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Who Do You Believe?

May 27, 2011 8:48 AM ET
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David Moenning's Blog
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Daily State of the Markets 
Friday Morning - May 27, 2011

Good Morning. The markets sent mixed messages on Thursday, leaving the traders not already on their way to the beach left to scratch their heads. Cutting to the chase, stocks advanced for a second straight session while bond yields fell on the weaker-than expected economic data. Normally, such divergent action might not be a problem or even worth noting. However, with the yield on the 10-year diving to its lowest level of the year, investors may be wondering which market they should put their faith in.

Logic would seem to dictate that crummy reports on both the economic and employment fronts would lead to falling stock prices, especially when you add a dive in bond yields to the mix. But instead, the S&P moved steadily higher for much of the session, finishing with a gain of +0.4% while the NASDAQ tacked on +0.8% and the Russell 2K jumped an impressive +1.32%. Hmmm....

Although many economists were looking for the first quarter's GDP growth rate to perk up a bit from the initial guesstimated rate of +1.8%, the first revision (which actually includes data from the entire quarter this time around) contained no such upside surprise. Thus, investors were forced to come to grips with the fact that the economy definitely began to struggle a bit during the March/April period.

Prior to the GDP report however, the bulls could be heard arguing that the data was "old news" by now as everybody has already accepted the fact that the economy hit a speed bump around the time that the Japanese earthquake/tsunami/nuclear disasters hit. Thus, our heroes in horns should have been more than a little red-faced when the very current report on initial claims for unemployment insurance also came in below expectations - again.

But as anyone who has been watching the action closely over the past month can attest, this isn't exactly your run-of-the-mill market environment. And instead of tanking on bad news, stocks managed to shake off the data and move on.

How can this be, you ask? We've got three quick reasons for the divergent behavior seen on Thursday. First, the tech sector caught a bid on the back of some decent earnings and Einhorn's call for Ballmer to step down at Microsoft so that shareholders could make some money on the stock for a change. Next there may have been a little thing called window dressing occurring Thursday as portfolio managers do indeed have a tendency to put any cash still laying around in portfolios to work in the last few days of a month. And finally there was the fact that while not completely tick-for-tick on Thursday, "the trade" did seem to have an impact as the rising Euro/falling dollar appeared to produce some gains in the stock market.

Getting back to the question posed in the title to this morning's missive, we're of the mind that if you are an investor who focuses on the fundamentals, you have got to believe the bond market here. Yesterday's reports did follow the trend of the data coming in on the punk side and as such it makes sense that yields are going down. However, it is worth noting that the uncertainty of the debt ceiling debate coupled with the Fed still buying bonds regardless of price may also have contributed to the big drop in yields Thursday.

But if you are a member of the church of what's working now, then you can ignore all of that fundamental mumbo jumbo and keep on keepin' on with "the trade." As we've been saying, at some point stocks will stop being driven by the action in the dollar. But with a long holiday weekend now upon us, we'd be willing to bet that today isn't likely to be the day.

Turning to this morning... European bourses are up nicely on the back of a report that EU banks may be able to avoid part of the new capital requirements. However, Fitch's downgrade of Japan's credit outlook is keeping things in check here in the U.S.

On the Economic front... Personal Incomes rose by +0.4% in April, which was in line with the consensus expectations for an increase of +0.4%. The March level was revised lower to +0.4%. Personal Consumption for the month rose by +0.4%, which was a tenth below the expectations of +0.5% and also below the March revised reading of +0.5% The Core PCE (think inflation) came in up +0.2%, which was above expectations for +0.1%.

Looking ahead, we'll get the University of Michigan Sentiment report at 9:55 am eastern and Pending Home Sales at 10:00 am.

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

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: +0.53%
    • Shanghai: -0.98%
    • Hong Kong: +0.95%
    • Japan: -0.42%
    • France: +1.10%
    • Germany: +0.37%
    • London: +0.81%

  • Crude Oil Futures: +$0.66 to $100.89
  • Gold: +$4.80 to $1527.60
  • Dollar: higher against the Yen, lower vs Pound and Euro
  • 10-Year Bond Yield: Currently trading at 3.143%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +5.61
    • Dow Jones Industrial Average: +41
    • NASDAQ Composite: +6.12


Wall Street Research Summary


  • Heinz (HNZ) - Estimates and target increased at Citi
  • Broadcom (BRCM) - Added to Top Picks at FBR Capital
  • Anadarko Petroleum (APC) - Sterne, Agee
  • Noble Energy (NBL) - Sterne, Agee
  • Entergy (ETR) - Wells Fargo



  • Target (TGT) - Mentioned cautiously at Citi
  • Rock-Tenn (RKT) - Deutsche Bank
  • Weyerhaeuser (WY) - Deutsche Bank
  • Aflac (AFL) - Morgan Stanley
  • Itron (ITRI) - RW Baird
  • Blue Coat (BCSI) - William Blair


    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.

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