David Moenning's Daily State of the Markets: 03/05

March 5, 2008 10:22 AM EST

Holding The Line

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

Much of yesterday’s session was extremely uncomfortable for the bulls as the onslaught of negatives appeared to push the Dow and S&P below the all-important line in the sand on the charts. In light of the fact that a good deal of the action is currently being dominated by trader types and that these investors tend to react to technical levels with gusto, the worry was that if the bears were able to push the major indices below the January lows, the selling would beget more selling, the shorts would double up, and in short, we would be looking at another whoosh down.

The early downside action was driven by the big-picture fears that (1) investors still do not know the extent of the damage from the credit crisis and (2) the slowdown in housing just might be coming home to roost. In terms of the specific news flow; first up, we got word from the Dubai Fund that Citigroup (C) was shopping for additional capital due to new writedowns that are coming down the pike. Next, we got yet another set of downgrades for the major banks. And finally, there was a lot of talk about the unwinding of hedge fund positions, which obviously puts pressure on the markets.

On the topic of banking, both Fed Chairman Bernanke and Vice Chairman Kohn had some discouraging words on the subject yesterday. Bernanke suggested that banks should strive to prevent foreclosures by cutting deals with homeowners to reduce their principal amounts (Hey, where do I sign up for that deal?). The Fed chairman apparently has done the math and since many of the homes being foreclosed upon these days would return only $0.30 to $0.40 on the dollar, he proposed that cutting a deal makes a lot of sense.

While it didn't get near as much play, the comments from Fed Vice Chairman Kohn were actually much more worrisome. Mr. Kohn said that more banking writedowns are coming and that the trend isn’t likely to reverse any time soon. He said that the banking system “faces challenges� and that he is concerned about the liquidity of the 50 biggest banks. And although his points weren’t exactly new, to hear a Fed official talk openly about liquidity problems in the banking system was disconcerting.

So, with investors suddenly feeling that there was no end in sight for the problems in housing and banking, it was little wonder that the bears found little resistance yesterday. And by mid-afternoon the Dow was down -225 points.

However, just about the time it was easy to have lost all hope, a couple of good things happened. First, CNBC reported that Ambac (ABK) was close to a deal. This news took down some of the concerns about the level of future writedowns. And then, Cisco’s (CSCO) John Chambers came out and said that he expects the slowdown he spoke of a while back, to be relatively shallow.

Just like that, the bears were seen running for cover and stocks were bouncing up off their lows. And despite the fact that the indices finished the day in the red, the important thing is that the line in the sand had not been crossed – which gives the bulls a reason to fight another day.

Turning to this morning, the ADP Employment numbers came in a bit weaker than expected. But given the fact that this report has had little predictive ability with regard to the Government’s version set to be released on Friday, these jobs number have been largely ignored so far. We also got a report on Nonfarm Productivity and Unit Labor Costs this morning. Productivity was a little light and as the inflation hawks have been predicting, the Labor Cost number was a bit hotter than expected.

Running through the rest of the pre-game indicators; the Asian markets waffled below breakeven while the major European markets are higher across the board. Crude futures are moving up so far with the latest quote higher by $0.85 to $100.37. Interest rates are moving up a bit with the 10-yr trading at a yield of 3.60% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to modestly higher open. The Dow futures are currently up about 30 points; the S&Ps are higher by about 3 points while the NASDAQ looks to be about 7 points above fair value at the moment.

Stocks "In Play" This Morning:

Today’s Earnings Before the Bell:

BJs Wholesale Club (NYSE: BJ) – Reported $0.80 vs. $0.74
Costco Wholesale (Nasdaq: COST) – Reported $0.74 vs. $0.74

News, Upgrades/Downgrades/Brokerage Research:

Plains Exploration & Production (NYSE: PXP) – Upgraded at Credit Suisse
Pioneer Drilling (NYSE: PDC) – Upgraded at Deutsche Bank
PepsiAmericas (NYSE: PAS) – Upgraded at Deutsche Bank
Western Digital (NYSE: WDC) – Downgraded at FTN Midwest
China Unicom (NYSE: CHU) – Mentioned positively at Goldman
Thornburg Mortgage (NYSE: TMA) – Downgraded at Jefferies
Microsoft (Nasdaq: MSFT) – Initiated Buy at Jefferies
Taiwan Semiconductor (NYSE: TSM) – Upgraded at Lehman
Fannie Mae (NYSE: FNM) – Upgraded at Morgan Stanley
Legg Mason (NYSE: LM) – Upgraded at Wachovia

Mr. Moenning holds Long positions in stocks mentioned: WDC

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

Related Categories

Contributors
Special Reports

Stocks Mentioned

Related Entities

• Credit Suisse
• Deutsche Bank
• Ben S. Bernanke
• Citi
• Morgan Stanley
• Jefferies & Co
• Wachovia
• FTN Midwest
• John Chambers

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?