David Moenning's Daily State of the Markets: 08/30

Hanging On Every Word

If there was any question as to what the driving force behind the market’s movement is lately, the last two days have cleared it up nicely. In short, traders are hanging on every word that comes out of Ben Bernanke’s mouth and it is the question of whether or not the Fed will cut interest rates next month that determines if stocks will move up or down on the session.

On Tuesday, traders interpreted the Fed minutes as suggesting that Mr. Bernanke and Co. remain focused solely on inflation. The rather hawkish tone of the minutes surprised traders who, for the most part, are assuming the FOMC will cut rates on September 18th. Traders were not at all pleased and decided to voice their displeasure by leaning on the sell button to the tune of a -280 point plunge.

But, yesterday it was obvious that Mr. Bernanke’s words can be a positive influence as well. Stocks reversed the vast majority of Tuesday’s drop after Bloomberg reported that Ben Bernanke had told Senator Charles Schumer in a letter that the FOMC is ready to “act as needed.” Bernanke reportedly also said that the Fed is monitoring the markets closely and that they are concerned about the variable rate mortgage market.

This was music to the bulls’ ears as the outcome of the credit crisis and the mortgage mess lies in the Fed's hands. To be sure, the markets have been faced with similar crises in the past and the bottom line is the Fed’s cavalry has usually done a good job of riding to the rescue. The concern in the market is that Mr. Bernanke the new kids on the block might drop the ball this time around.

The fear is that if the FOMC spends too much time focusing on inflation instead of mounting the charge against the current problem, the economy might actually be at risk of a recession. And while Ben Bernanke has given the markets no reason to believe that they will screw this up, until rates are actually cut, the uncertainty remains and traders will continue to hang on every word that comes out of the Fed.

So, with Gentle Ben using the words "ready to act as needed," confidence was restored that the Fed will keep their heads out of the sand and do the right thing. Traders once again voted with their feet and stocks soared 250 points.

Turning to this morning, it is back to the macro economic picture as we've got the government’s report on the second quarter's GDP to review before the bell. The government’s second try at the numbers show that the economy grew by 4.0%, which was a tenth under analysts expectations for a reading of 4.1%. On the consumer front, Personal Consumption came in a bit lighter than expected at 1.4%. And finally, Prices Index, which is a measure of inflation, came in right at expectations of 2.7%.

Running through the rest of the pre-game indicators, the overseas markets are mostly higher this morning. Crude futures are down by $0.08 with the latest quote at $73.43. Interest rates are a little lower as the 10-yr is trading with a yield of 4.53% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open a bit lower. The Dow futures are currently off by about 57 points; the S&Ps are down by 9 points, and the NASDAQ looks to be about 4 points below fair value at the moment.

Stocks "In Play" This Morning:

Today’s Earnings Before the Bell:

Ciena (CIEN) – Reported $0.41 vs. $0.30
Tiffany & Co (TIF) – Reported $0.45 vs. $0.35

News, Upgrades/Downgrades/Brokerage Research:

China Unicom (NYSE: CHU) – Mentioned positively in Barron's
SK Telecom (NYSE: SKM) – Mentioned positively in Barron's
Laboratory Corp (NYSE: LH) – Upgraded at Cowen
Motorola (NYSE: MOT) – Upgraded at Lehman
Canadian Pacific (NYSE: CP) – Upgraded at RBC
Goldman Sachs (NYSE: GS) – Lehman lowers estimates based on subprime exposure
Morgan Stanley (NYSE: MS) – Lehman lowers estimates based on subprime exposure
Merrill Lynch (NYSE: MER) – Lehman lowers estimates based on subprime exposure
Bear Stearns (NYSE: BSC) – Lehman lowers estimates based on subprime exposure

Mr. Moenning holds Long positions in stocks mentioned: MER

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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