David Moenning�s Daily State of the Markets: 2/15

Too Crowded

Good morning. Yesterday�s surprise blast higher was a fine example of what happens when a particular trade becomes too crowded. The day started off on the right foot as the report on Retail Sales came in much stronger than expected. The data perked up the bulls who had been feeling blue due to all the talk of a struggling economy and uncertainty in front of Bernanke�s testimony before Congress today.

In short, the report on Retail Sales showed that the consumer, who is responsible for almost 70% of the country�s economic activity, is alive and shopping. The retail numbers came in almost three times higher than expectations, which, by the way, was the biggest miss by economists in at least four years. Thus, the question begs to be asked, �Why was the report so strong?�

The answer is gift cards. If you think back to December, there was an awful lot of chatter about the impact of gift cards on the shopping season. Recall that retailers reported the sales of gift cards to be up nicely, but there was worry that consumers wouldn�t redeem them in a timely fashion. However, the January Retail Sales report shows that people do indeed redeem those cards pretty quickly. For example, clothing sales jumped 4.2%, which was the most since October 2002 and sales at restaurants (a very popular gift card selection) rose by 3.2%, which was the most in five years.

So armed with the knowledge that the consumer still apparently enjoys spending, in spite of the fact that their homes are no longer appreciating at a ridiculous clip, stocks started the day higher. However, with Bernanke�s first Congressional Testimony on tap in less than 24 hours and questions swirling as to what he might say, no one really expected stocks to get much traction to the upside.

But, no one really expected oil to drop below $60 either. And once it did, the bears realized that they were in trouble and it quickly became obvious that the trade to the short side in front of Bernanke was too crowded. Thus, oil�s move under $60 acted like a fire alarm being pulled in a crowded theater, and the bears rushed to the exits.

Regardless of the reason, stocks enjoyed one of their best days in more than three months and the venerable DJIA moved up to within spitting distance of new cycle highs. Volume improved nicely over Monday�s drop (a good thing) and breadth was solid.

Turning to this morning, it would appear that traders are waiting to hear what Mr. Bernanke has to say at 10:00 am eastern time before making any further commitments. Traders are hoping that the new Fed Chairman will continue to promote transparency, provide guidelines as to what can be expected, and speak in a manner that they can understand.

This morning�s economic data came in a bit better than expected. The Empire Manufacturing index was reported at 20.3, which was higher than the consensus estimate of 18.0 and the prior month�s reading of 20.1. The data suggest that manufacturing in the New York region remains strong.

Running through this morning�s pre-game indicators, Overseas markets were marginally lower with the exception of Hong Kong. Gold is up a smidge this morning with a gain of +$0.50 to $546.20. Oil is rebounding by +$0.24 to $59.81. Natural Gas is up a dime to $7.21. Bond yields are steady with the 2-yr at 4.67% and 10-yr at 4.60%. And finally, stock futures in the U.S. are marginally lower before the bell (Dow -10, S&P -1.50, and NASDAQ -0.50).

Stocks "In Play" This Morning:
ANF � Reported $1.80 vs. $1.78 Revenue $961.4M vs. $940.1M
BRK.A � Reports stakes in HRB, BUD, PIR, WFC
ECA � Reported $1.46 vs. $1.32 Revenues $4.28B vs. $3.96B
MER � Reached agreement with BLK
TXN � UBS Positive on potential gain in market share
JPM � Added to MER focus list

Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: MER

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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