David Moenning's Daily State of the Markets: 9/18

September 18, 2008 10:10 AM EDT

Nothing To Fear But, Well...

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

As the saying goes, “We have nothing to fear but… well, in this case, a collapse of the U.S. financial system.� Despite the bailout of AIG and billions of Dollars, Yen, Pounds, Euros, etc. having been injected into the banking system by Ben Bernanke and his central banker friends around the globe, stocks traded yesterday on pure unadulterated fear. The fear trade produced a loss of -450 points on the Dow and one of the wildest sessions ever seen in the bond market.

If you can turn away from the sea of red in the stock market for a moment, take a minute or two to think about what is happening right now. Bear Stearns and Lehman Brothers (LEH) are gone. Merrill (MER) had to be acquired. AIG needed the government’s help to the tune of $85 Billion in order to stave off collapse. Then during yesterday’s session we learned that Morgan Stanley (MS) is next in the merger line, Washington Mutual (WM) is auctioning itself to the highest bidder, and the NAV of one of the oldest money market funds in the country ‘broke the buck’ thanks to exposure to Lehman Brothers’ debt.

Oh, and lest we forget, there was also a report that the FDIC, you know - the government’s insurance agency that backs the public’s bank deposits to the tune of $100,000 apiece, is seeing its assets slip below the level set by congress after just 11 bank failures, which is a number that it sure to increase in the coming weeks and months.

So, how do we know that there was fear in the air yesterday? For starters there was the 200 point plunge in the last half-hour, which smacks of forced selling via margin calls. Next, the VIX, which is commonly referred to as the fear index, surged to the highest level since the end of the Tech Bubble Bear market. And then there was the action in the bond market. Despite the tens of billions of dollars that were pumped into the banking system in the U.S. and Europe, the overnight LIBOR rate more than doubled yesterday to 6.3475%. Corporate rates also soared as investors didn’t have much in the way of confidence to lend money to any company. For example, GM had to pay 5.25% for 7-day commercial paper yesterday; a rate that was up 1.25% from Tuesday’s level.

On the other side of the risk spectrum, you have good old treasury securities, which are backed by the full faith and credit of the U.S. Government. Believe it or not, the demand for “safe� money was so great yesterday that 3-month T-Bills traded with a yield of just 0.02% at one point. And no, that is NOT a typo! In short, there was so much demand for anything risk averse that investors preferred to worry about the return OF their money instead of the return on their money.

The one positive thing to take out of the abysmal action – and we did have to look hard to find it – is that this type of emotional washout is what usually defines market bottoms. So, while it probably isn’t time to jump back into the water, it is time to start looking for and thinking about opportunities.

Turning to this morning, Central Bankers are doing everything they can to make the system work again and the money being injected into the system is mind boggling. Twice last night there were reports of Japan injecting a trillion Yen or more into their system. Next, the Bank of England is teaming up with Helicopter Ben to air-drop billions into banks. And heck, even the Swiss are joining in the effort to push cash into banks. And so far at least, the efforts seem to be paying off in terms of the stock market’s early indications.

Next up, we hear that Morgan Stanley is about to begin official merger negotiations with Wachovia (WB).

Finally, pay close attention going forward to news headlines referring to regulators “changing the rules� because I’ve been saying for some time that this is the next step that is likely to be taken in order to combat this capital crisis. So far, we’ve seen the Chinese and the Russians lower their bank reserve requirements. And then this morning we see reports that the FDIC, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve are all quietly proposing significant changes in accounting rules

Running through the rest of the pre-game indicators, the foreign markets are mixed by region with Asia down and Europe up. Crude futures are moving up again with the latest quote showing oil trading higher by $2.64 to $99.80. Interest rates are rising with the yield on the 10-yr currently trading at 3.47%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a green open for a change. The Dow futures are currently ahead by about 110 points; the S&P’s are up by about 16 points, while the NASDAQ looks to be about 25 points above fair value at the moment.

Stocks “In Play� This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Google (GOOG) – Mentioned positively at Bernstein
Vodafone (NYSE: VOD) – Downgraded at Bernstein
PetroChina (NYSE: PTR) – Upgraded at Credit Suisse
Illinois Tool (NYSE: ITW) – Added to Conviction Buy list at Goldman
Advance Auto Parts (NYSE: AAP) – Upgraded at Goldman
Holly Corp (NYSE: HOC) – Upgraded at Goldman
Nortel (NYSE: NT) – Downgraded at JP Morgan
Denbury Resources (NYSE: DNR) – Downgraded at Merrill
Waters (NYSE: WAT) – Upgraded at Merrill
Target (NYSE: TGT) – Downgraded at Morgan Stanley
Ann Taylor (NYSE: ANN) – Upgraded at Piper
Vulcan Materials (NYSE: VMC) – lower targer at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: none

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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• Goldman Sachs Conviction Buy List
• Credit Suisse
• UBS
• JPMorgan
• Ben S. Bernanke
• Morgan Stanley
• Bear Stearns
• Lehman Brothers
• Wachovia
• David Moenning
• Crude Oil

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