David Moenning's Daily State of the Markets: 06/27

Worry, Worry, Worry

Good morning. For the second day in a row, the bulls attempted to make a comeback from the recent thrashing applied by their opponents. For the second day in a row, stocks started off strong and it looked like the bulls had a fighting chance to recover. But unfortunately, for the second day in a row, the morning’s enthusiasm quickly turned to worry and stocks finished in the red.

Although the bears appear to have the ball at the moment and some of the current leaders are starting to take it on the chin, we should point out that the majority of the selling is being caused by worry and is not due to changes in the economic outlook, earnings, inflation, or the Fed’s stance. This is important because, market declines based on emotion are usually short-lived. So, the key question right now is, will this one be any different?

What has changed, at least from a short-term perspective, is that complacency has been replaced by worry. Up until the beginning of June, investors were singing a happy tune which included the constant refrain of global liquidity and M&A news. Up until June, the word risk had disappeared from the vocabulary of most investors. And up until June, the market appeared to be a one-way street.

But then the worries started over the structure of hedge funds, renewed signs of weakness in the housing market, subprime mortgages, sluggish retail sales, lower consumer confidence, higher interest rates, new taxes for Private Equity, higher energy, and most importantly, the sustainability of the market’s liquidity tailwind.

Getting back to the yesterday, stocks took a turn for the worse once Bill Gross, who is the manager of the world’s largest bond fund, suggested that the subprime mortgage crisis was not an isolated event and will eventually take a toll on the economy. However, we should note that Mr. Gross has made it clear this year that he believes the economy will falter and that interest rates will fall, so he may be guilty of "talking his book" here.

Although stocks did explore the downside for the second day in a row, the bears couldn’t quite get the type of panic going that they had on Friday. This was due to the flurry of new M&A activity, which, in turn, got the rumor mill cranking again with all sorts of takeover and LBO possibilities. Luckily for the bulls, this reminded investors that M&A is a good thing and our heroes in horns were able to make things respectable into the close.

Turning to this morning, we have some economic data to review before the bell. Unfortunately, the report on sales of Durable Goods will bring more worry to the table as investors will no doubt take one look at the -2.8% headline and begin to fret over the health of the economy.

Running through the rest of the pre-game indicators, the foreign markets are once again lower across the board. Gold futures are moving down this morning by $0.70 to $644.60. In the oil pits, crude futures are moving down by $0.63 with the latest quote at $67.14. Interest rates are down big this morning with the yield on the 10-year currently trading at 5.04% level. And finally, with about an hour before the bell, stock futures in the U.S. are down hard. The Dow futures are currently off by about 70 points; the S&P’s are about 11 points underwater, while the NASDAQ looks to be about 12 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:*

Tesoro (TSO) – Downgraded at Citi
Valero (VLO) – Downgraded at Citi
Sunoco (SUN) – Downgraded at Citi
Cytec Industries (CYT) – Upgraded at Goldman Sachs
Mosaic (MOS) – Downgraded at Goldman Sachs
Toyota Motor (TM) – Upgraded at Goldman Sachs
Apollo Group (APOL) – Target increased at Lehman
Kohls (KSS) – Upgraded at RW Baird
Precision Castparts (PCP) – Mentioned positively at UBS
Nike (NKE) – Target increased at UBS

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

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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