David Moenning's Daily State of the Markets: 1/17

The Path of Least Resistance

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

With stocks continuing to move straight down almost on a daily basis and the S&P 500 breaking to its lowest level in 14 months yesterday, the phrase of the day right now seems to be: “The path of least resistance is down.” If we have heard it once this week, we’ve heard it 20 times as suddenly every money manager on T.V. is trying to look smart while their mutual funds are getting creamed.

Wednesday's session certainly started off on a dismal note as the earnings report from Intel (INTC) created a bit of an emotional tizzy around the world overnight, which certainly didn’t do much for stocks here in the pre-market. Then when we failed to receive even a ray of hope from the CPI report, it looked like Tuesday’s ugliness might continue. (But, to be fair, I’m not sure where anybody got the idea that the CPI report might somehow be a positive.)

But after confirmation that inflation is indeed growing; more bad news in the financial sector as guarantor AMBAC Financial (ABK) slashed its dividend; and a triple-digit drop in the first 90 minutes, the bulls finally managed to get up off the mat and throw a few punches. There was certainly no real damage done to the bear attack, but our heroes in horns can at least claim some sort of a moral victory on the day.

Although the rumor mill and a good deal of short-covering in financials were primarily responsible for interrupting the seemingly endless drop in stock prices, the bulls actually had a handful of positive talking points come lunchtime. There was a fair amount of talk of governmental stimulus. There was a report that mortgage activity has surged on the back of mortgage rates falling back below 6%. There was the Oracle (ORCL) buyout of BEA Systems (BEAS), which sent BEAS soaring +18.5% on the day. And finally, there were rumors that we might finally see the loan limits increased at Fannie (FNM) and Freddie (FRE).

Although it did feel like a rebound was at hand late in the afternoon, by the end of the day, the path of least resistance was indeed down as stocks succumbed to some last-minute selling to finish the day lower by -35.

Turning to this morning, the big news is the earnings report from Merrill Lynch (MER), which was nothing short of abysmal. Mother Merrill reported a loss of -$12.57 per share, which was a multiple of the expectation for -$4.70. In addition, Merrill wrote off $11.5 Billion, which was on top of the $7.9 Billion it wrote off in the third quarter.

We've also got more data on the housing market this morning. December Housing Starts came in much lower than expected and were down 14% from November while Building Permits fell by 8.1% and were also lower than expectations.

Looking at the rest of the day, everyone will be waiting to hear what Ben Bernanke has to say in his 10:00 am testimony before the House Budget Committee. In addition, we’ll get some more Fedspeak from Richard Fisher at 12:30 and Dennis Lockhart at 1:15 pm. And on the economic front, we’ll also hear about business conditions in the Philadelphia area mid-morning.

Running through the rest of the pre-game indicators; the overseas markets are mixed as the major markets in Asia were higher while Europe is basically flat. Crude futures are lower so far with the latest quote showing the February contract down by $0.93 to $91.77. Interest rates are rising with the 10-yr trading at a yield of 3.73% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. may try to open up a bit. The Dow futures are currently ahead by about 20 points; the S&Ps are up by about 2, while the NASDAQ looks to be about 7 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Blackrock (BLK) – Reported $2.52 vs. $2.15
Bank of New York (BK) – Reported $0.67 vs. $0.70
Merrill Lynch (MER) – Reported ($12.70) vs. ($4.70)
First Horizon (FHN) – Reported ($2.00) vs. ($1.06)
Intl Game Technology (IGT) – Reported $0.36 vs. $0.37

News, Upgrades/Downgrades/Brokerage Research:

Apple (Nasdaq: AAPL) – Mentioned positively in Barron’s Weekday Trader
Biogen Idec (Nasdaq: BIIB) – Upgraded at Bank of America
EBay (Nasdaq: EBAY) – Upgraded at Bear Stearns
Tesoro (NYSE: TSO) – Upgraded at BMO Capital
Harley Davidson (NYSE: HOG) – Downgraded at Citi
Alberto Culver (NYSE: ACV) – Upgraded at Citi
Tibco Software (Nasdaq: TIBX) – Upgraded at Citi
Loews Carolina Group (NYSE: CG) – Target increased at Credit Suisse
Altria (NYSE: MO) – Target increased at Credit Suisse
Coca Cola (NYSE: KO) – Added to Conviction Buy list at Goldman
Microsoft (Nasdaq: MSFT) – Added to Conviction Buy list at Goldman
Canon (NYSE: CAJ) – Upgraded at HSBC
Millennium Pharmaceuticals (Nasdaq: MLNM) – Upgraded at JP Morgan
Las Vegas Sands (NYSE: LVS) – Estimates reduced at Morgan Stanley
Boston Scientific (NYSE: BSX) – Upgraded at Morgan Stanley
JP Morgan (NYSE: JPM) – Downgraded at Oppenheimer
Wells Fargo (NYSE: WFC) – Downgraded at Oppenheimer
Express Scripts (Nasdaq: ESRX) – Target increased at Oppenheimer
Adobe Systems (Nasdaq: ADBE) – Downgraded at UBS
McAfee (NYSE: MFE) – Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: KO, AAPL, ESRX

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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