David Moenning's Daily State of the Markets 05/05

Clear Cut Catalysts

For a change, the catalysts for yesterday�s move higher were fairly clear cut. There was no need to dig around for rumors or to review speeches by Fed governors. Nope, yesterday�s action was easy to understand as oil prices plunged and the monthly retail sales reports showed that the consumer is still alive and shopping.

Although Easter�s shift forward into the April reporting period certainly put some pop in the numbers, chain-store sales still rose more than expected. Led by Wal-Mart�s jump of 6.8% and Target�s sales growth of 10.4%, the reports helped alleviate fears that the consumer would stop spending in response to higher gasoline prices. But to be fair to the bears, the latest big jump in gas prices came later in the month. So it remains to be seen how consumers will react to the recent media attention placed on the price of gasoline

And speaking of oil, the latest spike higher in gasoline prices was tied to the potential for shortages that might have occurred because of the government�s mandated move to ethanol. Everyone knows that there is plenty of crude available at the present time. At issue is the ability of refineries to produce enough of the right mix of gasoline in the prescribed time frame. But a proposal by Energy Secretary Bodman to eliminate the tax on ethanol imports, when combined with the proposal to push back the deadline for the switch from MBTE, means that worries over potential gasoline shortages may be overblown. Oil dropped -$2.34 in response and finished the day below $70 at $69.94. However, before you run out and start shorting oil contracts, let�s remember that we�ve still got a couple of issues out there (most notably, Iran) that will probably continue to support the price of crude.

So with falling oil prices and news that the consumer has yet to crawl into a hole, stock prices rallied Thursday. However, the enthusiasm was curbed by concerns over this morning�s employment report. Lest we forget, the Fed is still in play and remains a major focal point right now with the FOMC meeting next week.

But the bulls will argue that yesterday�s gains in front of the jobs report goes to the underlying strength in the market right now. Of course, the bears counter with the idea that momentum appears to be waning as the major indices continue to bump into overhead resistance.

Turning to this morning, it�s all about jobs. Looking at the numbers, it would appear that the Employment report came in adorned in golden pigtails. Non-farm payrolls increased by 138,000, which was less than the consensus expectation of 200,000. The unemployment rate held steady at 4.7% but the wages component was a bit stronger than anticipated. The average work week increased by a 0.1% while hourly earnings popped up much more than expected.

Stocks and bonds are rallying in response to the data while the dollar is falling. The bulls will argue that the report makes it clear that the Fed needs to stop now while the economy is still growing nicely. The bulls will also suggest that this month�s weakness in new job creation is an indication that the rate hikes may be beginning to have an impact on the labor market and that the Fed should quit before it inflicts any lasting damage.

Running through the rest of the pre-game indicators, both Hong Kong and Japanese markets were closed overnight while European markets are mostly higher this morning. Oil futures are bouncing back up and are currently trading higher by $0.55 to $70.49. Natural Gas is also trading higher to $7.21. Gold is quoted this morning at $682. Interest rates are moving lower in response to the weaker than expected jobs number with the 2-year currently trading at 4.91% and the 10-yr is at 5.11%, which is down from the 5.15% level seen before the report. And finally, stock futures in the U.S. are pointing to a stronger open with the Dow futures up 34, the S&Ps are higher by 4.30, while the NASDAQ futures are gaining 8.20.

Stocks �In Play� This Morning:
Semtech (SMTC) � Downgraded at Morgan Stanley
Analog Devices (ADI) � Downgraded at Merrill Lynch
Scottish RE (SCT) � Downgraded at Bear Stearns & Keefe, Bruyette
Toll Bros (TOL) � Reported Q2 Home Sale revenue $1.44B vs. $1.45B
Berkshire Hathaway (BRK.A) � WSJ says announcement for major acquisition forthcoming
Phelps Dodge (PD) � Mentioned positively in Business Week
Time Warner (TWX) � AOL to offer free incoming calls to IM users
EOG Res (EOG) � Reports $1.53 vs. $1.27, Revenues $1.08B vs. $1.02B
HCC Ins (HCC) � Reports $0.67 vs. $0.62, Revenues $466.1M vs. $447.1M
Apple (AAPL) � LoopRumors says MacBooks to begin appearing in stores
McKesson (MCK) � Reports $0.68 vs. $0.68, Revenues $23.06B vs. $22.81, Authorizes $500M buyback
Oceaneering Intl (OII) � Reports $0.93 vs. $0.76, Revenues $281.5M vs. $276.7M, Guides higher
Global Signal (GSL) � Upgraded at Bear Stearns
Activision (ATVI) � Mentioned positively at Deutsche Bank

Disclosure: Long positions in stocks mentioned: BSC, MS, MER, MCK

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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 of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM�s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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