David Moenning's Daily State of the Markets: 08/22

Uncertainty Remains

Although the market definitely has had a much better feel to it since the Fed cut the Discount Rate on Friday, a good deal of uncertainty remains with regard to the impact of the mortgage mess on the economy and earnings.

Although most believe the Fed sent a clear signal that it intends to cut the Fed Funds rate at their September 18th meeting, FOMC members are trying hard to avoid the impression that they are being swayed by the action in the markets. For example, on the pro side of the rate cut argument, we've got the Fed Funds futures currently projecting a 90% chance of a reduction in the Funds rate by the end of September. In addition, the head of the Senate Banking Committee Christopher Dodd informed us yesterday that Ben Bernanke told him in a meeting that Mr. Bernanke was ready to use “all the tools at his disposal."

However, later in the day, Richmond Fed President Jeffrey Lacker said that financial market volatility does not in and of itself necessitate a change in Fed policy. But, despite the tough talk by Mr. Lacker, the consensus sees a rate cut on September 18th for one simple reason – the cut in the Discount Rate was primarily a symbolic move designed to help banks with their liquidity issues. A cut in the Funds rate would actually force market rates down, which, in turn, would most likely create a reduction in the adjustable rate mortgages that are a major source of concern going forward.

Two other items were worthy of note from yesterday's session. First, the M&A rumor mill got cranked up after brief hiatus and talk of several deals started to make the rounds. This is positive in that it shows that (1) deals can still get done in this constrictive debt environment and (2) not all financing has been shut down.

The other big story yesterday was the price of oil. While it's been a while since crude futures were a focal point, the fact that Hurricane Dean, which is a monster storm, did not venture toward the Gulf’s major oil and gas installations turned out to be bearish for oil. With the "storm premium" being removed for now, oil dipped back below $70, losing $1.39 to close at $69.57.

The end result of yesterday’s trading was a mixed bag for the major indices. Although the Dow finished in the red, the leaders and most other indices enjoyed modestly green screens and it was positive to see the breadth statistics favor the bulls.

Turning to this morning, we don’t have any economic news to review before the bell but the talk of a merger between TD Ameritrade and E-Trade has traders buzzing.

Running through the rest of the pre-game indicators, the overseas markets were mostly higher as confidence builds that the Fed will cut rates. Crude futures are higher by $0.28 with the latest quote at $69.85. Interest rates are rising this morning as the 10-yr is trading with a yield of 4.62% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to move higher. The Dow futures are currently ahead by about 70 points; the S&Ps are up by about 10 points, and the NASDAQ looks to be about 11 points above fair value at the moment.

Stocks "In Play" This Morning:

Today's Earnings Before the Bell:

Toll Brothers (NYSE: TOL) – Reported $0.16 vs. $0.05
Talbot's (NYSE: TLB) – Reported <$0.25> vs. <$0.26>

News, Upgrades/Downgrades/Brokerage Research:

TD Ameritrade (Nasdaq: AMTD) – WSJ reports company in merger talks with ETFC
Centurytel (NYSE: CTL) – Upgraded at Bear Stearns, Merrill Lynch
Estee Lauder (NYSE: EL) – Downgraded at Credit Suisse
Target (NYSE: TGT) – Upgraded at Goldman Sachs
Lowes (NYSE: LOW) – Upgraded at JP Morgan, UBS
Cameco Corp (NYSE: CCJ) – Upgraded at Merrill Lynch
H&R Block (NYSE: HRB) – Moody’s cuts debt rating
E-Trade Financial (Nasdaq:ETFC) – Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: 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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