David Moenning's Daily State of the Markets: 11/08

Too Much to Handle

Whenever stocks get tagged for big losses, if you are anything like me, you want to know WHY the carnage occurred. Take yesterday for example. There really wasn’t anything new brought to light during the session. And yet, the Dow got hit for yet another loss of more than -350 points, which marks the third such loss we’ve seen since October 19th and the second 350 point plunge so far this month.

There were actually plenty of reasons for traders to sell stocks yesterday and we’ll get to them in a second. But first, let’s step back and review the big picture again. Why bother rehashing the past, you ask? Because, for me anyway, doing so helps bring some clarity to the situation.

So, let’s review. This summer’s Credit Crisis Correction took the indices down about 10% from mid-July through mid-August. The reason stocks fell was fairly simple: No one knew what to expect in terms of the damage inflicted by the credit crisis on the economy and earnings. But then just when things looked bleak, Mr. Bernanke’s cavalry mounted up and rode to the rescue with a big rate cut and the promise of more to come.

As we’ve discussed, stocks rallied in response to the rate cuts as “Don’t fight the Fed” became the bulls’ battle cry. But it is important to note that socks also rose on the back of the idea that we had seen the worst of the credit crisis. After all, between the Superfund and the Fed, it appeared that the problem was under control. So naturally, stocks rallied and eventually hit new highs.

But unfortunately, the assumption that the credit problems were under control is now being questioned. And in response, we’ve got stocks tumbling back down. And since the bears were able to breach the 1492 support zone that was very important to the chart watchers out there yesterday, it appears that we’ve got a full-fledged retest on our hands.

Okay, so much for the big-picture stuff. What the heck caused stocks to get smoked again yesterday? For starters, the news on the credit front continues to worsen. There was a good deal of speculation that Morgan Stanley was about to announce a large write-down. We had reports of a fire sale in mortgage-backed securities and more downgrades of debt by Moody’s. In addition, NY Attorney General Andrew Cuomo subpoenaed Fannie May and Freddie Mac seeking information on loans from Washington Mutual (WM) which may have been based on fraudulent appraisals. And speaking of WaMu, the bank yesterday wouldn’t confirm whether its dividend was safe.

Still on the topic of credit, Morgan Stanley added to the worries that problems in the mortgage market are spilling over to other areas of the credit universe by saying that Capital One (COF) and American Express (AXP) would need to raise their estimates for write-down.

Now toss in oil still trading over $96, the problems with the dollar (yep, it dropped again), China’s threat to start buying “stronger currencies”, GM’s miserable report, and William Poole’s comments suggesting that the Fed is still fretting over the credit crisis and the bottom line is that there was simply too much bad news to fight off yesterday.

Turning to this morning, Cisco’s report looked good on the surface as the company beat by $0.04 instead of the usual penny, but weak guidance for next quarter and a comment about the U.S. market being “lumpy” is not sitting well with traders.

We don’t have much in the way of economic data before the bell, but traders will be glued to the TV when Mr. Bernanke testifies today.

Running through the rest of the pre-game indicators; Asian markets sank overnight while the European Bourses are mixed at the moment. Crude futures are heading higher again with the latest quote showing the December contract up $0.32 to $96.69. Interest rates are a bit lower this morning with the 10-yr trading at a yield of 4.33% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open higher. The Dow futures are currently ahead by about 60 points; the S&Ps are up by about 4 points, while the NASDAQ looks to be about 3 points below fair value at the moment thanks to Cisco.

Stocks “In Play” This Morning:
Yesterday’s Earnings After the Bell:
American Intl Group (NYSE: AIG) – Reported $1.44 vs. $01.62
Cisco Systems (Nasdaq: CSCO) – Reported $0.40 vs. $0.36
News Corp (NYSE: NWS.A) – Reported $0.23 vs. $0.22

Today’s Earnings Before the Bell:
Clear Channel Comm (NYSE: CCU) – Reported $0.52 vs. $0.38
Dynegy (NYSE: DYN) – Reported $0.11 vs. $0.17
Ford (NYSE: F) – Reported ($0.01) vs. ($0.48)
Urban Outfitters (Nasdaq: URBN) – Reported $0.27 vs. $0.24

News, Upgrades/Downgrades/Brokerage Research:
Sotheby’s (NYSE: BID) – Downgraded at BofA
Washington Mutual (NYSE: WM) – Bear Stearns sees dividend cut possible
ING Group (NYSE: ING) – Downgraded at Bear Stearns
Parker Hannifin (NYSE: PH) – Target increased at Citi
Ship Finance Intl (NYSE: SFL) – Upgraded at Citi Ashland (ASH) – Upgraded at Credit Suisse
Genentech (NYSE: DNA) – Added to Conviction Buy list at Goldman Sachs
Coeur D’Alene Mines (NYSE: CDE) – Upgraded at JP Morgan
Cisco Systems (Nasdaq: CSCO) – Lehman sees pullback as opportunity
AFLAC (NYSE: AFL) – Downgraded at Merrill, Added to Top Picks at Friedman

Mr. Moenning holds Long positions in stocks mentioned: MER, DYN, CSCO, AFL

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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