Daily State of the Markets 
Friday Morning – August 21, 2009  

A week ago today, the bears began to argue – and rather successfully, I might add – that the global rebound might be delayed. Our friends in fur pointed to a laundry list of problems that were likely to become a blockade on the road to economic recovery. So, with stocks having enjoyed a very nice advance in a very short period of time on the back of the idea that the recession was drawing to a close, well, the bears’ negative proclamations were akin to yelling “fire” in a crowded theater.

It didn’t help that one of the only countries on the planet still seeing positive GDP growth found itself under siege from sellers at the very same time. And although China’s Shanghai’s index was definitely due for a pullback after a run of some 90% through August 4th, the rather swift correction in the Chinese stock market helped the domestic bears find their mojo. Well, for a couple of days anyway.

With stocks having been beaten about the head and chest on Monday, the bear camp was suddenly quite popular and it looked like a full-fledged correction was about to commence. However, since then, the economic data has managed to poke a bit of a hole in the bear camp argument.

Thursday’s market was a pretty good example of this point. There was nothing explosive that came out on the news front and the headline number on initial jobless claims wasn’t exactly encouraging. But after that, we got word that the Leading Economic Index (LEI) improved for the fourth month in a row and the Philly Fed General Business Index jumped into the plus column for the first time since November 2007.

Again, neither of these reports is a blockbuster and neither carries the same weight with the press as something like the employment report. But, it is VERY hard to argue with the numbers as both reports confirm that the contraction has ended.

I fully recognize that only economics geeks find this data terribly interesting. But as we’ve been saying lately, the state of the economy is what the game is all about these days. So, while most investors may find this stuff rather dull, digging into the data is a necessary evil in the current environment.

I promise not to delve too deeply into the numbers, but there is one aspect of the Philly Fed report that was particularly interesting. The future activity index gained 4.9 points in August to 56.8. This indicates that an increasing number of firms are expecting business conditions to improve over the next six months. And all the individual indexes but one, continued to point to increasing future activity. Finally, in this month’s special question about inventories, twice as many firms expect to increase inventories over the next three months as was seen just four months ago. Thus, if one looks at the cold hard numbers, it is hard to argue that the economy is not heading in the right direction. And, in short, it is for this reason that stocks find themselves just a stone’s throw from new cycle-highs.

Turning to this morning, we don’t have any economic data before the bell. But we will get the report on Existing Home Sales at 10:00 am. In addition, Ben Bernanke speaks from Jackson Hole this morning. And on the news front, China has indeed increased their capital requirements for banks.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region with Asia down and Europe up. Crude futures are moving higher with the latest quote showing oil trading up by $1.20 to $74.53. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.44%, while the yield on the 3-month T-Bill is trading at 0.16%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 30 points; the S&P’s are up about 5 points, while the NASDAQ looks to be about 7 points above fair value at the moment.

Yesterday’s Earnings After the Bell:

Aeropostale (ARO) – Reported $0.57 vs. $0.55 Brocade (BRCD) – Reported $0.12 vs. $0.11 Salesforce.com (CRM) – Reported $0.17 vs. $0.15 Foot Locker (FL) – Reported $0.00 vs. $0.07 Gap (GPS) – Reported $0.33 vs. $0.31 Intuit (INTU) – Reported -$0.10 vs. -$0.12 Mentor Graphics (MENT) – Reported $0.02 vs. -$0.10 Pacific Sunwear (PSUN) – Reported -$0.22 vs. -$0.22

Today’s Earnings Before the Bell:

Ann Taylor (ANN) – Reported $0.06 vs. $0.02 JM Smucker (SJM) – Reported $0.92 vs. $0.80

Upgrades/Downgrades/Brokerage Research:

Flextronics (FLEX) – Upgraded at Citi Jabil Circuit (JBL) – Upgraded at Citi Varian Medical (VAR) – Upgraded at Citi Children’s Place (PLCE) – Upgraded at Citi Cigna (CI) – Downgraded at Cowen Intuit (INTU) – Downgraded at Credit Suisse Salesforce.com (CRM) – Upgraded at FBR Capital Gap (GPS) – Upgraded at FBR Capital Dick’s Sporting Goods (FKS) – Downgraded at Goldman First Solar (FSLR) – Downgraded at Jefferies SunPower (SPWRA) – Downgraded at Jefferies Lubrizol (LZ) – Downgraded at JP Morgan Netflix (NFLX) – Initiated overweight at Morgan Stanley Apple (AAPL) – Estimates increased at Thomas Weisel Nike (NKE) – Estimates reduced at Thomas Weisel Burger King Holdings (BKC) – Estimates reduced at UBS Schnitzer Steel (SCHN) – Upgraded at UBS

Long positions in stocks mentioned: ARO, LZ, AAPL

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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