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Are The Winds Shifting?

May 23, 2011 8:52 AM ET
David Moenning profile picture
David Moenning's Blog
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Daily State of the Markets 
Monday Morning - May 23, 2011

Good Morning. Investors looking to stay in tune with the current environment must constantly be on the lookout for changes to the outlook for the economy, earnings growth, inflation, interest rates, etc. Cutting directly to the chase, recent economic data suggests that we may (the key word at this point in the game) be seeing a shift in the direction the winds are blowing.

Up until April 29th, the stock market had enjoyed a strong tailwind. The economy was improving and concerns about the recent "soft patch" were fading. Quarterly earnings continued to come in above expectations. The Fed remained committed to keeping ZIRP (zero interest rate policy) in place. Worries about Europe had all but evaporated as the EU/IMF plans seemed to be working. Inflation didn't appear to be much of a threat. The Chinese looked to walking the economic tightrope well. And even the jobs market in the U.S. appeared to be finding some modest momentum.

Since the beginning of May however, it looks like those tailwinds may be turning into headwinds. Exhibit A in our argument is that concerns about Europe are suddenly back in the headlines as worries about a replay of 2007-08's credit crisis are increasing. While market's don't usually get hit for the same reason twice, recall that it was hedge funds "blowing up" due to the dislocations in the credit markets that started the spiral downward a couple years ago. And given that transparency amongst the hedgies remains opaque at best, the worries about the impact of a sovereign debt default are on the rise.

Sticking with the Eurozone theme for a moment longer, Friday's news flow wasn't particularly positive. First there was Germany's Bundesbank report, which stated in no uncertain terms that it expects the country's economic growth to slow "for the foreseeable future." Then there was the report that Norway had decided to put the brakes on financial aid to Greece. Next up was Fitch's downgrade of Greece's long-term debt rating. And finally, the report showing that Germany's PPI came in double consensus expectations led some analysts to put inflation concerns back on the table.

Closer to home, a couple of earnings reports from retailers created some consternation for the macro crowd. Normally, we don't pay too much attention to individual company earnings as they don't usually have an effect on the overall market. However, word that cost increases at Gap (GPS) would impact earnings in the second half of the year put a dismal stamp on the earnings season for the retailers. Aeropostale suffered a similar fate on Friday as it too spoke of increasing costs and narrowing margins going forward, causing the teen retailer to cut its earnings expectations for the coming quarter.

Now toss in last week's economic data such as the LEI, the Philly Fed report, and the housing data, and it becomes clear that the winds just might be starting to shift. This does NOT mean that stocks will head lower from here. However, recent data might cause some investors to implement the old saw, "Sell in May and go away."

Turning to this morning... S&P's warning that it may soon downgrade Italy's credit rating in response to slowing economic growth, coupled with election results in Spain and Germany have European markets on the defensive this morning. As expected, U.S. markets have followed suit in the early going with futures pointing to a lower open.

On the Economic front... The Chicago Fed reported that their National Activity Index fell to a reading of -0.45 points in April from a reading of +0.32 in March. This was the first negative reading since December 2010 and the lowest level for the index since August 2010. This is yet another report suggesting that the economy has hit a speed bump.

Thought for the day... Go ahead and expect good things to happen to you today, you just might be surprised...

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: -1.76%
    • Shanghai: -2.90%
    • Hong Kong: -2.11%
    • Japan: -1.52%
    • France: -1.96%
    • Germany: -1.81%
    • London: -1.56%

  • Crude Oil Futures: -$3.28 to $96.81
  • Gold: -$3.28 to $1505.20
  • Dollar: lower against the Yen, higher vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading at 3.107%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -15.20
    • Dow Jones Industrial Average: -140
    • NASDAQ Composite: -27.4


Wall Street Research Summary


  • Fair Isaac (FICO) - Argus
  • Foot Locker (FL) - Estimates increased at Citi
  • Pinnacle Entertainment (PNK) - Credit Suisse
  • Gap (GPS) - Deutsche Bank
  • Maxim Integrated (MXIM) - Goldman Sachs
  • Limited Brands (LTD) - Goldman Sachs
  • Mosaic (MOS) - JPMorgan, Stifel Nicolaus
  • CF Industries (CF) - JPMorgan
  • iRobot (IRBT) - JPMorgan
  • AK Steel (AKS) - Morgan Stanley
  • Baxter (BAX) - Target increased at RBC
  • Applied Materials (AMAT) - Target increased at RBC
  • Walt Disney (DIS) - Stifel Nicolaus



  • LDK Solar (LDK) - Argus
  • Con Edison (ED) - BofA/Merrill
  • UIL Holdings (UIL) - BofA/Merrill
  • LM Ericsson (ERIC) - BofA/Merrill
  • FedEx (FDX) - Removed from S.T. Buy at Deutsche Bank
  • Parexel (PRXL) - Goldman Sachs
  • ON Semiconductor (ONNN) - Goldman Sachs
  • The Buckle (BKE) - Goldman Sachs
  • American Eagle (AEO) - Target and estimates cut at UBS


    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.

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