David Moenning's Daily State of the Markets: 10/08

The Cavalries Ride

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

Before we get to this morning’s big news of a globally coordinated rate cut, we need to spend just a couple of minutes looking back at yesterday’s -508 point thrashing. However, since this is one of those good news/bad news reports, we’ll try to get to the good news as quickly as possible.

First the bad news. What we have been witnessing over the past few days is nothing short of an out-and-out crash – it’s just that this one is occurring in slow motion. But make no mistake about it; stocks are in panic mode. Yesterday’s plunge of 508 points (which, eerily enough, was the exact same point total as 1987’s Black Monday) brought the two-day decline in the Dow to 875 points or -8.48%, the month’s drop to 1403 points or -12.93%, and the year-to-date results to -28.78%. What is even more disappointing is that the DJIA is actually the best performer of the bunch so far this year as the S&P is now off -32.15% and the NASDAQ is down -33.84%.

The cause of yesterday’s big drop was not terribly obvious. However, once you put all the pieces together, it wasn’t surprising to see Monday’s late day dead-cat-bounce erased. First, Bank of America (BAC) preannounced their earnings in order to get the report out of the way. Earnings per share came in at just $0.15, which was just one-quarter of the Reuters consensus for $0.60. BAC then cut its dividend in half, announced the need to raise $10 Billion, and said it doesn’t see writeoffs ending until “well into 2009.” And as one of my colleagues used to say, “This is not good.”

There were several other negative points that helped traders stay on the dark side yesterday, but in an effort to get to the good news, let’s just fast forward to the major impetus of Tuesday’s plunge and then move on. In short, the big problem yesterday was the statement from Ben Bernanke. Gentle Ben effectively sounded the alarm on the economy and gave traders the impression that the Fed too is in panic mode at the present time.

But enough about the bad news. The good news – at least for the moment – is the Cavalry has mounted up and is riding hard this morning. Although its ranks are severely depleted and weary from battle, the Bernanke Cavalry is attacking the credit crisis once again with a rate cut of 50 basis points. The pre-opening move is obviously intended to help ease the panic in the market and brings the Fed Funds rate down to 1.5%.

And while Bernanke’s Boys may look a little tired, this time they are not riding alone in the fight as the ECB, the Bank of England, and the central banks from Canada, Sweden, Switzerland, and China are mounting up as well.

The move has prompted Bank of America to cut the Prime Rate to 4.5% from 5.0%, which in normal times, would be considered a positive for the housing market and small businesses everywhere. However, with the crisis in credit reaching levels never seen before, we will have to wait and see if this morning’s action will have an impact.

As you might expect, stock markets around the world initially improved on the news, although unfortunately, not dramatically so. However, with Japan having plunged -9.4% overnight and Hong Kong having dropped -8.2% it does appear that the markets now up and trading are moving up and out of the abyss.

But with this being one of the last weapons the Fed and Central Bankers around the world have to use, the question of the day is if this move will help traders move forward from the current doomsday mentality. And while it may not happen today, we do need to note that the negativity in the market has reached epic levels and is something that will eventually lead to significant upside opportunity.

Running through the rest of the pre-game indicators, the foreign markets are a mixed bag but the numbers are mostly red. Crude futures are lower with the latest quote showing oil trading down $1.43 to $88.63. Interest rates are up so far with the yield on the 10-yr currently trading at 3.51% while the yield on the 3-month T-Bill is now 0.51%. And finally, with about 45 minutes before the bell, the futures are now pointing to a mixed open. The Dow futures are currently ahead by just 20 points; the S&P’s are actually down a fraction, while the NASDAQ looks to be about 16 points below fair value at the moment. So, stay tuned, this is going to be interesting.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Alcoa (NYSE: AA) – Reported $0.37 vs. $0.51
Yum Brands (NYSE: YUM) – Reported $0.58 vs. $0.54
Bank of America (NYSE: BAC) – Reported $0.15 vs. $0.60

Today’s Earnings Before the Bell:

Costco (COST) – Reported $0.92 vs. $0.93

News, Upgrades/Downgrades/Brokerage Research:

Apollo Group (Nasdaq: APOL) – Upgraded at Bank of America
KLA Tencor (Nasdaq: KLAC) – Downgraded at Bank of America
ValueClick (Nasdaq: VCLK) – Downgraded at Bank of America
US Steel (NYSE: X) – Estimates and target reduced at Bank of America, Downgraded at Morgan Stanley
General Motors (NYSE: GM) – Downgraded at Citi
Ford (NYSE: F) – Downgraded at Citi

BMC Software (NYSE: BMC) – Upgraded at JP Morgan
Citrix Systems (Nasdaq: CTXS) – Upgraded at JP Morgan
Cadence Design (Nasdaq: CDNS) – Upgraded at JP Morgan
Symantec (Nasdaq: SYMC) – Upgraded at JP Morgan
United Parcel Service (NYSE: UPS) – Downgraded at Merrill
FedEx (NYSE: FDX) – Downgraded at Merrill
Burlington Northern (NYSE: BNI) – Downgraded at Merrill
CSX Corp (NYSE: CSX) – Downgraded at Merrill
Forward Air (Nasdaq: FWRD) – Downgraded at Merrill
Bristol Myers Squibb (NYSE: BMY) – Upgraded at Merrill
Pfizer (NYSE: PFE) – Upgraded at Merrill
Nucor (NYSE: NUE) – Upgraded at Morgan Stanley
Estee Lauder (NYSE: EL) – Downgraded at Morgan Stanley
Energizer (NYSE: ENR) – Downgraded at Morgan Stanley
BJ’s Wholesale (NYSE: BJ) – Reports Same Store Sales of +10.4% vs. Street Account +11.7%
Costco (Nasdaq: COST) – Reports Same Store Sales of +7.0% vs. Street Account +7.2%
Target (NYSE: TGT) – Reports Same Store Sales of -3.0% vs. Street Account -1.1%
Walgreens (NYSE: WAG) – Reports Same Store Sales of +4.7% vs. Street Account +5.5%
Wal-Mart (NYSE: WMT) – Reports Same Store Sales of +2.4% vs. Street Account +2.3%

Disclosure: Mr. Moenning and/or related firms hold long positions in: WMT, COST, BJ

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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