David Moenning's Daily State of the Markets: 06/14

June 14, 2007 9:26 AM EDT
Are the Bulls Back?

Good morning. If there was any question as to whether the action in the bond market has been leading stocks lately, yesterday's action removed all doubt. And while the underlying cause for the blast higher in stocks was a little counterintuitive, the bulls were happy to accept the outcome as just about every index reversed course and recovered the prior day's drop.

Stocks initially moved higher in response to some better than expected economic data. For example, Retail sales were on the robust side, showing the best gains in almost a year and a half. Business Inventories were up, which should help this quarter's GDP growth. And finally, the Fed's Beige Book showed a majority of districts to be enjoying "modest or moderate" economic growth without any overall pressure on inflation.

In looking at the charts, it would appear that the release of the Beige Book report was the primary catalyst that really got the bulls moving. Up to that point, stocks had been enjoying a nice day but there was clearly some concern as to whether the nice day would soon be replaced by more nastiness in the bond market. After all, with rates on a rampage and moving to new multi-year highs, there was definitely some nervousness in the air.

But with bond yields having hit 5.31% in pre-market trading, which was the highest level since April 2002, the boys in the bond pits may have finally decided enough was enough. You see, logic would suggest that the day's stronger than expected economic data would have added fuel to the bond bears' fire. But the fact that bonds ignored the data and yields reversed lower suggests that the enormous move in bond yields may have peaked out - at least on a short-term basis.

So with the consumer and economy looking like both will be able to weather the bond market storm, buyers returned to the stock market. And while there is little doubt that there was a good deal of short-covering happening yesterday, the bulls will take the biggest one-day point gain in almost a year and smile.

Turning to this morning, we've got some important inflation data to review in the form of the Producer Price Index. But before we get to the domestic numbers, we should point out that the Swiss raised rates overnight and the CPI numbers across the pond came in in-line with expectations while May's Retail Sales numbers in the UK were a bit better than expected.

Now let's get to the important numbers here at home. The government reported that the PPI increased by 0.9% in May, which was well above the consensus estimate of +0.5%. More importantly - at least from the Fed's perspective - the Core Rate, which excludes those pesky items such as food and energy, increased by just 0.2%, which was right in line with expectations.

On a year-over-year basis, the Core PPI, which, again is what the Fed is watching, ticked up by a tenth to 1.6%, but remains below the cycle high of 2.0% set last December.

Stocks and bonds have moved a bit lower in reaction to the data as the bond bears appear to have something new to work with this morning.

Running through the rest of the pre-game indicators, the foreign markets followed the U.S. higher overnight. Gold futures are moving down again this morning by $2.20 to $650.50. In the oil pits, crude futures are moving up $0.34 with the latest quote at $66.60. Interest rates are moving up this morning with the yield on the 10-year currently trading at 5.23%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are reacting to every tick in the bond market and are currently looking flattish. The Dow futures are currently up 15; the S&P's are about even, while the NASDAQ looks to be about 1 point below fair value at the moment.

Stocks "In Play" This Morning:

Today's Earnings Before the Bell:

Bear Stearns (NYSE: BSC) - Reported $3.40 (ex $0.88 charge) vs. $3.49
Goldman Sachs (NYSE: GS) - Reported $4.93 vs. $4.76

News, Upgrades/Downgrades/Brokerage Research:*

Intersil (NASDAQ: ISIL) - Upgraded at Banc of America
SLM Corp (NYSE: SLM) - Downgraded at Bear Stearns
Portugal Telecom (NYSE: PT) - Upgraded at Credit Suisse
Sanofi-Aventis (NYSE: SNY) - Downgraded at Goldman Sachs, JP Morgan, Merrill Lynch
Kulicke & Soffa (NASDAQ: KLIC) - Upgraded at Merrill Lynch
Dow Jones (NYSE: DJ) - Downgraded at UBS
Centurytel (NYSE: CTL) - Upgraded at UBS
Cincinnati Bell (NYSE: CBB) - UBS begins coverage with Buy

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

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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