Daily State of the Markets 
Thursday Morning – February 25, 2010  

The Dow dropped 101 points on Tuesday only to rebound 91 points on Wednesday. So, is there anything to take away from the back-and-forth action or is this just another example of boys and their toys (as in hedge funds and big institutions running buy and sell programs)?

While this is clearly just one man’s opinion, I am of the mind that Ms. Market did indeed tell us a thing or two over the past couple of sessions. The most important thing that we’ve learned over the past 48 hours is that the outlook for the Fed’s exit strategy trumps the recent economic data – even some pretty crummy economic data.

On Tuesday, stocks were tagged for a triple digit loss, which was blamed on the much weaker than expected data on consumer confidence. The move managed to violate, albeit modestly, an important moving average (the 50-day) and the bears could be heard telling anyone that would listen that a double-dip is about to begin and that we will be retesting the lows in the very near future.

However, we opined that the drop on Tuesday had more to do with a buyers sitting on their hands and waiting on Bernanke than a reaction to data showing that the economy might be getting worse. Sure, the confidence numbers were bad. But with the Fed having surprised everyone with their purportedly meaningless increase in the Discount Rate, the bigger worry was that the very transparent Bernanke Fed had suddenly become decidedly less so.

Exhibit B in our argument went on display yesterday morning as the report on New Home Sales was more than a little disappointing. Sales in January fell to a record low of just 309K on an annualized basis, which was well below the consensus for 354K and the December total of 348K. In addition, the price of new homes being sold dropped another 5.6% to $203.5K in January.

So, if you add the really bad housing report on top of the surprisingly weak consumer confidence number, one might have expected to hear an awful lot of talk about the economy turning lower and perhaps a precipitous drop in the stock market. But instead, we got a gain of 91 points, which put the Dow back within spitting distance of its recent high-water mark.

The final input to our analysis of the past two sessions is Ben Bernanke’s testimony in front of the House Financial Services Committee on Wednesday. In short, the Fed Chairman did a good job of convincing traders that the Fed has no interest in surprising the markets and that nothing has changed on the monetary policy front. Bernanke once again uttered the magic words, “for an extended period” in relation to how long rates are expected to stay low, which was music to the ears of the glass-is-at-least-half-full camp.

So, our take away from the recent down-one-day-and-then-up-the-next action is (a) everyone knows the economic recovery is going to be uneven and the confidence and new home sales data is simply part of the recovery process, and (b) having confidence in the Fed’s plan is much more important to the market right now.

Turning to this morning, the attention appears to be returning to Greece as there is talk of possible downgrades at Moody’s and S&P. On the economic front, orders for long-lasting goods rose nicely in January. The Commerce Department reported that Durable Goods orders grew by +3.0% during the month, which was ahead of the consensus expectations for +1.5% and above December’s revised reading of 1.9% (revised up from +0.3%).

On the jobs front, the Labor Department reported that initial claims for unemployment insurance for the week ending February 20th rose by 22,000 to 496K, which was above the expectations for a reading of 460K. Last week’s revised total was 474K (from 473K). Continuing Claims for unemployment for the week ending February 6th were also above consensus at 4.617M vs. expectations for 4.57M and last week’s revised total of 4.611M (from 4.563M).

Running through the rest of the pre-game indicators, the overseas markets are mostly lower. Crude futures are down $1.10 to $78.90. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.65%. Next, gold is moving down by $5.80 to $1091.40 and the dollar is higher against the Yen, Euro, and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a down open. The Dow futures are currently off by about 80 points; the S&P’s are down about 10 points, while the NASDAQ looks to be about 14 points below fair value at the moment.

Yesterday’s Earnings After The Bell

Company

Symbol

EPS
Reuters
Estimate
Blockbuster BBI -$0.24 -$0.24
Salesforce.com CRM $0.16* $0.15
Express Scripts ESRX $0.97 $0.90
Flowserve FLS $1.96 $1.90
Limited Brands LTD $1.01 $0.98
TriQuint Semiconductor TQNT $0.14 $0.13

Earnings Before The Bell

Company

Symbol

EPS
Reuters
Estimate
Dr Pepper Snapple DPS $0.44 $0.43
Foster Wheeler FWLT $0.67 $0.65
Heinz HNZ $0.83 $0.77
Iron Mountain IRM $0.27 $0.23
King Pharmaceuticals KG $0.23 $0.24
Kohl’s KSS $1.40 $1.37
Mylan MYL $0.33 $0.30
Newmont Mining NEM $1.14* $0. 79
NII Holdings NIHD $0.35 $0.56
MetroPCS Communications PCS $0.09 $0.06
US Cellular USM $024. $0.20

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

Upgrades:

Clean Harbors (CLH) – BofA/Merrill Transocean (RIG) – Defended at Citi CME Group (CME) – Deutsche Bank Nike (NKE) – Added to Conviction Buy at Goldman Big Lots (BIG) – JP Morgan

Downgrades:

Fifth Third (FITB) – Citi Blockbuster (BBI) – Janney Capital Palm (PALM) – Morgan Stanley Gamestop (GME) – Piper Jaffray Psychiatric Solutions (PSYS) – Piper Jaffray Thomson Reuters (TRI) – Piper Jaffray

Long positions in stocks mentioned: ESRX, MYL, DPS

Best of luck today 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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