David Moenning's Daily State of the Markets: 6/03

June 3, 2008 10:22 AM EDT

Credit Crisis II?

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

Stocks got tagged for triple-digit losses on Monday in response to a resumption of worries over the credit crisis. While just about everyone under the sun has opined that we have seen the worst of the credit problems, this is not to say that we are out of the woods in terms of writedowns and capital raises. In short, Monday was filled with bad news on the financial front and although stocks finished off their lows, the greater than 1% loss erased the gains seen in the previous four sessions.

The day started off on a bad foot when UK mortgage lender Bradford & Bingley warned of losses in the upcoming quarter and announced they were raising capital. Although this situation isn’t exactly new, the pricing of the shares at a 33% discount to the market took traders by surprise and highlighted the fact that liquidity is far from abundant these days.

Next up, a couple of high profile jobs were cut at Wachovia (WB) and Washington Mutual (WM). The CEO of Wachovia got the heave-ho from the board while the head honcho at Wamu simply had his responsibilities cut. Although neither company cited reasons for the moves, everybody knows that someone ultimately had to pay for the mess that the companies find themselves in.

But what really put traders in a bad mood was the news that Standard & Poors had downgraded the credit ratings on Morgan Stanley (MS), Merrill Lynch (MER), and Lehman Brothers (LEH). S&P’s review of the sector suggested that there would be more writedowns coming as well as “further sharp deterioration� in mortgage loan and residential construction portfolios. In addition, S&P moved the outlooks for Citi (C), Wachovia, and JP Morgan (JPM) to negative.

But that wasn't all as Oppenheimer’s Meredith Whitney stayed the bear course in the financials and slashed estimates on Lehman again.

Despite the fact that none of this news represented anything new, traders used the data to push stocks down more than 200 points intraday as commentators worried that we were seeing the beginnings of a new phase in the credit crisis.

So, the question at this stage of the game is if we will see a retest of the Credit Crisis lows based on another round of problems in the financial sector. The bulls will argue that yesterday’s selling represented a continuation of the last week’s overbought pullback and is nothing more than noise. However, across the field, our furry friends point to the fact that the market has reentered the trading range and that there isn’t likely to be any meaningful support until we return to the lows.

Turning to this morning, we do not have any economic news to review before the bell, but we will get a look at the report on US Factory Orders at 10:00 am.

Running through the rest of the pre-game indicators; the foreign markets are mostly lower but by differing degrees as Asia followed Wall Street lower while European bourses are mixed. Crude futures are moving down with the latest quote showing oil trading lower by $0.36 to $127.40. Interest rates are lower this morning as the yield on the 10-yr is currently trading at 3.97%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a modestly higher open at the moment. The Dow futures are currently ahead by about 25 points; the S&P’s are up by about 4 points, while the NASDAQ looks to be about 8 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Monsanto (NYSE: MON) – Estimates increased at BB&T Markets, Goldman Sachs
CBS (NYSE: CBS) – Target reduced at Bernstein
Medco Health Solutions (NYSE: MHS) – Estimate and target increased at Citi
AK Steel (NYSE: AKS) – Estimate increased at Deutsche Bank
Arcelor Mittal (NYSE: MT) – Estimate increased at Deutsche Bank
Nucor (NYSE: NUE) – Estimate increased at Deutsche Bank
U.S. Steel (NYSE: X) – Estimate increased at Deutsche Bank
Abercrombie & Fitch (NYSE: ANF) – Downgraded at Friedman Billings
China Unicom (NYSE: CHU) – Downgraded at Morgan Stanley
CSX Corp (NYSE: CSX) – Downgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: MON, AKS, CHU, CSX

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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Related Entities

• Deutsche Bank
• UBS
• Factory Orders
• JPMorgan
• Goldman Sachs
• Citi
• Morgan Stanley
• Merrill Lynch
• Lehman Brothers
• Wachovia
• Friedman, Billings, Ramsey

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