David Moenning's Daily State of the Markets: 05/18
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The New Market Math
With the Fed�s stance now officially deemed to be �data dependent,� yesterday�s thrashing in the stock market seems to indicate that there is a new formula for determining the equilibrium point in the major indices. Yesterday�s session, while extremely unpleasant for investors, did teach us that: +0.1X = -214.
In English, the market�s �new math� indicates that an extra 0.1% in the Core CPI was good for a plunge of 214 points on the Dow, losses of -1.5% or more in all the major indices, and a seventh straight down day for our friends in four-letter-land (aka the NASDAQ). Technicians will quickly point out that breadth was horrific and volume was quite strong, which, according to those who believe in the tea leaves and the idea that �the tape tells all,� is an ominous sign.
At issue yesterday was the slight differential between the expected Core CPI and the actual number. For quite some time now, analysts have been able to wave off inflation worries as simply being oil related, due to the fact that, while the headline number has been coming in a bit hotter than anticipated lately, the trend has also been for the Core rate to actually come in below expectations. That trend changed yesterday as the Core rate came in at +0.3%, which was a tenth higher than analysts had been looking for.
In parsing the numbers in the report, frankly, there weren�t any real surprises or any new reason to believe that inflation is escalating. No, yesterday�s move was all about the idea that the Fed will take one look at the core numbers and strap the hiking boots back on. Almost immediately there was talk of a 50 basis point (0.5%) hike in June. And then from there, the economic extrapolations got downright ugly in a big hurry.
With the bears clearly in control of the ball and some serious fear in the air, the bulls had no defense to suggestions that the Fed will now proceed to wreck the economy. The bears played the housing market/interest rate/consumer connection all day long, and if you were buying all the projections, you were dialing your real estate broker by the end of the day and getting in line to sell.
To be fair though, the bears have earned this pullback and the decline has indeed inflicted some technical damage. But (which seems to be the operative word for the market right now), all is not lost for the bulls, and here�s why. Simply put, the key question any investor thinking about selling has to ask themselves right now is: Will we actually see a serious uptick in inflation?
Sure, we DO have some inflation brewing, but given the enormity of the move in commodity prices, this isn�t exactly a surprise. And anyone glancing at a 3-year chart of oil knows that the inflation picture certainly could have been a lot worse by now.
And let�s also keep in mind that the Fed HAS increased rates something like 16 times lately and what they�d like to do now is sit back and determine the extent to which these increases will slow the economy. Yes fans, every economist with a brain expects the economy to slow down this year. And if the economy does slow down, then it follows that the rate of inflation ought to slow as well.
So unless you believe that an increase of +0.3% in the core rate of inflation in April and a year-over-year reading of 2.3% is indicative of runaway inflation (we don�t), then you probably don�t need to panic just yet. Don�t get me wrong, I�m not saying that the market will simply skip merrily higher from here. And it is clear that the data will keep the Fed �vigilant� going forward. However, I�d like to suggest that some of the reaction to yesterday�s report might have been a wee bit overdone.
Turning to this morning, the bulls would appear to have circled the wagons in the early going. Lower oil prices, which can certainly help the outlook for inflation a little, and a decent session in Europe are giving the bulls some hope for a much needed rebound in confidence. But (there�s that word again), while a rebound is likely, it will be important to see if the bulls can put any muscle behind it.
Running through the pre-game indicators, overseas markets in Asia followed the U.S. lower while European markets are holding up nicely. Oil futures are trading down by $0.18 right now to $68.51. Gold is a little lower this morning and is quoted at $690.00 right now. Interest rates are moving down a bit this morning and the 2-year is currently trading at 4.95% while the 10-yr is at 5.14%. And finally, with about an hour before the bell, stock futures in the U.S. are moving higher. The Dow futures are currently up by 54 points, the S&Ps are higher by 7.30, and the NASDAQ is sporting a gain of 6.2 points.
Stocks �In Play� This Morning:
UnitedHealth Group (UNH) � Receives subpoena from US Attorney regarding option grants
Google (GOOG) � In talks with CHL to offer mobile search
Hewlett Packard (HPQ) � Upgraded at Morgan Stanley
Limited Brands (LTD) � Reported $0.25 vs. $0.18, Upgraded at Morgan Stanley
Talbot�s (TLB) � Upgraded at Piper Jaffray
Lear Corp (LEA) � Downgraded at UBS
Altria (MO) � Mentioned positively at Deutsche
General Motors (GM) � Mentioned cautiously in Barron�s
BEA Systems (BEAS � Reported $0.12 vs. $0.10, Revenues $323.2M vs. $321.8M, Guides higher
Intuit (INTU) � Reported $1.79 vs. $1.68, Authorizes split and repurchase plan
Sears Holdings (SHLD) � Reported $1.14 vs. $0.65, Revenues $12.0B vs. $12.3B
Circuit City (CC) � Price target raised at Citigroup
Qualcomm (QCOM) � Mentioned Positively at Lehman
Myogen (MYOG) � Added to focus list at Leering Swann
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.
With the Fed�s stance now officially deemed to be �data dependent,� yesterday�s thrashing in the stock market seems to indicate that there is a new formula for determining the equilibrium point in the major indices. Yesterday�s session, while extremely unpleasant for investors, did teach us that: +0.1X = -214.
In English, the market�s �new math� indicates that an extra 0.1% in the Core CPI was good for a plunge of 214 points on the Dow, losses of -1.5% or more in all the major indices, and a seventh straight down day for our friends in four-letter-land (aka the NASDAQ). Technicians will quickly point out that breadth was horrific and volume was quite strong, which, according to those who believe in the tea leaves and the idea that �the tape tells all,� is an ominous sign.
At issue yesterday was the slight differential between the expected Core CPI and the actual number. For quite some time now, analysts have been able to wave off inflation worries as simply being oil related, due to the fact that, while the headline number has been coming in a bit hotter than anticipated lately, the trend has also been for the Core rate to actually come in below expectations. That trend changed yesterday as the Core rate came in at +0.3%, which was a tenth higher than analysts had been looking for.
In parsing the numbers in the report, frankly, there weren�t any real surprises or any new reason to believe that inflation is escalating. No, yesterday�s move was all about the idea that the Fed will take one look at the core numbers and strap the hiking boots back on. Almost immediately there was talk of a 50 basis point (0.5%) hike in June. And then from there, the economic extrapolations got downright ugly in a big hurry.
With the bears clearly in control of the ball and some serious fear in the air, the bulls had no defense to suggestions that the Fed will now proceed to wreck the economy. The bears played the housing market/interest rate/consumer connection all day long, and if you were buying all the projections, you were dialing your real estate broker by the end of the day and getting in line to sell.
To be fair though, the bears have earned this pullback and the decline has indeed inflicted some technical damage. But (which seems to be the operative word for the market right now), all is not lost for the bulls, and here�s why. Simply put, the key question any investor thinking about selling has to ask themselves right now is: Will we actually see a serious uptick in inflation?
Sure, we DO have some inflation brewing, but given the enormity of the move in commodity prices, this isn�t exactly a surprise. And anyone glancing at a 3-year chart of oil knows that the inflation picture certainly could have been a lot worse by now.
And let�s also keep in mind that the Fed HAS increased rates something like 16 times lately and what they�d like to do now is sit back and determine the extent to which these increases will slow the economy. Yes fans, every economist with a brain expects the economy to slow down this year. And if the economy does slow down, then it follows that the rate of inflation ought to slow as well.
So unless you believe that an increase of +0.3% in the core rate of inflation in April and a year-over-year reading of 2.3% is indicative of runaway inflation (we don�t), then you probably don�t need to panic just yet. Don�t get me wrong, I�m not saying that the market will simply skip merrily higher from here. And it is clear that the data will keep the Fed �vigilant� going forward. However, I�d like to suggest that some of the reaction to yesterday�s report might have been a wee bit overdone.
Turning to this morning, the bulls would appear to have circled the wagons in the early going. Lower oil prices, which can certainly help the outlook for inflation a little, and a decent session in Europe are giving the bulls some hope for a much needed rebound in confidence. But (there�s that word again), while a rebound is likely, it will be important to see if the bulls can put any muscle behind it.
Running through the pre-game indicators, overseas markets in Asia followed the U.S. lower while European markets are holding up nicely. Oil futures are trading down by $0.18 right now to $68.51. Gold is a little lower this morning and is quoted at $690.00 right now. Interest rates are moving down a bit this morning and the 2-year is currently trading at 4.95% while the 10-yr is at 5.14%. And finally, with about an hour before the bell, stock futures in the U.S. are moving higher. The Dow futures are currently up by 54 points, the S&Ps are higher by 7.30, and the NASDAQ is sporting a gain of 6.2 points.
Stocks �In Play� This Morning:
UnitedHealth Group (UNH) � Receives subpoena from US Attorney regarding option grants
Google (GOOG) � In talks with CHL to offer mobile search
Hewlett Packard (HPQ) � Upgraded at Morgan Stanley
Limited Brands (LTD) � Reported $0.25 vs. $0.18, Upgraded at Morgan Stanley
Talbot�s (TLB) � Upgraded at Piper Jaffray
Lear Corp (LEA) � Downgraded at UBS
Altria (MO) � Mentioned positively at Deutsche
General Motors (GM) � Mentioned cautiously in Barron�s
BEA Systems (BEAS � Reported $0.12 vs. $0.10, Revenues $323.2M vs. $321.8M, Guides higher
Intuit (INTU) � Reported $1.79 vs. $1.68, Authorizes split and repurchase plan
Sears Holdings (SHLD) � Reported $1.14 vs. $0.65, Revenues $12.0B vs. $12.3B
Circuit City (CC) � Price target raised at Citigroup
Qualcomm (QCOM) � Mentioned Positively at Lehman
Myogen (MYOG) � Added to focus list at Leering Swann
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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