David Moenning's Daily State of the Markets: 12/05

Is Santa On Hold?

Although the historical script suggests that we should be starting to enjoy a Santa Claus rally right about now, the chatter on the street appears to be keeping Mr. Claus and his reindeer in a holding pattern.

If your zeal for the market does not include watching just about every headline that hits the tape, then you probably missed the reasons for yesterday’s modest decline. You see, it wasn’t a single catalyst that caused stocks to wilt into the close but rather the combination of several discouraging stories.

For starters, Moody’s (MCO) downgraded another batch of asset-backed securities, which, the bears tell us is an indication that credit problems persist despite two rounds of rate cuts by the Fed. Next, JP Morgan (JPM) warned that there is likely to be more writedowns coming in the beleaguered financial sector. Then Punk Ziegler downgraded the major investment banks, including Goldman (GS), Lehman (LEH), and Bear Stearns (BSC). Next up, Morgan Stanley (MS) chimed in with warnings of dividend cuts to come in some big name financials. Then there was some more chatter about earnings estimates coming down for the fourth quarter. And finally, there was an awful lot of talk about the ongoing tightness in the credit markets and the fear that additional rate cuts will not solve this problem.

So, with talk of recession occurring just about everywhere you turn and the calls for a 50 basis point rate cut becoming more prominent, it wasn’t exactly surprising to see stocks languish yesterday.

I guess the one positive we can find is that none of the worries making the rounds recently have been new. In fact, most of the concerns are rehashed versions of things we already know. For example, there was a report that the earnings estimates for the fourth quarter in the financial sector have fallen from close to 10% to something more like 3%. But given the size of the writedowns announced recently, anyone with a calculator has already figured this out.

The point here is that the sentiment in the market has been fairly downbeat so far this week and yet, the major indices have held onto the majority of last week’s Fed-induced rally. Therefore, a true contrarian might suggest that Santa might make an appearance after all in the near future.

Turning to this morning, we’ve got a couple of economic reports to review. First up is the controversial ADP Jobs data. ADP reported that November payrolls increased by a whopping +189,000 jobs, which easily exceeded the expectations for an increase in the vicinity of 50,000.

In addition, we got reports on the third quarter’s Nonfarm Productivity and Unit Labor Costs. Productivity came in a bit higher than expected at 6.3% versus the consensus of 5.9% and the Labor Cost number, which is watched closely by the Fed for signs of inflation, dropped by -2%, which was better than estimates for a decline of -1.2%.

Traders apparently like both sets of numbers as the futures have sprung higher in pre-market trading.

Running through the rest of the pre-game indicators; the overseas markets are up nicely across the board. Crude futures are up this morning with the latest quote showing the January contract trading higher by $1.23 to $89.55. Interest rates are higher on the better than expected economic data with the 10-yr trading at a yield of 3.94% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a pretty nice open. The Dow futures are currently ahead by about 115 points; the S&Ps are up by 13 points, while the NASDAQ looks to be about 22 points above fair value at the moment.

Stocks “In Play” This Morning:


News, Upgrades/Downgrades/Brokerage Research:

Hewlett Packard (NYSE: HPQ) – Mentioned positively at Bank of America
Dell (Nasdaq: DELL) – Mentioned positively at Bank of America
AmerisourceBergen (NYSE: ABC) – Upgraded at Bank of America
SK Telecom (NYSE: SKM) – Downgraded at Bear Stearns
Yahoo! (Nasdaq: YHOO) – Mentioned cautiously at Bernstein
Morgan Stanley (NYSE: MS) – Estimates reduced at CIBC Capital
JP Morgan (NYSE: JPM) – Estimates reduced at CIBC Capital
Citigroup (NYSE: C) – Estimates reduced at CIBC Capital
Fannie Mae (NYSE: FNM) – Downgraded at Credit Suisse, Piper Jaffray
Freddie Mac (NYSE: FRE) – Downgraded at Credit Suisse
Johnson Controls (NYSE: JCI) – Downgraded at Deutsche Bank
Telecom Italia (NYSE: TI) – Upgraded at Goldman
Pepsi Bottling Group (NYSE: PBG) – Downgraded at Goldman
Comcast (Nasdaq: CMCSA) – Downgraded at Goldman
Motorola (NYSE: MOT) – Estimates reduced at JP Morgan
PACCAR (Nasdaq: PCAR) – Upgraded at Merrill
Northern Trust (Nasdaq: NTRS) – Downgraded at Merrill
Intel (Nasdaq: INTC) – Upgraded at Thomas Weisel Partners

Mr. Moenning holds Long positions in stocks mentioned: MER, PBG, NTRS

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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