David Moenning's Daily State of the Markets: 3/26

Will “Bail, Borrow, and Print” Work?

If you are anything like me, you probably want to know why the volatility suddenly – and without warning – returned to the corner of Broad and Wall yesterday. The popular press talked about an “attack of nerves,” a display of “trader moxie,” and the idea that the market was pushed and pulled in both directions by the economic news.

Any way you slice it, it was a wild ride yesterday on Wall Street. The venerable DJIA was up +200 points in the first half-hour on the back of the Durable Goods report and another decent number in housing. And to be honest, seeing the Dow pull back around lunchtime wasn’t really surprising. But the dive from 7840 to 7560 certainly was. And then, just about the time you had yourself convinced that the pullback was going to be an opportunity to “buy the dip” into the close, the darn thing went the other way and soared 190 points in 50 minutes; finishing with a gain of 90 points on the day.

So, since I strongly believe that moves of this magnitude usually have a reason associated with them, let’s see if we can decipher the action. As we mentioned, stocks started off on the right foot on the economic news and the report that Bank of America (BAC) wants to join Goldman Sachs (GS) in paying off the TARP loan sooner rather than later.

But then the bad stuff started happening. First there was the report that the bond auction in the UK was an abject disaster. Then we got the report that the auction of $34 billion in 5-year notes here in the U.S. also wasn’t well received. And while traders didn’t have much of a problem with the former, the latter created anxiety over the government’s plan to “bail, borrow, and print” our way out of this economic quagmire.

On that note, first of all, I have to give credit to Ned Davis for coming up with the succinct catch phrase summarizing the US recovery plan. Yes, the very same plan which an EU official yesterday called “The way to hell.” Then when you consider that the Chinese, who just happen to be the largest holder of US debt these days, have also voiced concerns about the safety of their investments in US bonds, the reason for a selloff becomes clear enough for government work.

But wait, there’s more. On top of the worries that there might not be enough buyers for all that debt the government wants to create, word was that a “quant fund” had been caught leaning the wrong way and was being forced to dump stocks en masse. Now mix in an overbought market and some overhead resistance, and the reversal really wasn’t all that surprising.

Which brings us to the final hour blast off the lows. While we’ll never know for sure what actually triggered the repeated pressing of the buy button, we will note that the rebound started about the same time a report hit the wires suggesting that the UK auction wasn’t actually an abomination, but rather a matter involving technical difficulty. Couple this with the fund selling apparently having been completed, and boom – you’ve got a 200 point move in less than an hour.

So, what, if anything do we take from the roller coaster ride? The bulls will say it was an up day on an increase in volume. The bears will say it was a case of a rally stalling. And we’ll say that it was a day that could easily have wound up a lot worse, so we’ll give the bulls the nod here.

Turning to this morning, Best Buy (BBY) reported a better than expected quarter and then increased guidance for the coming year, which has lifted traders’ spirits and the pre-market futures a bit. On the economic front, the government reported that the final results for GDP in the fourth quarter came in at an annualized rate of -6.3%, which was a bit better than the consensus expectations for a reading of -6.6%. In addition, Personal Consumption was reported at -4.3% vs. -4.4% and the Core PCE (a measure of inflation) came in at +0.9% vs. +0.8%.

Running through the rest of the pre-game indicators, the overseas markets vary by region with Hong Kong and Japan up nicely and Europe fractionally mixed. Crude futures are moving higher with the latest quote showing oil trading up $0.88 to $53.65. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.81%, while 3-month LIBOR is at 1.23% and the yield on the 3-month T-Bill is trading at 0.18%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing a bit higher at the moment but are off their best levels. The Dow futures are currently ahead by about 25 points; the S&P’s are up by about 4 points, while the NASDAQ looks to be about 15 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Best Buy (NYSE: BBY) – Reported $1.61 vs. $1.40; Guides next year $2.50 - $2.90 vs. $2.45
Conagra (NYSE: CAG) – Reported $0.40 vs. $0.36
Dr Pepper Snapple (NYSE: DPS) – Reported $0.37 vs. $0.37

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

BHP Billiton (NYSE: BHP) – Downgraded at BAC/MER
Google (Nasdaq: GOOG) – Upgraded at Canaccord Adams
ValueClick (Nasdaq: VCLK) – Upgraded at Canaccord Adams
Celanese (NYSE: CE) – Added to Top Picks Live list at Citi
Lubrizol (NYSE: LZ) – Removed from Top Picks Live list at Citi
AXA (NYSE: AXA) – Added to Conviction Sell list at Goldman
Research In Motion (RIMM) – Mentioned positively at Goldman
PetroChina (NYSE: PTR) – Downgraded at HSBC
Janus Capital (NYSE: JNS) – Downgraded at JP Morgan
CNOOC (NYSE: CEO) – Downgraded at UBS
Nokia (NYSE: NOK) – Upgraded at UBS

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.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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