David Moenning's Daily State of the Markets: 04/20

Not This Time

Good morning. In late February, stocks dove hard in response, at least in part, to worries over the potential for interest rate increases in China. The fear was that if rates were raised, the economy would surely slow and one of the major driving forces behind the global growth story would be removed. This led to extrapolations of a global recession and a massive liquidity crisis. Sure, the subprime mortgage mess was also a major focus in the market’s quick tumble of 5%, but worry over an end to the Chinese growth story was definitely a key factor.

So, when the Chinese reported Wednesday night that their economy grew at an annual rate of 11.1% and that inflation had reached the highest level in more than two years, the worries over interest rates and global growth were instantly resurrected. Investors immediately assumed that rate increases were imminent in China, which, by definition are designed to slow the economy. And while this is clearly a negative for the growth story, higher rates in China would also put pressure on foreign currencies, which, in turn, brought back worries about the now-famous Carry-Trade.

The news of the higher-than expected growth in the Chinese economy sent stocks tumbling in the Pacific Rim and the selling spilled over to the rest of the world. And by the time the opening bell was ready to ring here in the U.S. yesterday, it looked like we might have an instant replay of the February plunge on our hands.

Although stocks did open lower, the veracity of February’s plunge was missing and there just didn’t seem to be any real fear in the air. Then, when the Leading Economic Indicators came in with a plus sign in front of the number after two straight monthly declines, the mood and the momentum started to swing back to the bulls.

While an increase of +0.1% in the LEI is hardly a reason to celebrate, the fact that we didn’t get a third straight monthly decline which, in the old days was considered an indicator that a recession was on the horizon, did allow traders to breathe easier. And before you knew it, stocks were on the mend and instead of an ugly down day, the indices flirted with breakeven and the Dow wound up eeking out another new all-time high.

But the key takeaway from yesterday’s action is that when you are talking about the reasons that stocks decline, it is important to remember that the market rarely falls for the same reason twice – especially when that reason is fear-based. So, while the Chinese may raise rates in the future and this may cause a slowdown in their economy, which, in turn could create a slowdown in global growth, this time, traders apparently decided not to worry until there was actually something to worry about.

Turning to this morning, there is no economic data scheduled for release before the bell and foreign markets appear to be celebrating the idea that the U.S. averted a potential crisis yesterday. In addition, Google’s surprisingly strong numbers are giving investors confidence before the bell.

Running through the rest of the pre-game indicators, the major foreign markets are higher across the board. Gold futures are moving up nicely this morning and are trading up by $8.20 to $696.50. In the oil pits, crude futures are also higher by $0.77 with the latest quote at $62.60. Interest rates are doing little this morning as the yield on the 10-year is currently trading at 4.66%. And finally, with about an hour before the bell, stock futures in the U.S. are preparing to advance smartly. The Dow futures are currently up by more than 70 points; the S&P’s are about 7 points above board, while the NASDAQ looks to be about 13 points ahead of fair value at the moment

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:
Advanced Micro Devices (NYSE: AMD) – Reported <$0.90> vs. <$0.47>
American Express (NYSE: AXP) – Reported $0.87 vs. $0.79
Capital One (NYSE: COF) – Reported $1.62 vs. $1.96
Google (NASDAQ: GOOG) – Reported $3.68 vs. $3.31

Today’s Earnings Before the Bell:
Caterpillar (NYSE: CAT) – Reported $1.23 vs. $1.08
Honeywell (NYSE: HON) – Reported $0.66 vs. $0.62
McDonalds (NYSE: MCD) – Reported $0.62 vs. $0.62
Pfizer (NYSE: PFE) – Reported $0.68 vs. $0.57
Schlumberger (NYSE: SLB) – Reported $0.96 vs. $0.90
Xerox (NYSE: XRX) – Reported $0.24 vs. $0.21

Upgrades/Downgrades/Brokerage Research:

Netflix (NASDAQ: NFLX) – Upgraded at BofA
Frontier Oil (NYSE: FTO) – Downgraded at Bear Stearns
Sunoco (NYSE: SUN) – Downgraded at Bear Stearns
Valero (NYSE: VLO) – Downgraded at Bear Stearns
Tesoro (NYSE: TSO) – Downgraded at Bear Stearns
Marathon Oil (NYSE: MRO) – Downgraded at Bear Stearns
Fifth Third Bancorp (NASDAQ: FITB) – Downgraded at Citigroup
SLM Corp (NYSE: SLM) – Downgraded at Goldman Sachs
CNOOC (NYSE: CEO) – Downgraded at Goldman Sachs
American Standard (NYSE: ASD) – Upgraded at JP Morgan
Echostar (NASDAQ: DISH) – Price target increased at Lehman
Palm Inc. (NASDAQ: PALM) – Upgraded at Lehman

Mr. Moenning holds Long positions in stocks mentioned: GS, FTO, VLO

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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