David Moenning's Daily State of the Markets: 1/31

A Change of Plans

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

After a shaky performance lately, the Bernanke Fed now appears to have gotten it completely right by boldly going where no Fed has gone before. In short, it looks like the Fed and the folks in Washington are pulling out all the stops in an attempt to fight off the potential for a recession in the U.S.

With yesterday's interest rate cut of 50 basis points (0.5%), Mr. Bernanke has knocked both the Fed Funds and Discount Rates down by 1.25% in just 9 days, which makes this the most aggressive rate reduction campaign ever. And with the statement that accompanied the announcement leaving the door open to further easing if needed, the most important thing to understand at this point in time is this Fed is now on the bulls' side.

While it is true that the GDP number for the fourth quarter was much weaker than expected yesterday and the stock market did sell off into the close (more on that in a moment), make no mistake about it; the Fed's rate cuts are a good thing. Lower rates are good for a sagging economy. They are good for the banks. They are good for mortgage lenders. They are good for mortgage borrowers and anyone looking to refinance those teaser rate loans we've all heard so much about. And most importantly, they are good for the consumers' psyche.

So, it is time to remember one of the most important rules of stock market investing: Don’t fight the Fed. There is no question that we can expect more volatility in the coming weeks and months. But, to cut to the chase, with the Fed and Washington on their side, the bulls argue that it is time to switch to an “opportunistic buying mode” where one uses volatility for buying.

What about the problems that remain out there, you ask? We need to remember that if there weren’t problems, then we wouldn’t need the rate cuts or the stimulus package. So, unless things look like they are going to get a lot worse – which is always a possibility – we are simply saying that investors needs to begin looking ahead and not back.

Speaking of problems, it was worry over more subprime problems that ruined the Fed rally yesterday afternoon. With stocks up triple digits, word got out that S&P was about to say something bad about bond ratings. And with Oppenheimer’s Meredith Whitney saying earlier in the day that downgrades in bonds could lead to another $70 Billion in writedowns, well, traders seized the opportunity to take some profits.

Let’s not forget that stocks have enjoyed a decent "bounce" over the past seven sessions and that many of the financials have soared 30% to 50% during that time. So, with just about every trader on the planet looking for a "retest" of the recent lows, it didn’t take much to get the bears moving and the buyers to move to the sidelines for a bit.

Turning to this morning, the economic data rolling in continues to be weaker than expected. The weekly jobless claims showed a spike to 375k versus 319k, which is causing traders to leap to the conclusion that the economy is indeed falling off a cliff. The other data we got this morning on Personal Income and Spending came in pretty close to expectations. However, traders are betting that the retest is "on" this morning as the futures are plummeting in response to the jobless claim numbers.

Running through the rest of the pre-game indicators; the overseas markets are mostly lower. Crude futures are down this morning with the futures currently trading lower by $1.05 to $91.28. Interest rates are moving down on the weaker economic data with the 10-yr trading at a yield of 3.59% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to another tough open. The Dow futures are currently off by about 170 points; the S&Ps are down by about 23 points, while the NASDAQ looks to be about 27 points below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:

AFLAC (NYSE:AFL) – Reported $0.78 vs. $0.80
Amazon.com (Nasdaq: AMZN) – Reported $0.48 vs. $0.47
Evergreen Solar (Nasdaq: ESLR) – Reported $0.01 vs. -$0.04
Eagle Materials (NYSE:EXP) – Reported $0.50 vs. $0.47
Murphy Oil (NYSE:MUR) – Reported $1.28 vs. $1.20
Pulte Home (NYSE:PHM) – Reported -$3.54. vs. -$0.76
Starbucks (Nasdaq: SBUX) – Reported $0.28 vs. $0.27
Snap On (NYSE:SNA) – Reported $0.98 vs. $0.82

Today’s Earnings Before the Bell:

Bristol Meyers Squibb (NYSE: BMY) – Reported $0.33 vs. $0.34
Celgene (Nasdaq: CELG) – Reported $0.31 vs. $0.31
Colgate Palmolive (NYSE: CL) – Reported $0.91 vs. $0.89
CVS Caremark (NYSE: CVS) – Reported $0.55 vs. $0.55
Goodrich (NYSE: GR) – Reported $1.04 vs. $0.91
Starwood Hotels (NYSE: HOT) – Reported $0.79 vs. $0.66
Mattel (NYSE: MAT) – Reported $0.76 vs. $0.73
MBIA (NYSE: MBI) – Reported -$3.30 vs. -$2.97
NASDAQ (Nasdaq: NDAQ) – Reported $0.46 vs. $0.47
Procter & Gamble (NYSE: PG) – Reported $0.98 vs. $0.97
Raytheon (NYSE: RTN) – Reported $0.96 vs. $0.92
Royal Dutch Shell (NYSE: RDS.A) – Reported $1.36 vs. $2.11
Western Union (NYSE: WU) – Reported $0.32 vs. $0.31
Wyeth (NYSE: WYE) – Reported $0.78 vs. $0.79

News, Upgrades/Downgrades/Brokerage Research:

Polo Ralph Lauren (NYSE: RL) – Downgraded at Bank of America
Alliance Data Systems (NYSE: ADS) – Upgraded at Bear Stearns
Nordstrom (NYSE: JWN) – Upgraded at Bear Stearns
Saks (NYSE: SKS) – Downgraded at Bear Stearns
General Motors (NYSE: GM) – Estimates reduced at Credit Suisse
Yum Brands (NYSE: YUM) – Downgraded at Deutsche Bank
Barrick Gold (NYSE: ABX) – Removed from Conviction Buy list at Goldman
Freeport McMoRan (NYSE: FCX) – Added to Conviction Buy list at Goldman
Adobe Systems (Nasdaq: ADBE) – Downgraded at Jefferies
Hess Corp (NYSE: HES) – Upgraded at JP Morgan
Covance (NYSE: CVD) – Target increased at Lehman
Pinnacle West Capital (NYSE: PNW) – Upgraded at Lehman
Schlumberger (NYSE: SLB) – Downgraded at RBC Capital
Baker Hughes (NYSE: BHI) – Downgraded at RBC Capital, Wachovia

Mr. Moenning holds Long positions in stocks mentioned: BHI, RTN, HES

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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