David Moenning's Daily State of the Markets: 2/21

February 21, 2008 10:03 AM EST
Fed Keeping Eyes On The Ball

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

Stocks opened with a triple-digit move to the downside once again yesterday in response to weak overseas markets and a CPI report that came in a bit hotter than anticipated. Given that oil had closed above $100 the day before and commodity prices have been moving straight up lately, it wasn’t exactly surprising to see traders suddenly fretting about inflation.

The worry wasn't centered on the concept of runaway inflation, but rather the idea that an uptick in inflation could tie the Fed's hands and leave the economy to flounder during the current slowdown phase. And given that most investors recognize that there isn’t really much the Fed can do about commodity inflation – other than to slow down the growth rate of the economy, which, of course, doesn’t appear to be a desired result at the present time – a decline in stock prices seemed appropriate.

But then suddenly, at 12:02 pm Eastern, stocks turned on a dime and proceeded to march higher throughout the afternoon; finishing with a gain of nearly 100 Dow points on the day. The explanation for the reversal of fortunes was simple. At noon, the minutes from the most recent Fed minutes were released and provided traders with solid evidence that the Fed is still on the case and won’t be distracted by a little inflation or all the yammering on the street about stagflation.

The minutes, coupled with a statement by St. Louis Fed President William Poole, spoke of ongoing dislocations in some markets and suggested that rates may need to go lower still from here. The Fed basically acknowledged the economic slowdown with a reduction in their growth forecast from a range of 1.8% to 2.5% down to 1.3% to 2.0%. In short, this was just the sort of statement that traders wanted as it shows that that the FOMC does indeed see what is going on and that they are no longer behind the curve regarding the outlook for the economy.

What about the CPI report, you ask? Well, first, we need to remember that the CPI is a lagging, or at the very best, a coincident economic indicator. In other words, this data shows what has already happened or what may be happening right now on the inflation front. And since the Fed confirmed their stance yesterday that they still expect inflation to moderate going forward, traders were able to set aside their fears of inflation or stagflation, and look at the bright side for a change.

Turning to this morning, the bulls may be looking to try and get something going as solid gains in Asia and better-than expected retail sales in Europe have the futures pointing higher. However, all eyes will be on the index of Leading Economic Indicators, or the LEI, at 10:00 eastern. But, please keep in mind that most economists feel that the LEI is really better at providing a snapshot of what is happening now than projecting the future.

Running through the rest of the pre-game indicators; the overseas markets are higher across the board this morning. Crude futures are moving lower with the latest quote off $1.03 to $98.67 as T Boone Pickens has projected oil will back up a bit here. Interest rates are moving down with the 10-yr trading at a yield of 3.87% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a higher open.

The Dow futures are currently ahead by about 60 points; the S&Ps are up by
5 points, while the NASDAQ looks to be about 15 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:
Analog Devices (NYSE: ADI) – Reported $0.40 vs. $0.40
Agnico Eagle Mines (NYSE: AEM) – Reported $0.25 vs. $0.24
Hertz Global (NYSE: HTZ) – Reported $0.29 vs. $0.27
Terex (NYSE: TEX) – Reported $1.67 vs. $1.40

Today’s Earnings Before the Bell:
Quest Diagnostics (NYSE: DGX) – Reported $0.79 vs. $0.78
JC Penney (NYSE: JCP) – Reported $1.93 vs. $1.78

News, Upgrades/Downgrades/Brokerage Research:
Portugal Telecom (NYSE: PT) – Downgraded at Bear Stearns
Cisco Systems (Nasdaq: CSCO) – Upgraded at Citi
Target (NYSE: TGT) – Downgraded at Citi
Wal-Mart (NYSE: WMT) – Target increased at Citi
Transocean (NYSE: RIG) – Upgraded at Goldman
Garmin (Nasdaq: GRMN) – Upgraded at RW Baird
Agnico Eagle Mines (NYSE: AEM) – Downgraded at UBS
Louisiana Pacific (NYSE: LPX) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: WMT

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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