David Moenning's Daily State of the Markets: 7/30

The Worst Is Over – Part III

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

Admittedly, there are times when the stock market appears to make little sense. For example, on Monday, the Dow fell 240 points on worries over the financials, but then rallied 266 points on Tuesday when a big broker actually surprised Wall Street with bad news. And while it is obvious that sometimes good news is bad and vice versa, it is rare that bad news can be bad one day and then viewed as good the next.

If you will recall, it was just two weeks ago that Merrill Lynch’s (NYSE: MER) new CEO John Thain told us that they would NOT need to raise any additional capital. Although this “everything’s fine” approach seems to now be the modus operandi for those in the brokerage community, it has also become code for “holy cow, do we have problems here.” So, just two weeks after assuring everyone on the Street that Mother Merrill was fine, the firm announced that it had decided to dump a bunch of CDO’s at bargain basement prices and to raise an extra $8.5 billion in capital.

Never mind that Merrill sold more than $30 billion of CDO’s for $0.22 on the dollar when they had been priced at $0.36 on Merrill’s books a couple weeks back. Never mind the implications for the rest of the financials – namely that Citi (C) has $14.4 Billion valued at $0.62 on the dollar or that Bank of America (BAC) has $5.1 Billion valued at $0.35 on the dollar. No, the key here is that the Street applauded Merrill’s move to “deleverage” and the idea that Wall Street firms still had access to new capital of that size.

So, with traders thinking that the worst is over – and this time they REALLY mean it – the recent game of running for cover in the financials continued. In short, the shorts covered and speculative traders went long. The result was Merrill rallied +7.9%, which was a little better than the 6% move seen in the broker-dealer index and in line with the move in the financial index.

However, yesterday’s 266 point Dow rally wasn’t strictly a financial affair. We should note that there were several other positive factors at work including another big drop in crude futures. Oil for September delivery dropped -$2.54 to $122.19 on concerns about “demand destruction” here in the U.S., worry over a more pronounced global economic slowdown, and comments from OPEC’s President Chakib Khelil. Khelil suggested yesterday that the price of oil was “abnormal” and that prices could fall by as much as $50 if the dollar continues to rally and the tensions surrounding Iran were to ease a bit.

Next, when you toss in a string of solid earnings reports from the likes of Agco (NYSE: AG), Amgen (Nasdaq: AMGN), Textron (NYSE: TXT), and US Steel (NYSE: X) alongside another strategic merger, well, you’ve got the makings for a rally. Now, the question becomes: Can it continue?

Turning to this morning, so far, at least it would appear that the answer is “yes.” ADP reported the its survey of new jobs rose by 9,000 in July, which was far better than the consensus expectations for a drop of 53K and supports the idea that we’ve seen the worst in this cycle.

Running through the rest of the pre-game indicators; the major foreign markets all followed Wall Street’s lead and are higher across the board. Crude futures are moving down with the latest quote showing oil trading lower by $0.11 to $122.06. Interest rates are up a little this morning with the yield on the 10-yr currently trading at 4.07%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to another decent open. The Dow futures are currently ahead by about 57 points; the S&P’s are up about 6 points, while the NASDAQ looks to be about 22 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Advent Software (Nasdaq: ADVS) – Reported $0.22 vs. $0.10
Arthur J Gallagher (NYSE: AJG) – Reported $0.45 vs. $0.47
Buffalo Wild Wings (Nasdaq: BWLD) – Reported $0.31 vs. $0.27
CB Richard Ellis (NYSE: CBG) – Reported $0.16 vs. $0.44
Centex (NYSE: CTX) – Reported -$1.36 vs. -$1.36
EOG Resources (NYSE: EOG) – Reported $2.52 vs. $2.35
Electronic Arts (Nasdaq: ERTS) – Reported -$0.42 vs. -$0.35
Genworth Financial (NYSE: GNW) – Reported $0.49 vs. $0.55
Lam Research (Nasdaq: LRCX) – Reported $0.60 vs. $0.39
Metlife (NYSE: MET) – Reported $1.30 vs. $1.51
Office Max (NYSE: OMX) – Reported $0.24 vs. $0.19
Viacom (NYSE: VIA.B) – Reported $0.65 vs. $0.58

Today’s Earnings Before the Bell:

American Tower (NYSE: AMT) – Reported $0.12 vs. $0.12
Avon Products (NYSE: AVP) – Reported $0.55 vs. $0.48
Cameron Intl (NYSE: CAM) – Reported $0.65 vs. $0.62
Comcast (Nasdaq: CMCSA) – Reported $0.21 vs. $0.22
Cummins (NYSE: CMI) – Reported $1.49 vs. $1.23
Corning (NYSE: GLW) – Reported $0.49 vs. $0.49
Jones Apparel (NYSE: JNY) – Reported $0.20 vs. $0.12
Moody’s (NYSE: MCO) – Reported $0.51 vs. $0.47
Office Depot (NYSE: ODP) – Reported $0.04 vs. $0.01
Reynolds American (NYSE: RAI) – Reported $1.24 vs. $1.18

News, Upgrades/Downgrades/Brokerage Research:

Wyeth (NYSE: WYE) – Downgraded at Citi
Eastman Chemical (NYSE: EMN) – Downgraded at Citi
SAP (NYSE: SAP) – Upgraded at Credit Suisse
CEMEX (NYSE: CX) – Downgraded at Credit Suisse
Schnitzer Steel (Nasdaq: SCHN) – Upgraded at Goldman
Merrill Lynch (NYSE: MER) – Upgraded at HSBC
Molson Coors (NYSE: TAP) – Downgraded at JP Morgan
Deutsche Telekom (NYSE: DT) – Upgraded at Merrill
Sepracor (Nasdaq: SEPR) – Downgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: CAM, AMT

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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