David Moenning's Daily State of the Markets: 7/14

July 14, 2008 9:41 AM EDT

Opening a Window Will Cool Things Down

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

Friday's session was another roller coaster ride driven by the trials and tribulations of Fannie Mae (FNM) and Freddie Mac (FRE). With lots of people, including former St. Louis Fed President William Poole saying that GSE’s would be insolvent if they were banks, concerns about the viability of both companies have been running rampant recently, which, of course has caused plenty of uncertainty for stock market investors.

What Mr. Poole is saying is that both companies have a good bit less than $0.02 in cash for every $1 in loans they have guaranteed – and remember that banks must have at least $0.10 on the dollar in reserve. And with the NY Times running an article saying basically that a government bailout would be next, the short-sellers were certainly enjoying themselves in the early going on Friday.

Given that a government bailout would mean that the stocks would be next to worthless, FNM fell nearly 50% to a level of $6.68. This, coupled with another spike in crude oil, sponsored by our good friends in Nigeria and Iran, took the DJIA down -252 points before noon.

Unfortunately, Treasury Secretary Paulson's comments that he prefers to see Fannie and Freddie in their current form were of no help to the market. And then Senator Christopher Dodd’s less subtle remarks, where the senator basically opined that the GSE’s were sound and had plenty of capital, also didn’t help stocks find a bottom.

And while the day wound up being all about Fannie and Freddie, it is worth noting that crude prices did hit another all-time record high of just over $147 in the early going.

But getting back to the story of the day, at 2:48pm Eastern, a Reuters report hit the wires stating that Ben Bernanke had told the GSE chief that Fannie and Freddie would be eligible to use the discount window. At first blush, this seemed like a much better alternative than having the government take on the $5 Trillion (yes, that's Trillion, with a "T") in mortgage loans issued by FNM and FRE.

This potential solution to a VERY big problem, caused the bears to scramble to cover their shorts. And in a dramatic display of the power of short-covering, the Dow proceeded to spike about 250 within the next 30 minutes points and even managed to break into the green for a brief moment.

But unfortunately, the fun didn't last as the next Reuters report stated that there had been no talks between the Fed and the GSE's. So, with no proof to back up the idea of the Fed opening the window to Fannie and Freddie, the bears quickly returned to work and pushed the Dow back down to a loss of -129.

Thus, the question of the day is if the Fed will indeed open up the discount window to Fannie and Freddie. While some will argue that this would simply be a band-aid, it might just stop the bleeding long enough to stabilize the patient.

Turning to this morning, it is now official: on Sunday the Fed announced that it will indeed open the discount window to Fannie and Freddie. In addition, the Treasury department has implemented a plan to backstop the two GSE's by (1) increasing the lines of credit with Treasury and (2) committing to purchase equity in either company if capital is needed.

As you might have guessed, the moves have sparked equity rallies in both Europe and the U.S. as the bears once again appear to be scrambling to take cover as fast as possible.

Running through the rest of the pre-game indicators; the major foreign markets are mixed by region with Asia down and Europe up. Crude futures are down this morning with the latest quote showing oil trading down to $143.27. Interest rates are higher this morning with the yield on the 10-yr currently trading at 3.98%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a very nice open. The Dow futures are currently ahead by about 130 points; the S&P’s are up by about 17 points, while the NASDAQ looks to be about 24 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

National Oilwell Varco (NYSE: NOV) – Upgraded at Bank of America
Genzyme (Nasdaq: GENZ) – Upgraded at Citi
Hercules (NYSE: HPC) – Downgraded at Deutsche Bank
Molson Coors (NYSE: TAP) – Upgraded at Deutsche Bank
Alcoa (NYSE: AA) – Upgraded at Goldman Sachs
Zion Bancorp (Nasdaq: ZION) – Added to Conviction Sell list at Goldman
Manpower (NYSE: MAN) – Downgraded at Goldman
Starwood Hotels (NYSE: HOT) – Downgraded at Goldman, Added to Conviction Sell list
Macy’s (NYSE: M) – Upgraded at JP Morgan
Dean Foods (NYSE: DF) – Upgraded at JP Morgan
Bank of America (NYSE: BAC) – Estimates reduced at Oppenheimer
JP Morgan (NYSE: JPM) – Estimates reduced at Oppenheimer
Louisiana Pacific (NYSE: LPX) – Upgraded at RBC Capital

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.

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

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