David Moenning's Daily State of the Markets: 1/15

Is Worst Still To Come?

Yesterday’s dive in stock prices, which for those of you keeping score at home marked the sixth straight down day on the Dow, was sponsored by one very simple idea: The worst of the credit crisis may still be ahead of us.

To clarify, this idea is not offered being up as an original opinion or prognostication, but rather was the message from the Fed’s Beige Book, JP Morgan’s (JPM) Jaime Dimon, and of course, Oppenheimer’s celebrity superstar and banking analyst Meredith Whitney.

While banking was the focus of the session, there was also a fairly impressive slate of negative data points throughout the day. For starters, the report on December’s Retail Sales was an abject disaster with no silver lining to be found anywhere. The report showed that yes Virginia, things ARE that bad in retail as sales totals fell for the sixth straight month and came in well below expectations. It also didn’t help that we are starting see bankruptcies in the sector.

But make no mistake about it; yesterday’s focus was squarely on the financial sector. At issue is the idea that we may not have seen the worst of the credit crisis and/or the ensuing fallout in the financial sectors.

Where do we get such an inflammatory idea, you ask? In short, this scary concept came straight from the source of all things financial – the Federal Reserve. In fact, the New York Fed reported that, “a contact monitoring the financial sector maintains that the industry is still far from hitting bottom.”

It also appears that JP Morgan’s Jaime Dimon concurs with the New York Fed. In an interview with the Financial Times, Dimon he said consumer loans and credit card trends continue to worsen. And then this morning, in a statement accompanying JPM’s earnings – which were actually better than expected – Dimon said that the Q4 results were "disappointing," and that if the economic environment deteriorates further, which is a distinct possibility, it is reasonable to expect additional negative impact on its businesses, continued higher loan losses, and increases to its credit reserves.

And while we’re on the topic, the word making the rounds yesterday was that another little company called Bank of America (BAC) is talking about needing billions more in order keep things kosher with the regulators.

What does it all mean? As we’ve been saying, the current stock market game is all about expectations versus reality. Up to this point, the expectations have been that we had seen the nadir of the writedowns and the capital raises. But with the idea that we haven’t yet seen the worst in the credit crisis starting to gain some traction, it is clear that the bears have regained possession of the ball.

However, we should keep in mind that it is hard to imagine the current reality being worse than the fear of Financial Armageddon that gripped the market on November 20th. So, given that stocks appear to making a run at those lows, the question of the day is if the discounting of stock prices has been enough to cover the current batch of bad news in the banking sector, or if we will need to see lower prices before the buyers return.

Turning to this morning, first, it is a modest positive that JP Morgan’s earnings of $0.07 per share were better than expectations for a nickel. Next, as expected, the ECB cut interest rates by 0.50% to 2%. On the economic front, Weekly Jobless Claims continued to climb as claims for the week ending 1/10 increased by 54K to 254K (estimates had been for 203K). And finally, the Producer Price Index came in at -1.9%, which was in line with the estimates for a drop of -2.0%. When you strip out food and energy, the Core rate increased by +0.2%, which was a smidge higher than the estimates for an increase +0.1%.

Running through the rest of the pre-game indicators, the major foreign markets all followed Wall Street lower. Crude futures are lower with the latest quote showing oil futures trading down by $0.68 to $36.60. On the interest rate front, we’ve got the yield on the 10-yr currently down at 2.20% and the yield on the 3-month T-Bill is at 0.09%. And finally, with about 45 minutes before the bell, while we hate to sound like broken record, stock futures in the U.S. are pointing lower once again. The Dow futures are currently off by about 30 points; the S&P’s are down by about 4 points, while the NASDAQ looks to be about 11 points below fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Xilinx (Nasdaq: XLNX) – Reported $0.32 vs. $0.31

Today’s Earnings Before the Bell:

JP Morgan Chase (NYSE: JPM) – Reported $0.07 vs. $0.05

Today’s Corporate News, Upgrades/Downgrades/Brokerage Research

Noble Corp (NYSE: NE) – Mentioned positively in Barron’s
Procter & Gamble (NYSE: PG) – Downgraded at Bernstein
Barrick Gold (NYSE: ABX) – Upgraded at Cannacord Adams
Kinross Gold (NYSE: KGC) – Downgraded at Cannacord Adams
Goldcorp (NYSE: GG) – Downgraded at Cannacord Adams
Daimler AG (NYSE: DAI) – Downgraded at Citi
BHP Billiton (NYSE: BHP) – Downgraded at Credit Suisse
M&T Bank (NYSE: MBT) – Downgraded at Friedman Billings Ramsey
Carnival Corp (NYSE: CCL) – Downgraded at Goldman
Royal Caribbean Cruises (NYSE: RCL) – Downgraded at Goldman
Dollar Tree Stores (Nasdaq: DLTR) – Upgraded at Goldman
Motorola (NYSE: MOT) – Upgraded at JP Morgan
Trimble Communications (Nasdaq: TRMB) – Downgraded at JP Morgan
Coca-Cola FEMSA (NYSE: KOF) – Upgraded at Morgan Stanley
Fomento Economico Mexicano (NYSE: FMX) – Upgraded at Morgan Stanley
AmerisourceBergen (NYSE: ABC) – Upgraded at Oppenheimer
Burlington Northern (NYSE: BNI) – Downgraded at RBC Capital
CSX (NYSE: CSX) – Initiated Outperform at RBC Capital
Apple (Nasdaq: AAPL) – Downgraded at RBC Capital, Maintained Outperform at Oppenheimer

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

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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