David Moenning's Daily State of the Markets: 7/18

July 18, 2008 9:39 AM EDT

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

http://PlayAudioMessage.com/play.asp?m=517671&f=BXAXZC&ps=13&c=FFFFFF&pm=2&h=25

Three Reasons

Yesterday, I was talking with a friend who knows my stock market modus operandi very well, and he asked, "Okay, Mr. I-need-a-reason-for everything, what the heck is the story with stocks suddenly blasting higher? And for the record, have you ever seen anything like this blast in the financials before?"

We joked that if you knock things down far enough, it really isn’t that hard to get a 30% - 50% gain in a couple of days. I mean heck, Fannie Mae (FNM) is now up 55% in two sessions – and yet it still needs a gain of +174% to get back to where it was in mid-May.

But getting back to the point; yes, I do believe that there is usually a reason behind big moves in the market. And from where I sit, right now there are basically three reasons for the recent move.

First, and foremost, the financials have been beaten so unmercifully over the past few months that the values have become compelling – assuming, that is, that the bank you are considering will actually stay in business. For example, there has been a great deal of worry about Lehman Brothers lately. And as the stock traded down into the $12 range, one analyst, whose name escapes me, pointed out that the wholly owned subsidiary of Neuberger Berman was worth $11 all by itself.

However, with the financial system teetering on the brink and the government scrambling to figure out ways to avoid collapse, you can’t really blame people for being a tad skeptical as to which firms might not make it through.

Enter the SEC and their infinite wisdom, or ultimate stupidity, depending upon your point of view. You see, Mr. Cox has decided that it is just too dangerous for traders to do naked short selling on the GSE’s (Fannie Mae, Freddie Mac, Sallie Mae, etc.) and the Primary Dealers (think Bear Stearns here). So, the bottom line is that a rule is about to be put into effect that would outlaw such practices – and the rule is scheduled to be implemented on Monday! So, it doesn’t take a Ph.D. in Wall Street's school of hard knocks to see that there might be a few folks out there scrambling to cover their naked shorts. And then, since these puppies have been blasting higher with reckless abandon, there also might be a few fully clothed shorts that have decided it's time to throw in the towel.

So, reason number one for the two-day blast in the financials can be labeled as a legislation-induced short squeeze of epic proportions.

Reasons numbers two and three are a good bit easier to understand. First, we've seen decent earnings from unlikely sources over the past two days – namely Wells Fargo (WFC) and JP Morgan (JPM). Now toss in a three-day drop in the price of oil to the tune of about $16, or 11%, and it’s easy to see why this triumvirate has caused some fireworks.

Turning to this morning, disappointing tech results after the bell yesterday from the likes of Google (GOOG) and Microsoft (MSFT) are being overcome this morning by better than expected results from Citigroup (C).

Running through the rest of the pre-game indicators; with the exception of Japan, the major foreign markets are higher across the board. Crude futures are a smidge lower this morning with the latest quote showing oil trading down $0.12 at $129.17. Interest rates are up a bit this morning with the yield on the 10-yr currently trading at 4.06%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a flattish open. The Dow futures are currently higher by about 12 points; the S&P’s are up by about a point, while the NASDAQ looks to be about 12 points below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:

Advanced Micro Devices (NYSE: AMD) – Reported -$0.60 vs. -$0.52
AptarGroup (NYSE: ATR) – Reported $0.64 vs. $0.63
Capital One (NYSE: COF) – Reported $1.24 vs. $1.31
Gilead Sciences (Nasdaq: GILD) – Reported $0.49 vs. $0.48
Google (Nasdaq: GOOG) – Reported $4.63 vs. $4.72
Intl Business Machines (NYSE: IBM) – Reported $1.98 vs. $1.82
Merrill Lynch (NYSE: MER) – Reported -$4.95 vs. -$1.94
Microsoft (Nasdaq: MSFT) – Reported $0.46 vs. $0.47
Zions Bancorp (Nasdaq: ZION) – Reported $0.65 vs. $0.68

Today’s Earnings Before the Bell:

Citigroup (NYSE: C) – Reported -$0.54 vs. -$0.67
Honeywell (NYSE: HON) – Reported $0.96 vs. $0.94
Manpower (NYSE: MAN) – Reported $1.52 vs. $1.50
Mattel (NYSE: MAT) – Reported $0.03 vs. $0.02
Schlumberger (NYSE: SLB) – Reported $1.16 vs. $1.13

News, Upgrades/Downgrades/Brokerage Research:

TD Ameritrade (Nasdaq: AMTD) – Downgraded at BMO Capital
Gilead Sciences (Nasdaq: GILD) – Downgraded at BMO, Jefferies
Nucor (NYSE: NUE) – Upgraded at CIBC World Markets
Intl Game Tech (NYSE: IGT) – Downgraded at Citi, Oppenheimer
Patterson UTI (Nasdaq: PTEN) – Upgraded at Credit Suisse
Coca Cola (NYSE: KO) – Removed from Conviction Buy list at Goldman
Werner Ent (Nasdaq: WERN) – Upgraded at JP Morgan
UAL Corp (Nasdaq: UAUA) – Upgraded at JP Morgan
Illumina (Nasdaq: ILMN) – Target increased at Lehman
Lehman (NYSE: LEH) – Moody’s lowers rating to A2
Merrill Lynch (NYSE: MER) – Moody’s lowers rating on senior debt to A2
Potash (NYSE: POT) – Target increased at RBC
Yum Brands (NYSE: YUM) – Upgraded at Wachovia

Disclosure: Mr. Moenning and/or related firms hold long positions in: KO, GILD, ILMN, POT

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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: DMoenning@HeritageCapitalManagement.com

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