David Moenning�s Daily State of the Markets: 05/15
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Coming Home to Roost?
Friday�s second straight day of triple digit declines suggested that the latest spike higher in oil prices may be coming home to roost. With the Fed saying they will be data dependent from here, you can rest assured that every market analyst in the country is parsing through any and all economic data, looking for clues as to the state of inflation and the economy.
Even a cursory look at Friday�s data gave traders pause. Import Prices came in almost double expectations and the University of Michigan�s Consumer Sentiment Index plunged. And it doesn�t take a PhD in Economics to see that oil was the primary culprit behind both reports.
Import Prices rose by 2.1% in April, which was the biggest increase since September and was well above the expectations for an increase of 1.2%. Petroleum prices fueled the surge with a jump of 11.5%. And while the ex-oil numbers were rather benign, let�s not forget that the U.S. dollar is on the decline once again. And just in case the economics of world currencies aren�t your cup of tea, it will suffice to say that a falling dollar makes foreign goods more expensive, which, yep, you guessed it, is indeed inflationary.
Higher oil prices were also to blame for the plunge in the U. of M�s Consumer Sentiment Index. The index itself fell to a reading of 79.0, which was far below the consensus expectation for 86.5. But it was the Current Conditions component of the report that attracted all the attention. The reading of how consumers feel right now plunged by the largest amount since late 1974! It would appear that the tension with Iran, higher gasoline prices, and rising interest rates are weighing on John Q. Public�s mood. The bottom line is that if this condition persists, economic weakness might not be too far behind.
The other driving force behind Friday�s drubbing was another move up in interest rates. Bond traders recognized that the Import Prices report was probably going to be viewed as inflationary. And although one can easily argue that this situation will recede with a drop in oil prices, the falling dollar issue doesn�t appear to have a solution in the near term. The boys in the bond pits sent prices lower and the yield on the 10-year finished at 5.19%, which was the highest level since mid 2002.
So, let�s do the market math and see what we get. Higher Import Prices, which don�t appear to be a fluke, plus a scared consumer, plus stubbornly high oil prices, plus, a new cycle-high for interest rates equals lower stock prices. And with the bulls appearing to stand aside once again, stocks got hit hard for the second day in a row.
The obvious question of the day is when will the cavalry arrive? Other than the inevitable rebound attempt, which can begin at any time, it will probably take some positive (or, in this case, negative) economic news to soothe traders� nerves. Looking at this week�s economic calendar, it would appear that inflation will be in focus with both the PPI and the CPI scheduled for release. Here�s this week�s schedule:
- Monday � Empire (New York) Regional Manufacturing Report
- Tuesday � Producer Price Index, Industrial Production
- Wednesday � Consumer Price Index
- Thursday � Leading Economic Indicators, Philly Fed Index
Turning to this morning, oil prices continue to be a focal point, but may actually lend the bulls a hand at some point. Saudi Arabia�s oil minister suggests that OPEC may be able to expand capacity faster than demand, which should help keep prices from escalating due to fundamentals. However, the U.S. Dollar fell to its lowest level in 12 years against the Yuan overnight as China may be accelerating their currency revaluation program.
Running through the rest of the pre-game indicators, all major overseas markets followed Wall Street lower again and with the exception of Japan, all sport losses in excess of 1.3% . Oil futures are trading lower by $1.85 right now to $70.15 on the Saudi comments. Gold is getting hit hard this morning as the yellow metal may be running into the anticipated pullback from recent highs. Gold is quoted down almost $20 this morning at $692 right now. Interest rates are moving a smidge lower this morning with the 2-year currently trading at 4.98% and the 10-yr is at 5.18%. And finally, with an hour before the bell, stock futures in the U.S. are trying to recover but still sport moderate losses. The Dow futures are about 21 points below fair value, while the differential on the S&Ps is about 3.50, and about 10 on the NASDAQ.
Stocks �In Play� This Morning:
Microsoft (MSFT) � DOJ approves use of MSN as default search in IE7
Applied Materials (AMAT) � Announces joint venture with Japan�s Dainpain Screen
Palm (PALM) � Launches Treo 700, mentioned positively in Barron�s
Lehman Brothers (LEH) � Positive mention in Barron�s
Goldman Sachs (GS) � Positive mention in Barron�s
CH Robinson (CHRW) � Positive mention in Barron�s
Phelps Dodge (PD) � Positive mention in Barron�s
Valero (VLO) � Positive mention in Barron�s
Triquint Semiconductor (TQNT) � Upgraded at Piper Jaffray
Nasdaq Market (NDAQ) � Upgraded at Bear Stearns
Texas Instruments (TXN) � Mentioned positively at ISI
Qualcomm (QCOM) � Mentioned positively at ISI
Intel (INTC) � Mentioned positively at ISI
Verizon (VZ) � Acquiring Vodafone�s stake in VZ Wireless
Pan American Silver (PAAS) � Upgraded at CIBC
WR Berkley (BER) � Upgraded at Merrill Lynch
Disclosure: Long positions in stocks mentioned: LEH, BSC, AMAT, GS, CHRW, VLO, TXN
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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.
Friday�s second straight day of triple digit declines suggested that the latest spike higher in oil prices may be coming home to roost. With the Fed saying they will be data dependent from here, you can rest assured that every market analyst in the country is parsing through any and all economic data, looking for clues as to the state of inflation and the economy.
Even a cursory look at Friday�s data gave traders pause. Import Prices came in almost double expectations and the University of Michigan�s Consumer Sentiment Index plunged. And it doesn�t take a PhD in Economics to see that oil was the primary culprit behind both reports.
Import Prices rose by 2.1% in April, which was the biggest increase since September and was well above the expectations for an increase of 1.2%. Petroleum prices fueled the surge with a jump of 11.5%. And while the ex-oil numbers were rather benign, let�s not forget that the U.S. dollar is on the decline once again. And just in case the economics of world currencies aren�t your cup of tea, it will suffice to say that a falling dollar makes foreign goods more expensive, which, yep, you guessed it, is indeed inflationary.
Higher oil prices were also to blame for the plunge in the U. of M�s Consumer Sentiment Index. The index itself fell to a reading of 79.0, which was far below the consensus expectation for 86.5. But it was the Current Conditions component of the report that attracted all the attention. The reading of how consumers feel right now plunged by the largest amount since late 1974! It would appear that the tension with Iran, higher gasoline prices, and rising interest rates are weighing on John Q. Public�s mood. The bottom line is that if this condition persists, economic weakness might not be too far behind.
The other driving force behind Friday�s drubbing was another move up in interest rates. Bond traders recognized that the Import Prices report was probably going to be viewed as inflationary. And although one can easily argue that this situation will recede with a drop in oil prices, the falling dollar issue doesn�t appear to have a solution in the near term. The boys in the bond pits sent prices lower and the yield on the 10-year finished at 5.19%, which was the highest level since mid 2002.
So, let�s do the market math and see what we get. Higher Import Prices, which don�t appear to be a fluke, plus a scared consumer, plus stubbornly high oil prices, plus, a new cycle-high for interest rates equals lower stock prices. And with the bulls appearing to stand aside once again, stocks got hit hard for the second day in a row.
The obvious question of the day is when will the cavalry arrive? Other than the inevitable rebound attempt, which can begin at any time, it will probably take some positive (or, in this case, negative) economic news to soothe traders� nerves. Looking at this week�s economic calendar, it would appear that inflation will be in focus with both the PPI and the CPI scheduled for release. Here�s this week�s schedule:
- Monday � Empire (New York) Regional Manufacturing Report
- Tuesday � Producer Price Index, Industrial Production
- Wednesday � Consumer Price Index
- Thursday � Leading Economic Indicators, Philly Fed Index
Turning to this morning, oil prices continue to be a focal point, but may actually lend the bulls a hand at some point. Saudi Arabia�s oil minister suggests that OPEC may be able to expand capacity faster than demand, which should help keep prices from escalating due to fundamentals. However, the U.S. Dollar fell to its lowest level in 12 years against the Yuan overnight as China may be accelerating their currency revaluation program.
Running through the rest of the pre-game indicators, all major overseas markets followed Wall Street lower again and with the exception of Japan, all sport losses in excess of 1.3% . Oil futures are trading lower by $1.85 right now to $70.15 on the Saudi comments. Gold is getting hit hard this morning as the yellow metal may be running into the anticipated pullback from recent highs. Gold is quoted down almost $20 this morning at $692 right now. Interest rates are moving a smidge lower this morning with the 2-year currently trading at 4.98% and the 10-yr is at 5.18%. And finally, with an hour before the bell, stock futures in the U.S. are trying to recover but still sport moderate losses. The Dow futures are about 21 points below fair value, while the differential on the S&Ps is about 3.50, and about 10 on the NASDAQ.
Stocks �In Play� This Morning:
Microsoft (MSFT) � DOJ approves use of MSN as default search in IE7
Applied Materials (AMAT) � Announces joint venture with Japan�s Dainpain Screen
Palm (PALM) � Launches Treo 700, mentioned positively in Barron�s
Lehman Brothers (LEH) � Positive mention in Barron�s
Goldman Sachs (GS) � Positive mention in Barron�s
CH Robinson (CHRW) � Positive mention in Barron�s
Phelps Dodge (PD) � Positive mention in Barron�s
Valero (VLO) � Positive mention in Barron�s
Triquint Semiconductor (TQNT) � Upgraded at Piper Jaffray
Nasdaq Market (NDAQ) � Upgraded at Bear Stearns
Texas Instruments (TXN) � Mentioned positively at ISI
Qualcomm (QCOM) � Mentioned positively at ISI
Intel (INTC) � Mentioned positively at ISI
Verizon (VZ) � Acquiring Vodafone�s stake in VZ Wireless
Pan American Silver (PAAS) � Upgraded at CIBC
WR Berkley (BER) � Upgraded at Merrill Lynch
Disclosure: Long positions in stocks mentioned: LEH, BSC, AMAT, GS, CHRW, VLO, TXN
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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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