David Moenning's Daily State of the Markets: 8/25

August 25, 2008 10:15 AM EDT

White Knight?

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

The story of the day on Friday was that a white knight in the form of Korea’s Development Bank was going to ride in and rescue Lehman Bros. (LEH). The thinking here is if a Lehman bailout is successful, then there would be one less shoe to potentially drop in the credit crisis.

We’ve already seen Bear Stearns go down and it is looking more and more likely that Fannie Mae (FNM) and Freddie Mac (FRE) are going down as well as the consensus view is that it is not a question of if, but when the government steps in. Thus, the fear in the back of traders’ minds is that we could see a domino effect as banks and brokers start to fall and that money available for bailouts may soon run out.

Therefore, the idea that Korea might step in and pick up a good chunk of LEH provided an opportunity for investors to breathe a sigh of relief (and cover some shorts). The story appeared to be supported by a KDB spokesman on Friday confirming that the bank IS indeed considering all kinds of options “including Lehman Brothers.” This sound bite helped to overshadow a CNBC report from Thursday evening that many private-equity firms were balking at Lehman’s view of its worth.

Although it was a late-summer Friday where even yours truly was taking a little time off before the opening bell, there was still a fair amount of activity leading to the Dow’s pop of nearly 200 points.

In addition to the hopes that Lehman had found a suitor, we also heard from a couple of market heavyweights: Ben Bernanke and Warren Buffett. The Fed Chairman said that growth is likely to fall short of trend for some time and that the strain on the economy is “becoming apparent.” Gentle Ben said that the Fed will continue to review all liquidity facilities to ensure that (a) they are working and (b) the Fed is ready to make adjustments if needed. This particular point was also viewed as a positive by those traders that were still at their desks on Friday afternoon.

On the whale watching front, Warren Buffett appeared to give both teams something to crow about on Friday. First, the Oracle of Omaha agreed that Lehman needs a savior and that Fannie and Freddie are unlikely to get by without a governmental bailout. However, Mr. Buffett went on to say that stocks are lower than they were a year ago, implying that valuations are improving.

Turning to this morning, a spokesman for the Korean Development Bank told the New York Times on Saturday that the reports suggesting that they would buy Lehman were erroneous and that, buying Lehman was NOT an option. So, it looks like this saga is likely to continue.

Also on the news front, Morgan Stanley has lowered its target for the S&P 500 for the year by 100 points to 1300 from 1400 based on reduced earnings expectations.

Running through the rest of the pre-game indicators, the foreign markets are a mixed bag with Asia up on talk of a stimulus package in China while the European bourses that are open are down a fraction. Crude futures are moving up with the latest quote showing oil trading higher by $0.61 to $115.20. Interest rates are moving lower this morning with the yield on the 10-yr currently trading at 3.80%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a slightly lower open. The Dow futures are currently off by about 17 points; the S&P’s are down by about 3 points, while the NASDAQ looks to be about 8 points below fair value at the moment.


Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

SunTrust Banks (NYSE: STI) – Downgraded at Citi
Ann Taylor (NYSE: ANN) – Upgraded at Citi
Cablevision (NYSE: CVC) – Downgraded at Citi
American Eagle Outfitters (NYSE: AEO) – Mentioned cautiously at Friedman Billings
Bemis (NYSE: BMS) – Upgraded at Merrill
Knight Transportation (NYSE: KNX) – Downgraded at Wachovia
Werner Enterprises (Nasdaq: WERN) – Downgraded at Wachovia

Disclosure: Mr. Moenning and/or related firms hold long positions in: GS

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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• Warren Buffett
• Ben S. Bernanke
• Citi
• Morgan Stanley
• Bear Stearns
• Lehman Brothers
• Wachovia
• Friedman, Billings, Ramsey
• David Moenning
• Crude Oil

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