David Moenning's Daily State of the Markets: 12/17

Muddying the Waters


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

Until last week, investors felt like they had a pretty clear picture of the future. The Fed appeared willing, albeit begrudgingly, to continue to cut interest rates in order to help fight the slowing economy, which would, if history repeats, mean a nice rebound sometime next year. And since stocks generally look ahead by six months or so, the outlook looked rather bright.

However, with both the PPI and CPI numbers coming in hotter than expected, Goldilocks was seen running from the room and to mix up my metaphors, the rosy picture the bulls had been counting on has been muddied up a bit.

The primary charge of the Federal Reserve is to protect the value of our currency, which means that they must try to avoid the ravages of inflation whenever possible. This, in turn, helps keeps the economy strong. Alan Greenspan said as much on ABC Sunday morning as the former Fed Chairman suggested that the most important driver of economic growth is not low interest rates, but rather, low inflation.

Friday’s CPI report quashed the idea that inflation remains low and/or contained at the present time. Led by a 5.7% spike in energy prices, the Consumer Price Index jumped by 0.8% in November, which was above expectations and the biggest rise since the hurricanes in the fall of 2005. According to the Labor Department, the rise in energy accounted for nearly 70% of the increase in the CPI.

Part of the problem here is it isn’t just oil that is going up. Rents rose 0.4%, food prices are up 4.8% over the past 12 months, apparel prices advanced 0.8% in November - the most since 1999, and health care costs have increased by 5% over the last year. Thus, even when you strip out energy and food, the Core CPI rose by 0.275%, which, again was above expectations.

So, despite the fact that the Fed really can’t co much about commodity inflation, the fear in the stock market is that they will try anyway. And this worry led to another dismal day on Wall Street with the Dow dropping -178 points and all the major indices following suit with losses of at least 1.2%.

The consensus view currently is that since the Fed can now play the inflation card, we can count on less help in the form of lower interest rates going forward. This leaves the new alternative funding methods such as the Term Auction Facility, which makes its debut today, as the primary tool the Fed can apply to try and thaw the money markets and encourage economic growth. And in short, the jury is definitely out on whether these new tools will work.

Turning to this morning, as one might have expected, we’ve got a game of follow the leader going as the world reacts to the inflation news.

Running through the rest of the pre-game indicators; as we mentioned there is a sea of red ink in the overseas markets. Crude futures down this morning with the latest quote showing the January contract lower by $0.84 to $90.43. Interest rates are lower so far with the 10-yr trading at a yield of 4.21% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to another down open. The Dow futures are currently off by about 50 points; the S&Ps are down by about 6 points, while the NASDAQ looks to be about 12 points below fair value at the moment.

Stocks "In Play" This Morning:


News, Upgrades/Downgrades/Brokerage Research:

American Eagle Outfitters (NYSE: AEO) – Upgraded at Bear Stearns
UBS (NYSE: UBS) – Downgraded at CIBC Capital Markets
Tesoro (NYSE: TSO) – Upgraded at Citi
Priceline (Nasdaq: PCLN) – Downgraded at Citi
Countrywide Financial (NYSE: CFC) – Downgraded at Citi
Capital One (NYSE: COF) – Downgraded at Citi
Bank of America (NYSE: BAC) – Downgraded at Citi
JP Morgan Chase (NYSE: JPM) – Downgraded at Citi
Wachovia (NYSE: WB) – Downgraded at Citi
Kroger (NYSE: KR) – Upgraded at Credit Suisse
Joy Global (Nasdaq: JOYG) – Target increased at Lehman
Orbitz Worldwide (NYSE: OWW) – Upgraded at Lehman
AGCO (NYSE: AG) – Upgraded at Morgan Stanley
Caterpillar (NYSE: CAT) – Downgraded at Morgan Stanley
Starbucks (Nasdaq: SBUX) – Downgraded at RBC
Apria Healthcare Group (NYSE: AHG) – Upgraded at UBS

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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