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David Moenning's Daily State of the Markets: 3/23

March 23, 2009 9:34 AM EDT
Changing The Rules After The Game Has Started?

I have spent the better part of the last two weeks talking about the idea that we’ve seen the nadir in the banking crisis and as such, that there is a very good chance that we’ve also see the worst of the Bear market. But, this morning, I’d like to play devil’s advocate and explore one possible way that I could be wrong. Cutting to the chase, when I looked the reason why stocks pulled back on Friday, I became a little concerned.

While politicians will be undoubtedly act like politicians and I completely understand that their primary job is to keep getting elected and to keep their party in power, what is going on right now in Washington over the AIG bonuses is borderline embarrassing.

Frankly, I am reticent to broach the subject of politics because my opinion on the goings on in Washington is unlikely to help me make money for clients. But in a classic case of focusing on the minutiae, Senator Dodd and friends appear to want to pass legislation that would effectively override private contracts that were legally drawn between a company and its employees.

Before you jump to the conclusion that I am backing AIG on the bonus issue, please understand that this isn’t about whether or not AIG should have bonused employees possessing a specific skill set necessary to avert a financial meltdown. Unfortunately, this appears to be more about Congress attempting to look like they’re standing up for the little guy and perhaps shooting themselves in the foot in the process.

While railing against the big bad financial guys seems to be politically expedient at the moment, we should keep in mind that the AIG bonuses were not “performance bonuses” or pats on the back for a job well done. No, these people are getting being paid to help unwind an incredibly complex mess the company made. And they are some of the only people on the planet that can actually do the job. So, while the government convinced Edward Liddy to take the CEO job at AIG for $1 (with no stock options, bonuses, etc.), most people in the financial business, or any business for that matter, do prefer to be paid for the work they do.

It will also suffice to say that Ben Bernanke and Henry Paulson wanted nothing to do with “bailing out” AIG. However, given the enormity of the problem at hand, they essentially had no choice. If you will recall, Lehman went under over a weekend. The point here is that because of one Wall Street firm biting the dust, the country’s financial system was thrown into chaos. And in case you’ve forgotten, it was because of Lehman going down that money market funds started breaking the buck. Thus, the U.S. Gov’t had no choice but to put up big bucks to keep from having to deal with a financial Armageddon that would have surely ensued if they simply let the AIG go the way of Lehman.

Finally, we should keep in mind that the Obama administration has decided that it wants private equity to step up to the plate and help buy up the bad assets. However, Strategas Research Partners summed it up best by writing, “If the Federal Government can capriciously and retroactively change the basic rules of business and contract law, it is difficult to expect hedge funds and private equity shops to take big chances on government sponsored assets regardless of the potential returns."

So, it is my humble opinion that if our Congressional leaders are going to insist on changing the rules of the game after the game has started, there is a very strong chance that Mr. Geithner’s plan to fix the banking system could have issues. And this, could be a problem for the stock market.

Turning to this morning, the long awaited plan from Treasury Secretary Tim Geithner has finally been released. The plan is to buy up to $1 trillion of toxic debt via a two pronged approach – one will purchase toxic securities and the other will purchase loans directly from banks. There will be approximately five separate P-PIF’s as well a new entity backed by the FDIC to offer guarantees to lenders.

Stock markets around the globe are responding positively to the plan and the futures here in the U.S. are up nicely. However, it will be interesting to see if the Hedge Funds and the private sector will actually participate after coming under attack by Congress.

Running through the rest of the pre-game indicators, the overseas markets are up nicely. Crude futures are moving up with the latest quote showing oil trading up $0.48 to $52.55. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.64%, while 3-month LIBOR is at 1.22% and the yield on the 3-month T-Bill is trading at 0.20%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing higher. The Dow futures are currently ahead by about 150 points; the S&P’s are up by about 26 points, while the NASDAQ looks to be about 21 points above fair value at the moment.

Stocks “In Play” This Morning:

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

Fluor (NYSE: FLR) – Downgraded at BAC/MER
General Mills (NYSE: GIS) – Upgraded at BAC/MER
Corning (NYSE: GLW) – Upgraded at Citi
Agilent (NYSE: A) – Upgraded at Credit Suisse
BHP Billiton (NYSE: BHP) – Downgraded at Credit Suisse
CA Inc (NYSE: CA) – Removed from Conviction Buy list at Goldman
AmBev (NYSE: ABV) – Upgraded at Morgan Stanley
Coca Cola Femsa (NYSE: KOF) – Downgraded at Morgan Stanley
FEMSA (NYSE: FMX) – Downgraded at Morgan Stanley
Harris Corp (NYSE: HRS) – Downgraded at Oppenheimer
Broadcom (Nasdaq: BRCM) – Target increased at RBC Capital
CarMax (NYSE: KMX) – Estimates increased UBS
AutoZone (NYSE: AZO) – Downgraded at UBS
O’Reilly Automotive (Nasdaq: ORLY) – Downgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: CA, AZO

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.TopStockPortfolios.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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Goldman Sachs Conviction Buy List, Credit Suisse, UBS, Henry Paulson, Ben S. Bernanke, Citi, Morgan Stanley, RBC Capital, David Moenning, Hedge Funds, Crude Oil, Timothy Geithner, FDIC, Barack Obama