David Moenning's Daily State of the Markets: 9/23

September 23, 2008 10:32 AM EDT

A Three Word Summation

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

There are three little words that when used in reference to a company’s earnings results usually send stocks skyward: better than expected. However, the overriding theme of the market these days can best be described by three words at the polar extreme of the spectrum. You see, Wall Street’s financial crisis seems to be ‘worse than anticipated’ at nearly every turn.

For example, in the beginning of the subprime mess, it was believed that banks and brokers had ‘kitchen sinked’ their earnings reports. However, as we now know, nothing could have been farther from the truth. Next, when Bear Stearns went down, many analysts announced that we had seen the type of emotional washout that usually accompanies important market bottoms. These analysts went on to argue that we had actually seen the worst of the crisis. But unfortunately, we have come to learn that things on Wall Street were far worse than anyone had dreamed as it wasn’t long before Lehman was in bankruptcy and Merrill Lynch was sold to the highest bidder.

After the Lehman/Merrill excitement, there was perhaps fifteen minutes or so of relief before investors began to focus on the next problem that turned out to be much worse than analysts had expected – AIG.

Now fast forward one week when the government announced, in a very timely fashion, that the U.S. taxpayer was going to backstop money market funds and buy up all of those bad mortgages. The powers-that-be assured us that the move to swallow up the toxic securities would allow banks to start lending again, which would, of course, help the housing market improve, which would, in turn, help the economy, and so on and so on.

Although the quadruple-witching expiration and the banning of short selling for a mere 800 stocks might have helped a wee bit, traders seemed to like the government’s plan and pushed stocks higher. It appeared that Hank Paulson had displayed some serious moxie by convincing those in Washington not to sit on their hands and watch the U.S. pull an instant replay of the Japanese deflationary cycle. And while there are a good many that view the government’s moves as something south of the free-market line, the feeling was that once again, we had faced the worst of the subprime slime.

But, as you may have guessed from the title of this morning’s missive, the latest of the latest maneuvers on Wall Street – better known as the last two investment banks standing morphing into regular old banks – caused investors to wonder if, yet again, things were actually much worse than had been anticipated. (Or put another way, how the heck is Goldman Sachs (GS) suddenly a problem?)

So, with details of the government’s estimated $1.8 Trillion expenditure a little sketchy and both Goldman and Morgan Stanley (MS) jumping on the last train out of Wall Street, it is little wonder that investors were a little jittery come Monday morning. Now toss in the biggest one-day dollar gain for oil in history and well, you’ve got the recipe for red ink on your hands.

Turning to this morning, we don’t have any economic data to review before the bell. However, any news on the economy would likely take a back seat today to the testimony of Hank Paulson and Ben Bernanke. So, in short, the markets are waiting to hear what these guys have to say about the government’s big plans.

Running through the rest of the pre-game indicators, the foreign markets are lower across the board. Crude futures are moving down after yesterday’s record run with the latest quote showing oil trading lower by $13.02 to $107.90. Interest rates are down 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 flat-to-down open. The Dow futures are currently off by a couple points; the S&P’s are down by about 2 points, while the NASDAQ looks to be about 10 points below fair value at the moment.

Stocks “In Play� This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Zions Bancorp (Nasdaq: ZION) – Downgraded at Citi
Regions Financial (NYSE: RF) – Downgraded at Citi
LSI Logic (NYSE: LSI) – Estimates and target lowered at Friedman Billings
Intl Paper (NYSE: IP) – Added to Conviction Buy list at Goldman
Canadian Nat’l Railway (NYSE: CNI) – Upgraded at Goldman
Circuit City (NYSE: CC) – Downgraded at Jefferies
ST Microelectronics (NYSE: STM) – Downgraded at JP Morgan
Northern Trust (Nasdaq: NTRS) – Upgraded at Merrill
Annaly Capital (NYSE: NLY) – Upgraded at Merrill
Vornado Realty (NYSE: VNO) – Upgraded at Merrill
Lam Research (Nasdaq: LRCX) – Downgraded at Merrill
General Electric (NYSE: GE) – Downgraded at Merrill
Bank of America (NYSE: BAC) – Estimates reduced at Oppenheimer
JP Morgan (NYSE: JPM) – Estimates reduced at Oppenheimer
Citigroup (NYSE: C) – Estimates reduced at Oppenheimer
Wells Fargo (NYSE: WFC) – Estimates reduced at Oppenheimer
Wachovia (NYSE: WB) – Estimates reduced at Oppenheimer

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.

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• Goldman Sachs Conviction Buy List
• JPMorgan
• Goldman Sachs
• Henry Paulson
• Ben S. Bernanke
• Citi
• Morgan Stanley
• Bear Stearns
• Jefferies & Co
• Merrill Lynch
• Wachovia
• Banc of America
• Friedman, Billings, Ramsey
• David Moenning
• Crude Oil

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