David Moenning's Daily State of the Markets: 7/21

The Worst Is Over (Part II)

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

With an awful lot of analysts now publically pronouncing that the worst is over in the financials (and this time they really mean it), stocks enjoyed a third straight day of green screens on Friday. The thinking here is that the government bailout of Fannie Mae (FNM) and Freddie Mac (FRE) marked an emotional bottom to the selling in the financial sector. And in much the same way as the blow-up of Bear Stearns marked the first proclamation that “the worst is over,” analysts once again seem to think that things can't get any worse for the banks and brokers.

For example, Barron's ran an article over the weekend stating that with many of the bank and brokerage stocks selling at close to book value, this represents a once-in-a-generation opportunity to snap up the shares. But, then again, when you dig into how Wells Fargo (WFC) and JP Morgan Chase (JPM) were able to miraculously produce better than expected earnings, a skeptic might think twice before bombing in right now.

But, in any event, the bulls have needed reason to be lately, and this idea that we’ve seen the worst in the financials (again) has been just the ticket. And with most technicians agreeing that the next logical resistance point for the Dow is still 300 points away, our heroes in horns were able to make it three in a row on Friday.

However, it wasn't all peaches and cream during the session as Technology shares struggled mightily, worries about oil returned as storms brew near the Gulf, and Minneapolis Fed President Stern (who is a voting member this year) provided a warning to the market on interest rates.

While some of the financials are bending accounting rules left and right to “beat the street,” shares of Microsoft (MSFT), Google (GOOG), and Advanced Microdevices (AMD) weren’t so lucky. So, despite all the happy talk on Friday, disappointing earnings left Mr. Softie down -6%, Google off nearly -10%, and Advanced Micro with a loss of -12.3%.

Finally, Minneapolis Fed President Stern said on Friday that the Fed should NOT wait for the financials and/or the housing market to stabilize before raising rates. Thus, I guess we can place Mr. Stern squarely in the inflation hawk camp – which is a group that rarely can see anything except a repeat of the 1970's.

Turning to this morning, we do not have any economic date before the bell, but we will get the Index of Leading Economic Indicators (LEI) at 10:00 am eastern. On the news front, we are seeing some more positive action in the early going in response to Bank of America’s (BAC) earnings. BAC reported earnings of $0.72 per share, which was well above the Reuters estimate of $0.48.

Running through the rest of the pre-game indicators; with the exception of Japan, which was closed overnight, the major foreign markets are up nicely across the board. Crude futures are moving up as Tropical Storm Dolly approaches the Gulf with the latest quote showing oil trading up $2.58 t0 $131.56. Interest rates are also up this morning with the yield on the 10-yr currently trading at 4.08%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently higher by about 40 points; the S&P’s are up by about 4 points, while the NASDAQ looks to be about 6 points above fair value at the moment.

Stocks "In Play" This Morning:

Today's Earnings Before the Bell:

Albemarle (NYSE: ALB) – Reported $0.67 vs. $0.65
Bank of America (NYSE: BAC) – Reported $0.72 vs. $0.48
Hasbro (NYSE: HAS) – Reported $0.25 vs. $0.22
Weatherford Intl (NYSE: WFT) – Reported $0.43 vs. $0.45

News, Upgrades/Downgrades/Brokerage Research:

Yahoo! (Nasdaq: YHOO) – Reports settlement with Carl Ichan
Target (NYSE: TGT) – Estimates reduced at Bank of America
American Intl Group (NYSE: AIG) – Upgraded at Bank of America
AGCO (NYSE: AG) – Added to Focus List at Credit Suisse
Stanley Works (NYSE: SWK) – Downgraded at Deutsche Bank
Volvo (OTC: VOLVY) – Downgraded at Deutsche Bank
Sherman Williams (NYSE: SHW) – Downgraded at Goldman
Nike (NYSE: NKE) – Downgraded at HSBC
Potash (NYSE: POT) – Estimates increased at JP Morgan
Genentech (NYSE: DNA) – Upgraded at Lehman
Diageo (NYSE: DEO) – Downgraded at Merrill
Biogen Idec (Nasdaq: BIIB) – Upgraded at Merrill
Whole Foods (Nasdaq: WFMI) – Upgraded at Morgan Stanley
Werner Ent (Nasdaq: WERN) – Downgraded at UBS
AMR Corp (NYSE: AMR) – Upgraded at UBS
Textron (NYSE: TXT) – Downgraded at UBS
Barr Pharmaceuticals (NYSE: BRL) – Downgraded at Wachovia

Disclosure: Mr. Moenning and/or related firms hold long positions in: POT

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]

You May Also Be Interested In