David Moenning's Daily State of the Markets: 09/10

The 'R' Word Returns

Analysts spent most of last week waiting on the Employment report in hopes that it would provide some resolution to the argument of whether the Fed would or should cut interest rates on September 18th. With economists looking for an increase of 112,000 new jobs in August, it was fairly easy to argue that there was really no economic reason for Mr. Bernanke and Co. to cut rates. The economy seemed to be growing nicely and there was really no threat of inflation.

However, one look at the jobs report changed everything. While last week’s ADP Employment report hinted that the jobs number might come in on the weak side, no one was expecting the Labor Dept. to report a loss of 4,000 jobs in August. While one month does not a trend make, the downward revisions to both June and July’s numbers, which totaled 81,000 jobs, suggest that there had been a pronounced slowdown in job creation BEFORE the credit crisis got started.

The fact that this was the first decline in job growth in four years and the biggest miss by economists, in terms of their estimates of job creation, in more than three years meant that talk of a recession was suddenly the order of the day. The questions making the rounds were along the lines of: Is a recession likely and are we in a recession now? Stocks plunged on the idea of a recession and the bond market soared – pushing yields on the 10-year to their lowest level since January 2006.

Prior to the jobs report, the discussion on Wall Street was whether or not the Fed should be cutting rates. But after the report, it is now a foregone conclusion that rates are coming down on the 18th as the fed has plenty of data to justify the move. Thus, the question of the day now becomes, will the cut in rates be 25bp or 50bp next week?

From a big picture standpoint, the jobs report appears to have changed the game. This was the first real indication that the economy was weak before the credit crisis got rolling. So now, analysts will be spending their time trying to determine how much damage was done by the mortgage mess and the freeze-up in commercial paper. And in short, the key question will be whether or not the Fed can engineer a soft landing going forward.

Turning to this morning, there is no economic data to report on before the bell. However, we will get a good deal of Fedspeak throughout the day as Fed Governors Lockhart, Yellen, Fisher, and Mishkin all have speeches scheduled today.

Running through the rest of the pre-game indicators, the overseas markets were a bit lower following Wall Street’s slide on Friday. Crude futures are off by -$0.76 with the latest quote at $75.94. Interest rates are steady this morning and the 10-yr is trading at a yield of 4.37% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open a little higher. The Dow futures are currently up by about 25 points; the S&Ps are up by 2 points, and the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Arcelor Mittal (NYSE: MT) – Downgraded at Citi
Amerigroup (NYSE: AGP) – Upgraded at Credit Suisse
Intersil (Nasdaq: ISIL) – Downgraded at Goldman Sachs
Ensco Intl (NYSE: ESV) – Downgraded at Jefferies
Rowan Companies (NYSE: RDC) – Downgraded at Jefferies
Thornburg Mortgage (NYSE: TMA) – Upgraded at Jefferies
Noble Corp (NYSE: NE) – Downgraded at Jefferies
Hasbro (NYSE: HAS) – Upgraded at JP Morgan
Palm Inc (Nasdaq: PALM) – Downgraded at Lehman
Countrywide Financial (NYSE: CFC) – Target lowered at UBS
Convergys Corp (NYSE: CVG) – Upgraded at UBS
Mylan Labs (NYSE: MYL) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: None

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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