David Moenning's Daily State of the Markets:

Say It Ain't So, Warren!

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


After thinking about it quite a bit this weekend (I had a fair amount of time to kill at the Denver Hard Rock while waiting for my freshman daughter to emerge from the Lifehouse concert), I decided that there is really no way to sugarcoat it; Friday’s action was just plain lousy.

Yes it is true that a fair amount of the selling was based on word that a hedge fund was being forced to liquidate holdings. On Saturday, our suspicions were confirmed as we learned that the London-based Peloton Fund had indeed run into trouble as six banks began to seize the fund’s assets on Friday in response to non-payment of securities loans. But before you rush to judgment about the former partners at Goldman now turned hedge fund managers, you should understand that these boys were up +87% last year. So, this just goes to show how quickly things can turn when you bet big on the credit markets these days.

The key point to the Peloton story is that at least some of Friday's thrashing was indeed attributable to forced selling, and as such, artificial.

However, while the rumors in hedgie-land certainly added to the downward action Friday afternoon, this wasn’t the only problem on the day. No, the big concern is that we have yet to see the worst of the credit crisis.

If you look back over the past 6 months and match up the news stories with the charts, it becomes clear that rallies have been driven by hope that the worst was over and the declines are fueled by fears that it isn’t. And in short, Friday’s decline was clearly fueled by the latter. During the session, we got word that the bailout of AMBAC Financial (ABK) had hit a snag; that AIG had said the writeoffs will continue; that there were problems in the municipal bond market; that MBIA warned of further losses in January; and that UBS had increased their estimates for the total damage stemming from subprime by 50%.

The end result was a drop of -315 on the Dow and expectations for the Fed to now drop interest rates by 75 basis points at their March meeting.

Turning to this morning, Warren Buffet, of all people, appears to have added some fuel to the Bear’s argument. In his annual letter to shareholders released over the weekend, the Oracle of Omaha said that the trouble in the insurance business is likely to persist and that stocks aren’t exactly cheap.


It also isn’t helping that HSBC Holdings (HBC) has fanned the flames of fear on the credit front this morning with another writedown of $6.7 Billion. And sticking with the theme that "You ain’t seen nothing yet," UBS is also in the spotlight again today as talk of more writedowns persist.

On the economic front, we don't have any economic data scheduled for release before the bell today or even tomorrow. However, things pick up starting on Wednesday and finish off the week strong with the big Jobs report on Friday.

Running through the rest of the pre-game indicators; the overseas markets were lower across the board. Crude futures are moving down so far with the latest quote off by $0.39 to $101.45. Interest rates are moving up a bit with the 10-yr trading at a yield of 3.56% at the moment. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to soft open. The Dow futures are currently about 15 points below fair value; the S&Ps are lower by about a point, while the NASDAQ also looks to be about a point below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Apple (Nasdaq: AAPL) – Estimates reduced at Bank of America
Darden Restaurants (NYSE: DRI) – Upgraded at Bear Stearns
Ford Motor Co (NYSE: F) – Downgraded at Citi
Palm Inc (Nasdaq: PALM) – Mentioned positively at JP Morgan
Kohls (NYSE: KSS) – Upgraded at JP Morgan
Western Digital (NYSE: WDC) – Downgraded at JP Morgan
Seagate Technology (NYSE: STX) – Upgraded at JP Morgan
DeVry (NYSE: DV) – Upgraded at Lehman
Dean Foods (NYSE: DF) – Upgraded at Morgan Stanley
Northrop Grumman (NYSE: NOC) – Upgraded at Oppenheimer
Thornburg Mortgage (NYSE: TMA) – S&P Lowers rating to B- from B
Expeditors Intl Washington (Nasdaq: EXPD) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: NOVL

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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