David Moenning�s Daily State of the Markets: 02/07
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Some Time to Think
Stocks ended little changed yesterday in a rather listless day of trading. There was no economic news to guide traders and not much on the horizon either. So after last week�s barrage of news and data, and the realization that earnings season is winding down, traders were left with some time to think about the big picture.
For example, Ed Keon of Prudential made headlines yesterday as he made a rather dramatic shift in his firm�s recommended exposure to the stock market. Up until yesterday, Ed had been an ardent supporter of the bull camp and despite his benchmark allocation of 60% stocks and 40% bonds; Mr. Keon had recommended that Prudential�s clients keep 100% of their assets invested in stocks.
However, yesterday Ed announced that �after further review� he was changing his tune. Instead of being fully invested in stocks, he now purports an allocation of 55% stocks, 35% bonds, and 10% cash. Mr. Keon went on CNBC and told the audience that he wasn�t really bearish on stocks; it�s just that he wasn�t nearly as bullish as he had been.
When asked about his sudden change of heart, Ed responded that a review of last week�s data created some concern about the outlook for equity returns. Up until last week, he felt that the environment for equities was positive and that stocks could easily outperform both cash and bonds.
However, after reviewing last Friday�s employment report and the data showing unit labor costs rising, Ed feels that an uptick in inflation is a distinct possibility. And with the potential for inflation to increase, a peek at history reminds us that this is not exactly a stock-friendly development.
Mr. Keon went on to suggest that if you strip out the results from energy companies, which continue to knock the cover off the ball, the earnings picture isn�t all that inspiring. And then one look at the money flow data shows that the public just isn�t pumping money into the stock market at the pace it once was. Finally, Ed pointed out that the situation in Iran is likely to linger for some time, which will likely lead to some uncertainty. Mr. Keon closed by saying that when he added it all up, he wound up with lower potential returns for stocks in the coming 12 months.
So with Mr. Keon now joining the majority of analysts who are predicting a rather sluggish year for stocks, the question that gets raised, in my mind anyway, has to do with contrarian thinking. While it rarely pays to go opposite the crowd just for the sake of being contrary, it does make me nervous when any view (especially mine) becomes overly popular. Thus, one could easily make the argument that the idea that we will see another neutral year where stocks post gains of 8% or so because of the big picture issues the market faces is simply too �easy.� Thus, we should probably remain on our toes for a divergence from the popular theme � one way or the other.
OK, it�s time to get back to reality. This morning�s pre-market activity has a rather discouraging feel to it. Once again there is no economic news to review before the opening bell and only the report on Consumer Credit to ponder during the session.
On the earnings and company front, GM cut it�s dividend by 50% and announced a pay cut for its top executives. Toll Brothers reduced its outlook for 2006, which prompted some downgrades. And BP�s revenue numbers came in on the light side. This may cause traders to figure that if even an oil company can miss; we may have problems on our hands.
Running through the rest of the pre-market indicators, Overseas markets are lower; Gold is down this morning by -$5.30 to $569.00; surprisingly Oil is moving lower by -$0.71 to $64.40; Natural Gas is off -$0.24 to $7.75; the inversion of the yield curve continues with the 2 yr at 4.60% and 10 yr at 4.53%; and finally, stock futures in the U.S. are down a bit before the bell (Dow -16, S&P -2.80, and NASDAQ -7.0).
Stocks "In Play" This Morning:
GM � Announced dividend cut of 50%
KO � Reported $0.46 vs. $0.44 Revenue $5.55B vs. $5.41B
TOL � Reduces forecast for 2006, downgraded at MER
BP � Reports profits of $4.99B vs. $5.7B
DIS � Reports $0.35 vs. $0.30 Revenue $8.85B vs. $8.85B
NBR � Reports $1.35 vs. $1.28 Revenue $920.5M vs. $945M
INTC � Bear Stearns reduces estimates
Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: NBR, INTC
To see David Moenning�s Trading Record or the rank for any Top Guns Stocks, visit: http://www.AnotherWinningTrade.com/SI
Stocks ended little changed yesterday in a rather listless day of trading. There was no economic news to guide traders and not much on the horizon either. So after last week�s barrage of news and data, and the realization that earnings season is winding down, traders were left with some time to think about the big picture.
For example, Ed Keon of Prudential made headlines yesterday as he made a rather dramatic shift in his firm�s recommended exposure to the stock market. Up until yesterday, Ed had been an ardent supporter of the bull camp and despite his benchmark allocation of 60% stocks and 40% bonds; Mr. Keon had recommended that Prudential�s clients keep 100% of their assets invested in stocks.
However, yesterday Ed announced that �after further review� he was changing his tune. Instead of being fully invested in stocks, he now purports an allocation of 55% stocks, 35% bonds, and 10% cash. Mr. Keon went on CNBC and told the audience that he wasn�t really bearish on stocks; it�s just that he wasn�t nearly as bullish as he had been.
When asked about his sudden change of heart, Ed responded that a review of last week�s data created some concern about the outlook for equity returns. Up until last week, he felt that the environment for equities was positive and that stocks could easily outperform both cash and bonds.
However, after reviewing last Friday�s employment report and the data showing unit labor costs rising, Ed feels that an uptick in inflation is a distinct possibility. And with the potential for inflation to increase, a peek at history reminds us that this is not exactly a stock-friendly development.
Mr. Keon went on to suggest that if you strip out the results from energy companies, which continue to knock the cover off the ball, the earnings picture isn�t all that inspiring. And then one look at the money flow data shows that the public just isn�t pumping money into the stock market at the pace it once was. Finally, Ed pointed out that the situation in Iran is likely to linger for some time, which will likely lead to some uncertainty. Mr. Keon closed by saying that when he added it all up, he wound up with lower potential returns for stocks in the coming 12 months.
So with Mr. Keon now joining the majority of analysts who are predicting a rather sluggish year for stocks, the question that gets raised, in my mind anyway, has to do with contrarian thinking. While it rarely pays to go opposite the crowd just for the sake of being contrary, it does make me nervous when any view (especially mine) becomes overly popular. Thus, one could easily make the argument that the idea that we will see another neutral year where stocks post gains of 8% or so because of the big picture issues the market faces is simply too �easy.� Thus, we should probably remain on our toes for a divergence from the popular theme � one way or the other.
OK, it�s time to get back to reality. This morning�s pre-market activity has a rather discouraging feel to it. Once again there is no economic news to review before the opening bell and only the report on Consumer Credit to ponder during the session.
On the earnings and company front, GM cut it�s dividend by 50% and announced a pay cut for its top executives. Toll Brothers reduced its outlook for 2006, which prompted some downgrades. And BP�s revenue numbers came in on the light side. This may cause traders to figure that if even an oil company can miss; we may have problems on our hands.
Running through the rest of the pre-market indicators, Overseas markets are lower; Gold is down this morning by -$5.30 to $569.00; surprisingly Oil is moving lower by -$0.71 to $64.40; Natural Gas is off -$0.24 to $7.75; the inversion of the yield curve continues with the 2 yr at 4.60% and 10 yr at 4.53%; and finally, stock futures in the U.S. are down a bit before the bell (Dow -16, S&P -2.80, and NASDAQ -7.0).
Stocks "In Play" This Morning:
GM � Announced dividend cut of 50%
KO � Reported $0.46 vs. $0.44 Revenue $5.55B vs. $5.41B
TOL � Reduces forecast for 2006, downgraded at MER
BP � Reports profits of $4.99B vs. $5.7B
DIS � Reports $0.35 vs. $0.30 Revenue $8.85B vs. $8.85B
NBR � Reports $1.35 vs. $1.28 Revenue $920.5M vs. $945M
INTC � Bear Stearns reduces estimates
Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: NBR, INTC
To see David Moenning�s Trading Record or the rank for any Top Guns Stocks, visit: http://www.AnotherWinningTrade.com/SI
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