David Moenning's Daily State of the Markets: 09/19

A Preemptive Strike

Ben Bernanke's cavalry rode to the rescue yesterday in what can only be described as dramatic fashion. The big worry among traders had been that the Bernanke Fed might fall behind the curve with regard to the health of the economy. In short, the fear was that Gentle Ben might miss the big picture weakness that seems to be occurring in the economy and wind up implementing a plan that would be too-little-too-late.

However, at 2:15 pm eastern yesterday, the Fed Chairman announced a preemptive strike against future economic weakness by cutting both the Fed Funds and Discount Rates by 0.50%. The move drew cheers from the crowd and stocks celebrated wildly by soaring 335 points.

Unlike Alan Greenspan, who appears to be everywhere in the media these days, Mr. Bernanke’s words are not terribly difficult to interpret. For example, the accompanying statement said that, “…developments in financial markets since the last FOMC meeting have increased the uncertainty surrounding the economic outlook.” Therefore, yesterday’s move was “intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from disruptions in financial markets and to promote moderate growth over time.” And none of the above needs much explanation.

In addition, Mr. Bernanke left the door open for additional rate cuts, by saying the FOMC “will continue to assess the effects of these and other developments on economic prospects.” Our interpretation is that this suggests another 25bp cut is coming in October.

Old habits die hard, so, in reading between the lines of the statement, we should note that the Fed mentioned the financial markets and credit conditions three times. And in such a brief statement, we view this as an exclamation point on the idea that the Fed will be watching the conditions in the money markets VERY closely.

So as to not be considered irresponsible, the FOMC also acknowledged "that some inflation risks remain" and promised to carefully monitor developments. However, given the emphasis on the Fed’s concern about the health of the economy and yesterday’s drop of -1.4% in the Producer Price Index, it is fairly obvious that inflation is a back-burner issue at the moment.

In sum, Bernanke’s preemptive strike puts the Fed ahead of the curve in terms of the economy and shows that the FOMC is indeed concerned about the prospects of a recession. Which, judging by the response of stock markets around the globe, is a good thing.

Turning to this morning’s pre-market, we’ve got another inflation number to review before the bell as well as a report on the state of the housing market.

The government reported that the Consumer Price Index in August came in with a loss of -0.1%, which, like the headline PPI, was better than the consensus estimate for an unchanged reading. When you strip out food and energy, the Core Rate was reported to have gained 0.1%, which was in line with expectations.

On the housing front, both housing starts and building permits came in a little on the light side – but this is hardly surprising news.

Running through the rest of the pre-game indicators, the overseas markets have soared in response to yesterday’s rate cut here in the U.S. Crude futures are up yet again, this time by $0.60 to $82.11. Interest rates are also up again this morning and the 10-yr is trading at a yield of 4.50% at the moment. And finally, with about 45 minutes before the bell, stock futures in the U.S. are looking to open higher once again. The Dow futures are currently ahead by about 40 points; the S&Ps are up by about 6 points, and the NASDAQ looks to be about 3 points above fair value at the moment.

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:

Darden Restaurants (DRI) – Reported $0.73 vs. $0.70

Today’s Earnings Before the Bell:

General Mills (NYSE: GIS) – Reported $0.81 vs. $0.79
Morgan Stanley (NYSE: MS) – Reported $1.38 vs. $1.54

News, Upgrades/Downgrades/Brokerage Research:

Reliance Steel (NYSE: RS) – Mentioned positively in Barron’s
MFA Mortgage Inv (NYSE: MFA) – Upgraded at Bear Stearns
CheckFree Corp (Nasdaq: CKFR) – Downgraded at Citi
Coca Cola Enterprises (NYSE: CCE) – Downgraded at Deutsche Bank
Plexus Corp (Nasdaq: PLXS) – Upgraded at JP Morgan
Ruby Tuesday (NYSE: RT) – Upgraded at JP Morgan, Downgraded at Wachovia
Juniper Networks (Nasdaq: JNPR) – Downgraded at Merrill
Cameco Corp (NYSE: CCJ) – Downgraded at Merrill
US Airways (NYSE: LCC) – Initiated overweight at Morgan Stanley
Tenaris (NYSE: TS) – Target increased at Morgan Stanley
McAfee Inc (NYSE: MFE) – Downgraded at Morgan Stanley
XM Satellite Radio (Nasdaq: XMSR) – Downgraded at UBS
Sirius Satellite Radio (Nasdaq: SIRI) – Downgraded at UBS

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

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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