David Moenning's Daily State of the Markets: 03/14

Mortgage Meltdown (Part II)

Good morning. Stocks experienced a replay of the recent mortgage market meltdown yesterday as headline after headline warned of potential difficulty in the sector. And in short, the combination of the negative headlines and worries about the possible expansion of the mess in mortgages pushed the Dow down 240 points, for the second biggest point drop of the year.

There was little mystery behind the catalyst for yesterday’s move lower.
Most of the news was about the mortgage lenders and the negative headlines just kept coming. For example, by now, everybody knows about New Century’s troubles. The company has said that it doesn’t have cash to pay lenders and that it is being investigated criminally for the action in the stock price. And then yesterday we learned that NEW will soon be delisted from the NYSE.

Next, another of the subprime mortgage lenders, Accredited Home Lenders
(LEND) announced overnight that it was seeking waivers and an extension of waivers to ease its own liquidity shortfall. That was good for a quick hit of -65% to the stock price.

In addition, we learned that several Wall Street firms are being subpoenaed for their research in the subprime arena.

And finally, the Mortgage Bankers Association came out with numbers on mortgage defaults and delinquencies. While the selling appeared to accelerate on the MBA report, these numbers shouldn’t really be much of a surprise to anyone. Delinquencies rose in the fourth quarter by 0.28% to 4.95%. Not surprisingly, delinquencies rose in the high-risk mortgage market by 0.77% to 13.33%. However, before anybody panics, it is important to understand that this number is below the peak seen in 2002 and wasn’t even a record increase.

While the bears tried to promote the idea that the MBA numbers are indicative of a widening problem in the mortgage market, this does not appear to be the case. It is true that these low quality loans are now experiencing some difficulty. But when you lend money aggressively to people with little or no down payments and very little credit qualifications, it probably shouldn’t be much of surprise to see some of these loans go south.

Getting back to the stock market, just about every technician worth their salt has been looking for a retest of the lows. However, a swift decline which retraced almost the entire bounce on increasing volume wasn’t exactly the preferred scenario.

So, now we play the bottoming game. The bulls will try and pick themselves up off the canvas and stop the bleeding while the bears will be looking to make a new low and instill some fear into the market. So, stay tuned and be sure to watch those old lows carefully.

Turning to this morning, as expected, the overseas markets all followed the U.S. lower with Asian markets dropping -2.5% or more while the European bourses are sporting losses in the -1.6% range.

Running through the pre-game indicators, gold futures are trading lower by $9.20 this morning to $640.20 right now. In the oil pits, crude futures are up $0.23 this morning and the latest quote is at $58.16. Interest rates are moving lower this morning with the yield on the 10-year currently trading at 4.48%. And finally, with about an hour before the bell, stock futures in the U.S. are looking to head a little lower. The Dow futures are currently off by about 30 points; the S&P’s are down about
3 points, while the NASDAQ looks to be about 5 points below fair value at the moment.

Stocks “In Play” This Morning:
Micron Technology (NYSE: MU) – Upgraded at Citigroup
Chevron (NYSE:CVX) – Upgraded at Deutsche Bank
Countrywide Financial (NYSE:CFC) – Upgraded at Friedman Billings
Checkpoint Software (CHKP) – Upgraded at Freidman Billings
Qualcomm (Nasdaq:QCOM) – Upgraded at JP Morgan
Darden Restaurants (NYSE: DRI) – Upgraded at Lehman
Commscope (NYSE: CTV) – Upgraded at Oppenheimer
Cheesecake Factory (Nasdaq: CAKE) – Upgraded at Raymond James
American Eagle Outfitters (NYSE: AEO) – Upgraded at Susquehanna
Kroger (NYSE: KR) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: 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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