David Moenning's Daily State of the Markets: 05/07

May 7, 2008 10:15 AM EDT

Paulson Joins the Chorus

Here’s a link to listen to an Audio Version of the report

Perhaps the biggest driving force behind the market’s recent rally to the highs of the year has been the idea that the worst is behind us in terms of the damage inflicted by the subprime slime and the ensuing credit crisis. This thought has been backed up by a long line of movers and shakers who have declared publically that we’ve seen the worst. And now that Treasury Secretary Henry Paulson has joined the chorus, it looks like traders may have nothing to fear but fear itself on the subject.

It was the topic of the financial crisis that once again drove trading on Tuesday as stocks first dove on a dismal report from Fannie Mae (FNM) and then rebounded on an update from AMBAC Financial (ABK). Fannie first got the market’s attention when they came out with a Trifecta of bad news as the company missed earnings badly, announced that they needed to raise $6 Billion, and then cut their dividend by almost 30%. But, in keeping with the the-worst-is-behind-us theme, the stock quickly reversed course and finished higher by almost 9% on the day.

The financials also struggled yesterday with word that Merrill Lynch keeps finding billions of dollars of crummy assets (Level 3 assets increased by 70%), asset manager Legg Mason lost more than expected last quarter and announced they would sell $1Billion in stock, and then UBS said it would sell $15Billion in mortgage assets to a new Blackrock (BLK) fund and slash more than 5000 jobs.

The worst is over theme was also supported by the report from financial guarantor, AMBAC Financial Group (ABK). While many believe the company’s future isn’t exactly rosy, as evidenced by the stock’s drop in price from near $100 to a hair under $5 yesterday, their Q1 update was definitely encouraging from a big-picture standpoint. The company said yesterday that secondary market transactions with the company’s insurance are steadily increasing and that new business during the first two weeks of April was equal to its entire production in the first quarter of 2008.

I know that rehashing this type of news is beyond boring. But, as they say, it isn’t the news it is how the market reacts to the news that is important. So, despite the auspicious start and all the bad news in the financial sector, traders focused on the idea that the worst is indeed behind us and decided that buying remains the order of the day.

Turning to this morning, the government just released the first quarter numbers on Non-Farm Productivity and Unit Labor Costs. The report was largely better than expected as productivity increased by 2.2% versus expectations for 1.6%. On the inflation front, Unit Labor Costs came in a bit under expectations at 2.2% versus the consensus of 2.5%.

Running through the rest of the pre-game indicators; with the exception of Hong Kong, the foreign markets are mostly higher. Crude futures are moving up again with the latest quote showing oil higher by $0.21 to $122.05. Interest rates are also moving up on the better than expected economic data as the yield on the 10-yr is currently trading at 3.92%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to relatively flat open. The Dow futures are currently ahead by about 8 points; the S&P’s are down about a point, while the NASDAQ looks to be about 3 points below fair value at the moment.

Stocks “In Play� This Morning:

Yesterday’s Earnings After the Bell:

American Capital (ACAS) – Reported $0.77 vs. $0.76
Cisco Systems (CSCO) – Reported $0.38 vs. $0.36
Disney (DIS) – Reported $0.58 vs. $0.50
Onyx Pharmaceuticals (ONXX) – Reported $0.24 vs. -$0.05
Pitney Bowes (PBI) – Reported $0.66 vs. $0.65
Tesoro (TSO) – Reported -$0.60 vs. -$0.50


Today’s Earnings Before the Bell:

DirecTV Group (NYSE: DTV) – Reported $0.32 vs. $0.31
Devon Energy (NYSE: DVN) – Reported $2.74 vs. $2.33
Marsh & McLennan (NYSE: MMC) – Reported $0.40 vs. $0.44
NCR Corp (NYSE: NCR) – Reported $0.21 vs. $0.17
Telephone & Data Systems (NYSE: TDS) – Reported $0.62 vs. $0.57

News, Upgrades/Downgrades/Brokerage Research:

Anadarko Petroleum (NYSE: APC) – Upgraded at Bernstein
Georgia Gulf Corp (NYSE: GGC) – Downgraded at Citi
Sohu.com (Nasdaq: SOHU) – Downgraded at Deutsche Bank
NYSE Euronext (NYSE: NYX) – Upgraded at Deutsche Bank
Apple (Nasdaq: AAPL) – Mentioned positively at Goldman
Teva Pharmaceuticals (Nasdaq: TEVA) – Removed from Conviction Buy list at Goldman
Lukoil (Nasdaq: LUKOY) – Upgraded at Goldman
PetroChina (NYSE: PTR) – Downgraded at JP Morgan
Knight Capital Group (Nasdaq: NITE) – Downgraded at Lehman
Coca Cola Femsa (NYSE: KOF) – Downgraded at Morgan Stanley
Sara Lee (NYSE: SLE) – Upgraded at Wachovia

Mr. Moenning holds Long positions in stocks mentioned: DVN, TDS

Note: All earnings reports compared to Reuter’s consensus estimates

** For More of David Moenning’s Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopGunsTrading.com

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.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 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.


David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: DMoenning@HeritageCapitalManagement.com

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• Goldman Sachs Conviction Buy List
• Deutsche Bank
• UBS
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