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It’s What Wasn’t Said That Matters

Daily State of the Markets 
Thursday Morning - September 8, 2011

Good morning. Sometimes it's what isn't said that really matters. For example, while there was an abundance of seemingly important headlines from all over the globe to sift through on Wednesday, the fact that the "R" word has been used less and less lately may have been the key to the bulls' victory yesterday. To be sure, the nattering nabobs of negativity have had plenty to talk about over the past seven weeks. And in short, a weakening U.S. economy has adorned the top of the bears' list of the macro worries for some time now.

Given the fact that the economy's growth rate was revised down - and down hard - in the first quarter and then GDP barely made it to +1% in the second quarter (+0.96% to be exact), it is fairly easy to understand why a fair number of analysts quickly became concerned about the economy dipping back below the zero line. After all, a 17% correction in the stock market, fears of another global banking crisis hitting the front page on an all-too regular basis, the food fight that qualified as a debate in Washington, and then the downgrade of the credit rating of the good 'ol USofA surely didn't leave consumers feeling overly confident.

The thinking was simple. With the speed at which news is disseminated these days, the nonstop flow of negative headlines could easily convince John and Jane Q. Public to hunker down and stop spending. So, with the economy barely moving and the consumer responsible for 70% of the economy, it didn't take a doctorate in applied mathematics to figure out that the economic expansion in the U.S. might be at risk.

However, after some really brutal data points, the more recent economic reports have shown that the economy seems to be continuing to mosey along, albeit at a maddeningly slow pace. The ISM Manufacturing Index (designed to indicate the state of the manufacturing sector) stayed above 50, the ISM Non-Manufacturing Index surprised to the upside at 53.3, the August Jobs report, while not positive, also wasn't negative, and then Wednesday's Beige Book failed to even hint at the idea of an economic contraction.

In fact the report on the Fed's twelve banking districts said that five districts showed "modest or slight expansion" while Atlanta reported a "subdued pace," Cleveland reported "slow growth," New York indicated "sluggish growth" and both Chicago and Richmond said that economic activity "expanded more slowly." While none of these reports is a reason for celebration, again, there was also no mention of a recession.

Although the U.S. economy is by no means out of the woods and there will likely be more negative economic reports in the coming months (to say nothing of the upcoming earnings season), the bottom line is that hope appears to be making a comeback at the corner of Broad and Wall. There is hope that the economy will be able to keep whistling past the graveyard and resume an upward path. There is hope that the boys and girls in Washington will quit fighting long enough to do something positive for the nation. And there is hope that Ben Bernanke and his banker buddies will once again mount their white horses and ride to the rescue.

On that note, another reason behind Wednesday's joyride to the upside was a report by Morgan Stanley which opined that a coordinated stimulative effort by the major central banks of the world (the U.S. Federal Reserve, the ECB, the Bank of Japan, and the Bank of England) could be in the offing at this weekend's G-7 meeting. Thus, any traders that were starting to wonder about the staying power of their short positions might have decided it was time to run for cover.

The question of whether or not central bankers and/or major governments should still be trying to artificially prop up prices of financial assets is sure to rage as we go forward. However, anyone playing the stock market game from a short-term perspective is likely to remember that rule number one is "Don't fight the Fed" - especially when they are on a mission!

In sum, while there will undoubtedly be lots of arguments about the outlook for the future, sometimes the words not being said are those that hold the key.

Turning to this morning... Both the Bank of England and the ECB have left interest rates unchanged this morning as expected. The focus now turns to Jean-Claude Trichet's press conference. In addition, OECD says global growth has ground to a halt and Morgan Stanley is out with a report suggesting that the G-7 will jointly intervene at this weekend's summit.

On the Economic front... Initial Claims for Unemployment Insurance for the week ending 9/3 rose by 2,000 to 414K, which was above the consensus estimate for 405K and last week’s revised total of 412K. Continuing Claims for the week ending 8/27 came in at 3.717M vs. 3.707M and last week’s 3.747M.

Thought for the day... Awareness and choice are yours to exercise...

Pre-Game Indicators

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

 

  • Major Foreign Markets:
    • Australia: +0.16
       
    • Shanghai: -0.68%
       
    • Hong Kong: -0.67%
       
    • Japan: +0.34%
       
    • France: +0.56%
       
    • Germany: +0.59%
       
    • Italy: +0.98%
       
    • Spain: +1.38%
       
    • London: +0.30%

     
  • Crude Oil Futures: +$0.04 to $89.38
     
  • Gold: +$29.40 to $1847.00
     
  • Dollar: lower against the Yen and Pound, higher vs. Euro
     
  • 10-Year Bond Yield: Currently trading at 1.980
     
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -7.8
       
    • Dow Jones Industrial Average: -64
       
    • NASDAQ Composite: -11.6

 

Wall Street Research Summary

Upgrades:

  • Juniper Networks (NYSE:JNPR) - Auriga
     
  • Cisco Systems (NASDAQ:CSCO) - Auriga
     
  • AutoZone (NYSE:AZO) - Added to short-term buy at Deutsche Bank
     
  • Power Integrations (NASDAQ:POWI) - Deutsche Bank
     
  • NCR Corp (NYSE:NCR) - JPMorgan
     
  • Safeway (NYSE:SWY) - Morgan Stanley
     
  • Valero (NYSE:VLO) - Mentioned positively at Oppenheimer
     
  • Talbots (NYSE:TLB) - Piper Jaffray
     
  • Devon Energy (NYSE:DVN) - UBS
     
  • Southwestern Energy (NYSE:SWN) - UBS
     
  • Exxon Mobil (NYSE:XOM) - UBS
     
  • Nasdaq OMX Group (NASDAQ:NDAQ) - Estimates increased at Wells Fargo
     
  • Darden Restaurants (NYSE:DRI) - Wells Fargo

     

    Downgrades:

  • American Electric Power (NYSE:AEP) - BofA/Merrill
     
  • Hospira (NYSE:HSP) - Estimates cut at Goldman
     
  • Travelzoo (NASDAQ:TZOO) - Morgan Keegan
     
  • Texas Instruments (NYSE:TXN) - Target cut at Oppenheimer
     
  • Temple-Inland (NYSE:TIN) - UBS
     
  • Quicksilver Resources (NYSE:KWK) - UBS
     
  • CSX Corp (NYSE:CSX) - Estimates and target cut at Wells Fargo

     

    Long positions in stocks mentioned: none

    For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com

     


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