David Moenning's Daily State of the Markets: 8/18

Theme Change

Here's a link to listen to an Audio Version of the report:

In case you've been on vacation for the past month or haven’t been able to take your eyes off the Olympic coverage, you need to be aware of the fact that the major theme traders have been focusing on has clearly changed. Gone is the idea that Chinese demand for just about everything will drive commodity prices ever higher and global economies skyward. No, today, the theme driving the markets is all about ‘demand destruction’ and the slowdown of the world’s economies.

I know, with China's economy still growing at a rate in the double digits, it hard to argue that demand for commodities is going to suddenly go slack. However, the important thing to understand here is that China’s GDP has fallen off lately. And given that stock prices basically discount a forward-looking stream of earnings; when things slow down, prices tend to correct to the downside.

One question I was asked recently mirrored this sentiment. A fellow softball fan recently asked, “Why are oil prices down 25% when we were worried about not having enough of the stuff just a month and a half ago?”

The answer is simple. In early July we hadn’t seen the data showing that sky-high oil prices were destroying demand for oil’s byproducts. We didn’t know that the economies of Europe were starting to tank. And we didn’t know that China’s GDP had pulled back by a couple of points. But once the year-over-year data began to show that global economies were slowing and that the demand for gasoline was on the decline, traders began to focus on the new trade in town.

So, despite the fact that the financial crisis is NOT over and that banks and brokers will continue to raise capital, which, in turn, will continue to keep liquidity tight, the stock market appears to be in pretty good shape right now. The thinking here is with commodities prices falling, worries about inflation should begin to recede. And with the rest of the world starting to slow down, suddenly the U.S. dollar doesn’t look so bad. And this brings us back to the idea that the theme of the market is changing.

Friday’s market action went along with this theory. Oil continued to fall, the dollar continued its recent rally, interest rates declined, and the early cyclical stocks continued to rebound off the bottom. All of which was due to the idea that the global economies are slowing a bit. So while we are a long way away from an outright rosy picture, at the moment, it does appear that a changing theme is a good thing.

Turning to this morning, we don’t have any economic data to review before the bell but stocks have reversed earlier declines and are looking to move up just a bit.

Running through the rest of the pre-game indicators, with the exception of Japan, Asian markets were mostly lower overnight while European markets are higher. Crude futures are moving sideways with the latest quote showing oil trading higher by $0.02 to $113.79. Interest rates are up a smidge this morning with the yield on the 10-yr currently trading at 3.85%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 45 points; the S&P’s are up by about 4 points, while the NASDAQ looks to be about 8 points above fair value at the moment.

Stocks “In Play” This Morning:


Today’s Earnings Before the Bell:

Lowe’s (NYSE: LOW) – Reported $0.64 vs. $0.56

News, Upgrades/Downgrades/Brokerage Research:

Potash (NYSE: POT) – Added to Top Picks list at Citi
Hershey (NYSE: HSY) – Downgraded at Citi
Air Products (NYSE: APD) – Added to Conviction Buy list at Goldman
Manpower (NYSE: MAN) – Downgraded at Lehman
Robert Half (NYSE: RHI) – Downgraded at Lehman
Fluor Corp (NYSE: FLR) – Upgraded at Stanford Group

Disclosure: Mr. Moenning and/or related firms hold long positions in: POT, FLR

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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]

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