Contributors

From http://www.moneymorning.com

By Shah Gilani
Contributing Editor

Given that the U.S. Federal Reserve is the master of “Three-Card Monte,� can you tell what’s in the cards for short-term interest rates?

Three-Card Monte is a confidence game in which manipulation and misdirection are employed as the “mark� tries to guess where the “money card� is among the three facedown choices.

The Federal Reserve’s job is to masterfully manipulate the public’s perception of where interest rates are headed. And it runs this larger-than-life game with three specific face cards:

• Inflation.
  
• The U.S. dollar.
  
• And the actual “money card,â€� which is interest rates.

For the Fed, the end game is public confidence itself. The central bank actually intended to gain and keep our confidence in its ability to stem inflation and strengthen the greenback. And it pursues these two objectives by simultaneously managing the direction of interest rates and working to keep the economy from dropping into a recession, or worse, a depression.

The Fed and the Global Game of Dealer’s Choice

First, ladies and gentlemen, please take a good look at the inflation card. What we have here is the Jack of Spades, the rising inflation card, and a devilish villain whose prospects instill fear in all the world’s central bankers – not to mention the public at large. But remember that real inflation is initially trumped by inflationary expectations. Here’s what that means: No matter how bad inflation gets when it rears up, this tsunami of swirling prices doesn’t really reach shore and inflict damage until there is a pervasive expectation of its arrival.

It’s here that the perception about the potential impact actually begins to take hold and starts changing our behavior.

If a loaf of bread costs $2.00 today and $2.50 tomorrow, is that a problem?  Let’s assume that prices for some other things are rising, too. That may or may not be a problem; it depends on what you are buying. But if you look at the increase in those items that have risen in price, you can raise the specter of impending inflation. The question to ask is this: Is it affecting you?

Prices rise and fall based not only on the supply and demand for our loaf of bread, but also on the same catalysts for the underlying ingredients and labor that go into that bread loaf.

If increases in those costs are passed along in the form of higher prices for the finished product, then we will pay more. But we may no longer have a need to purchase that loaf of bread, or we may have substitution possibilities that are not as costly. Inflation is only a problem if there are a lot of goods and services for which there are no substitutes, meaning that we have to pay those passed-along higher prices for such “essentials.�

It is therefore the expectation of inflation across a wide spectrum of mostly essential goods and services that begets real inflation. And as we’ll see shortly, it’s a viciously virulent circle. If prices rise and we cannot afford the goods and services we demand, we will seek higher wages to be able to finance this newfound higher cost-of-living. If we achieve higher wages to pay for the higher cost-of-living, our employers’ profit margins are crimped and they have to charge more for the goods and services we produce for them so that they can pay us.

Finally we have a “real� problem – “real� inflation. And it’s quite a hand to be dealt.

But beware of the trickery being played upon us. Let’s take a look to see what I mean.

Watch for the Fed’s One Hellacious Hole Card

The first card of the three to be played is the Jack of Spades – the card the Fed shows us when it acknowledges its own inflationary worries. Central Bank Chairman Ben S. Bernanke & Co. show us that card because it’s meant to tell us: “We have to raise interest rates to stamp out your expectation that inflation is taking root.�

That’s an important part of the central bank’s hand. But here’s a secret those of you who aren’t yet initiated in this confidence game probably aren’t aware of: The Fed doesn’t really have to actually raise interest rates, since the mere expectation the central bank is going to act is enough to change individual behaviors and alter market trends.

Second, ladies and gentlemen, we have the Jack of Clubs – the falling-dollar card, another devilish villain. Take a good look, folks: The prospect of a falling dollar means that – relative to other currencies and other economies (Europe, China, India, Japan and South America, to name just a few), America’s worth is declining.

The falling-dollar card also points to increased inflation. Why? Because the more the greenback declines, the more it costs us to buy the goods and services we get from all of our trading partners.

Additionally – and much more insidiously in nature – the value of all the dollars that our trading partners hold is falling, meaning that the buying power of their dollar reserves are in decline, as well. That’s a problem for many reasons, not the least of which is that their stronger currencies allow them to buy U.S. assets at bargain-basement prices. Indeed, it’s already happening, as we see from all the foreign takeovers of U.S. companies, and from Dubai’s recent buyout of New York’s Chrysler Building.

Moreover, since most of the world’s commodities – especially oil – are priced in dollars, it takes more and more dollars to pay for those commodities. And with oil, the producers are loath to see their petro-gusher revenue decline. So with every downward click in the dollar, there’s a corresponding upward click in the per-barrel price.

If that doesn’t represent inflation, nothing does.

For the Fed, then, the Jack of Clubs is the card the central bank is now waving to say: “We have let the greenback fall far enough and we are ready to support our dollar and strengthen it.�

At this point, the only real way to strengthen the dollar is to raise interest rates.

So, my good friends, just where is that third card, the Queen of Hearts, the interest rate card? In which direction are rates going?

The Queen of Hearts is nowhere in sight.

The confidence game now demands that the Fed take action against inflation and strengthen the dollar. The two Jacks are the cards central bank policymakers are energetically and enthusiastically waving in our faces. But it’s misdirection – that’s the game.

By waving those two cards, the Fed implies that interest rates must rise to stem inflation and support the dollar.

But rates cannot rise. The game is fixed. And most investors don’t even realize it.

The Fix Is In

The Fed is not really worried about inflation (on a relative basis). It’s true that inflation has reared its ugly head, and is inflicting both damage and pain on the U.S. economy. But the collective expectation for inflation and its resulting pressures are not here yet. The Fed knows that as we are falling deeper into recession, jobs will be lost, wages will not rise, consumers will not be buying. There’s no real need to raise rates. The central bank just needs to show us that it has that card; it’s part of the game. It’s about giving us confidence in its resolve to do battle with the evil forces of inflation.

The same is true of the Fed and the dollar. It’s only been in the past couple of weeks that the current “Bush-league� administration and the Fed have even acknowledged the dollar’s big swoon. Why the delay? Because they knew consumers were tapped out and that the only growth (which they point to as part of their confidence-building shell game) is being generated by exports. The dollar has fallen so far that our U.S.-made goods and services are essentially “on sale� when compared to wares made in countries whose currencies have zoomed to record highs against the greenback.

I hope I’m not confusing you. But if you are a bit bewildered, let me provide the “spoiler� here by telling you precisely why the “money card� stays face down: Interest rates cannot go higher.

The credit crisis has blown our banking system apart, and the fallout from that explosion has smashed our entire capital formation/borrowing & lending infrastructure. And the capital that formally emanated from that sophisticated system is what makes the merry go round.

Rates now have to stay low in order to jump-start these crucial liquidity flows and re-ignite demand. While it’s true that maintaining low interest rates will further fuel inflation, the Fed really has no choice. Or perhaps it’s a Hobson’s choice. You see, if the central bank actually raises rates to combat inflation, adjustable rates on mortgages will rise, setting in motion a whole new round of housing defaults, which will lead to an escalation of bank write-downs, which will torpedo stock prices, which will force institutional investors to liquidate holdings to raise capital. The same will happen out in the marketplace, where companies with debt coming due will find it impossible to refinance, touching off still another avenue of defaults, losses, and write-downs.

Better to keep rates low now – and believe that it can throttle back inflation later on.

Beware of the proverbial dead-cat bounce. Keep your eyes on the prize. There will be a market bottom. It’s not clear how long that will take. But keep this in mind: It won’t be a buying opportunity until the “shills� have been shaken out and “the game� the Fed is playing is no longer a confidence game, but instead is the kind of transparent, well-supervised marketplace that’s the hallmark of capitalism.

More reports at http://www.moneymorning.com

From http://www.moneymorning.com

By Martin Hutchinson
Contributing Editor

Dubai has plenty of qualities that catch an investor’s eye.

• The emirate has the world’s only (self-proclaimed) 7-star hotel.
  
• Dubai also is home to the biggest financial market in the Middle East, which is itself publicly quoted and trades at 25 times forecast 2008 earnings.
  
• It has been enjoying one of the greatest construction booms the world has ever seen.
  
• And Dubai is planning a huge tourist expansion, aiming to boost that sector to more than the 18% of the economy it already accounts for.

So, why aren’t Dubai investments a screaming buy, where we should all be investing our money? After all, plenty of brokers think it’s just that.

From a short-term perspective, Dubai investments haven’t done too badly. The Dubai Financial Market General Index is down about 13% this year, far less than the much-hyped emerging markets of India and China, or even the United States.

But there’s a possible catch.

Whereas 2006 and 2007 were good years for investors in India and superb ones for investors in China, they were lousy for investors in Dubai. The DFM General Index hit its all time high in November 2005, declined pretty steadily over the next two years, and is currently sitting about 40% below that high. Even at that depressed level, the DFM General Index is still trading at about 17 times projected earnings for this year and 3.3 times book value, so it’s not cheap.

That immediately raises questions. While Dubai has little in the way of its own oil reserves, its economy rests fundamentally on its position as entrepôt for the immense oil-exporting region of the Middle East, and for the United Arab Emirates (UAE), the oil-rich federation of which Dubai is a member. Oil prices were around $60 per barrel in November 2005 when the DFM General Index was at its peak; oil is now trading in the neighborhood of $130 per barrel, even after last week’s big sell-off – so why is Dubai’s stock market down 40%?

It’s entirely possible that Dubai isn’t as solid as some of its proponents believe.

Two years ago – before the real estate crash – it might have seemed impressive that Dubai, with 0.02% of the world’s population, was employing more than 10% of the world’s tower construction cranes; today we know better. Dubai’s rate of inflation is around 20%, and it’s on the upswing, while home mortgage interest rates sit below 7%.  That means that the cost of making a home mortgage – in real terms – is negative 13%. The UAE government is considering allowing its currency, the dirham, to float upward against the dollar, but hasn’t done so yet.

Dubai received more than 7 million tourists last year, with 1 million of those coming in from Great Britain (who presumably prefer the climate) – but the British government currently rates Dubai’s terrorism threat at its highest level. It’s not hard to imagine what a terrorist attack could do to Dubai’s impressive tourist rates.

Dubai is also planning to spend $82 billion on aerospace projects to include the world’s largest airport – but with a population of only 1.5 million, it will need a lot of foreign traffic to fill up such a behemoth.

The potential for that to come to pass is there, given the growing levels of investment that China and others are making in the Middle East, and because the Dubai project isn’t solely focused on tourism: The airport and aerospace hub is viewed as an economic-development project. But success is far from guaranteed, and an economic downturn could make the objectives tough – if not impossible – to achieve. Indeed, should the ongoing global financial crisis eviscerate worldwide growth, Dubai’s development strategy could be exposed as a bubble, not a boom.

To be sure, other small nations have engineered economic miracles. Consider, for example, the economic success of Singapore, which has a smaller land area but three times the population.

Like Dubai, Singapore has no core advantage, such as a wealth of natural resources. Nor does it have a bevy of natural tourist hot spots. And much like Dubai, Singapore’s only advantage is one of geographic position. However, Singapore has an income per capita at purchasing power parity of $49,700 (eighth highest in the world) compared to the UAE’s $37,300.

Singapore’s growth has been built on two factors:

• The extremely high education level of its population (relative to income at first, in the 1960s, but in absolute terms now).
  
• And an obsessive focus on moving up the value chain in everything it does.

Dubai has neither advantage; it supplements its small local population with a huge underclass of immigrants (more than 80% of the population in the UAE as a whole), rather than upgrading the capabilities of its own people, and it relies on building artificial tourism in an area where (because of the unpleasant climate and relative lack of natural or historic attractions) it’s possible that no natural flow of tourists would have otherwise occurred.

An economy built on construction, tourism, and a boundless flow of cash, without any special knowledge base, is one that could end up being derailed in the long run. And that long run could be more painful if it turns out that Dubai has been feeding a major construction bubble through deeply negative interest rates.

The other potential black cloud looming over the Dubai economy is that of oil prices, should $130 - $140 per barrel oil turn out to be a short-term speculative price spike.

With the Bush Administration pushing for offshore drilling and the world automobile industry devastated by consumer tastes that quickly shifted to small cars and trucks, increased supplies and decreased consumption could push oil prices down to a more reasonable level.

Assuming OPEC doesn’t intercede and act to keep prices high, the right confluence of factors could potentially push oil prices back down under the Century Mark. And in a perfect world, with the right confluence of factors, oil could end up below $100 per barrel, or even as low as the $60-$80 range. And while that price level would still be well above the $10-$15 per barrel prevalent before 2002, it is far below oil’s current levels.

The Middle East in general has predicated their future plans on the oil bonanza continuing in full flow for the indefinite future. Even though $60-80 oil would provide ample revenue for their citizens to enjoy an excellent living standard, their economies are not properly set up to adjust to such a lower revenue flow. If oil prices were to fall, the inevitable effect would be tighter money as interest rates return to normal levels, exacerbated by an acute cash shortage.

Dubai is looking to diversify itself away from the petro-gusher, which is one reason it is trying to position itself as a global boom intermediary, benefiting from tourism and establishing itself as a new residential destination for the world’s uber-rich. It also aims to utilize its airport and aerospace ventures to fuel its real estate and global commerce aspirations.

But a key question remains: Is it still tied in so tightly to the Middle East “black gold� bonanza that it will suffer in kind should energy prices hit a deflationary downdraft?

The next few years will be telling. If its global growth aspirations get a needed lift, the tiny Gulf nation could become more than just a well-recognized name on a map; it could end up as a key stopping-off point for business executives traveling from one side of the world to the other, might one day even evolve into a commercial spaceport, and will stand as an example of a country that was able to engineer an economic makeover of massive proportions.

But should oil prices crater, Dubai’s aerospace venture fail to attain take-off speed, and its vision as a tourism and residential mecca of the future turn out to be ill-conceived as I fear, the opposite extreme is possible: With a construction bubble more inflated than the 2006 Florida condo market and a monetary policy looser than the one being operated by U.S. Federal Reserve Chairman Ben S. Bernanke, Dubai could shortly resemble a jungle of half-completed skyscrapers, with 10% occupancy rates and bankrupt landlords. Its landing would be painful, and, potentially, not long delayed. It’s not an investment for the risk averse.

More at: http://www.moneymorning.com

Never Mind?

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

For what seems like forever and a day, “the trade� among the hedge fund types (aka the evil speculators) was to be long “stuff� (oil, steel, coal, natural gas, etc) and be short just about anything in the financial sector. But, with the powers-that-be telling us once again that we’ve seen the worst in the financial crisis and convincing anyone that will listen that it’s simply un-American to short bank stocks, “the trade� has now been reversed. So nowadays, the way to print money in your leveraged portfolio is to be long just about any old bank or broker and to be short all the stuff that makes the world go around.

However, the advent of the “new trade� and the corresponding gains in the financials, brings up an interesting question. Since the financials are now sporting eye popping returns over the past week – Wachovia (WB) is up +85%, Fannie Mae (FNM) has gained +90% and even the beleaguered Lehman Bros (LEH) has put together a move up of +63% – do you suppose we’ll soon be hearing calls for MORE speculation instead of less? After all, things are now going the right direction, aren’t they? So, do you think we’ll soon hear one of the geniuses in Washington stand up and say “Oops, Never Mind� with regard to the witch hunt for the evil speculators?

Yesterday’s market was highlighted by yet another impressive run higher in the banks and brokers. Again, perhaps the evil speculators were to blame, but who really cares when the banking index soared +9% and the brokers jumped an equally impressive +8.4%.

The move in the financials was spurred once again by an earnings report that was bad, but not nearly as gosh-awful as had been expected. For example, Wachovia (WB) opened down when the company reported a quarterly loss of $8.9 Billion, or $1.27 per share, on revenues that fell short about $1 Billion. They then added insult to injury by announcing that the dividend was being cut by 87%. In addition, Fitch added fuel to the fire by downgrading WB’s debt. So, as one might expect, traders initially voted with their feet and Wachovia opened lower by about -11%.

However, just about the time that the folks in Washington might have been thinking about coming up with more ways to nail those nasty short-sellers, Wachovia announced that they were NOT interested in issuing more stock at this time. And just like that, boom – WB and the rest of the bank stocks were off to the races. And while we sincerely doubt that all of the buyers are long-term investors looking to put the stock away for the next decade, Wachovia did wind up with a nifty little gain of +27.4% on the day. God bless the speculators, eh?

Turning to this morning, we don’t have any economic data to review before the bell but analysts are being kept busy with a boatload of earnings reports as more than 150 S&P companies report this week. So far in the early going, we’ve got strength in the dollar and another drop in crude, which, as you might have guessed, is providing support for equities.

Running through the rest of the pre-game indicators; the major foreign markets are up nicely across the board. Crude futures are moving down again with the latest quote showing oil trading off $2.05 to $126.37. Interest rates are higher this morning with the yield on the 10-yr currently trading at 4.13%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 25 points; the S&P’s are up about 3.50 points, while the NASDAQ looks to be about 6 points above fair value at the moment.

Stocks “In Play� This Morning:

Yesterday’s Earnings After the Bell:

Broadcom (Nasdaq: BRCM) – Reported $0.25 vs. $0.35
CH Robinson Worldwide (Nasdaq: CHRW) – Reported $0.52 vs. $0.55
E-Trade Financial (Nasdaq: ETFC) – Reported -$0.19 vs. -$0.14
Illumina (Nasdaq: ILMN) – Reported $0.29 vs. $0.28
Intuitive Surgical (Nasdaq: ISRG) – Reported $1.28 vs. $1.18
Nabors Industries (NYSE: NBR) – Reported $0.73 vs. $0.69
Norfolk Southern (NYSE: NSC) – Reported $1.18 vs. $1.05
Pactiv (NYSE: PTV) – Reported $0.50 vs. $0.48
STMicroelectronics (NYSE: STM) – Reported $0.18 vs. $0.12
Southern Financial Group (NYSE: SFG) – Reported -$0.22 vs. -$0.17
Washington Mutual (NYSE: WM) – Reported -$3.34 vs. -$1.04
Yahoo! (Nasdaq: YHOO) – Reported $0.10 vs. $0.10

Today’s Earnings Before the Bell:

Arkansas Best (Nasdaq: ABFS) – Reported $0.64 vs. $0.75
Air Products (NYSE: APD) – Reported $1.32 vs. $1.31
Allegheny Technologies (NYSE: ATI) – Reported $1.55 vs. $1.56
Boeing (NYSE: BA) – Reported $1.16 vs. $1.30
ConocoPhillips (NYSE: COP) – Reported $3.50 vs. $3.53
EMC Corp (NYSE: EMC) – Reported $0.18 vs. $0.17
Exelon (NYSE: EXC) – Reported $1.13 vs. $1.01
General Dynamics (NYSE: GD) – Reported $1.60 vs. $1.44
Genzyme (Nasdaq: GENZ) – Reported $0.98 vs. $0.97
Hershey (NYSE: HSY) – Reported $0.28 vs. $0.28
McDonalds (NYSE: MCD) – Reported $0.94 vs. $0.86
PepsiCo (NYSE: PEP) – Reported $1.03 vs. $1.02
Pfizer (NYSE: PFE) – Reported $0.55 vs. $0.54
Phillip Morris (NYSE: PM) – Reported $0.86 vs. $0.83
AT&T (NYSE: T) – Reported $076. vs. $0.76
The Travelers (NYSE: TRV) – Reported $1.50 vs. $1.45
Unisys (NYSE: UIS) – Reported -$0.04 vs. $0.03
Whirlpool (NYSE: WHR) – Reported $1.53 vs. $1.37
Wyeth (NYSE: WYE) – Reported $0.91 vs. $0.87

News, Upgrades/Downgrades/Brokerage Research:

Freeport McMoRan (NYSE: FCX) – Mentioned positively at Citi
Target (NYSE: TGT) – Downgraded at Credit Suisse
American Axle (NYSE: AXL) – Downgraded at Deutsche Bank
First Horizon Nat’l (FHN) – Upgraded at Goldman
PNC Financial (NYSE: PNC) – Upgraded at Goldman
US Bancorp (NYSE: USB) – Downgraded at Goldman
Kinetic Concepts (NYSE: KCI) – Upgraded at Goldman
AXA (NYSE: AXA) – Upgraded at HSBC
Frontline (NYSE: FRO) – Upgraded at JP Morgan
Caterpillar (NYSE: CAT) – Downgraded at JP Morgan
Costco (Nasdaq: COST) – Downgraded at JP Morgan
Nordic American Tanker (NYSE: NAT) – Upgraded at JP Morgan
Mirant (NYSE: MIR) – Downgraded at Lehman
Washington Mutual (NYSE: WM) – Downgraded at Merrill, Piper Jaffray
Onyx Pharmaceuticals (Nasdaq: ONXX) – Downgraded at Merrill
Vodafone (NYSE: VOD) – Upgraded at Morgan Stanley
Baker Hughes (NYSE: BHI) – Upgraded at RBC Capital, UBS
SunTrust Banks (NYSE: STI) – Upgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: ILMN

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 Moenning’s Daily State of the Markets:



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

http://PlayAudioMessage.com/play.asp?m=518585&f=TWMNEC&ps=13&c=FFFFFF&pm=2&h=25



Never Mind?



For what seems like forever and a day, “the trade� among the hedge fund types (aka the evil speculators) was to be long “stuff� (oil, steel, coal, natural gas, etc) and be short just about anything in the financial sector. But, with the powers-that-be telling us once again that we’ve seen the worst in the financial crisis and convincing anyone that will listen that it’s simply un-American to short bank stocks, “the trade� has now been reversed. So nowadays, the way to print money in your leveraged portfolio is to be long just about any old bank or broker and to be short all the stuff that makes the world go around.



However, the advent of the “new trade� and the corresponding gains in the financials, brings up an interesting question. Since the financials are now sporting eye popping returns over the past week – Wachovia (WB) is up +85%, Fannie Mae (FNM) has gained +90% and even the beleaguered Lehman Bros (LEH) has put together a move up of +63% – do you suppose we’ll soon be hearing calls for MORE speculation instead of less? After all, things are now going the right direction, aren’t they? So, do you think we’ll soon hear one of the geniuses in Washington stand up and say “Oops, Never Mind� with regard to the witch hunt for the evil speculators?



Yesterday’s market was highlighted by yet another impressive run higher in the banks and brokers. Again, perhaps the evil speculators were to blame, but who really cares when the banking index soared +9% and the brokers jumped an equally impressive +8.4%.



The move in the financials was spurred once again by an earnings report that was bad, but not nearly as gosh-awful as had been expected. For example, Wachovia (WB) opened down when the company reported a quarterly loss of $8.9 Billion, or $1.27 per share, on revenues that fell short about $1 Billion. They then added insult to injury by announcing that the dividend was being cut by 87%. In addition, Fitch added fuel to the fire by downgrading WB’s debt. So, as one might expect, traders initially voted with their feet and Wachovia opened lower by about -11%.



However, just about the time that the folks in Washington might have been thinking about coming up with more ways to nail those nasty short-sellers, Wachovia announced that they were NOT interested in issuing more stock at this time. And just like that, boom – WB and the rest of the bank stocks were off to the races. And while we sincerely doubt that all of the buyers are long-term investors looking to put the stock away for the next decade, Wachovia did wind up with a nifty little gain of +27.4% on the day. God bless the speculators, eh?



Turning to this morning, we don’t have any economic data to review before the bell but analysts are being kept busy with a boatload of earnings reports as more than 150 S&P companies report this week. So far in the early going, we’ve got strength in the dollar and another drop in crude, which, as you might have guessed, is providing support for equities.



Running through the rest of the pre-game indicators; the major foreign markets are up nicely across the board. Crude futures are moving down again with the latest quote showing oil trading off $2.05 to $126.37. Interest rates are higher this morning with the yield on the 10-yr currently trading at 4.13%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 25 points; the S&P’s are up about 3.50 points, while the NASDAQ looks to be about 6 points above fair value at the moment.



Stocks “In Play� This Morning:



Yesterday’s Earnings After the Bell:

Broadcom (BRCM) – Reported $0.25 vs. $0.35

CH Robinson Worldwide (CHRW) – Reported $0.52 vs. $0.55

E-Trade Financial (ETFC) – Reported -$0.19 vs. -$0.14

Illumina (ILMN) – Reported $0.29 vs. $0.28

Intuitive Surgical (ISRG) – Reported $1.28 vs. $1.18

Nabors Industries (NBR) – Reported $0.73 vs. $0.69

Norfolk Southern (NSC) – Reported $1.18 vs. $1.05

Pactiv (PTV) – Reported $0.50 vs. $0.48

STMicroelectronics (STM) – Reported $0.18 vs. $0.12

Southern Financial Group (SFG) – Reported -$0.22 vs. -$0.17

Washington Mutual (WM) – Reported -$3.34 vs. -$1.04

Yahoo! (YHOO) – Reported $0.10 vs. $0.10



Today’s Earnings Before the Bell:

Arkansas Best (ABFS) – Reported $0.64 vs. $0.75

Air Products (APD) – Reported $1.32 vs. $1.31

Allegheny Technologies (ATI) – Reported $1.55 vs. $1.56

Boeing (BA) – Reported $1.16 vs. $1.30

ConocoPhillips (COP) – Reported $3.50 vs. $3.53

EMC Corp (EMC) – Reported $0.18 vs. $0.17

Exelon (EXC) – Reported $1.13 vs. $1.01

General Dynamics (GD) – Reported $1.60 vs. $1.44

Genzyme (GENZ) – Reported $0.98 vs. $0.97

Hershey (HSY) – Reported $0.28 vs. $0.28

McDonalds (MCD) – Reported $0.94 vs. $0.86

PepsiCo (PEP) – Reported $1.03 vs. $1.02

Pfizer (PFE) – Reported $0.55 vs. $0.54

Phillip Morris (PM) – Reported $0.86 vs. $0.83

AT&T (T) – Reported $076. vs. $0.76

The Travelers (TRV) – Reported $1.50 vs. $1.45

Unisys (UIS) – Reported -$0.04 vs. $0.03

Whirlpool (WHR) – Reported $1.53 vs. $1.37

Wyeth (WYE) – Reported $0.91 vs. $0.87



News, Upgrades/Downgrades/Brokerage Research:

Freeport McMoRan (FCX) – Mentioned positively at Citi

Target (TGT) – Downgraded at Credit Suisse

American Axle (AXL) – Downgraded at Deutsche Bank

First Horizon Nat’l (FHN) – Upgraded at Goldman

PNC Financial (PNC) – Upgraded at Goldman

US Bancorp (USB) – Downgraded at Goldman

Kinetic Concepts (KCI) – Upgraded at Goldman

AXA (AXA) – Upgraded at HSBC

Frontline (FRO) – Upgraded at JP Morgan

Caterpillar (CAT) – Downgraded at JP Morgan

Costco (COST) – Downgraded at JP Morgan

Nordic American Tanker (NAT) – Upgraded at JP Morgan

Mirant (MIR) – Downgraded at Lehman

Washington Mutual (WM) – Downgraded at Merrill, Piper Jaffray

Onyx Pharmaceuticals (ONXX) – Downgraded at Merrill

Vodafone (VOD) – Upgraded at Morgan Stanley

Baker Hughes (BHI) – Upgraded at RBC Capital, UBS

SunTrust Banks (STI) – Upgraded at UBS



Disclosure: Mr. Moenning and/or related firms hold long positions in: ILMN



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





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David D. Moenning

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David D. Moenning

Heritage Capital Management

Main: 630-250-4700

Direct: 303-670-9761

email: DMoenning@HeritageCapitalManagement.com

From Notable Calls

Several firms are commenting on Zimmer Holdings (NYSE: ZMH) following the Orthopedic device maker lowered its 2008 profit and sales forecast and suspended U.S. sales of one of its hip products on Tuesday, sending its shares nearly 10 percent lower:

- Piper Jaffray is downgrading the stock to Neutral from Buy due to: 1) Concerns raised by their ortho survey and field checks, and 2) product- and DOJ-related issues facing the company. Firm notes they are big believers of orthopaedics, but there are several near-term issues making them more selective, and more cautious on ZMH, specifically. They would view any near term strength as an opportunity to rotate into other names in their universe with fewer near-term challenges.

The results of their survey of 50 orthopaedic surgeons and our anecdotal industry checks indicate that the post-DOJ orthopaedic market will benefit small- to mid-sized players at the expense of larger players like ZMH, at least for now. In addition, 32% of the respondents to the survey indicated that they noticed an increase in patients deferring surgery, and 64% expect to see deferrals increase over the next year. ZMH is the market leader and most affected by a slowdown in procedures – a scenario that the Street appears to have written off at the moment. Thus far, Q2 is showing a bounce-back from Q1, but the firm worries about unexpected share and volume trends over the next few quarters.

Firm's 12-month price target is $79, which is based on a 15x PE multiple on projected 2010 EPS of $5.29. The previous analyst's price target was $88, based on 18x CY09E EPS of $4.88.

- Cowen notes the quarter was actually decent, with revenue beating, and EPS hitting, consensus expectations -- the latter is notable given that most recent Street adjustments had a $0.01/share negative bias due to ongoing Durom concerns.

However, the pre-announcement was necessitated due to: 1) AMH's decision to temporarily voluntarily suspend marketing and distribution of Durom in the U.S.; 2) weakness in U.S. Dental revenues; and 3) slower- than-anticipated uptake on certain new products. Consequently, despite what was essentially an in line Q2 performance, management reduced their expectations for FY sales growth from 10.0-11.0% (6.0-7.0% excluding FX) to 8.5%-9.0% (4.5%-5.0%) and EPS was guided down from $4.20-4.25 to $4.05-4.10. The more pessimistic H2 outlook appears to go beyond Durom -- pending additional details on the conference call, we note that broader implications for the group are possible

Applying a 16x multiple to the low end revised FY08 guidance suggests shares are likely to open in the mid-$60s.

Maintains Neutral.

- Baird notes ZMH is temporarily halting U.S. Durom sales and lowering 2008 revenue/EPS guidance (guidance cut related to Durom issues, slow new product uptake, sluggish U.S. dental market). Estimates/price target under review pending today's call, but believe upward bias to firm's Street-low '09 projections exists given significant share repurchases and lack of worldwide Durom recall (which our model had assumed). Despite this, they would not recommend buying on weakness unless shares fall to low $60s.

Neutral, $74 tgt.

- Morgan Stanley is the most positive of the bunch noting Q2 sales and EPS were generally in-line with expectations and support firm's view that orthopaedic implant market fundamentals are intact, and market share remains sticky. A reduction in 2008 EPS guidance, however, will more than overshadow Q2 results. While they believe that investors had expected a cut in guidance due to Durom (and they had already lowered #s), the reduction was more significant than expected Assuming a similar cut to 2009 numbers and applying a trough one-year forward multiple puts the stock at $66.

Firm awaits clarity on several issues on the conference call (namely on SG&A spending and the
non-Durom cuts to guidance) to revise their model. On the Durom issues alone, the after market sell off appears to be an overreaction, and they think the key to the stock recovering will be confirmation that the Durom issues and slower ramp of new products will be transient.

Maintains Overweight and $85 tgt.

Notablecalls: I'm very much inclined to pick up some ZMH in the low $60's as:

- Durom is not being recalled but rather temporarily halted. The $40 mln product will likely return to US market in Q3. As I understand it, the problems w/ Durom are related to surgeons not knowing how to use the product rather than the product itself. ZMH will take a qtr or two to educate the docs.

- Problems around dental demand should not come as a surprise. Dental represents less than 10% of ZMH revenue and is tied closely to the consumer. Just take a look at what PDCO, HSIC and XRAY have been saying. No surprise there.

- ZMH is a high quality name being pushed down on transitional problems. Around low-to-mid $60's one has the opportunity to pick up a 15% net grower at around 15x this yr EPS & 13x CY09. That's cheap. Especially in med-tech.

For more calls go to http://notablecalls.blogspot.com/

From MoneyMorning.com

By Martin Hutchinson
Contributing Editor

The bailout of mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) is extremely confusing to holders of their debt and equity securities, because it’s very difficult to figure out what the final outcome of the “rescue" might be, and if so, who benefits.

However, as a service to Money Morning readers who are unfortunate enough to have been holding Fannie or Freddie paper, or to the venturesome few who wonder whether there is any among the debris, I thought I’d peer through the fog of uncertainty and try to figure out what the different classes of Fannie and Freddie securities may be worth.

Tread Lightly and Bury a Big Debt

Let’s start - gingerly - with the politics. It would be politically impossible to allow $5 trillion of mortgage debt to default, particularly since its purchasers had been told that it was “just as good as" U.S. government paper. The economically logical course would be to take Fannie and Freddie fully into government ownership, sweeping all their debt onto Uncle Sam’s balance sheet (thus roughly doubling its reported debt/gross domestic product (GDP) and debt/export ratios), and then winding down Fannie and Freddie’s operations, since neither entity serves a useful purpose in a proper free market.

That won’t happen, for two reasons:

• First, it would make U.S. debt ratios look bad, possibly increasing the nation’s cost of borrowing from foreign central banks.  In not formally accounting for the liability, Uncle Sam is basically pulling the same scam the banks did when they shoved all their worst mortgage assets into Structured Investment Vehicles (SIVs), but so what? Do you actually expect the government to follow the same rules of honest accounting as the private sector?

• Second, Fannie and Freddie top management are politically plugged in - in the biggest ways possible - and won’t allow themselves to be “demoted" from cushy slots as big shots earning $12 million a year and transformed into lowly GS-15 government wage slaves (civil servants who will top out at $155,000) simply because the companies they ran were “nationalized."

Therefore, Fannie and Freddie will remain members of the private sector, but will be given taxpayer handouts to keep them in business. In return for those handouts, they may be forced to raise extra capital from the market, or in an extreme case their existing capital may be wiped out and replaced by government loans or equity injections. Holders of Fannie and Freddie debt will probably be protected; holders of their shares probably won’t.

Given the outlook for Fannie and Freddie, what’s the outlook for their holders of particular securities? Let’s look at individual securities.

• Direct Agency Debt: These are obligations of Fannie and Freddie directly, generally with ordinary fixed-term maturities. They are currently trading very close to government paper, within 0.05% of it in yield, much closer than they were before the bailout. There’s a tiny risk you will lose money on these, but if you do, you will lose most of it because Fannie and Freddie’s assets may not be worth much. Buying Treasury bonds directly looks to be a much better bet.


• Mortgage-Backed Securities (MBS): These have a final maturity of 30 years, but their average maturities are much less than that, depending upon the repayments on the underlying mortgages. If interest rates were to drop, they would mature quite quickly; if interest rates were to shoot up, they would behave like a 30-year bond, as nobody would refinance the cheap mortgages. They trade at yields around 1% above long-term Treasuries. Here you should ignore the Fannie and Freddie guarantee altogether and try to find out when the MBS you are buying was originated. If it dates from before 2003 or so, it will contain mortgages on houses that later appreciated substantially in price - so may still have a cushion above the mortgage value. MBS originated in 2006, on the other hand - no matter how fine their initial quality - today will be suffering from the housing-price decline, which will have lowered the potential sale prices of many of the houses below the value of their mortgages. Among older mortgage-backed securities, however, there will be bargains that will very likely never use the Fannie/Freddie guarantee.


• Common Stock: No matter how cheap it may look, I’d avoid stock altogether. First, the government may insist on it being wiped out as a condition of a bailout. Second, both Fannie and Freddie are talking about raising $10 billon or more of new capital - but their market capitalizations are below that figure, so these stock offerings would be hugely dilutive to existing shareholders. If Fannie and Freddie issued preferred stock, the dividends would be huge, wiping out the possibility of dividends on the common stock for several years.


• Preferred Stock: This is the most interesting flotsam among the debris. In order to bolster their capital, Fannie and Freddie are each talking about issuing $5 billion to $10 billion worth of preferred stock. To get sold, that preferred stock would have to carry a very high dividend yield - people are talking of 13%, although I’d say 11%-12% is more realistic. If the preferred stock is genuine “equity preferred" - in which the dividends are not tax-deductible for Fannie and Freddie (which it would have to in order to be counted as capital) - then its dividends would be taxable at 15%, just like common-stock dividends. While there’s obviously a possibility that Fannie and Freddie could make large preferred stock issues and then declare bankruptcy, it’s fairly unlikely given the announced bailout - investors in a new preferred issue could reasonably sue the government for seducing them into investing with promises of a bailout that didn’t materialize. So, these issues would offer a reasonably secure yield of say 11%-12%, taxable at 15% (provided a newly elected U.S. President Barack Obama doesn’t remove the dividend-tax break, an move that’s not near the top of his list). That looks pretty attractive.


• 
  

  Cautious investors should probably avoid Fannie and Freddie securities altogether, selling any they have left to be on the safe side. More-adventurous investors may find Fannie and Freddie-backed MBS attractive, providing they’re old enough, and any new issues of preferred stock extremely tempting. Even the most hardened thrill-seeker should probably avoid the common stock; the odds appear stacked against it.

  
  

  [Editor’s Note: With each successive financial mess that appears in the U.S. securities markets, the odds of the much-feared “SuperCrash" become greater and greater. But those who fear the SuperCrash do so only because they know nothing of the once-in-a-lifetime profit plays that will emanate from the this cataclysmic event. For a report on these profit plays - an offer that includes a free copy of New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" - please click here.]