David Moenning's Daily State of the Markets: 03/22

Bernanke Backs Off

Good morning. After six straight meetings without a rate hike, Mr. Bernanke finally admitted yesterday that the FOMC is done on the hiking trail. And while this may have been a foregone conclusion to almost anyone following the economy, the fact that the Fed made it official was music to the bulls’ ears.

And by official, what we really mean is that a single phrase from within the Fed’s prepared statement was removed. In discussing the outlook for the future of Fed Policy as it relates to the risks of inflation, Mr. Bernanke and Co. removed the words “any additional firming that may be needed” from their statement. And in their place, they added the phrase, “future policy adjustments.”

To almost everyone reading between the lines and keeping score at home, this subtle shift in language means two things. First, it means that the FOMC is no longer seriously considering raising rates. While the FOMC remains concerned about the risk of inflation, they reiterated their view that inflation is likely to moderate over time.

In addition, the change in the Fed’s language means that yesterday may have been a first step toward an eventual rate reduction. While it seems unlikely that Gentle Ben is going to cut rates in the first half of the year, yesterday’s move toward a more neutral stance may have set the stage for a cut in the second half of 2007.

The Fed also gave the bulls some confidence with regard to the economy and acknowledged the housing market’s issues in the process. By stating that they expect the economy “to expand at a moderate pace over coming quarters” the FOMC reassured investors that the economy seems to be doing “just fine, thank you.”

Once the news was disseminated, traders didn’t hesitate as the market instantly surged higher by almost 150 points. The statement let the bulls know that the Fed was on the case with regard to the mortgage market and that so far at least, there doesn’t appear to be any real concern about the future. And by moving to a more neutral stance Mr. Bernanke basically told investors that they would do what it takes to keep the economy moving forward.

The furious rally in the last hour and forty-five minutes also meant that the indices have now retraced a large chunk of the correction as the recent move higher has taken the S&P back to within 1.7% of its all-time highs. And while the Dow and NASDAQ still need to recover something in the 2.6% range, the fear that had been so prevalent over the past three weeks appears to have subsided.

Turning to this morning, there is no major economic news scheduled for release before the bell. However, the news that Motorola reduced their earnings guidance for the quarter after the close yesterday is removing some of the post-Fed enthusiasm.

Running through the rest of the pre-game indicators, overseas markets enjoyed solid gains overnight in response to Wall Street’s rally. Gold futures are trading up by $4.60 this morning to $664.60. In the oil pits, crude futures are higher by $1.00 with the latest quote at $60.61. Interest rates are moving up a bit this morning, with the yield on the 10-year currently trading at 4.55%. And finally, with about an hour before the bell, stock futures in the U.S. are all right around breakeven.

Stocks “In Play” This Morning:

Motorola (NYSE: MOT) – Reduces Q1 EPS guidance, Downgraded at RBC Capital
ConAgra (NYSE: CAG) – Reported $0.38 vs. $0.35
General Mills (NYSE: GIS) – Reports $0.73 vs. $0.70
KB Home (NYSE: KBH) – Reported $0.40 vs. $0.38
Aeropostale (NYSE: ARO) – Downgraded at BofA
Procter & Gamble (NYSE: PG) – Upgraded at Bear Stearns
RF Micro Devices (Nasdaq: RFMD) – Downgraded at CIBC
Allegheny Energy (NYSE: AYE) – Downgraded at Citigroup
Saks Inc (NYSE: SKS) – Upgraded at Citigroup
Nokia (NYSE: NOK) – Price target increased at Credit Suisse
Alon Energy – Upgraded at Credit Suisse
Biovail Corp (NYSE: BVF) – Downgraded at Goldman Sachs
Raytheon (NYSE: RTN) – Downgraded at Goldman Sachs
Intl Rectifier (NYSE: IRF) – Downgraded at Lehman

Mr. Moenning holds Long positions in stocks mentioned: BSC, GS, AYE

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.

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