David Moenning's Daily State of the Markets: 3/19

Don’t Fight the Fed!

I know that we've mentioned this a time or three over the past decade, but one of the oldest clichés on Wall Street is "Don’t fight the Fed." The thinking is that if the FOMC is in the process of either deflating or reflating the economy, it is best to get out of their way because, in short, these guys control the money supply. This phrase may be appropriate again right now because after yesterday’s Fed meeting, it is clear that Mr. Bernanke & Co. are on the warpath and won’t rest until mortgage rates fall, lending picks up, and the economy improves.

The bears have argued that the downward spiral in the economy is unlikely to be halted any time soon because after the Fed cut rates to 0%, they ran out of ammunition. However, Mr. Ben Bernanke is proving that he may indeed be the Jack Bauer of finance because his FOMC continues to come up with creative ways to attack this problem. And yesterday, was a perfect example of this as Bernanke effectively announced the Fed would implement a plan of “quantitative easing” to the tune of $1.15 Trillion.

According to Wikipedia, the term “quantitative easing” refers to the creation of a pre-determined quantity of new money out of thin air through open market operations by a central bank. In simple terms, it means the Fed is going to “print money” and then deposit it into the banking system in the hope that the banks will then lend the money to customers.

In short, this is what the brouhaha was all about yesterday when the FOMC announced that it will be buying $300 Billion in longer-term treasuries, $750 Billion in mortgage-backed securities –bringing the total for the year to $1.25 Trillion in MBS’s, and another $100 Billion of debt from the likes of Fannie and Freddie.

The big-picture game plan is to revive the housing market by pushing mortgage interest rates down. As you will recall, mortgage rates have remained stubbornly high throughout this crisis due to the tightening of lending standards by the banks. The idea here is that lower rates will allow homeowners to refinance mortgages with teaser rates and make currently deflated home prices more attractive to potential buyers.

The bond market “got it” immediately as the announcement caused an historic plunge in bond yields. For example the yield on the 10 year dove from a high of 3.03% to 2.53% in a matter of 15 minutes. In looking back, this was the biggest drop in yields in 23 years.

It is important to note that the Fed wasn’t the stock market bulls’ only friend yesterday. In the early going we got another M&A deal with IBM (IBM) buying Sun Microsystems (JAVA). We got news that Ken Lewis of Bank of America (BAC) wants to pay back $45 Billion in TARP funds before the end of the year. We got word that the Obama administration is likely to expand the use of the TALF to include buying distressed assets. And finally, we got a report on FASB’s guidelines for how to price impaired assets.

So, after a seven-day rally which has tacked almost 1,000 points onto the Dow and a nifty gain of +17.4% in the S&P 500, the question now becomes: Was that it? Or is there more to come?

Ever since last Tuesday’s announcement that the banks were actually making money right now, we’ve been saying that this move is more than just a bounce and we continue to stick by this view. However, with the S&P now overbought and bumping into resistance at 800, it wouldn’t be surprising to see the bulls take a breather in here somewhere.

Turning to this morning, Initial Jobless Claims came in a bit below the consensus at 646,000 (economists had been looking for 655K). However, Continuing Claims were a bit more worrisome at 5.47million versus expectations for a reading of 5.32 M.

Running through the rest of the pre-game indicators, with the exception of Japan, the overseas markets are higher across the board. Crude futures are moving up with the latest quote showing oil trading up by $2.86 to $51. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.496%, while 3-month LIBOR is at 1.23% and the yield on the 3-month T-Bill is trading at 0.20%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing a bit higher. The Dow futures are currently ahead by about 40 points; the S&P’s are up by about 5 points, while the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Cintas (Nasdaq: CTAS) – Reported $0.47 vs. $0.48
Nike (NYSE: NKE) – Reported $0.99 vs. $0.79
Oracle (Nasdaq: ORCL) – Reported $0.35 vs. $0.32

Today’s Earnings Before the Bell:

Barnes & Noble (NYSE: BKS) – Reported $1.46 vs. $1.48
Discover Financial (NYSE: DFS) – Reported $0.25 vs. -$0.14
FedEx (NYSE: FDX) – Reported $0.31 vs. $0.46
Progress Software (Nasdaq: PRGS) – Reported $0.39 vs. $0.38

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

General Mills (NYSE: GIS) – Target reduced at Bernstein
3M (NYSE: MMM) – Target reduced at Bernstein
Ericsson (ERIC) – Downgraded at Bernstein
M&T Bank Corp (NYSE: MTB) – Downgraded at Citi
Nokia (NYSE: NOK) – Upgraded at Credit Suisse
Alliant Techsystems (NYSE: ATK) – Downgraded at Goldman
Knight Capital Group (Nasdaq: NITE) – Downgraded at Goldman
Eaton Vance (NYSE: EV) – Downgraded at Goldman
Waddell & Reed (NYSE: WDR) – Upgraded at Goldman
Sun Microsystems (Nasdaq: JAVA) – Upgraded at Goldman
Alcoa (NYSE: AA) – Upgraded at JP Morgan
California Water Services (NYSE: CWT) – Upgraded at RW Baird
NICOR (NYSE: GAS) – Upgraded at RW Baird
Piedmont Nat Gas (NYSE: PNY) – Upgraded at RW Baird
Aqua America (NYSE: WTR) – Upgraded at RW Baird
CIGNA (NYSE: CI) – Rating cut at S&P to BBB from BBB+
Terex (NYSE: TEX) – Downgraded at Wachovia

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

Note: All earnings reports compared to Reuter’s consensus estimates



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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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