David Moenning's Daily State of the Markets: 2/26

The Ratings Game

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

Over the past month or so, it has become painfully obvious that the stock market has been tied to the prospects of the monoline bond insurers. Although these companies are in dire straits due to the subprime mess and the ensuing credit crisis, the concern has been that if rating agencies such as Standard & Poor’s, Fitch, and Moody’s were to actually reduce their ratings on the bond insurers, another round of writedowns would ensue at the banks and brokerage firms on Wall Street. And in short, this is something that the already stretched balance sheets of the big banks could ill afford.

So, with the likes of AMBAC Financial (ABK) and MBIA Inc. (MBI) scrambling to round up cash or make a deal other than the one offered by Warren Buffett, traders have been on pins and needles trying to determine which would come first – the deals or the writedowns? If the insurers could find a way to round up the cash soon enough to keep their credit ratings intact, then the bulls will argue that we’ve seen the worst of the credit crisis and traders should be looking ahead. However, if the downgrades and the write-offs were to get started, well, the bears suggest that there’s no telling how bad things might get.

While the rating game may sound like a lot of alphabet soup, the recent action in the stock market illustrates the importance of this issue to traders. For example, Friday’s late-day news that AMBAC was close to a deal was good for a blast of 225 points on the Dow in less than an hour. And then yesterday’s news that S&P had reaffirmed the AAA rating of AMBAC and MBIA pushed the venerable index up 150 points in a matter of minutes and helped the bulls put up a nice gain on the day.

So to summarize, it would appear that Standard & Poor’s has signed off on any tentative deal or bailout of the poster children in this drama. And although the deals aren’t quite done yet, it was important to get S&P’s blessing before going forward. You see, to the bond insurers, their AAA rating is everything and without it, they are out of business.

Turning to this morning, traders are now focusing their attention back to the economic front as we’ve got some inflation data this morning. And one look at the PPI report shows that we definitely have some inflation to contend with right now. The PPI for January came in with an increase of 1.0%, which was more than double the expectations of 0.4%. When you strip out food and energy, the Core rate wasn’t much better as the +0.4% increase was double the consensus of 0.2%.

However, given that the CRB index of commodity prices is up double digits so far this year, this number isn’t exactly a surprise to most traders. So, the big question now becomes whether or not inflation will moderate going forward as the Fed is projecting.

And speaking of the Fed, we’ll hear what Fed Vice Chairman Donald Kohn has to say about the economy and monetary policy today at 12:15 pm. Given the PPI data, you can be sure that traders will be interested to hear what Mr. Kohn has to say on the topic of inflation.

Running through the rest of the pre-game indicators; with the exception of Japan, the overseas markets are higher across the board this morning. Crude futures are moving down a bit with the latest quote off $0.47 to $98.76. Interest rates are moving higher so far with the 10-yr trading at a yield of 3.91% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently about 40 points below fair value; the S&Ps are lower by about 5 points, while the NASDAQ also looks to be about 10 points below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:

Nordstrom (JWN) – Reported $0.92 vs. $0.89

Today's Earnings Before the Bell:

Auto Zone (NYSE: AZO) – Reported $1.67 vs. $1.61
CBS (NYSE: CBS) – Reported $0.54 vs. $0.53
Home Depot (NYSE: HD) – Reported $0.40 vs. $0.43
Office Depot (NYSE: ODP) – Reported $0.10 vs. $0.19
Radio Shack (NYSE: RSH) – Reported $0.72 vs. $0.72
Sirius Satellite Radio (Nasdaq: SIRI) – Reported -$0.11 vs. -$0.13
Target (NYSE: TGT) – Reported $1.23 vs. $1.23

News, Upgrades/Downgrades/Brokerage Research:

Paychex, Inc (Nasdaq: PAYX) – Downgraded at Bank of America
Automatic Data Processing (NYSE: ADP) – Downgraded at Bank of America
Repsol (NYSE: REP) – Downgraded at HSBC, Upgraded at Bear Stearns
AK Steel (NYSE: AKS) – Estimates increased at Credit Suisse
MasterCard (NYSE: MA) – Upgraded at Credit Suisse
AMBAC Financial Group (NYSE: ABK) – Target increased at Goldman Sachs
MBIA Inc (NYSE: MBI) – Target increased at Goldman Sachs
Rite Aid (NYSE: RAD) – Upgraded at – Upgraded at JP Morgan
China Pete & Chemical (NYSE: SNP) – Downgraded at Merrill
PetroChina Ltd (NYSE: PTR) – Downgraded at Merrill
Wynn Resorts (Nasdaq: WYNN) – Estimates reduced at Morgan Stanley
Occidental Petroleum (NYSE: OXY) – Upgraded at Oppenheimer
Google (Nasdaq: GOOG) – Target reduced at UBS
Steel Dynamics (Nasdaq: STLD) – Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: AKS, MA, STLD

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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