David Moenning's Daily State of the Markets: 12/06

Has Goldilocks Returned?

The story of the day on Wednesday was the economic data coming in stronger than expected but yet, not strong enough to derail the idea that the Fed will cut rates next Tuesday. Up until the release of the ADP and Productivity reports, the thinking had been that Mr. Bernanke & Co. may need to cut rates by 50 basis points in order to counteract what was perceived as growing economic weakness. However, with the private sector jobs data coming in better than anticipated, this thinking changed almost instantly. Suddenly the thought was that the economy might not be as bad as had been thought and that Goldilocks was back.

Goldi's return, when coupled with the growing momentum for a governmental solution to the mortgage mess generated some genuine enthusiasm in the market and traders responded with a gain of almost 200 points.

While it was a good day overall, there was a modest hiccup in the afternoon after Moody’s published a report on bond insurer MBIA Inc. (MBI). The report stated that the company is at greater risk of a capital shortfall than has been communicated to date. And due to the market’s extreme sensitivity to all things credit related, stocks took a dive for a bit before recovering nicely in the last hour.

The big thing to take away from yesterday’s action is that the economy is the key to the game right now. Whereas investors had cheered weak economic news as an argument for lower rates just a few weeks back, it appears that the focus is now on the economy avoiding recession. Thus, any good news right now is, well, good news.

The market's big day seemed to also suggest that a 50 basis point cut may no longer be on the table. But with the large amount of uncertainty out there regarding the future of the economy, it looks like a rate cut of 25 basis points is still in the cards, which appears to be just fine with traders.

Turning to this morning, we’ve got some more interest rate news from across the pond. The Bank of England unexpectedly cut rates this morning by 0.25% to 5.5% while the European Central Bank continues to fret about inflation and left rates unchanged at 4.0%.

We've also got retailers reporting November same-store sales this morning. Wal-Mart's (WMT) numbers came in better than expected at 1.5% vs. 1.2% while Costco (COST), Macy’s (M) and BJ’s (BJ) numbers were also above expectations. However, the rest of the board looks mixed.

And finally, the markets will be waiting to hear what President Bush and Treasury Secretary Paulson have to say with regard to their mortgage plan this afternoon.

Running through the rest of the pre-game indicators; the overseas markets are up nicely across the board. Crude futures are down this morning with the latest quote showing the January contract trading lower by $0.79 to $86.70. Interest rates are higher so far with the 10-yr trading at a yield of 3.97% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a relatively flat open. The Dow futures are currently ahead by about 7 points; the S&Ps are up by about a point, while the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Intel (Nasdaq: INTC) – Mentioned positively at Bear Stearns
Wachovia (NYSE: WB) – Target reduced at Bernstein
Genentech (NYSE: DNA) – Upgraded at Cowen, Downgraded at Jefferies, Mentioned positively at Morgan Stanley
Digital River (Nasdaq: DRIV) – Downgraded at Deutsche Bank
Autodesk (Nasdaq: ADSK) – Target increased at Deutsche Bank
PDI Biopharma (Nasdaq: PDLI) – Upgraded at Lehman
Merrill Lynch (NYSE: MER) – Estimates reduced at Lehman
Boeing (NYSE: BA) – Mentioned positively at Lehman re: 787 call
Goldman Sachs (NYSE: GS) – Downgraded at Merrill Lynch, Estimates increased at Lehman
Morgan Stanley (NYSE: MS) – Downgraded at Merrill Lynch, Estimates reduced at Lehman
Wells Fargo (NYSE: WFC) – Downgraded at Merrill Lynch

Mr. Moenning holds Long positions in stocks mentioned: MER

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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