David Moenning's Daily State of the Markets 2/23

Still All About the Banks

In case you aren’t sure what your “tell” should be for the direction of the market these days, we’re of the mind that you can turn off all the other quotes and simply watch the BKX, because, in short, this market is still all about the banks. In fact, the ONLY thing you needed to watch on Friday was the banking index and the newswires.

The Dow dove to a new 6-year low on Friday after Senate Banking Chairman Chris Dodd said that that nationalization of banks may happen sooner rather than later. And when traders combined that statement with comments from former Fed Chairman Alan Greenspan last week that he supported the idea of at least a temporary nationalization of the banks and then the complete and utter silence from Mr. Geithner’s office for the past 8 days, well it didn’t take advanced math to figure out that bank shareholders might soon be toast.

Before you could figure out whether to use an‘s’ or a ‘z’ in nationalization (note to self: stop reading so many articles from the Financial Times), the Dow was down 220 points and visiting levels it hadn’t seen since 1997.

Just 45 minutes later, Bank of America (BAC) tried to stem the tide and fired back with a headline from a memo to employees which read, “Bank of America sees no reason to nationalize a bank that is profitable, well capitalized and lending actively.” CEO Ken Lewis followed that up 90 minutes later with the statement, “speculation of a nationalization is based on a lack of understanding of our bank’s financial position.”

However, traders viewed this as a defensive statement and assumed that the worst for equity holders in many of the big banks may be just around the corner.

With the banks tanking again (Citi traded as low as $1.61 and BAC saw $2.53 during the dive) and Timothy Geithner nowhere to be found, somebody in the administration finally figured out that it was time to say something. At 1:57 pm EST, White House Press Secretary Gibbs came out and said, “This administration continues to believe strongly that a privately held banking system is the correct way to go…."

With it being an options expiration Friday, stocks rallied furiously in response to these reassuring words and then continued to recover after CNBC reported that the Treasury Department would announce details of its banking rescue plan next week, which, of course, we assume will be this week – so stay tuned.

Turning to this morning, the focus on the banks continues. First up RBS announced over the weekend it will be split into a “good bank/bad bank” structure. Next, there has been a good deal of talk about a WSJ article discussing the possibility of the government converting its preferred shares in Citi (C) to common, which would boost tangible common equity – a measure of financial strength. In addition, the New York Times reports that the so-called stress tests of the nation’s 20 biggest banks will begin Feb 26th. And less than 10 minutes ago a headline came across the wires stating that Treasury and the Fed “stand firmly behind” the banking system. So, it looks like things may be improving.

Running through the rest of the pre-game indicators, with the exception of Japan, the major foreign markets are up nicely. Crude futures are up a bit with the latest quote showing oil trading higher by $0.28 to $40.31. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.86%, while overnight LIBOR is at 0.27% and the yield on the 3-month T-Bill is trading at 0.28%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing up for a change. The Dow futures are currently ahead by about 60 points; the S&P’s are up by about 8 points, while the NASDAQ looks to be about 9 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Corporate News, Upgrades/Downgrades/Brokerage Research:

Expedia (Nasdaq: EXPE) – Upgraded at Bank of America
UAL Corp (Nasdaq: UAUA) – Upgraded at Bank of America/Merrill
SkyWest (Nasdaq: SKYW) – Upgraded at Bank of America/Merrill
Mylan Inc (NYSE: MYL) – Upgraded at Barclays
Blue Nile (Nasdaq: NILE) – Upgraded at Citi
Limited Brands (NYSE: LTD) – Upgraded at Citi
Synovus Financial (NYSE: SNV) – Upgraded at Citi
Huntington Bancshares (Nasdaq: HBAC) – Downgraded at Citi
Regions Financial (NYSE: RF) – Downgraded at Citi
Zions Bancorporation (Nasdaq: ZION) – Downgraded at Citi
Motorola (NYSE: MOT) – Upgraded at Credit Suisse
Psychiatric Solutions (Nasdaq:�PSYS) – Upgraded at Deutsche Bank
Palm Inc (Nasdaq: PALM) – Upgraded at Deutsche Bank
ConocoPhillips (NYSE: COP) – Upgraded at Deutsche Bank
Exxon Mobil (NYSE: XOM) – Upgraded at Deutsche Bank
Estee Lauder (NYSE: EL) – Added to Conviction Sell list at Goldman
SK Telecom (NYSE: SKM) – Upgraded at JP Morgan
ITT Corp (NYSE: ITT) – Upgraded at JP Morgan
Dryships (Nasdaq: DRYS) – Upgraded at Oppenheimer
Garmin (Nasdaq: GRMN) – Estimates reduced at RBC Capital
Barrick Gold (NYSE: ABX) – Downgraded at RBC Capital
JC Penney (NYSE: JCP) – Downgraded at Thomas Weisel
WYNN Resorts (Nasdaq: WYNN) – Target reduced at UBS
MGM Mirage (NYSE: MGM) – Target reduced at UBS

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

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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