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David Moenning's Daily State of the Markets: 12/14

December 14, 2007 10:36 AM EST
Still Unconvinced

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

On Wednesday, it was obvious that traders were more than a little unhappy with the Fed’s recent plays. Most believed that the FOMC had no business continuing to worry about inflation when there was data warning that the economy could be slowing. And as such, the feeling was that the Fed should have lowered rates further. Veteran analysts were also up in arms that Mr. Bernanke & Co would mislead the markets by holding out on the announcement of the new Term Auction Facility. In short, the Fed’s maneuvering created massive volatility in stocks and there were even calls for resignations.

But by Thursday morning, the Fed's call on interest rates didn’t seem quite so dumb. It turns out that the PPI soared 3.2% in November, which was more than double the expectations and the largest one-month increase since August 1973. Even when food and energy were excluded, prices rose by 0.4%, which once again, was double the expectation. And then on a year-over year basis, it is pretty hard to argue the idea of low inflation when the PPI increases by a whopping +7.2%. Thus, all of a sudden, Bernanke's gang didn't look quite as inept as they had on Wednesday.

However, the mishandling of the TAF announcement still created problems in the markets yesterday and traders are by no means convinced that the plan will actually ease the liquidity problems. For example, the LIBOR rate (the overnight lending rate in London) remains at its highest level since 2000 and short-term credit markets aren’t anywhere near where it should be.

There were other problems in the market as well yesterday. Lehman Brothers warned of further writedowns, the SIV Superfund plan appeared to be unraveling further, and the big financials hit another new low.

But, on the other side of the coin there were some positives that may have helped convince traders to do a little buying or cover some shorts into the close. For example, retail sales came in better than expected, which is a good indication that the economy isn’t quite dead yet. The dollar rallied for a change. We heard a rather upbeat forecast from Honeywell (HON). And finally, the price of oil actually fell on the day.

But despite the green screens at the end of the day, the markets are still unconvinced that things are going to be peachy keen going forward. Thus, unfortunately this is no time to be spending the trading day at the malls as the tide can turn on a dime right now.

Turning to this morning, we've got another round of inflation data to review, so let’s get right to it. The government reported that the Consumer Price Index for November came in with a gain of +0.8%, which was above the expectations for an increase of +0.6%. And when you strip out food and energy, the Core Rate showed an increase of +0.3%, which again was above the consensus expectation for an increase of +0.2%. And on a year-over-year basis, the CPI now sports an increase of +4.3% while the Core Rate sits with a gain of +2.3%. Thus, it is easy to see that we’ve got come commodity inflation on our hands right now.

Running through the rest of the pre-game indicators; the overseas markets are lower across the board. Crude futures down a bit with the latest quote showing the January contract lower by $0.36 to $91.89. Interest rates are higher with the 10-yr trading at a yield of 4.24% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 100 points; the S&Ps are down by about 12 points, while the NASDAQ looks to be about 16 points below fair value at the moment.

Stocks "In Play" This Morning:


News, Upgrades/Downgrades/Brokerage Research:

JetBlue Airways (JBLU) – Upgraded at Bear Stearns
Valero (NYSE: VLO) – Downgraded at Bear Stearns
Hecla Mining (NYSE: HL) – Upgraded at CIBC
Gamestop (NYSE: GME) – Mentioned positively at Credit Suisse
Devon Energy (NYSE: DVN) – Downgraded at Credit Suisse
EOG Resources (NYSE: EOG) – Downgraded at Credits Suisse, Upgraded at Goldman
Quicksilver Resources (NYSE: KWK) – Downgraded at Credit Suisse
Exelon Corp (NYSE: EXC) – Downgraded at Deutsche Bank
Cabot Oil & Gas (NYSE: COG) – Added to Conviction Buy list at Goldman
Holly Corp (NYSE: HOC) – Upgraded at Goldman
Murphy Oil (NYSE: MUR) – Downgraded at Goldman
Safeway (NYSE: SWY) – Upgraded at Merrill Lynch

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

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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