Daily State of the Markets 
Friday Morning – August 28, 2009  

In all honesty, it is difficult to take too much away from the action at this time of year because we are in the heart of vacation season on Wall Street. So, while the price action is beginning to feel a little like déjà vu all over again, there is really no telling whether the current set up is mimicking what we saw in the first two weeks of June or if the traders that are on the desks are simply killing time until after Labor Day.

However, as we mentioned yesterday, the trick to this game is to stay in tune with what is driving the market at all times. And given that the Dow was down 84 points in the early morning but then managed to finish with a gain of 37, there was certainly a driving force to be considered.

Stocks headed down at the open and there really wasn’t any news that could be attributed to the decline. Although there was some additional talk about China’s plan to curb overcapacity, it appeared that the bears had finally wrestled the ball away from their opponents and were attempting to make the most of it.

But, just about the time you might have gotten yourself convinced that the anticipated pullback, that everyone has been talking about, was indeed underway, traders began to notice the strength in a couple of former blue chips who now have big slugs of their stock owned by the U.S. Treasury Department – namely AIG (AIG) and Citi (C).

AIG popped up +26.9% yesterday and has more than doubled in price over the past 8 trading days alone. And as long as we’re having fun with numbers, we’ll note that the stock of the insurance giant has increased +404% since July 9th. The reason for all of the upside excitement in a company that the Treasury owns nearly 90% of is related to the new CEO saying that AIG will be able to repay the government and “may be able to do something for the shareholders as well.”

Although the action in Citi pales in comparison, the gain of +9.1% on what was otherwise expected to be a down day was most impressive. And speaking of impressive, C has gained +88% since July 27th. The cause for the upside surprise here has been hedge fund big wig John Paulson’s reported interest in the company. Apparently the man who made billions correctly playing the credit crisis is now saying Citi is undervalued.

While these two former market darlings appeared to save the day for the bulls, one has to wonder how much leadership stocks of this ilk can actually provide over the long-term. And we would be remiss if we didn’t mention that the real generals of this year’s move higher, namely the NASDAQ and China, have been largely missing in action of late. So, while we hate to rain on the bulls’ parade, this situation is definitely something to watch going forward.

Turning to this morning, Dell’s (DELL) earnings just before yesterday’s close (the report was accidentally leaked early) is lifting spirits so far this morning. On the economic front, Personal Incomes for July came in unchanged, which was below the expectations for a gain of +0.1%. Personal Spending was reported with a gain of +0.2%, which was on target with the expectations for +0.2%. June’s Income was revised upwardly to -1.1% from -1.3% while spending also saw an upward revision to +0.6% from +0.4%. The July PCE Deflator was -0.8% over the past year versus expectations for -0.9%.

Running through the rest of the pre-game indicators, the major overseas markets are mixed with European markets higher. Crude futures are moving up a bit with the latest quote showing oil trading higher by $0.45 to $72.94. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.51%, while the yield on the 3-month T-Bill is trading at 0.14%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly higher open. The Dow futures are currently ahead by about 30 points; the S&P’s are up about 5 points, while the NASDAQ also looks to be about 5 points above fair value at the moment.

Yesterday’s Earnings After the Bell:

Dell (DELL) – Reported $0.24 vs. $0.23 J Crew Group (JCG) – Reported $0.29 vs. $0.15 Marvell (MRVL) – Reported $0.18 vs. $0.15 Novell (NOVL) – Reported $0.07 vs. $0.07

Today’s Earnings Before the Bell:

Tiffany & Co (TIF) – Reported $0.39 vs. $0.33

Upgrades/Downgrades/Brokerage Research:

Williams-Sonoma (WSM) – Upgraded at Goldman Realty Income (O) – Downgraded at Janney Montgomery Scott Cedar Fair (FUN) – Downgraded at KeyBanc Bristol-Myers (BMY) – Downgraded at Morgan Stanley Infosys (INFY) – Downgraded at Morgan Stanley Pacific Sunwear (PSUN) – Upgraded at Pali Research Tesoro (TSO) – Estimates reduced at Soleil Securities Holly Corp (HOC) – Estimates reduced at Soleil Securities Frontier Oil (FTO) – Estimates reduced at Soleil Securities Valero (VLO) – Estimates reduced at Soleil Securities Sunoco (SUN) – Estimates reduced at Soleil Securities Potash (POT) – Downgraded at UBS Mosaic (MOS) – Downgraded at UBS

Long positions in stocks mentioned: MS

Enjoy your Friday, have a pleasant weekend, and until next time, “may the bulls be with you!”

David D. Moenning
Founder TopStockPortfolios.com

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


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