David Moenning's Daily State of the Markets: 09/28

Prettying Up the Portfolios

Yesterday's market confirmed the idea that bad economic news is indeed good news for the stock market at the present time. As a case in point, we got some more punk news on the housing front and word that the growth in the economy was lower than previously thought in the second quarter. And in response to the bad news, stocks rose 35 points.

While this is clearly counterintuitive, the thinking is that weak economic data provides the Fed with the "wiggle room" – which apparently is a new official Fed term these days – to reduce interest rates further. And at this stage of the game, the belief is that if the Fed will continue to cut rates, the economy will perk up shortly and we will be able to escape from the credit crisis and subprime mess unscathed.

Although the news on the housing market is expected to be lousy these days, unfortunately the breadth of the decline appears to be growing. For example, the Commerce Department reported yesterday that the number of new homes sold in August fell by 8.3% on an annualized basis, to its lowest level in more than seven years. This was well below analysts expectations for a drop of 4.6% and is an indication that we have yet to see the bottom in the housing market.

But the bad news on the housing market didn’t stop there as the report also provided insight into the prices of the new homes that were sold. In short, it has taken significant price incentives from homebuilders to get people to buy homes and move their inventory. The average price nationwide fell by more than 7%, which is the largest year-over-year decline since 1992.

The government also finished up the numbers on the second quarter’s GDP growth rate, which was revised downward to a 3.8% annualized rate from 4.0%. We learned from the report that before-tax corporate profits were revised a bit lower to 6.1% while after-tax profits also came in a little lower at a 5.2% annualized rate.

So again, with home prices falling and the economy slowing, why on earth would stock prices rise? Well, besides the idea that the Fed is on the case, we should also keep in mind that the end of the third quarter is upon us. Therefore, there is undoubtedly some window dressing going on among mutual fund managers. And remember, the game goes like this: if you’ve got Apple listed in your portfolio at the end of the quarter, your investors are inclined to think you’ve owned this winner all quarter and enjoyed the ride from $122 to $154. And although this is a rather moronic idea, the window dressing game continues to be played quarter after quarter.

Turning to this morning, today is the last day of the quarter, which for the record, is not necessarily always an up day due to settlement issues. But, getting to the matters at hand, we’ve got some more economic data to review – this time it’s the report on Personal Income and Spending. Incomes were a tenth light compared to expectations and spending was a bit higher. But most importantly, the year-over-year Core PCE came in at 1.8%, which remains in the Fed’s comfort zone.

On the news front, reports that the UK's Northern Rock is back asking for cash at the Bank of England has stocks looking lower. The troubled mortgage lender reportedly borrowed an additional 5 billion pounds over the past week and this is leading to the idea this morning that the credit crisis may have a bit farther to run.

Running through the rest of the pre-game indicators, the overseas markets are mostly lower this morning Crude futures are up $0.09 so far with the latest quote at $82.97. Interest rates are lower this morning with the 10-yr is trading at a yield of 4.54% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open to the downside. The Dow futures are currently off by about 26 points; the S&Ps are down by about 2 points, and the NASDAQ looks to be about 1 point below fair value at the moment.

Stocks "In Play" This Morning:


News, Upgrades/Downgrades/Brokerage Research:

Harman Intl (NYSE: HAR) – Upgraded at Bear Stearns
Chipotle Mexican Grill (NYSE: CMG) – Downgraded at Citi
Luminent Mortgage (NYSE: LUM) – Upgraded at Deutsche Bank
Conseco (NYSE: CNO) – Upgraded at Friedman Billings
Cognos (Nasdaq: COGN) – Upgraded at Goldman Sachs
Packaging Corp America (NYSE: PKG) – Upgraded at Goldman Sachs
Target (NYSE: TGT) – Upgraded at Merrill Lynch
Altria (NYSE: MO) – Mentioned positively at Morgan Stanley
Apple (Nasdaq: AAPL) – Piper increases sales estimates of iPhones for quarter
Starwood Hotels (NYSE: HOT) – Earnings estimate increased at Thomas Weisel
KB Home (NYSE: KBH) – Price target reduced at UBS

Mr. Moenning holds Long positions in stocks mentioned: MER, AAPL

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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