The Right Stuff?

Sep. 28, 2012 8:16 AM ET
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Portfolio Strategy, ETF investing, Long/Short Equity

Contributor Since 2009

David Moenning is founder and Chief Investment Officer at Heritage Capital Research, a Registered Investment Advisor. Heritage is an independent, privately owned, investment management firm located in the Denver area. Mr. Moenning has more than 33 years of portfolio management experience and focuses on a risk-managed approach to capital markets via modernized portfolio development and dynamic adaptation to ever-changing macro environments. Most recently Chief Investment Officer for a $1.3 billion RIA firm.

Daily State of the Markets
Friday, September 28, 2012

Good morning. After suffering through an extended "sloppy period" (my trusty charts indicate that the DJIA had been down 4 days in a row and it had been nine days since the S&P had enjoyed a good day - and frankly, that day also ended badly) the bulls finally recovered some of their long-lost mojo on Thursday. Just about the time the bears had convinced everyone that the "growth slowing" theme was going to ruin the global economy, that QE3 wasn't going to work, and that the ECB was powerless to end the European debt crisis, it appears that Spain said all the right stuff yesterday.

While one day does not a trend make, it is worth noting that the bears did seem to have things going their way of late. As such, the quick turnaround seen yesterday, which was not accompanied by any good news here in the States, may be a bit of a tell going forward. Or, at the very least, the 1% gain in all the indices save the DJIA, established a new line in the sand to battle over in the coming days.

It is also interesting to note that traders received not one, not two, but three pieces of bad economic news on Thursday. Orders for Durable Goods tanked unexpectedly, GDP surprised to the downside (by a large margin) and the Pending Home Sales report exposed a flaw in the housing recovery theme (it turns out the only houses moving lately have been distressed properties and now that the supply of distressed properties is drying up, so are sales totals). Therefore, it was a bit of a surprise to see the tape remain buoyant in the face of what had been a pretty dour market environment over the past two weeks.

The key to the "turnaround Thursday" was the release of Spain's new budget. Normally, such an event isn't worthy of a single Tweet from anybody. But in a market where fear is running high that the Eurozone crisis will flare up again and send stock prices reeling lower, all eyes and ears were fixed on Spain's Deputy Prime Minister Thursday morning as the country's new budget was revealed.

If you are like me, you probably don't care to dig into the details of a budget written in a foreign language. But since Spain is the singular hot spot in the Eurozone crisis at the moment, and Europe is still one of the primary focal points for the stock market, we were all forced to review the darn thing.

The bottom line is this; the Spanish budget apparently contained the right stuff. The budget was heavy on spending cuts and will raise some new taxes. But most importantly, EU Vice-President Olli Rehn said that Spain's new budget and the accompanying reforms met or exceeded the EU recommendations. And it was THIS comment that sent stocks spiking higher.

The worry has been that Spain wouldn't ever formally ask for assistance from the EU/ECB bond-buying program because the "conditions" placed on the country would be too onerous. However, with the EU saying, "Nice job guys" with regard to the budget, it is a sign that the conditions being demanded by the EU/ECB won't be overzealous. This means that Spain WILL be able to ask for assistance. And this means that the ECB WILL be able to save the day by waving their bond-buying bazooka in the faces of the so-called bond vigilantes. And of course, this, in turn, means that the Europe mess just might fall by the wayside as far as the stock market is concerned.

If traders don't have Europe to worry about on an hourly basis, this would leave the stock market to focus on little things like China, the Fiscal Cliff, the election, and of course, earnings season. On that score, it was encouraging to see corporate profits come in almost double the expectations in yesterday's GDP report. But whether or not the earnings season will contain all the right stuff is another story. Stay tuned.

Turning to this morning... Early gains in Europe have been reversed on disappointing data as well as the new budget out of France (growth projections were cut by approximately 0.5%). And although Asian markets moved higher, sentiment in the U.S. futures markets is tracking the pullback in Europe. As such, futures now point to a weaker open on Wall Street.

On the Economic front... We'll get reports on Personal Income and Spending, Chicago PMI and the UofM Consumer Sentiment index this morning.

Thought for the day... Remember, there is no "I" in team

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: +0.99%
    • Shanghai: +1.44%
    • Hong Kong: +0.37%
    • Japan: -0.89%
    • France: -0.79%
    • Germany: -0.23%
    • Italy: -0.98%
    • Spain: +1.33%
    • London: +0.04%
  • Crude Oil Futures: +$0.07 to $91.92
  • Gold: +$0.80 to $1781.00
  • Dollar: higher against the yen and euro, lower vs. pound
  • 10-Year Bond Yield: Currently trading at 1.623%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -4.70
    • Dow Jones Industrial Average: -46
    • NASDAQ Composite: -7.70

Positions in stocks mentioned: none

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The opinions and forecasts expressed herein are those of Mr. David Moenning 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. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

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