David Moenning's Daily State of the Markets: 5/22

USA Not AAA?

Despite the fact that a great many traders were either already at the beach or had their eyes fixed on the exits yesterday, there was a fair amount of economic data to plow through and several stories that helped shape the day; not the least of which was the worry that the good ol’ USofA might see its credit rating downgraded.

To be sure, stocks started off on the wrong foot yesterday morning. First there was Alan Greenspan’s suggestion that the financial drama is not over and that the U.S. faces a “very serious potential mortgage crisis.” This was followed up quickly with the report that weekly jobless claims came in worse than expected. So, when you added this to Wednesday’s downbeat comments on the economy by the Fed and the reversal day on the charts, it appeared that the bears were set up nicely for the session.

On the topic of economic data, the reaction to yesterday’s reports would seem to indicate that the shift is now “on.” In short, no longer is the idea of things getting worse at slower pace considered to be good news. No, it would appear that traders are now looking for out-and-out improvement in the economy right now.

But after reviewing the reports from the Philly Fed and the LEI, we are reminded of the immortal words of the Rolling Stones, “You don’t always get what you want…” as neither report was terribly inspiring. And although there was some upbeat points in the Philly Fed report, traders saw what they wanted to see and continued to hit the sell button in response.

However, the real story to yesterday’s trading had to do with the idea of sovereign credit ratings. The first salvo came when Standard & Poor’s lowered their outlook on the UK to negative from stable. And although it took a while to surface, the worry then shifted to the idea that given the extended contraction in the U.S. economy, we could see our coveted AAA rating downgraded.

In light of the fact that the United States is borrowing boatloads of money right now and has enjoyed an AAA rating on its debt since 1917, this is no small matter. And perhaps the most damning part of the story is that when asked to comment, S&P didn’t deny that the downgrade was a possibility. In response, the dollar cracked to new lows, interest rates spiked higher with the 10-year soaring to 3.35%, and stocks continued to weaken.

The good news on the subject came after the closing bell as Moody’s reassured traders that the United States rating remains AAA and stable. So with this news and the fact that stocks halved their losses into the close, thereby avoiding a breakdown on the charts, it appears we can now return our attention to the important stuff – I.E. what to put on the barbeque and the weekend festivities.

Turning to this morning, Treasury Secretary Geithner has mirrored the Fed’s recent statements by saying he sees a gradual recovery in the economy. However, in the interview with Bloomberg TV, Geithner went on to say that Wall Street’s pay practices must see substantial changes and that the banks wanting to repay the TARP money must show they have plenty of capital on hand before the move will be approved.

Running through the rest of the pre-game indicators, the major overseas markets are mixed with Asia down and Europe up about 1%. Crude futures are moving higher with the latest quote showing oil trading up $0.85 at $61.90. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.33%, while the yield on the 3-month T-Bill is trading at 0.15%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 70 points; the S&P’s are up about 8 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:

Genworth Financial (NYSE: GNW) – Downgraded at BofA/Merrill
Archer Daniels Midland (NYSE: ADM) – Upgraded at Citi
Agrium (NYSE: AGU) – Upgraded at Citi
Mosaic (NYSE: MOS) – Upgraded at Citi
Potash (NYSE: POT) – Upgraded at Citi
Monsanto (NYSE: MON) – Downgraded at Citi
Ensco Intl (NYSE: ESV) – Upgraded at Deutsche Bank
Noble Corp (NYSE: NE) – Upgraded at Deutsche Bank
Rowan Companies (NYSE: RDC) – Upgraded at Deutsche Bank
Diamond Offshore (NYSE: DO) – Downgraded at Deutsche Bank
Anglo American (Nasdaq: AAUK) – Upgraded at Goldman
Red Robin Gourmet Burgers (Nasdaq: RRGB) – Downgraded at JP Morgan
Diageo (NYSE: DEO) – Upgraded at JP Morgan
SunTrust Banks (NYSE: STI) – Downgraded at Morgan Stanley
Public Storage (NYSE: PSA) – Target increased at UBS
Eagle Bulk Shipping (Nasdaq: EGLE) – Downgraded at UBS
Autodesk (Nasdaq: ADSK) – Upgraded at KeyBanc

Long positions in stocks mentioned: JPM

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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