David Moenning's Daily State of the Markets: 06/10

Changing Their Tune?

Here’s a link to listen to an Audio Version of the report

After Friday’s 400 point plunge, one might argue that a 70 point rebound on Monday was a step in the right direction. The bulls had oil pulling back, a better than expected report on housing, and solid sales from Mickey D’s, which would seem to indicate that the consumer may not have one foot in the grave after all.

Most everyone will also have to admit that the idea of Saudi Arabia effectively saying “enough is enough” with regard to the relentless rise in oil sounds like a good thing. And then the fact that pending home sales jumped up 6.3% in April, which was far better than the consensus estimates and the most since December 2001, definitely can be construed as a positive. And finally, with McDonald’s (MCD), which is now the poster child for global growth, saying that sales are continuing to grow around the globe, it is hard to get overly negative.

However, the bears took a decidedly different view of yesterday’s action. Our furry friends argue that the gain of 70 on the DJIA was a smoke screen for what was really going on out there. The bears point to the measly 1 point gain in the S&P, the drop of 15 points on the NASDAQ, and the advance-decline data (where decliners led advancers by a two to one margin) as a more accurate depiction of the day.

So, while the Dow was getting some help from the likes of Exxon Mobil (XOM) and McDonalds, the rest of the market appeared to have struggled mightily. The primary source of the problem was what appeared to be a coordinated effort from the Fed and Treasury to start talking tough on inflation and the dollar’s decline.

It is easy to see that a falling dollar has been beneficial to U.S. multinational companies. However, the demise of the dollar has also been a part of the problem with regard to crude’s rude rise. Thus, traders recognize that after a long downtrend, it might be time for the greenback to turn around. And as such, everyone is listening intently for any indication that the powers-that-be might be changing their tune. So, when Treasury Secretary Paulson said yesterday that you can’t ever rule out the possibility of governmental intervention in the currency market, traders sat up and took notice.

However, it wasn’t only Mr. Paulson that appeared to be changing his tune as we heard not one, but two Fed governors start to sound a lot more hawkish on inflation. Then last night in a speech in Chatham, MA, Ben Bernanke joined the chorus. The Fed Chairman said that, so far at least, increases in raw material costs have not been passed on to the consumer but that such a trend is not guaranteed to continue. According to Mr. Bernanke, the Fed will strongly resist any erosion in inflation expectations, which, in English, means that higher rates are on the horizon.

So with the Fed now talking about fighting an inflation battle they can’t win without slowing the economy, it is little wonder that stocks aren’t reacting too terribly well at the moment.

Turning to this morning, oil is rebounding and the overseas markets heard Mr. Bernanke loud and clear overnight. Thus, it looks like it might be a tough open on Wall Street.

Running through the rest of the pre-game indicators; the foreign markets down across the board. Crude futures are moving higher with the latest quote showing oil trading up by $3.45 to $137.80. Interest rates are moving up this morning as the yield on the 10-yr is currently trading at 4.02%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a rough start to the day. The Dow futures are currently lower by about 90 points; the S&P’s are down by about 11 points, while the NASDAQ looks to be about 19 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research

Marathon Oil (NYSE: MRO) – Mentioned positively at Citi
Lehman Brothers (NYSE: LEH) – Downgraded at Credit Suisse
Coca Cola (NYSE: KO) – Upgraded at Deutsche Bank
Kellogg (NYSE: K) – Upgraded at JP Morgan
Apple (Nasdaq: AAPL) – Target increased at Lehman, Citi
St. Mary Land Exploration (NYSE: SM) – Upgraded at Merrill Lynch
Quest Diagnostics (NYSE: DGX) – Upgraded at Merrill Lynch
Monsanto (NYSE: MON) – Mentioned positively at Morgan Stanley
DirecTV (NYSE: DTV) – Target increased at Morgan Stanley
RF Microdevices (Nasdaq: RFMD) – Estimate and target increased at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: KO

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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]

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