard (HPQ) � Reported $0.52 vs. $0.48, Upgraded at Citigroup
Sears Holdings (SHLD) � Reported $1.74 vs. $1.67
General Motors (GM) � Downgraded at JP Morgan
Advanced Micro Devices (AMD) � Upgraded at Citigroup
Silicon Labs (SLAB) � Upgraded at Citigroup
OMI Corp (OMM) � Downgraded at Bear Stearns
Research in Motion (RIMM) � Upgraded at RBC Capital
Safeco (SAFC) � Downgraded at Morgan Stanley
Progressive Corp (PGR) � Upgraded at Morgan Stanley
Dynegy (DYN) � Downgraded at Calyon
Wachovia (WB) � Added to Buy List at Goldman Sachs
Sysco (SYY) � Upgraded at HSBC
CIT Group (CIT) � Upgraded at UBS, Wachovia

Long positions in stocks mentioned: BSC, GS

** 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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