David Moenning's Daily State of the Markets: 07/27

Credit Crunch Goes Global

Good morning. While the concept of a credit crunch, which means that the rising cost of borrowing will negatively impact earnings, was introduced on Wednesday, yesterday, the concept of the credit crunch going global pulverized stocks. It was one of the ugliest days in a long time and although the Dow did finish 138 points off the low, this was little consolation given the ultimate drop of -311 points.

Part of the problem yesterday was that the data on Existing Home Sales made it clear that we have not seen the bottom in the housing market. Thus, the worry is that the combination of tougher lending standards, rising oil prices, and further declines to come in home prices will cause the consumer to pull in the reins, which is something the economy can ill afford at this time.

But the real issue yesterday, the one that caused investors to sell first, ask questions later and then rinse and repeat, was that the problem in the credit markets appears to be going global. For example, on Wednesday we learned that a FTSE 100 company (Alliance Boot) had postponed its sale of senior loans. Yesterday, we got word that Gazprom (the Russian energy company) had cancelled the sale of debt due to the now popular phrase, ‘market conditions.’ And then closer to home, ‘weak market conditions' in the credit markets also caused Tyco (TYC) to cancel a debt offering yesterday.

The fact that companies are canceling or postponing the sale of debt because they don’t like the prices right now is nothing new, as this type of thing happens from time to time. However, the worry is that what we are seeing now is just the tip of the iceberg. And IF the credit crunch begins to take hold and decides to stick around a while, the bears argue that they’ve got the bulls on the run.

While we have been saying for a while that it is a good idea to give the bulls the benefit of the doubt whenever things get messy, the bears are telling anyone that will listen that the two driving factors behind this bull market - M&A and the Global Growth story - are now in trouble. And although it may be a little early to declare the death of the bull, as money managers, we do have to admit that the bears could actually have a point here.

On the other side of the aisle though, our heroes in horns can be heard protesting that the global growth story remains intact. They argue that the economies of the BRIC countries remain strong (almost too much so) and point to China's recent GDP report, which showed growth in excess of 12%, as a case in point.

Finally, let's cut to the chase and get to the question on everyone's minds: Is this the end of the road for the bulls? Although we know that it is just plain dumb to argue with mother nature (meaning that the market can and will do whatever it needs to to confuse and confound investors), the bottom line is that we see the current waterfall decline as the latest in a string of ‘bad news panics’ that have occasionally interrupted the bull run that really got rolling in late 2005.

However, with our major market models declining at the present time; we WILL be watching the action very closely over the next couple of weeks for signs that it is time to seek cover.

Turning to this morning, we've got the GDP report to dig into, which is always an important number. But, before we get to that, we should note that in the early going the bears appear to continue to be in control as stock futures are pointing lower.

Getting to the economic data, the GDP report is kind of a mixed bag. The headline number was better than expected at +3.4% vs. expectations for 3.2%, as was the Price Index (a measure of inflation), which at 2.7% was lower than projections of 3.4%. However, the Personal Consumption component was a bit weaker than expected at 1.3 vs. 1.6. This, of course, suggests that the consumer may be turning a little cautious at the moment.

Running through the rest of the pre-game indicators, as expected, the foreign markets are all down hard at the moment. In the oil pits, crude futures are moving up after yesterday’s drop with the latest quote up $0.32 to $75.27. Interest rates are lower this morning as the flight-to-quality continues. The yield on the 10-year is currently trading at 4.75%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to another tough open. The Dow futures are currently down by about 59 points; the S&P's are off by 9 points, while the NASDAQ looks to be about 7 points below fair value at the moment.

Stocks "In Play" This Morning:

Yesterday's Earnings After the Bell:

Amgen (NASDAQ: AMGN) – Reported $1.12 vs. $1.07
Allegheny Energy (NYSE: AYE) – Reported $0.45 vs. $0.30
Compuware (NASDAQ: CPWR) – Reported $0.00 vs. $0.04
Crocs (NASDAQ: CROX) – Reported $0.58 vs. $0.44
Eastman Chemical (NYSE: EMN) – Reported $1.34 vs. $1.31
Foundry Networks (NASDAQ: FDRY) – Reported $0.12 vs. $0.12
Federated Investors (NYSE: FII) – Reported $0.54 vs. $0.54
Flextronics (NASDAQ: FLEX) – Reported $0.22 vs. $0.21
Genworth Financial (NYSE: GNW) – Reported $0.78 vs. $0.78
Hartford Financial (NYSE: HIG) – Reported $2.39 vs. $2.28
KLA Tencor (NASDAQ: KLAC) – Reported $0.93 vs. $0.85
McKesson (NYSE: MCK) – Reported $0.77 vs. $0.71
McAfee (NYSE: MFE) – Reported $0.41 vs. $0.37
Meritage Homes (NYSE: MTH) – Reported <$2.16> vs. $0.44
Qlogic (NASDAQ: QLGC) – Reported $0.15 vs. $0.18
Verisign (NASDAQ: VRSN) – Reported $0.25 vs. $0.25
Varian Semiconductor (NASDAQ: VSEA) – Reported $0.29 vs. $0.28
YRC Worldwide (NASDAQ: YRCW) – Reported $0.91 vs. $0.82

Today's Earnings Before the Bell:

Baker Hughes (NYSE: BHI) – Reported $1.12 vs. $1.11
Clear Channel Comm (NYSE: CCU) – Reported $0.42 vs. $0.43
Chevron (NYSE: CVX) – Reported $2.52 vs. $2.28
Fortune Brands (NYSE: FO) – Reported $1.48 vs. $1.44
Ingersoll Rand (NYSE: IR) – Reported $0.95 vs. $0.95
ITT Corp (NYSE: ITT) – Reported $0.92 vs. $0.90
Medco Health Solutions (NYSE: MHS) – Reported $0.86 vs. $0.77
Sepracor (NASDAQ: SEPR) – Reported $0.05 vs. $0.38

News, Upgrades/Downgrades/Brokerage Research:*

Fifth Third Bancorp (NASDAQ: FITB) – Upgraded at BofA
NYSE Euronext (NYSE: NYX) – Upgraded at BofA
Autonation (NYSE: AN) – Downgraded at Bear Stearns
Reliant Energy (NYSE: RRI) – Upgraded at CIBC
Aeropostale (NYSE: ARO) – Upgraded at Citi
Nordstrom (NYSE: JWN) – Upgraded at Citi
Gap (NYSE: GPS) – Upgraded at Citi
Cabot Oil & Gas (NYSE: COG) – Upgraded at Friedman Billings
UST Inc (NYSE: UST) – Upgraded at Goldman Sachs, Merrill Lynch
Qlogic (NASDAQ: QLGC) – Downgraded at JP Morgan, Merrill Lynch
Ford (NYSE: F) – Upgraded at Merrill Lynch
Wendy’s Intl (NYSE: WEN) – Upgraded at Wachovia

Mr. Moenning holds Long positions in stocks mentioned: MFE, MHS, RRI, UST, MER

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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