David Moenning's Daily State of the Markets: 5/12

Diluting the Upside?

Stocks pulled back on Monday and it now appears that it’s “game on” as to which team can maintain possession of the ball in the near term. There were several negative factors working in the market yesterday as it seems that suddenly everyone is worried about how far stocks have rallied since the March 9th low.

For starters, valuation concerns cropped up for the first time in ages yesterday after Bloomberg reported that stocks had enjoyed the best earnings-season rally since 2002. While this is hardly ground breaking news, the article went on to say that the rally has pushed 34% of the companies in the S&P 500 above analyst price targets for the next year. Thus, the phrase “too far, too fast” was all the rage yesterday.

Next up, the Wall Street Journal also suggested that valuation issues may be growing. In an article, the Journal opined that by many measures, stocks are approaching levels that bring them either in line or closer to long-term averages.

Then there was the always upbeat Meredith Whitney. To the surprise of no one, Ms. Whitney, the former Oppenheimer analyst who made a name for herself by worrying about subprime before it became popular, didn’t have anything good to say about the banking industry. In yet another downbeat interview on CNBC, Whitney dumped on the banks again, which seemed to give the bears some inspiration in the last half-hour. In short, Ms. Meredith suggested that the rally in the banks was “the great government momentum trade” and that “at the underlying core, the earnings power of the banks is negligible.”

However, one of the biggest issues the market had to deal with yesterday was the matter of dilution. You see, as Ben Bernanke reminded us last night from Jekyll Island, the bank stress tests were intended to provide a level of confidence in the banking system. However, the bad news is that the $74.6 billion the government has instructed the 10 firms failing the test to raise must come from somewhere. And after the demonstration of how the new administration plays the game with companies it lends a hand to, these banks want no part of any government program.

So, with stocks having rallied nicely off the bottom and confidence growing that we may soon see a turn in the economy, banks are scurrying to get stock offerings out the door. For example, after Friday’s stress test results, Morgan Stanley (MS), Wells Fargo (WFC), and Bank of America (BAC) either raised or announced plans to raise a total of $30 billion.

On Monday, the big banks were joined by US Bancorp (USB), Capital One (COF), BB&T (BBT), and KeyCorp, which collectively plan to raise another $6.3 billion. And then after the close, we learned that Bank of New York (BK), Commercial REIT SL Green (SLG), Anadarko Petroleum (APC), and Ford (F) also plan to tap the market for cash.

The good news is that companies can now come to the market for capital again. The bad news is the capital raises take money out of the pool of buyers in the stock market. So, we will need to keep a close eye on this activity.

Turning to this morning, influential banking analyst Dick Bove has decided to counter Meredith Whitney’s downbeat view by raising his price targets on Morgan Stanley (MS) and Goldman Sachs (GS). Bove added that Goldman’s current quarter may come in above expectations.

Running through the rest of the pre-game indicators, the major overseas markets are mixed. Crude futures are moving up with the latest quote showing oil trading higher by $1.34 to $59.84. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.20%, while the yield on the 3-month T-Bill is trading at 0.18%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a small bounce at the open. The Dow futures are currently ahead by about 50 points; the S&P’s are up about 5 points, while the NASDAQ looks to be about 8 points above fair value at the moment.

Stocks “In Play” This Morning:

Upgrades/Downgrades/Brokerage Research:

American Eagle Outfitters (NYSE: AEO) – Upgraded at Barclays
TJX Cos (NYSE: TJX) – Upgraded at Barclays, Credit Suisse
Chicos (NYSE: CHS) – Upgraded at Barclays
Gap Inc (NYSE: GPS) – Upgraded at Barclays
Energy Conversion Devices (Nasdaq: ENER) – Upgraded at Citi, Downgraded at Credit Suisse
Principal Financial Group (NYSE: PFG) – Upgraded at Credit Suisse
Intl Paper (NYSE: IP) – Downgraded at Deutsche Bank
Temple Inland (NYSE: TIN) – Downgraded at Deutsche Bank
Taiwan Semiconductor (NYSE: TSM) – Downgraded at Freidman Billings
T. Rowe Price (Nasdaq: TROW) – Upgraded at Goldman
Invesco (NYSE: IVZ) – Downgraded at Goldman
Janus (NYSE: JNS) – Downgraded at Goldman
Cisco Systems (Nasdaq: CSCO) – Goldman sees IT spending stabilizing, April positive for CSCO
Ciena (Nasdaq: CIEN) – Downgraded at JMP Securities
Textron (NYSE: TXT) – Upgraded at JP Morgan
Chesapeake Energy (NYSE: CHK) – Upgraded at Morgan Stanley
Morgan Stanley (NYSE: MS) – Target increased at Rochdale
Goldman Sachs (NYSE: GS) – Target increased at Rochdale
Ford (NYSE: F) – UBS raises target

Long positions in stocks mentioned: AEO, CSCO, BAC

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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