David Moenning's Daily State of the Markets: 12/04

Will It Be Enough?

Since the middle of July, the market has been driven by the same couple of concepts. Stocks decline on fears of what the subprime mess might do to the economy and then rally back when the Fed either cuts rates or talks about doing so. Thus, with the market now in rally mode based on the expectations of further rate cuts, it is normal to expect traders to be focused solely on the Fedspeak in front of the December 11 FOMC meeting.

However, yesterday there appeared to be a deviation from the script. While the bulls did get the comments they were looking for from both Philly Fed President Rosengren and the San Francisco Fed’s Janet Yellen, stocks turned lower in the afternoon. Both FOMC members suggested that there has been some softening in the economic data and that the risks to the economy are growing. So naturally, the question of the day is why didn't stocks once again celebrate the concept of the cavalry riding to the rescue?

Our best guess is that there is a growing uneasiness about whether or not the rate cuts, which appear to be being made begrudgingly, are going to do the trick. From a big picture standpoint, the answer is yes – rate cuts always help the economy. But from a shorter-term perspective, things are getting dicey enough to bring the result into question.

For example, yesterday's ISM Manufacturing Index, which is designed to indicate the status of the manufacturing sector, came in at 50.8, which was a tenth above with expectations. However, the reading was the lowest in ten months and only slightly above the all-important 50 level, which is the demarcation line for growth in the manufacturing sector. And with oil prices at record levels, the prices paid component of the report could be viewed as a problem.

The bond market seemed to confirm the concern about the state of the economy as the yield on the 10-year moved down to 3.89% yesterday and appears to be in the process of probing the recent lows.

So, although one day does not a trend make, this is no time to assume that the Fed is going to continue to save the day. So, with the decision from the FOMC just a week away and Fed officials saying they will need to factor in the upcoming data, every bit of economic news is going to be scrutinized heavily.

Turning to this morning, there are no economic numbers to review before the bell. But the news flow has been active as a downgrade of the investment banks by JP Morgan (JPM) and disappointing guidance from Nokia (NOK) is keeping the mood downbeat in the early going.

Running through the rest of the pre-game indicators; with the exception of Hong Kong, the overseas markets are lower across the board. Crude futures are up a smidge this morning with the latest quote showing the January contract trading up $0.08 to $89.39. Interest rates are lower once again this morning with the 10-yr trading at a yield of 3.86% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing down. The Dow futures are currently off by about 50 points; the S&Ps are down by 8 points, while the NASDAQ looks to be about 15 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Tiffany’s (NYSE: TIF) – Downgraded at BofA
Imclone (Nasdaq: IMCL) – Downgraded at BofA
Cephalon (Nasdaq: CEPH) – Upgraded at Friedman Billings
Pharmaceutical Product Dev (Nasdaq: PPDI) – Target increased at Goldman Sachs
Charles River Labs (NYSE: CRL) – Target increased at Goldman Sachs
Covance (NYSE: CVD) – Upgraded at Goldman Sachs
XM Satellite Radio (Nasdaq: XMSR) – Downgraded at Goldman Sachs
Oracle (Nasdaq: ORCL) – Downgraded at JMP Securities
Activision (Nasdaq: ATVI) – Upgraded at Lehman
Citigroup (NYSE: C) – Target reduced at UBS
Choice Hotels (NYSE: CHH) – Upgraded at Wachovia

Mr. Moenning holds Long positions in stocks mentioned: None

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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