David Moenning's Daily State of the Markets: 7/15

Crisis Averted, But...

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

With both the Fed and the U.S. Treasury coming up with plans on Sunday to backstop Fannie Mae (FNM) and Freddie Mac (FRE), it appeared that the latest crisis in the financials was going to be averted. Given that the Fed was willing to open up the discount window to the GSE’s and that the Treasury Dept said it would be happy to buy up any new stock offerings Fannie and Freddie might need in order to raise more capital, it looked like stocks might have some room to rally.

And rally they did yesterday morning – well, for about 15 minutes anyway. It took just that long for traders to turn their attention away from Fannie and Freddie and toward Lehman Brothers (LEH), the new IndyMac Federal, and the growing list of banks that are on the Fed’s watch list.

With IndyMac having been taken over by the Feds over the weekend, the question on traders’ minds suddenly became, who would be next? Thus, the speculation game in the banking sector got hot and heavy yesterday with big losses capping already massive declines in names such as National City (NCC), Washington Mutual (WM), Zions Bancorp (ZION), and First Horizon National (FHN).

While the number of banks at risk of failing right now totals less than 100 (recall that more than 1000 bank went under during the S&L crisis), the fear is that bank failures are likely to put more pressure on the already fragile housing market, which, in turn, would cause consumer confidence to fall farther still. And with the WSJ citing data from the FDIC that uninsured assets in banks have doubled since 1992, savers may be more at risk than they think. So, if you want to take a look at the dark side here… if news of savers losing money starts to hit the nightly news reports, well, let’s just say that the consumer isn't likely to run out and spend wildly.

Then there is Lehman Brothers, which has developed a nasty habit of falling 10% or so each day lately. Obviously, the worry at this stage is that LEH will become the next Bear Stearns. And although there is a great deal of talk about a take-under being in the works, with confidence on the Street growing thin, a run on client accounts may not be such a farfetched idea.

Turning to this morning, the "Who's Next?" game is gaining momentum and the lack of confidence in the U.S. Economy is now being reflected in the greenback, which just hit an all-time low against the Euro. And the worry over the financials is being reflected in big losses overseas.

We also have a good bit of economic data to plow through before the bell as well as the start of the earnings parade. And in addition, we’ll get more Fedspeak and a Presidential press conference in the first couple of hours.

On the inflation front, June's PPI came with a gain of +1.8%, which was above the estimates for an increase of +1.3%. But when you strip out food and energy (insert eye-roll here) the Core PPI increased by +0.2%, which was actually below expectations for a rise of +0.3%.

Next up, Retail Sales for June came in lower than expected with a gain of +0.2% versus +0.3% and when you strip out the sale of autos the story was similar as we saw an increase of+0.8% versus expectations for +0.9%.

And finally, the Empire Manufacturing Index, which is designed to indicate the state of the manufacturing sector in the New York area fell a bit less than expected, coming in with a reading of -4.9% versus expectations for a reading of -7.4.

Running through the rest of the pre-game indicators; the major foreign markets are down hard across the board. Crude futures are up this morning with the latest quote showing oil trading at $145.37. Interest rates are lower this morning with the yield on the 10-yr currently trading at 3.88%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to another tough open. The Dow futures are currently off by about 130 points; the S&P’s are down by about 14 points, while the NASDAQ looks to be about 15 points below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday's Earnings After the Bell:

Genentech (NYSE: DNA) – Reported $0.82 vs. $0.85
JB Hunt Transportation (Nasdaq: JBHT) – Reported $0.39 vs. $0.36
Novellus Systems (Nasdaq: NVLS) – Reported $0.06 vs. $0.04

Today's Earnings Before the Bell:

Eaton (NYSE: ETN) – Reported $2.10 vs. $1.96
Johnson & Johnson (NYSE: JNJ) – Reported $1.18. vs. $1.12
State Street (NYSE: STT) – Reported $1.40 vs. $1.34
US Bancorp (NYSE: USB) – Reported $0.53 vs. $0.59

News, Upgrades/Downgrades/Brokerage Research:

Vail Resorts (NYSE: MTN) – Downgraded at Bank of America
Worthington (NYSE: WOR) – Added to Conviction Sell list at Goldman
AT&T (NYSE: T) – Removed from Conviction Buy list at Goldman
Waste Management (NYSE: WMI) – Removed from Conviction Buy list at Goldman
Schering Plough (NYSE: SGP) – Upgraded at Lehman
China Petroleum (NYSE: SNP) – Downgraded at Morgan Stanley
Freeport McMoRan (NYSE: FCX) – Estimates increased at Morgan Stanley
Wachovia (NYSE: WB) – Downgraded at Oppenheimer
Lennar (NYSE: LEN) – Upgraded at UBS
Kimberly Clark (NYSE: KMB) – Downgraded at Wachovia
American Intl Group (NYSE: AIG) – Downgraded at Wachovia

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.


David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]

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