David Moenning's Daily State of the Markets: 9/8

Say Thanks to Hank

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

Friday’s stock market started off on a very sour note in response to a jobs report that was nothing short of disturbing. As such, it wasn’t’ much of a surprise to see the Dow quickly down another 150 points. And with the venerable index once again within spitting distance of the July lows, the bulls were probably becoming more than a little uncomfortable.

However, despite the negative data about the U.S. economy and the endless chatter about the global slowdown, the markets turned around and actually finished with some green on the screen as the closing bell rang. And although the gain of 32 points didn’t put much of a dent in the week’s decline, the turnaround was definitely intriguing.

You see, at the time, no one could really put their finger on why stocks would suddenly reverse course when all of the data pointed to another thrashing. Besides the surprise spike in the unemployment rate, we got word from Nokia (NOK) that things aren’t going all that well and a report that showed mortgage delinquencies at their highest level since 1979. Then there was the blurb on the wires about bank #10 biting the dust, word that Hurricane Ike might find its way into the Gulf, and the ongoing saga of Lehman’s (LEH) attempt to round up capital. No, this was a day that was set up to be u-g-l-y.

But instead of another black Friday, stocks rallied after lunch and moved steadily higher into the close. Initially it looked like some shorts were simply covering after a nice week. But as the afternoon wore on, it began to feel like something was up. And sure enough, after digging around, we started to hear the chatter that Mr. Paulson was about to pull the plug on Fannie (FNM) and Freddie (FRE).

Then on Sunday morning, it became official – the government was stepping in. The wires state that the Treasury Department will make periodic investments in Fannie and Freddie (which together back about 50% of the mortgages in the U.S.) via the purchase of preferred equity and warrants as needed. The common and preferred stock will remain but the dividends will be eliminated.

Why is the government taking over something like $5 Trillion in mortgage guarantees a good thing, you ask? First, it removes a massive overhang of uncertainty from the market. While no one really expected it to happen, had the government let Fannie and Freddie try to fend for themselves, a financial crisis the likes of which this country has NEVER seen would have ensued.

But instead, all of that paper out there with Fannie and Freddie’s name on it just became the equivalent of treasuries from a capital standpoint. And if you paid any attention to your Money and Banking class in college, you will recognize this means that banks now have more capital to lend. And because of the spreads available these days, there is even an incentive for banks to now lend to individuals again. So, one could argue that the move to take over Fan-Fred, as it is now being called, will help mortgage capital become more readily available and may actually allow rates to fall.

Turning to this morning, stock markets around the globe are celebrating wildly in response to the move. So, investors in the U.S. should probably take a moment to quietly thank Mr. Paulson for the stock market rally that is about to begin.

Running through the rest of the pre-game indicators, the foreign markets are soaring across the board. Crude futures are moving up with the latest quote showing oil trading higher by $1.45 to $107.68. Interest rates are reversing higher with the yield on the 10-yr currently trading at 3.80%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a very strong open. The Dow futures are currently ahead by about 250 points; the S&P’s are up by about 35 points, while the NASDAQ looks to be about 39 points above fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Advanced Micro Devices (NYSE: AMD) – Upgraded at Bank of America
Investment Technology Group (NYSE: ITG) – Downgraded at Bank of America
Fannie Mae (NYSE: FNM) – Downgraded at Citi, Lehman
Freddie Mac (NYSE: FRE) – Downgraded at Citi, Lehman
Tenaris (NYSE: TS) – Upgraded at Citi
Transocean (NYSE: RIG) – Upgraded at Deutsche Bank
Prudential (NYSE: PRU) – Upgraded at Friedman Billings
Zions Bancorp (Nasdaq: ZION) – Upgraded at Friedman Billings
Nalco Holding (NYSE:NLC) – Upgraded at Goldman
PetSmart (Nasdaq: PETM) – Downgraded at Goldman
AutoZone (NYSE: AZO) – Downgraded at Goldman
USG Corp (NYSE: USG) – Upgraded at JP Morgan
Mohawk Industries (NYSE: MHK) – Downgraded at JP Morgan
Lehman Brothers (NYSE: LEH) – Upgraded at Merrill, Estimates reduced at Oppenheimer
Goldman Sachs (NYSE: GS) – Upgraded at Merrill, Estimates reduced at Oppenheimer
Merrill Lynch (NYSE: MER) – Estimates reduced at Oppenheimer
UST Inc (NYSE: UST) – Downgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: GS

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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