David Moenning's Daily State of the Markets: 10/24

October 24, 2008 10:03 AM EDT

What Does It Mean?

For those of you that like a little movement in your daily dose of stock market action, you were not disappointed yesterday and you most certainly won’t be today. Yesterday stocks bounded back and forth and back and forth all day long, moving 100 points every five minutes or so with seemingly little effort – or better yet, with even less reason. In case you missed it, the Dow swung in a 550 point range on Thursday with at least 11 different swings of 150 points over ten to fifteen minute spans. So yes, Virginia, volatility definitely remains a little elevated. But the question is what does it mean?

One of the things we’ve talked about extensively in our Crash Playbook is that volatility tends to stick around for a while, even after a panic low has been seen. And so, while it may not be much fun to watch, the market appears to be acting fairly normal relative to the typical crash scenario.

But, before we get to the question of the day, the next question on everyone’s mind is if the intraday line in the sand from 10/10 is going to hold. Frankly, I can make an equally strong argument for both sides of this one right now. But, I also know that history is on the side of those predicting lower prices as Ned Davis Research tells us that stocks have headed lower after a “panic bottom” in eight of the ten market crashes they’ve studied on the S&P 500. However, the good news is that the average post-panic low move down has only amounted to another 7%. And looking at the futures limit-down this morning makes this appear to be the probable outcome.

Turning back to the question of what the volatility means, the answer may best be summed up with the now famous quote from UBS’s Art Cashin, who pointed out at the beginning of this crisis well over a year ago, “we just don’t know what we don’t know right now.” Sure, we know that the earnings coming in aren’t that bad. But we knew the current numbers wouldn’t be horrific – it is NEXT quarter’s numbers that we’re clueless on. And yes, we do know that the economy is slowing down. But we don’t know how MUCH it is going to slow down. And remember, Wall Street fears uncertainty more than anything else.

Then turning to the subject of the credit crisis, we are beginning to come to grips with how much damage the weapons of capital destruction have inflicted. For example, just yesterday afternoon, we learned that the auction for WaMu’s CDS’s went off at 57 cents on the dollar – meaning that the sellers of protection will pay $0.43 on the dollar. But, come on, does anybody but the most sophisticated bond guys in New York really know what this means?

So, as we don the helmets and get ready for another wild ride on the Wall Street roller coaster, try to keep in mind that with all the unanswered questions out there, this bottoming process isn’t likely to end quickly. Thus, we need to accept the volatility for what it is (both an expression of uncertainty and a demand for cash) and keep an eye on that intraday line in the sand.

Turning to this morning, there is really no way to sugarcoat this – it is downright ugly out there. The futures on the S&P 500 and the Dow are both lock limit down with moves of -60 and -550 respectively (meaning they can’t trade below these levels before the open) on the heels of redemptions and big drops in foreign markets. So, it appears that the big bad bears are about to obliterate that line we’ve been watching and kick some sand in the bulls’ faces on the way by.

And for those of you keeping score at home, once the market opens, the NYSE circuit breakers would kick in with a drop 1,100 points on the Dow (which doesn’t look likely at the moment). If the breakers are tripped before 2:00, trading would then be halted for an hour. If after 2:00 trading is halted for 30 minutes. And then if after 2:30, there is not halt.

Running through the rest of the pre-game indicators, the major overseas markets got smoked overnight. Hong Kong fell -8.3%, Japan was down -9.6%, France is off -8.1%, Germany has dropped -7.9%, and the UK is currently down -7%. Not surprisingly, crude futures are down again with the latest quote showing oil trading lower by $4.48 to $63.36. On the interest rates front, we’ve got the yield on the 10-yr currently trading at 3.51% while the yield on the 3-month T-Bill is at 0.711% and overnight LIBOR is at 1.28% which is up from yesterday’s rate of 1.21%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are crushed. The Dow futures are currently off by about 460 points; the S&P’s are down by about 53 points, while the NASDAQ looks to be about 74 points below fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Arch Capital Group (Nasdaq: ACGL) – Reported $1.02 vs. $0.59
AFLAC (NYSE: AFL) – Reported $0.21 vs. $1.00
Airgas (NYSE: ARG) – Reported $0.86 vs. $0.83
Burlington Northern (NYSE: BNI) – Reported $1.91 vs. $1.69
Cheesecake Factory (Nasdaq: CAKE) – Reported $0.19 vs. $0.27
Chubb (NYSE: CB) – Reported $0.93 vs. $0.92
Columbia Sportswear (Nasdaq: COLM) – Reported $1.69 vs. $1.41
Compuware (Nasdaq: CPWR) – Reported $0.08 vs. $0.07
DST Systems (NYSE: DST) – Reported $0.97 vs. $0.95
DeVRY (NYSE: DV) – Reported $0.48 vs. $0.44
Eastman Chemical (NYSE: EMN) – Reported $1.35 vs. $1.39
Federated Investors (NYSE: FII) – Reported $0.56 vs. $0.54
Flextronics (Nasdaq: FLEX) – Reported $0.28 vs. $0.28
Juniper Networks (Nasdaq: JNPR) – Reported $0.32 vs. $0.30
Microchip (Nasdaq: MCHP) – Reported $0.45 vs. $0.41
Microsoft (Nasdaq: MSFT) – Reported $0.48 vs. $0.47
PerkinElmer (NYSE: PKI) – Reported $0.38 vs. $0.35
Companhia Vale Do Rio Doce (NYSE: RIO) – Reported $0.94 vs. $0.64
Stericycle (Nasdaq: SRCL) – Reported $0.45 vs. $0.44
Varian Medical (NYSE: VAR) – Reported $0.68 vs. $0.65
Western Digital (NYSE: WDC) – Reported $0.93 vs. $0.81
MEMC Electronic Materials (NYSE: WFR) – Reported $0.86 vs. $0.88
YRC Worldwide (Nasdaq: YRCW) – Reported -$0.63 vs. -$0.09

Today’s Earnings Before the Bell:

Corn Products (NYSE: CPO) – Reported $1.15 vs. $0.78
Fortune Brands (NYSE: FO) – Reported $1.11 vs. $1.08
Ingersoll Rand (NYSE: IR) – Reported $0.99 vs. $0.99
ITT Corp (NYSE: ITT) – Reported $1.12 vs. $1.06
Timken (NYSE: TKR) – Reported $1.41 vs. $1.05
T. Rowe Price (Nasdaq: TROW) – Reported $0.56 vs. $0.56
UST Inc (NYSE: UST) – Reported $0.91 vs. $0.90

News, Upgrades/Downgrades/Brokerage Research:

AES Corp (NYSE: AES) – Downgraded at Barclays
DR Horton (NYSE: DHI) – Upgraded at Citi
Diamond Offshore (NYSE: DO) – Upgraded at Deutsche Bank
Netgear (Nasdaq: NTGR) – Downgraded at Deutsche Bank
Janus Capital (NYSE: JNS) – Downgraded at Friedman Billings
Repsol (NYSE: REP) – Downgraded at Goldman
First Horizon NYSE: (FHN) – Downgraded at Goldman
Fifth Third Bancorp (Nasdaq: FITB) – Downgraded at Goldman
KeyCorp (NYSE: KEY) – Upgraded at Goldman
National Oilwell Varco (NYSE: NOV) – Downgraded at JP Morgan
Jet Blue (Nasdaq: JBLU) – Upgraded at JP Morgan
Kinetic Concepts (NYSE: KCI) – Upgraded at Merrill
Alcon (NYSE: ACL) – Downgraded at Merrill
Juniper Networks (Nasdaq: JNPR) – Upgraded at Merrill
Level 3 Communications (Nasdaq: LVLT) – Downgraded at Merrill

Raytheon (NYSE: RTN) – Upgraded at Merrill, Target reduced at UBS
Alcatel Lucent (NYSE: ALU) – Downgraded at Merrill
Ericsson (Nasdaq: ERIC) – Upgraded at Merrill
Zimmer Holdings (NYSE: ZMH) – Downgraded at Morgan Stanley
Home Depot (NYSE: HD) – Upgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: BNI, DV

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.

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