David Moenning's Daily State of the Markets: 12/11

Finding Values

It would be easy to say that socks rallied again yesterday in anticipation of the Fed cutting rates this afternoon. It would be easy, but it would be wrong. Although expectations are indeed high for Mr. Bernanke to cut the Fed Funds rate by 0.25% at 2:15 pm eastern and then issue a statement suggesting there is more to come, the real reason the Dow put up another 100 point gain yesterday has to do with cold, hard cash.

While word of a $10 Billion write-down at UBS (UBS) sounded ominous before the bell yesterday morning, it was actually the announcement that the investment bank had lined up a cash infusion of $11.5 Billion that got traders talking. It turns out that investors in Singapore were willing to put up $10 Billion and it was widely rumored that Abu Dhabi was writing 10-digit checks again.

Then when the news hit that mortgage insurer MBIA Inc (MBI) had received a $1 Billion investment from Warburg Pincus, it became clear that some pretty big money was betting on a bottom in the financials.

So, with liquidity concerns receding, the thinking appears to have turned from fear to finding values. Recall that Abu Dhabi has already plunked down a bunch of cash at Citigroup (C). Recall that Countrywide has already received a helping hand. And recall that Legg Mason’s Bill Miller said recently that the financial stocks are at their cheapest levels since 1990.

The point is that during severe declines, somebody, somewhere along the line steps up and says, "hey, this stock looks cheap here." And this is what gave the bulls the confidence to drive stocks higher in front of today’s Fed meeting.

Speaking of the Fed, with talk of recession becoming more prominent, the pressure is rising for Bernanke's boys to get this one right. For example, Morgan Stanley issued a report yesterday saying that the risks of recession have increased. And another report out of PIMCO said that the Fed Funds rate will ultimately fall below 3% in response to economic weakness.

Thus, it is widely expected that today’s statement will be somewhat of an about-face from what was mentioned in October's policy explanation. At the last meeting, the Fed told us that the risks of growth and inflation were about even and that the FOMC must stay vigilant in their fight against inflation. But now it has become extremely clear to anyone and everyone looking at the numbers that the risk of recession clearly outweighs the risk of inflation perking up. Therefore, the markets expect some sort of a mea culpa from the Fed today.

Turning to this morning, we don't have any economic data to review before the opening bell. But with the Fed announcement on tap in just a few hours, nobody really cares about economic data anyway.

Running through the rest of the pre-game indicators; the overseas markets are mixed by region again this morning as Asian stocks are higher while European stocks are lower on business sentiment data. Crude futures are up a bit so far with the latest quote showing the January contract higher by $0.70 to $88.56. Interest rates are a smidge lower with the 10-yr trading at a yield of 4.13% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a slightly higher open. The Dow futures are currently ahead by about 25 points; the S&Ps are up by about 2.5 points, while the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Reliant Resources (NYSE: RRI) – Upgraded at Bank of America
UBS (NYSE: UBS) – Upgraded at Bear Stearns
Medarex (Nasdaq: MEDX) – Downgraded at Bear Stearns
Starbucks (Nasdaq: SBUX) – Downgraded at Goldman Sachs
Burger King Holdings (NYSE: BKC) – Upgraded at Goldman Sachs
Air Products (NYSE: APD) – Downgraded at JP Morgan
Praxair (NYSE: PX) – Downgraded at JP Morgan
JP Morgan (NYSE: JPM)– Downgraded at Keefe, Bruyette & Woods
MasterCard (NYSE: MA) – Upgraded at Keefe, Bruyette & Woods
Discover Financial Services (NYSE: DFS) – Downgraded at Keefe, Bruyette & Woods
American Express (NYSE: AXP) – Downgraded at Keefe, Bruyette & Woods
Wendy’s (NYSE: WEN) – Target reduced at Lehman
DeVRY (NYSE: DV) – Downgraded at Morgan Stanley, Valuation cited
Advance Auto Parts (NYSE: AAP) – Upgraded at Morgan Stanley

Mr. Moenning holds Long positions in stocks mentioned: MA, DV

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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