David Moenning's Daily State of the Markets: 9/17

September 17, 2008 10:16 AM EDT

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

Too Big To Fail?

During the Lehman (LEH) saga, Hank Paulson made it clear that Wall Street was not going to be bailed out en masse by the federal government. With Lehman turning its nose up at assistance from the Korea Development Bank as well as other buy-out offers, the powers-that-be in Washington did not want to become the lenders of last resort for firms that had gotten themselves into big trouble via the use of ridiculous amounts of leverage.

So, after Lehman finally woke up and recognized that it was in dire straits, Mr. Paulson, who as the former head of Goldman Sachs (GS) knows a thing or two about the ways of Wall Street, ‘just said no’ to helping out the 153 year-old investment bank.

However, AIG (AIG) wound up being a horse of a different color. As the massive insurance company started to flounder, as evidenced by a drop in the stock price of -83% over the last eight trading days, Mr. Paulson and friends also tried to hold the line.

But, in the end, the sheer size of the company, which operates in more than 100 countries, caused Washington to change its tune. The ripple effect of a company this big failing was projected to be more like a tsunami to the financial system. So, in short, AIG was finally deemed to be too big to fail. And it was this flip-flop on the government’s stance on a bailout of AIG that was behind Wall Street’s reversal of fortunes yesterday.

With Private Equity having walked out on negotiations to provide capital to AIG, downgrades from S&P, Moody’s, and Fitch, and reports stating that the insurer would be unable to secure an emergency funding package from the likes of Goldman and JP Morgan, things were not looking good for the market or AIG yesterday morning. The stock of AIG opened at $1.25, which represented a drop of 73% or so from Monday’s close. The Dow followed suit with an opening decline of 175 points and it looked like it was going to be another good day to be hunkered down in a fox hole.

And while the Fed’s announcement that it had decided not to cut rates any further did get traders’ attention for a brief moment and caused the requisite knee-jerk reaction, the day remained all about AIG. So, once word came out that there was a possibility of using government funds to support the massive insurance company, traders breathed a huge sigh of relief and hit the buy button into the close.

Before we move on, we should recognize that the Fed did the right thing yesterday by doing nothing on the interest rate front. You see, Mr. Bernanke and Co. have come up with all kinds of ways to make sure that the financial system has plenty of liquidity. But Gentle Ben also said “No mas� to the idea of increasing bank profit margin via a reduction in the Fed Funds rate.

Turning to this morning, investors remain on edge about the state of the financial system as we have yet another problem on our hands. The Primary Fund, which is one of the first and largest money market funds has done the unthinkable and put a seven-day freeze on redemptions as the Lehman bankruptcy sent its NAV below the all-important $1 per share mark.

On the economic front, August Housing Starts came in at 895K, which was below the consensus reading of 950K while Building Permits were also light at 854K vs. expectations for 927K.

Running through the rest of the pre-game indicators, the foreign markets are mixed by market. Crude futures are moving up with the latest quote showing oil trading higher by $3.14 to $94.29. Interest rates are falling again after yesterday’s dramatic rebound with the yield on the 10-yr currently trading at 3.44%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to another down open. The Dow futures are currently off by about 140 points; the S&P’s are down by about 18 points, while the NASDAQ looks to be about 17 points below fair value at the moment.

Stocks “In Play� This Morning:

Yesterday’s Earnings After the Bell:

Adobe Systems (Nasdaq: ADBE) – Reported $0.50 vs. $0.46
Morgan Stanley (NYSE: MS) – Reported $1.32 vs. $0.80

Today’s Earnings Before the Bell:

General Mills (NYSE: GIS) – Reported $0.96 vs. $0.87

News, Upgrades/Downgrades/Brokerage Research:

Evergreen Solar (Nasdaq: ESLR) – Upgraded at Citi
Perrigo (Nasdaq: PRGO) – Upgraded at Credit Suisse
Sony (NYSE: SNE) – Downgraded at Goldman
Travelers (NYSE: TRV) – Upgraded at Goldman
ACE Ltd (NYSE: ACE) – Upgraded at Goldman
Kimberly Clark (NYSE: KMB) – Upgraded at Goldman
Colgate (NYSE: CL) – Downgraded at Goldman
Tupperware (NYSE: TUP) – Downgraded at JP Morgan
Ashland (NYSE: ASH) – Upgraded at JP Morgan
Annaly Capital (NYSE: NLY) – Upgraded at JP Morgan
Dean Foods (NYSE: DF) – Mentioned positively at Morgan Stanley
Goldman Sachs (NYSE: GS) – Estimates reduced at Oppenheimer, Target reduced at UBS, Upgraded at Wachovia
Morgan Stanley (NYSE: MS) – Target reduced at UBS

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

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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• Credit Suisse
• UBS
• JPMorgan
• Goldman Sachs
• Henry Paulson
• Ben S. Bernanke
• Citi
• Morgan Stanley
• Wachovia
• David Moenning
• Crude Oil

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