David Moenning's Daily State of the Markets: 01/08

Is Good News Bad Again?

Good morning. Stocks pulled back on Friday on the heels of a stronger-than expected Employment report. While the number of new jobs created in the economy was higher than expected and is usually considered a good thing, the big jump in Hourly Earnings caused traders to worry that the Fed might start thinking about heading back out on the hiking trail.

Based on the Jobs report, it looks like our little game of Goldilocks and the Economy may have swung too far into the �too hot� zone. The Labor Department reported that the economy created 81,000 more jobs over the last two months than analysts had projected, which was the biggest �miss� by analysts in over a year. However, the real problem was the +0.5% increase in worker compensation.

At issue is the fact that the Fed lives in constant fear of any uptick in inflation. And in short, the 4.2% rise in Hourly Earnings over the last 12 months is sure to get Mr. Bernanke�s attention. The year-over-year increase in wages was the biggest such rise in six years and looks likely to eliminate any possibility of a Fed easing in the next 6 months.

To drive the point home, the Fed Funds futures contract put the odds of a rate cut before the May meeting at 54% prior to the Employment report. However, just after the report was released, those odds fell precipitously to around 34%.

To be sure, the idea that a stronger economy is bad for stock prices is more than a little counterintuitive. But to clarify, investors had hoped that the economy would weaken just enough to encourage the Fed to turn on the money supply spigot but not enough to cause concerns about a recession. In theory, this would provide more upside to corporate profits than simply allowing the economy to grow on its own. However, any sign of inflation, especially in the area of wages, puts a definite crimp in these plans.

With that said, however, we do need to keep in mind that the current rally has been a straight-up affair and that the catalysts behind the move remain largely intact. So, while we can certainly expect to see the game become more two-sided in the near-term, we should probably continue to give the bulls the benefit of the doubt for now.

Turning to this morning, we don�t have any economic data to deal with today, or even tomorrow for that matter. However, we will get a big report on December�s retail sales on Friday.

Stocks are modestly higher in the early going as the M&A activity has returned. There are no fewer than four deals going this morning and while none are of the blockbuster variety, investors will likely continue to be encouraged by the quantity of deals.

Running through the rest of the pre-game indicators, Japan was closed overnight and Hong Kong finished lower, but the European markets are all sporting nice gains this morning on the back of the M&A activity across the pond. Gold futures are higher this morning with the last trade up $2.60 to $609.50. In the oil pits, crude futures are rebounding after last week�s thrashing and the latest quote shows the February futures contract up $0.73 to $57.04. Interest rates are continuing to move up this morning with the 10-year currently trading at a 4.67% yield. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open a little higher. The Dow futures are currently ahead by 20 points; the S&Ps are 2 points above breakeven, while the NASDAQ looks to be about 3 points under fair value at the moment.

Stocks �In Play� This Morning:

Bed Bath & Beyond (BBBY) � Mentioned positively in Barron�s
Sprint Nextel (S) � Mentioned positively in Barron�s
TIVO (TIVO) � Upgraded at Bear Stearns
Applebee�s (APPB) � Downgraded at Bear Stearns
PF Chang (PFCB) � Downgraded at Bear Stearns
General Dynamics (GD) � Upgraded at Cowen
Wal-Mart (WMT) � Downgraded at Goldman Sachs
HSBC Holdings (HBC) � Downgraded at JP Morgan
Ensco (ESV) � Downgraded at JP Morgan
Torchmark (TMK) � Downgraded at Lehman
Allstate (ALL) � Downgraded at Lehman
DST Systems (DST) � Upgraded at Morgan Stanley
Newmont Mining (NEM) � Downgraded at Prudential
Autodesk (ADSK) � Upgraded at UBS
Intl Business Machines (IBM) � Upgraded at UBS
EMC Corp (EMC) � Upgraded at UBS

Long positions in stocks mentioned: BSC, MS, GS, S, IBM, LEH


** 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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