David Moenning's Daily State of the Markets: 08/03

Soothing Words Help, But ....

Stocks finished higher for the second straight day yesterday on the back of a string of soothing words regarding the state of the subprime mess. While the popular press attributed the triple-digit gain to strong earnings, in reality, it was no fewer than five different comments from five different sources that seemed to calm investors’ nerves about the potential for the subprime problem to spread.

First up, Barclays offered upbeat comments before the market opened. The company said that liquidity is still available, that deals will continue to get done, and that subprime concerns may be overblown at this point in time.

Next, Fed Governor Randall Kroszner said that the Fed is watching the subprime situation very, very (yes, he said very twice) closely. Mr. Kroszner suggested that while foreclosures are likely to rise in the near-term, the economic fundamentals have not changed in the past two weeks.

We also got word that MBIA, a company that services mortgages, said that the subprime market is not threatening its earnings or balance sheet.

Then, Goldman Sachs Credit Research actually upgraded the homebuilders sector to neutral from cautious

And finally, Buckingham said that the subprime issue is likely to become a smaller problem for the beleaguered brokers as we go forward.

While these comments by no means suggest that the subprime problem should be ignored, they do provide hope that perhaps the correction we’ve seen so far in stock prices may have sufficiently discounted any further difficulties.

So with some upbeat words to back them up, the bulls embarked on what will likely be viewed by technicians as the “B” leg of a typical A-B-C style corrective phase. The first leg, which is commonly labeled as the A leg, sees stock prices decline precipitously. The B leg is the rebound phase – which is also commonly referred to as a dead cat bounce – sees prices typically recover one-third to one-half of the drop. And finally, the C leg is the retest of the lows, which often sees stocks move to a new low before the real recovery begins.

Whether or not this typical corrective pattern continues is anybody’s guess. But since this decline has been a bit nastier than anything we’ve seen in while, it is important to not get overly excited during the early phases of a rebound.

Turning to this morning, we’ve got the big Kahuna of economic reports to review, so let’s get right to the numbers. The Labor Department reported that Nonfarm Payrolls increased by 92,000 in July, which was below the consensus estimate of 127,000. The Unemployment Rate actually rose by a tenth to 4.6% and average Hourly Earnings came in right at consensus. In short, the report has to be considered a little on the soft side. But, whether or not equity traders will decide to view the report as Goldilocks-like remains to be seen. So far at least, stocks have pulled back a bit in response to the report.

Running through the rest of the pre-game indicators, foreign markets are a bit lower. In the oil pits, crude futures are moving higher again with the latest quote up $0.34 to $77.20. Interest rates are lower this morning as the yield on the 10-year is currently trading at 4.74%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to modestly weaker open. The Dow futures are currently down by about 12 points; the S&P’s are lower by about a point, while the NASDAQ also looks to be about a point below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:
Activision (Nasdaq: ATVI) – Reported $0.11 vs. $0.08
Allied Waste (NYSE: AW) – Reported $0.21 vs. $0.18
Chesapeake Energy (NYSE: CHK) – Reported $0.71 vs. $0.65
EOG Resources (NYSE: EOG) – Reported $1.17 vs. $1.06
Public Storage (NYSE: PSA) – Reported $1.10 vs. $1.12
SBA Communications (Nasdaq: SBAC) – Reported <$0.15> vs. <$0.13>

Today’s Earnings Before the Bell:

Procter & Gamble (NYSE: PG) – Reported $0.67 vs. $0.66

News, Upgrades/Downgrades/Brokerage Research:*

PG&E (NYSE: PCG) – Upgraded at BofA
Cox Radio (NYSE: CXR) – Upgraded at BofA
Network Appliance (Nasdaq: NTAP) – Downgraded at Bear Stearns, Upgraded at Citi
Fiserv Inc (Nasdaq: FISV) – Upgraded at CIBC
ONEOK (NYSE: OKE) – Upgraded at Citi
Talbot's (NYSE: TLB) – Downgraded at Citi
Sempra Energy (NYSE: SRE) – Upgraded at Jefferies
Expedia (Nasdaq: EXPE) – Upgraded at JP Morgan
Tyco (NYSE: TYC) – Upgraded at JP Morgan
Clorox (NYSE: CLX) – Downgraded at Lehman
YRC Worldwide (Nasdaq: YRCW) – Upgraded at RW Baird
Transocean (NYSE: RIG) – Upgraded at Wachovia

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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