David Moenning's Daily State of the Markets: 07/12

Systemic Risk?

Good morning. Don't you just love it when market analysts use big words to explain why stocks moved up or down that day? For example, the key to yesterday's rally was tied to a comment from Fed Governor Kevin Warsch, who said the difficulty in the subprime mortgage arena is NOT likely to cause systemic risk to the financial system here in the U.S.

While this sounds simply wonderful and stocks rallied on the news, I'm sure there were more than a few traders who scurried directly to Websters.com to find out what the heck he was talking about. Although, the word systemic is generally considered a medical term, in this case Mr. Warsch was going for the more commonly used definition in finance, which is:

Systemic – Pertaining to or affecting an entire system.

The point is that one day after Standard & Poors had announced that they were going to be forced to downgrade something like $12 billion in debt tied to subprime mortgages, Fed Governor Warsch was telling us that the carnage in the subprime market will likely be contained and is unlikely to spread to the entire financial system.

Not to be outdone, Philly Fed President Charles Plosser tackled another touchy subject on Wall Street yesterday. Using terms that made sense to most people, Mr. Plosser said that the housing slump has not derailed the prospect for the economy to return to a normal growth rate (something economists call "returning to trend") by the end of 2007.

These two comments from Mr. Bernanke's boys when coupled with some fresh M&A activity allowed traders to brush aside Tuesday's worries and return to buy mode. After all, we all know that when the Fed speaks, people listen. And when the dust had settled, the Dow had gained back a little more than one-half of the prior session's losses and the bulls were feeling better about themselves.

Turning to this morning, we don't have any economic data to review before the bell. But with a couple of pretty good earnings reports from Yum Brands
(NYSE: YUM) and Genentech (NYSE: DNA) after the close yesterday and this morning's report that Wal-Mart's store sales results for June were better than expected, the bulls will be looking to continue to recover more lost ground today.

Running through the rest of the pre-game indicators, with the exception of Japan, all the foreign markets followed Wall Street higher overnight. Gold futures are moving up this morning by $4.50 to $666.60. In the oil pits, crude futures are moving up a bit with the latest quote up $0.16 at $73.17.
Interest rates are moving up a fraction this morning with the yield on the 10-year currently trading at 5.09%. And finally, with about an hour before the bell, stock futures in the U.S. are looking higher at the moment. The Dow futures are currently up by about more than 50 points; the S&P's are higher about 6 points, while the NASDAQ looks to be almost 10 points ahead fair value at the moment.

Stocks "In Play" This Morning:

Yesterday's Earnings After the Bell:

YUM Brands (NYSE: YUM) – Reported $0.39 vs. $0.36
Genentech (NYSE: DNA) – Reported $0.78 vs. $0.71

Today's Earnings Before the Bell:

Fastenal (NASDAQ: FAST)
Marriott (NYSE: MAR)
Progressive Corp (NYSE: PGR)

News, Upgrades/Downgrades/Brokerage Research:*

Motorola (NYSE: MOT) – Reducesrevenue guidance for quarter
Wal-Mart (NYSE: WMT) – Reports June Same Store Sales +2.4% vs. +0.8%
JC Penney (NYSE: JCP) – Reports June Same Store Sales -1.5% vs. - 2.8%
Intel (NASDAQ: INTC) – Estimates increased at Banc of America
Sandisk (NASDAQ: SNDK) – Target increased at Citi
Raytheon (NYSE: RTN) – Upgraded at JP Morgan
Lockheed Martin (NYSE: LMT) – Upgraded at JP Morgan
Northrop Grumman (NYSE: NOC) – Downgraded at JPMorgan
Sovereign Bancorp (NYSE: SOV) – Upgraded at Merrill Lynch
Southern Copper (NYSE: PCU) – Upgraded at Morgan Stanley
Royal Dutch Shell (NYSE: RDS.A) – Downgraded at UBS

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

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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