Daily State of the Markets 
Monday Morning – October 12, 2009  

Last week marked the two year anniversary of the Dow and S&P’s all-time highs of 14,164.53 and 1565.15 respectively. If you are interested in such matters, October 9th 2007 was the last time the press was able to crow about the blue chip indices reaching the Promised Land. And while we did read a couple reports suggesting that Friday’s move to a new cycle high in the DJIA was a celebration of sorts, we’re going to stick with the idea that Ben Bernanke’s comments on Thursday night were behind Friday’s gains.

At first blush, Bernanke’s comments didn’t appear to matter all that much as the Fed Chairman said “when the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration.” This was in line with what every other Fed-head has been saying lately and helped to balance out the more aggressive views from Fed Governor Kevin Warsh.

However, the stock market is a fickle beast that often needs a great deal of reassurance in order to continue on its path. And although the Fed Chairman’s comments were indeed subtle, they were effective all the same. Bernanke’s said, “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.” And in short, this statement, although not new, conveyed the idea that the economy is on the mend and that higher interest rates ARE coming – eventually.

Unlike past Fed-heads, this chairman believes in keeping the Fed’s policies transparent. Thus, when assimilating the message from the various speeches of the past couple of weeks, it becomes clear that Mr. Bernanke and friends are currently in the process of laying the groundwork for higher interest rates in the future.

And yet in true Goldilocks fashion, Mr. Bernanke made it clear in the speech that we are not there yet. Bernanke said, “My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

What this means to stock market investors is they can continue to look to better days ahead in terms of both the economy and corporate earnings. Yes, it is true that the proof will be in the pudding at some point. But for now, this market is all about discounting the future and not about judging the economic strength of the future.

On a side note, the Bernanke speech also gave the U.S. dollar a much needed boost as the greenback bounced up off its most recent 14-month lows. However, before we party too hard about the dollar’s newfound strength, we should probably consider that the long weekend in the U.S. as well as the documented dollar intervention in Thailand, Malaysia, Taiwan, Hong Kong, and Singapore might have played a bit of a role as well.

Turning to this morning, we don’t have any economic data to review today. However, we will get reports on September Retail Sales and the CPI this week. And the earnings parade will definitely start to roll later in the week.

Running through the rest of the pre-game indicators, the foreign markets are mixed by region with Asian markets down a bit and European markets up nicely. Crude futures are moving up with the latest quote showing oil trading higher by $1.58 to $73.15. On the interest rate front, we’ve got the yield on the 10-yr trading up to 3.38%, while the yield on the 3-month T-Bill is currently at 0.06%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another up open. The Dow futures are currently ahead by about 40 points; the S&P’s are up about 6 points, while the NASDAQ looks to be about 9 points above fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Sherman-Williams (SHW) – Upgraded at BofA/Merrill Occidental Petroleum (OXY) – Downgraded at Citi Lockheed Martin (LMT) – Downgraded at Cowen MasterCard (MA) – Upgraded at Credit Suisse Visa (V) – Upgraded at Credit Suisse WW Grainger (GWW) – Upgraded at Credit Suisse Dr. Pepper Snapple (DPS) – Downgraded at Deutsche Bank Google (GOOG) – Estimates increased at Goldman Estee Lauder (EL) – Added to Conviction Buy list at Goldman Johnson Controls (JCI) – Removed from Conviction Buy list at Goldman Cameron Intl (CAM) – Downgraded at HSBC Nokia (NOK) – Downgraded at HSBC Sempra Energy (SRE) – Upgraded at Jefferies Symantec (SYMC) – Upgraded at Jefferies Citrix Systems (CTXS) – Upgraded at Jefferies VMware (VMW) – Upgraded at Jefferies Kroger (KR) – Upgraded at JP Morgan Plum Creek (PCL) – Upgraded at JP Morgan Brocade (BRCD) – Downgraded at Oppenheimer NVIDIA (NVDA) – Downgraded at Pacific Crest First Solar (FSLR) – Downgraded at Pacific Crest American Eagle (AEO) – Upgraded at Susquehanna Amgen (AMGN) – Upgraded at UBS SanDisk (SNDK) – Downgraded at UBS Coca-Cola (KO) – Estimates and target increased at UBS Advanced Micro (AMD) – Upgraded at UBS

Long positions in stocks mentioned: GS, GOOG, OXY, DPS

Be sure to keep everything in perspective 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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