David Moenning's Daily State of the Markets: 12/02

It Ain’t Over

Last week’s big rally led many to believe that we’d seen the worst in the credit crisis. Last week’s introduction of the new economic team gave us hope that the there were answers forthcoming. And last week’s new policy initiatives led many to believe that the recession could be handled. However, if yesterday’s surprise -9% freefall told us anything, it was that this bear market is not over just yet.

In all fairness, stocks had become overbought and the big rally may indeed have gone a little too far too fast. Thus, a pullback was certainly to be expected. And coming into the session, anyone who was feeling left out of last week’s fun might have been tempted to do a little nibbling. So it will suffice to say that a plunge of -7.7% on the Dow, -9% on both the S&P and NASDAQ, and a -12% shellacking of the Russell 2000 wasn’t on many folks’ radar screens for the first day of December.

The problems presented during yesterday’s session weren’t exactly new, so speak up if you’ve heard any of this before. There was talk of a global slowdown. There was some angst over what is going to happen to the carmakers. There was the announcement that we really are in a recession after all. There was talk of banks still not having enough capital. And there was a big brouhaha over consumer credit.

So, since these relatively familiar issues are more of the same thing we’ve been dealing with for months and have been the source of all the “discounting” to the downside, the question is why the heck did the market nosedive to the tune of 680 points – again?

For starters, we need to remember that the ONLY people playing the game on a daily basis right now are active traders and the hedge funds. So, if you are an active trader and you had just watched the market blast up for 5 days, you probably knew that a pullback was close at hand. Therefore, if you were looking to “get long” you were probably waiting for a pullback before you pulled the trigger. What I’m trying to say is that no one was probably too terribly interested in buying at the outset yesterday morning. And then as the decline morphed into something much worse than traders had expected, the buyers simply stood aside.

Okay, that’s the technical story. Now let’s get back to the fundamental story. The primary issue with yesterday’s session was the idea that we may not yet have seen the worst in the credit mess and that economic conditions could get much worse in far more places than previously thought.

First there was news that Japan’s auto sales fell by 24% last month – ouch. Then we heard that the PMI in China fell to 38 – and remember that anything below 50 is considered a sign of economic contraction. And in short, the words China and contraction aren’t supposed to go together in the same sentence. Then there was the rather lengthy report from Oppenheimer’s new rock star Meredith Whitney who told us that credit cards were going to be the next shoe to drop. In a nutshell, Ms. Whitney said that credit card companies are likely to pull $2 Trillion (yep, that’s a “T”) in consumer loan lines in the coming year.

So when you add it all up, you are left with the realization that this thing isn’t over yet – and it may not be for some time. However, today’s another day, and with the average volatility currently running at 3.8% each day, all it will take is for some good news to get things going the other way.

Turning to this morning, we don’t have any economic news before the bell. On the news front, Australia cut interest rates by 1%. And in looking at the day ahead, we’ll hear the not-so Big 3 automakers start to make their pitches for survival to Congress.

Running through the rest of the pre-game indicators, most of the major overseas markets followed Wall Street lower. Crude futures are up with the latest quote showing oil trading higher by $0.53 to $49.81 On the interest rate front, we’ve got the yield on the 10-yr currently trading at 2.76%, the yield on the 3-month T-Bill is at 0.05%, and overnight LIBOR is at 1.0%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to an attempted bounce at the open. The Dow futures are currently ahead by about 135 points; the S&P’s are up about 16 points, while the NASDAQ looks to be about 20 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Beazer Homes (NYSE: BZH) – Reported -$12.32 vs. -$2.30
Sears Holdings (Nasdaq: SHLD) – Reported -$0.90 vs. -$0.49
Staples (Nasdaq: SPLS) – Reported $0.42 vs. $0.41

News, Upgrades/Downgrades/Brokerage Research:

General Electric (NYSE: GE) – Guides Q4 EPS to low end of range to $0.50 – to $52
DeVry (NYSE: DV) – Mentioned positively in Barron’s
Dow Chemical (NYSE: DOW) – Estimates reduced at Bank of America
Bank of America (NYSE: BAC) – Estimates reduced at Citi
Emerson Electric (NYSE: EMR) – Downgraded at Citi
3M (NYSE: MMM) – Downgraded at Citi
Prudential (NYSE: PRU) – Fitch downgrades senior debt rating
Quest Software (Nasdaq: QSFT) – Downgraded at Goldman
Salesforce.com (NYSE: CRM) – Added to Conviction Sell list at Goldman
Rio Tinto (NYSE: RTP) – Downgraded at JP Morgan
Pactiv (NYSE: PTV) – Downgraded at KeyBanc
Teco Energy (NYSE: TE) – Downgraded at Merrill
Palm Inc (Nasdaq: PALM) – Downgraded at Merrill
Williams Sonoma (NYSE: WSM) – Upgraded at Merrill
First Solar (Nasdaq: FSLR) – Target reduced at Morgan Stanley
SunPower (Nasdaq: SPWRA) – Target reduced at Morgan Stanley
DST Systems (NYSE: DST) – Downgraded at Morgan Stanley
WYNN Resorts (Nasdaq: WYNN) – Estimates reduced at Thomas Weisel
Intersil (Nasdaq: ISIL) – Target reduced at UBS
Walgreen (NYSE: WAG) – November Same Store Sales -0.9% vs. StreetAccount est. +0.6%

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

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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