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Once More For Emphasis

May 12, 2011 8:52 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 
Thursday Morning - May 12, 2011

Good morning. If you were at all mystified as to the driver(s) behind Wednesday's dance to the downside in the stock and commodity markets, I'm going to suggest that you may not be paying enough attention to your "Daily State of the Market" reports :-)

While there were certainly several other stories that may have captured traders' attention yesterday, the bottom line is that this move was - everybody join in now - all about the buck! I know, I know... I have been banging this drum for some time now. But yesterday's action confirmed that these big intraday spikes are more often than not, tied to the movement in the dollar.

For those of you that remain skeptical on this topic, let's take a look at some charts to drive the point home. And to make things perfectly clear, let's look at the following charts on a 1-minute basis (yes, the game has come to that - if you don't have a 1-min chart up on your screen, you may not be "seeing" the true picture): FXE, UUP, and SPY.

The first thing you may notice is that yesterday's chart of the FXE (CurrencyShares Euro ETF) looks remarkably similar to the SPY (SPDR S&P 500 ETF) and that both appear to be inversely correlated to the UUP (PowerShares US Dollar Index ETF). In short, this is because the dive in the Euro, which included a break of important support (the $142 level on the FXE), triggered dollar buying, which, in turn, triggered computerized sell programs in stocks. Simple, right?

Surely there is more to the game than this from a big-picture standpoint. But the bottom line here is that stocks didn't dive because of concerns about Europe, China, corporate earnings, the Fed, interest rates, the end of QE2, or even the economy. No, stocks dove because the fast-money's computerized trades were programmed that way.

In my humble opinion, Wednesday's rout wasn't a case of macro concerns, but rather the way the game is played at the micro (in this case the "super-micro") level. Look at the charts... Once the Euro broke down at around 11:45 am eastern, the dollar surged and stocks tanked. Any questions as to the drivers here?

In the old days, the players and their strategies were easy to understand. You had the pensions, the banks and insurance companies, the mutual funds, and the public - all of which were primarily "long only" investors. And while these players still exist to varying degrees today, you also have hedge funds, sovereign funds, and the dark pools to take into account.

Nowadays, the hedgies run, often at the speed of light, at least a couple trillion dollars (before leverage!) and the high-frequency gang accounts for something like 60% of all NYSE trading on a daily basis. As such, it is the "fast (I mean, REALLY fast) money" that can dominate a market in the short run. And the key thing to understand right now is that "the trade" the fast-money crowd is focused on and implementing on a daily basis involves the dollar, stocks, and commodities.

Now that I've climbed down off of my soapbox, I should point out that there were a couple other factors at work yesterday. For example, there may have been some commodity-demand concerns brewing due to the demand destruction beginning to show up in oil (gasoline demand has dropped -2.3% over the past year) and the potential slowdown in places like China. In addition, the concerns about Greece as well as worries about inflation in Poland and England may have contributed to the selling of the Euro, which triggered the buying in the dollar, which, well, you get the idea.

So once more for emphasis, I'd like to suggest that while the stock market's primary trend is clearly up, anything that causes the dollar to rally is likely going to be a problem for stocks - at least in the short-term - for a while longer yet.

Turning to this morning... Overseas markets are mostly lower in response to the action on Wall Street. In addition, the Chinese continue to tighten monetary policy via the announcement of another hike in bank reserve requirements overnight. Closer to home, U.S. futures are below fair value but off their worst levels.

On the Economic front... The Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for April rose by +0.8%, which was above the consensus estimate for +0.6% and March’s +0.7%. When you strip out food and energy, the so-called Core PPI came in at +0.3%, which a tenth above the consensus for +0.2% and below March’s +0.3%.

Next up, the Commerce Department reported that Retail Sales rose in the month of April by +0.5%. This was below the consensus for +0.7%. When you strip out the sales of autos, sales were up +0.6%, which was below the consensus for an increase of +0.7%.

And finally, Initial Claims for Unemployment Insurance for the week ending 5/7 fell by 44K to 434K. This was above the consensus estimate for 424K but below last week’s total of 478K. Continuing Claims for the week ending 4/30 came in at 3.756M vs. 3.700M and last week’s 3.751M.

Thought for the day... Regardless of the colors on the screens, make the decision to enjoy your day...

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: -1.68%
    • Shanghai: -1.33%
    • Hong Kong: -0.94%
    • Japan: -1.50%
    • France: -1.28%
    • Germany: -1.39%
    • London: -1.08%

  • Crude Oil Futures: -$1.71 to $96.40
  • Gold: -$15.90 to $1485.50
  • Dollar: higher against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 3.173%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -4.82
    • Dow Jones Industrial Average: -49
    • NASDAQ Composite: -12.00


Wall Street Research Summary


  • Hershey (HSY) - Argus
  • First Solar (FSLR) - Mentioned positively at Auriga
  • Symantec (SYMC) - BAC/ML
  • CVS Caremark (CVS) - BAC/ML
  • Allegheny Technologies (ATI) - Goldman Sachs
  • RTI International Minerals (RTI) - Estimates increased at Goldman Sachs
  • Ross Stores (ROST) - Jefferies
  • TJX Companies (TJX) - Jefferies
  • Transocean (RIG) - JPMorgan
  • Tesoro (TSO) - Target increased at Oppenheimer
  • Arthur J. Gallagher (AJG) - Stifel Nicolaus



  • Choice Hotels (CHH) - Argus
  • Vail Resorts (MTN) - BAC/ML
  • Cisco Systems (CSCO) - Canaccord Genuity, RW Baird
  • Reliance Steel (RS) - Goldman Sachs
  • American Eagle (AEO) - Jefferies
  • Molycorp (MCP) - JPMorgan
  • Kinder Morgan Energy Partners (KMP) - Morgan Stanley
  • Spectra Energy Partners (SEP) - Morgan Stanley
  • Vera Bradley (VRA) - Wells Fargo


    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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