David Moenning�s Daily State of the Markets: 11/02
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Bonds Tell the Story
Good morning. Stocks retreated again yesterday, but this time, they did so with a little enthusiasm. Although a drop of 50 points isn�t exactly the end of the world, it�s the story behind the decline that might be causing some consternation in the bull camp.
Stocks opened higher on the back of strong earnings from MasterCard and a takeover in the beleaguered Health Care sector (CVS for CMX). But then at 10:00 am, the economic data began to flow and bond prices started jumping. And in short, it was the move in the bond market that caused stock traders to finally start taking some profits in earnest.
Cutting to the chase, the boys in the bond pits took one look at the ISM report and began buying bonds with both hands. Prices surged higher and yields plunged for the fifth time in the last six sessions. And make no mistake about it, the move in bonds has been huge lately -- since October 24th, the yield on the 10-year has fallen from 4.82% to yesterday�s close of 4.56%.
The reason for the precipitous decline in bond yields is that the economic data coming in over the last week has been unanimously weaker than anticipated. For example, analysts expected yesterday�s ISM Composite Index (which measures the pace of manufacturing in the U.S.) to rise by 0.6 to a reading of 53.5. But instead, the index fell by 1.7 points to just 51.2, which was the lowest reading since June 2003.
And although the index remains above 50, which is the line in the sand indicating whether the manufacturing sector is expected to grow or contract, it is definitely going in the wrong direction right now. And what�s more, the report showed that inventories are rising too fast � which is an ominous sign in a slowdown. In fact, the last time inventories were this high, the country was heading into recession.
I know, I know� Isn�t bad news supposed to be good news right now because it keeps the Fed off the hiking trail? Well, unfortunately that�s only about half right at the present time. The recent data does indeed keep the Fed out of the picture in terms of rate hikes. However, the current focal point of the market is the issue of a soft landing for the economy. And right now anyway, the bond market is saying the landing is starting to look a little bumpy.
So with inflation concerns fading, traders are now focusing on the prospects for growth in the economy. Thus, we will need to pay close attention to those big numbers in the coming weeks.
In looking at this morning�s pre-market activity, stocks have turned a little lower on the Productivity numbers as Q3 productivity came in at unchanged versus expectations for an increase of 1%. The reduced productivity of workers means that the Unit Labor Costs were higher than expected. The report shows that Labor Costs were 3.8% versus expectations for 3.3% and last month was revised higher to 5.4%. Thus, the bears will try and argue that we might have a problem with some wage inflation.
Running through the rest of the pre-game indicators, with the exception of Hong Kong, which enjoyed a solid session, the rest of the major overseas markets are a bit lower this morning. Gold futures are pulling back a bit and are quoted at $618.00 right now. Crude futures are in decline once again this morning with the latest quote showing oil down $0.60 to $58.18. Interest rates are a little higher this morning with the 2-year currently quoted at 4.68% while the 10-yr is trading with a yield of 4.59% right now. And finally, with about an hour before the bell, stock futures in the U.S. are trading below breakeven. The Dow futures are currently 15 points below fair value, the S&Ps are off by 0.40, and the NASDAQ is sporting a decline of about 4 point at the moment.
Stocks �In Play� This Morning:
Prudential (PRU) � Reported $1.72 vs. $1.48
CVS (CVS) � Reported $0.33 vs. $0.32, � Downgraded at Deutsche Bank
Sunoco (SUN) � Reported $2.76 vs. $2.13
Tesoro (TSO) � Reported $4.16 vs. $3.29
Campbell Soup (CPB) � Mentioned negatively in Barron�s
Plexus (PLXS) � Upgraded at Bear Stearns, RW Baird
Landstar Systems (LSTR) � Downgraded at Bear Stearns
Valero (VLO) � Upgraded at Citigroup
Express Scripts (ESRX) � Mentioned as takeover candidate at Credit Suisse
Dell (DELL) � Upgraded at Goldman Sachs
MasterCard (MA) � Downgraded at Morgan Stanley
Affiliated Computer Services (ACS) � Downgraded at Stifel Nicolaus
Lockheed Martin (LMT) � Upgraded at UBS
Caremark Rx (CMX) � Downgraded at Wachovia, First Albany
Intel (INTC) � Downgraded at Merrill Lynch
JC Penney (JCP) � Increases guidance
Long positions in stocks mentioned: GS, MS, SUN, ACS, MER, JCP
** 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.
Good morning. Stocks retreated again yesterday, but this time, they did so with a little enthusiasm. Although a drop of 50 points isn�t exactly the end of the world, it�s the story behind the decline that might be causing some consternation in the bull camp.
Stocks opened higher on the back of strong earnings from MasterCard and a takeover in the beleaguered Health Care sector (CVS for CMX). But then at 10:00 am, the economic data began to flow and bond prices started jumping. And in short, it was the move in the bond market that caused stock traders to finally start taking some profits in earnest.
Cutting to the chase, the boys in the bond pits took one look at the ISM report and began buying bonds with both hands. Prices surged higher and yields plunged for the fifth time in the last six sessions. And make no mistake about it, the move in bonds has been huge lately -- since October 24th, the yield on the 10-year has fallen from 4.82% to yesterday�s close of 4.56%.
The reason for the precipitous decline in bond yields is that the economic data coming in over the last week has been unanimously weaker than anticipated. For example, analysts expected yesterday�s ISM Composite Index (which measures the pace of manufacturing in the U.S.) to rise by 0.6 to a reading of 53.5. But instead, the index fell by 1.7 points to just 51.2, which was the lowest reading since June 2003.
And although the index remains above 50, which is the line in the sand indicating whether the manufacturing sector is expected to grow or contract, it is definitely going in the wrong direction right now. And what�s more, the report showed that inventories are rising too fast � which is an ominous sign in a slowdown. In fact, the last time inventories were this high, the country was heading into recession.
I know, I know� Isn�t bad news supposed to be good news right now because it keeps the Fed off the hiking trail? Well, unfortunately that�s only about half right at the present time. The recent data does indeed keep the Fed out of the picture in terms of rate hikes. However, the current focal point of the market is the issue of a soft landing for the economy. And right now anyway, the bond market is saying the landing is starting to look a little bumpy.
So with inflation concerns fading, traders are now focusing on the prospects for growth in the economy. Thus, we will need to pay close attention to those big numbers in the coming weeks.
In looking at this morning�s pre-market activity, stocks have turned a little lower on the Productivity numbers as Q3 productivity came in at unchanged versus expectations for an increase of 1%. The reduced productivity of workers means that the Unit Labor Costs were higher than expected. The report shows that Labor Costs were 3.8% versus expectations for 3.3% and last month was revised higher to 5.4%. Thus, the bears will try and argue that we might have a problem with some wage inflation.
Running through the rest of the pre-game indicators, with the exception of Hong Kong, which enjoyed a solid session, the rest of the major overseas markets are a bit lower this morning. Gold futures are pulling back a bit and are quoted at $618.00 right now. Crude futures are in decline once again this morning with the latest quote showing oil down $0.60 to $58.18. Interest rates are a little higher this morning with the 2-year currently quoted at 4.68% while the 10-yr is trading with a yield of 4.59% right now. And finally, with about an hour before the bell, stock futures in the U.S. are trading below breakeven. The Dow futures are currently 15 points below fair value, the S&Ps are off by 0.40, and the NASDAQ is sporting a decline of about 4 point at the moment.
Stocks �In Play� This Morning:
Prudential (PRU) � Reported $1.72 vs. $1.48
CVS (CVS) � Reported $0.33 vs. $0.32, � Downgraded at Deutsche Bank
Sunoco (SUN) � Reported $2.76 vs. $2.13
Tesoro (TSO) � Reported $4.16 vs. $3.29
Campbell Soup (CPB) � Mentioned negatively in Barron�s
Plexus (PLXS) � Upgraded at Bear Stearns, RW Baird
Landstar Systems (LSTR) � Downgraded at Bear Stearns
Valero (VLO) � Upgraded at Citigroup
Express Scripts (ESRX) � Mentioned as takeover candidate at Credit Suisse
Dell (DELL) � Upgraded at Goldman Sachs
MasterCard (MA) � Downgraded at Morgan Stanley
Affiliated Computer Services (ACS) � Downgraded at Stifel Nicolaus
Lockheed Martin (LMT) � Upgraded at UBS
Caremark Rx (CMX) � Downgraded at Wachovia, First Albany
Intel (INTC) � Downgraded at Merrill Lynch
JC Penney (JCP) � Increases guidance
Long positions in stocks mentioned: GS, MS, SUN, ACS, MER, JCP
** 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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