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The Free Pass

Apr. 29, 2011 8:48 AM ET
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David Moenning's Blog
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Portfolio Strategy, ETF investing, Long/Short Equity

Seeking Alpha Analyst 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 Morning - April 29, 2011

Good morning. Back in the fall of 2010, big-time hedge fund manager David Tepper made headlines when he pronounced that everything was a buy going forward due to the Fed's likely implementation of QE2. Tepper opined that with the Fed looking to push "asset prices" higher, it made sense to play along with Bernanke's plan. The ensuing rally became known as the "Tepper Trade" as, true to his prognostication, just about everything in sight embarked on an upward path for the next six months.

This trade worked exceptionally well as stocks marched higher with nary an interruption until the messy stuff started happening in mid-February. After a strong surge in stock prices, which amounted to something on the order of +28% for the S&P 500 from September 1, 2010 through February 18th, the uprisings in the Mideast and North Africa, the resurgence of debt difficulties in the Eurozone, and the triple tragedies in Japan caused investors to rethink the Tepper Trade - well, for about a month, anyway.

In addition, during this time, we started to hear more and more hawkish commentary coming out of the Fed as folks like Dallas Fed President Richard Fisher began to publically lament about the prospects for inflation. By mid-March, traders had become convinced that the combination of the geopolitical problems and supply interruptions (as well as the potential for a nuclear disaster) in Japan would cause the global economy to slow. And after a six-month hiatus, the bears appeared to be back.

Of course, that was BEFORE Ben Bernanke started doing his darndest to communicate the Fed's stance to the markets. Say what you will about our Fed Chairman, but it is clear that Gentle Ben is bound and determined to keep the U.S. economy out of deflationary spiral. As one of the foremost scholars on the Great Depression, Bernanke knows that once deflation sets in, it can be VERY difficult to reverse. So, Bernanke's answer is simple - make stuff go up in value.

In my humble opinion, what we are seeing now in the stock market is the realization that the Fed's "Free Pass" for the markets continues to be in play. On Wednesday, Mr. Bernanke said that inflation isn't a problem from a bigger-picture standpoint and that employment isn't where he would like it to be. Therefore, the Fed is going to keep the ZIRP (zero interest rate policy) in place "for an extended period."

To traders, this means that it's okay to "Party on Wayne" with regard to the "risk trade." And for those of you that still may not understand how this particular "trade" works, let's break it down. With the Fed saying it isn't worried about the dollar, traders basically have a free pass to sell the dollar short. Of course, this means that you are selling something that you don't own, which puts cash into your account. So, what do you do with that cash? You buy stuff that benefits from the dollar's decline (which you are helping to further) such as commodities, emerging markets, and big multinational companies that tend to see increases in earnings from the currency play.

How long will this "free pass" to higher stock prices last, you ask? Obviously no one knows for sure, but until either the Fed decides to change its tune or the economy encounters something that causes growth to slow, it is probably best to continue to lean on the "buy the dips" strategy.

Turning to this morning... With all eyes on the Royal Wedding in London, the markets are fairly quiet in the early going. However, strong earnings from Caterpillar (CAT) seemed to improve the mood a few minutes ago on the DJIA.

On the Economic front... Personal Incomes rose by +0.5% in March, which was above the consensus expectations for an increase of +0.4%. The February level was revised higher to +0.5%. Personal Spending (now called “Consumption”) for the month rose by +0.6%, which was in line with the expectations of +0.6% but below the February revised reading of +0.9% On the inflation front, the Core PCE (personal consumption expenditures) came in up +0.1%, which was below expectations for +0.1%.

Finally, the Employment Cost Index during Q1 2011 was reported at +0.6%, which was a tenth above expectations.

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: -1.08%
    • Shanghai: +0.87%
    • Hong Kong: -0.36%
    • Japan: Closed
    • France: -0.16%
    • Germany: +0.29%
    • London: Closed

  • Crude Oil Futures: +$0.46 (May contract) to $113.32
  • Gold: +$7.00 to $1538.20
  • Dollar: higher against the Yen, lower vs. Euro and Pound.
  • 10-Year Bond Yield: Currently trading at 3.318%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +0.57
    • Dow Jones Industrial Average: +21
    • NASDAQ Composite: -3.95


Wall Street Research Summary


  • Colgate-Palmolive (CL) - Deutsche Bank
  • Procter & Gamble (PG) - Deutsche Bank
  • Boeing (BA) - Upgraded at HSBC
  • SL Green Realty (SLG) - JMP Securities
  • Dow Chemical (DOE) - JPMorgan
  • Mine Safety (MSA) - RW Baird
  • Abiomed (ABMD) - RW Baird



  • Oshkosh (OSK) - Benchmark, Goldman Sachs, RW Baird
  • Imax (IMAX) - Canaccord Genuity
  • Trimble Navigation (TRMB) - Canaccord Genuity
  • Helmerich & Payne (HP) - Canaccord Genuity
  • GenProbe (GPRO) - Canaccord Genuity
  • Verizon (VZ) - Citi
  • Ingram Micro (IM) - Removed from Conviction Buy at Goldman Sachs
  • Research In Motion (RIMM) - Jefferies
  • Molson Coors (TAP) - JPMorgan
  • OfficeMax (OMX) - JPMorgan
  • Regeneron Pharmaceuticals (REGN) - RBC Capital
  • Coca Cola Enterprises (CCE) - UBS
  • Choice Hotels (CHH) - Wells Fargo


    Yesterday's Earnings After The Bell



    Cerner CERN $0.80 $0.70
    Cliffs Natural Resources CLF $3.11 $2.22
    Eastman Chemical EMN $2.52 $1.93
    Expedia EXPE $0.25 $0.26
    Federated Investors FII $0.32* $0.43
    KLA-Tencor KLAC $1.31 $1.24
    Leggett & Platt LEG $0.30 $0.20
    Motorola Mobility MMI -$0.80 -$0.12
    Microsoft MSFT $0.61 $0.56
    Monster Worldwide MWW $0.05 $0.03
    Republic Services RSG $0.42 $0.41
    Southwestern Energy SWN $0.39 $0.39
    VeriSign VRSN $0.32 $0.32

    Today's Earnings Before The Bell



    Apartment Investment AIV $0.39 $0.36
    Aon Corp AOC $0.80 $0.80
    Caterpillar CAT $1.84 $1.31
    Coventry Health Care CVH $0.74* $0.52
    DR Horton DHI $0.09* -%0.05
    Entergy ETR $1.38 $1.34
    FLIR Systems FLIR $0.32 $0.36
    Goodyear Tire GT $0.42 $0.12
    ITT Corporation ITT $0.98 $0.93
    Merck MRK $0.92 $0.84
    NextEra Energy NEE $0.94 $0.95
    Newell Rubbermaid NWL $0.30 $0.28
    Pitney Bowes PBI $0.53 $0.53
    Pinnacle West PNW -$0.14 -$0.01
    Simon Property SPG $1.61 $1.54
    VF Corp VFC $1.71* $1.61
    Weyerhaeuser WY $0.00 $0.12

    * Report includes items that make comparisons to the consensus estimate questionable

    Long positions in stocks mentioned: none

    For more "top stock" portfolios and research, visit TopStockPortfolios.com


    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 TopStockPortfolios 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. Stocks should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    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.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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