David Moenning's Daily State of the Markets: 3/13

The List Gets Longer

Stocks enjoyed a third straight day of gains yesterday, during which the Dow has put on a nifty 623 points or +9.5% while the S&P has jumped an impressive +10.96%, and the NASDAQ has soared +12.46%. So, with tongue firmly implanted in cheek, we’d like to point out that at the current pace of about 208 points a day, the Dow could be back at new highs in just 33 more days.

Okay, that could be considered just a tad optimistic. However, the point to such a ridiculous statement is to counter the ongoing slew of complaints about the current rally. Just about everywhere you turn; some analyst can be heard telling us why the rally is nothing more than a bounce and that it can’t last – despite the fact that there is a long list of good things happening in the stock market these days.

On that note, we’d like to offer yesterday’s headlines as Exhibit A in our argument as to why the recent bounce may wind up being more than just a bounce. So, let’s do this: Below is a list of yesterday’s headlines. When you are done perusing them, see if you don’t find yourself just a little more optimistic about the future prospects for stock prices:

GE’s (GE) Debt Downgraded by S&P – Yet the stock rises +12.7% (a sign that this bad news has been discounted)

Retail Sales for February were better than expected and January’s results were revised higher

General Motors (GM) announced that it won’t need the $2 billion the government has set aside for it in March after all.

Roche is buying the rest of Genentech (Is M&A on the comeback trail?)

FASB Chairman Herz says the board will have a proposal on changes to mark-to-market within the next three weeks

Bank of America (BAC) CEO Ken Lewis says:

-- BofA will be profitable for the full year 2009
-- He is confident they will pass the government’s new stress test
-- BofA doesn’t need any more money

So, now that we’re feeling better about things let’s turn our attention to which of these was the reason for yesterday’s rally. Actually it is the combination of positive headlines over the past few sessions that seems to be providing a confidence boost these days – or at least causing the shorts to run for cover. However, if we had to pick one, it would be the headline on the mark-to-market issue.

This issue is important because it goes to the root cause of the banking crisis – how to price the toxic assets still on the books of the banks. We’ve been saying for about a year that the best way out of this mess is to simply declare a force majeure in the alphabet soup area of the credit market in order to allow the market some time to resume trading and to get a handle on prices that are not based on fire sales.

As you are no doubt aware, the problem here is that banks have securities on their books that don’t trade, which makes it kind of difficult to figure out what they are really worth. But in simple terms, the mark-to-market rules state that the banks must value the securities at the price of the last trade, which is the cause of all the writedowns and capital problems in the banking industry.

So, if the accounting types can come up with a plan to realistically price a security that is by no means worthless, then the banking crisis might be well on its way to being over.

Getting back to the stock market, the question at hand is this: Is this the start of a new bull market? Our answer is: Who knows and frankly, who cares? The point is that things had become entirely too negative and the valuations of SOME companies had become ludicrous. Thus, if things improve at all from the Armageddon scenario that has plagued the market this year, then the simple point is that stocks may have some upside “discounting” to do yet.

Turning to this morning, Citi’s (C) Chairman Richard Parson says that the bank won’t need any additional capital and expressed confidence that the bank will not be nationalized. So, we can add that to our growing list of good things happening.

Running through the rest of the pre-game indicators, the overseas markets are up nicely across the board. Crude futures are higher again with the latest quote showing oil trading up by $0.91 to $47.94. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.93%, while 3-month LIBOR is steady at 1.32% and the yield on the 3-month T-Bill is trading down 5 basis points at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are still pointing to a modestly higher open. The Dow futures are currently ahead by about 35 points; the S&P’s are up by about 5 points, while the NASDAQ looks to be about 2 points above fair value at the moment.

Stocks “In Play” This Morning:

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

Express Scripts (Nasdaq: ESRX) – Upgraded at Argus Research
Alcatel-Lucent (NYSE: ALU) – Upgraded at BAC/MER
Devon Energy (NYSE: DVN) – Upgraded at Barclays
Apple (Nasdaq: AAPL) – Estimates reduced at BMO Capital
Genentech (NYSE: DNA) – Downgraded at Barclays, Citi, JP Morgan, Oppenheimer, UBS
Merck (NYSE: MRK) – Upgraded at Bernstein
Taubman Centers (NYSE: TCO) – Upgraded at Goldman
Foster Wheeler (Nasdaq: FWLT) – Upgraded at Goldman
Helmerich & Payne (NYSE: HP) – Downgraded at Goldman
Oil States Intl (NYSE: OIS) – Upgraded at Goldman
BJ Services (NYSE: BJS) – Downgraded at Goldman
PMC Sierra (Nasdaq: PMCS) – Added to Conviction Buy list at Goldman
King Pharmaceuticals (NYSE: KG) – Added to Conviction Buy list at Goldman
Macy’s (NYSE: M) – Removed from Conviction Buy list at Goldman
Wal-Mart (NYSE: WMT) – Removed from Conviction Buy list at Goldman
Smithfield Foods (NYSE: SFD) – Estimates reduced at Morgan Stanley
Palm Inc (Nasdaq: PALM) – Upgraded at RBC Capital
Burger King Holdings (NYSE: BKC) – Initiated outperform at RW Baird
McDonalds (NYSE: MCD) – Initiated outperform at RW Baird
General Dynamics (NYSE: GD) – Target reduced at UBS
Textron (NYSE: TXT) – Target reduced at UBS
Paychex (Nasdaq: PAYX) – Upgraded at UBS
Mylan (NYSE: MYL) – Initiated Buy at UBS
Teva Pharmaceuticals (Nasdaq: TEVA) – Initiated Buy at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: MYL, TEVA

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.TopStockPortfolios.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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