Daily State of the Markets 
Thursday Morning – August 27, 2009  

The primary reason we write the Daily State of the Markets report each morning is to make darn sure we understand what is driving the market at all times. As I’ve mentioned a time or three over the years, the idea is if we can stay in tune with the driving forces in the short-term, then we shouldn’t get fooled when the environment changes or wind up straying too far from the major theme.

So, with the market basically defying the odds, logic, and a whole bunch of bearish traders right now, we thought it might be a good idea to make sure we spell out what those driving forces in the market are at the present time.

Cutting to the chase, we believe there are two factors at work here. First and foremost is “the recovery trade.” While this theme actually takes many forms, it is based primarily on the idea that at least parts of the world are currently in a recovery mode. Think China and Latin America here for sure. But then as an adjunct to this, with the U.S. recession having ended, traders are now betting on a recovery here at home.

Therefore, as long as the economic data both here and abroad continues to show that the recovery theme remains intact, then, in short, stocks can go higher. Why? Because of the second driving force right now – mutual fund buying.

While we won’t have empirical proof for another month or so that the mutual fund industry is putting any cash that may be laying around back to work, we are fairly confident that the quarterly reports will show that this is exactly what has been occurring. Experienced fund managers know that stocks rally in anticipation of both a recovery in the economy and in corporate earnings. Thus, now is exactly the time that fund managers are thinking about not getting left behind.

Sure stocks have run a long way and are overdue for a correction of almost any magnitude. But with “the recovery trade” still working, we may not see a meaningful pullback until either some doubt creeps in or the trade loses steam.

Which brings us to this morning’s point. Yesterday’s economic data in the U.S. was indeed better than expected as both New Home Sales and Durable Goods Orders came in above expectations. But what you probably didn’t hear was the report that the Chinese are talking about putting “curbs on overcapacity” especially in the areas of steel and cement. I know what you’re thinking because for most investors, the word “huh?” is the logical response to this statement.

While we’ve only got a couple moments left this morning, we can sum up the situation here with the old refrain, “slow down, you’re going too fast.” So, if the Chinese are thinking about slowing things down – even a little – well, this isn’t exactly what “the recovery trade” is all about and is definitely something to watch.

Turning to this morning, Initial Jobless Claims were reported at 570K, which was a bit above the consensus for 565K and below last week’s revised total of 580K. Continuing Claims for Unemployment Insurance were better at 6.133M vs. 6.242M and last week’s total of 6.241M.


Next up, the government’s second try at the Q2 GDP numbers shows a decline of -1.0% in the April through June period, which better than the consensus of -1.5% but in line with the first “guess” of -1.0%. The GDP Price index came in unchanged vs. +0.2% while Personal Consumption was better at -1.0% vs. -1.3% and the Core PCE (a measure of inflation) was reported at 2.0% vs. 2.0%.

Running through the rest of the pre-game indicators, the major overseas markets mostly lower. Crude futures are moving a bit lower with the latest quote showing oil trading off by $0.57 to $70.86. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.48%, 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 flat-to-slightly-lower open. The Dow futures are currently off by about 2 points; the S&P’s are down about a point, while the NASDAQ looks to be about a point above fair value at the moment.

Today’s Earnings Before the Bell:

American Eagle (AEO) – Reported $0.14 vs. $0.14 Toronto-Dominion Bank (TD) – Reported $1.47 vs. $1.23 Toll Brothers (TOL) – Reported -$2.93 vs. -$3.03

Upgrades/Downgrades/Brokerage Research:

Dollar Tree (DLTR) – Upgraded at Barclays Olin Corp (OLN) – Upgraded at Barclays Bed Bath & Beyond (BBBY) – Initiated Buy at Citi Williams-Sonoma (WSM) – Initiated Buy at Citi Intl Paper (IP) – Estimates and target increased at Deutsche Bank Greenhill (GHL) – Upgraded at Goldman Alkermes (ALKS) – Downgraded at Jefferies Heartland Express (HTLD) – Upgraded at UBS Knight Transportation (KNX) – Upgraded at UBS

Long positions in stocks mentioned: none

Be sure to take time to breathe 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


The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com 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 our websites and TopStockPortfolios publications 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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.