David Moenning's Daily State of the Markets: 8/19

August 19, 2008 9:46 AM EDT

What Price Value?

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

The focus returned to the financial sector yesterday as two stories dominated the trading session. First, there was word that Lehman Brothers (LEH) was having difficulty unloading $40 billion worth of commercial real estate and real estate securities. And second, a weekend Barron’s article suggested that Fannie Mae (FNM) and Freddie Mac (FRE) might have to be nationalized after all. So, after spending a couple of weeks playing the stronger dollar/global slowdown theme, yesterday, traders returned to a game they know quite well – shorting the financials.

The crux of the problem in the financials continues to be a lack of cold, hard cash. As bank after bank and broker after broker goes through the deleveraging process, which, in English means the firms are selling assets or raising capital to pay down the loans they used to buy toxic securities with, the problem is that it is becoming tougher to find buyers for the stuff they want to sell.

For example, Lehman was the source of several rumors on Monday, most of which focused on the value placed on the real estate assets they were attempting to sell. Just as Merrill (MER) had established a price in the CDO market when they dumped a boatload of the stuff earlier in the month, the potential sale of Lehman’s real estate holdings will establish a benchmark value for commercial real estate properties. However, as you might guess, the sticking point in the deal appears to be the price.

The problem is there just aren’t a whole lot of potential buyers interested at this point in time. And since everybody knows that Lehman needs the money, the question of valuation becomes paramount. Thus, traders are watching this situation closely to find just how badly Lehman needs to trade commercial real estate assets for cash on their balance sheet.

The other difficulty seen in the market on Monday was the worry that things are so bad at Fannie and Freddie that the government is going to have to step in and take over. If you will recall, it was just a month ago that Fannie Mae popped up +120% in just 6 trading days in response to Hank Paulson’s reassurance that the GSE’s were well capitalized. However, since the 23rd of July, FNM has plunged 59% to a new 30-year low of $6.15. You see, if the government does have to step in and take over, stockholders will be vaporized as they will get next to nothing, if anything for their shares. And this alone is reason enough to make some people want to head for the exits.

So, with worry about the financials returning to the forefront and Wall Street’s traditional vacation season in full swing, it is little wonder that stocks got tagged for hefty losses yesterday. However, the good news from the chart-watcher camp is that the Dow and S&P have not yet broken down and as such, hope remains.

Turning to this morning, we’ve got some inflation data to sift through. Unfortunately, the PPI came in VERY hot with an increase of +1.2%, which was double expectations. When you strip out food and energy, the Core PPI was also a problem at +0.7%, which was more than triple the consensus for an increase of +0.2%. On a year-over-year basis, the headline PPI came in at 9.8%, which is the highest rate since 1981. As you might expect, stocks have tanked on the news.

Running through the rest of the pre-game indicators, the major foreign markets all followed Wall Street overnight. Crude futures are moving down with the latest quote showing oil trading lower by $0.88 to $111.99. Surprisingly, interest rates are up just a hair this morning with the yield on the 10-yr currently trading at 3.83%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 90 points; the S&P’s are down by about 8 points, while the NASDAQ looks to be about 10 points below fair value at the moment.


Stocks "In Play" This Morning:

Today’s Earnings Before the Bell:

Home Depot (NYSE: HD) – Reported $0.71 vs. $0.61
Medtronic (NYSE: MDT) – Reported $0.72 vs. $0.69
Sacks (NYSE: SKS) – Reported -$0.22 vs. -$0.19
Target (NYSE: TGT) – Reported $0.82 vs. $0.76

News, Upgrades/Downgrades/Brokerage Research:

MasterCard (NYSE: MA) – Upgraded at Goldman
Affiliated Computer Services (NYSE: ACS) – Downgraded at Goldman
Automatic Data Processing (NYSE: ADP) – Downgraded at Goldman
Lehman (NYSE: LEH) – Mentioned cautiously at JP Morgan
JP Morgan Chase (NYSE: JPM) – Estimates reduced at Morgan Stanley
Cheniere Energy NYSE: (LNG) – Upgraded at RBC Capital
Dicks Sporting Goods (NYSE: DKS) – Upgraded at RW Baird
Darden Restaurants (NYSE: DRI) – Downgraded at UBS
Goldman Sachs (NYSE: GS) – Estimates reduced at William Blair
Morgan Stanley (NYSE: MS) – Estimates reduced at William Blair

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.

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

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• UBS
• William Blair
• JPMorgan
• Goldman Sachs
• Henry Paulson
• Morgan Stanley
• Lehman Brothers
• Robert W Baird
• RBC Capital
• David Moenning

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