David Moenning's Daily State of the Markets: 12/13

New Acronym Angst

A brand new acronym from our friends at the Federal Reserve created quite a stir in the early going yesterday morning. Just after 9:00 am eastern time, Mr. Bernanke & Co. introduced something called a T.A.F., which stands for Term Auction Facility. The newest governmental acronym was created in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank, and was designed to "address elevated pressures in short-term funding markets."

The plan, which was also supported by the Bank of Japan, is said to be the biggest joint liquidity injection since 9/11 as the Fed is scheduled to pump $20 billion into the system on December 17th and December 20th.

At first blush, investors seemed to like the plan and before you could remember what TAF actually stood for, the Dow was up 270 points. And just like that, the bulls were grinning from ear to ear and the vast majority of Tuesday’s post-Fed hysterics had been erased.

But then the questions started. Why did the Fed hold off introducing their new baby? Why didn’t they hint at the plan when they had everyone's ear on Tuesday? Why aren’t they following the playbook that has worked so well in the past? And why did the very sector the TAF was supposed to help (i.e. the banks) actually plunge on the day?

Although Fed officials vehemently denied that the announcement had anything to do with the market's 350 point tank job on Tuesday, the timing of the announcement was extremely curious. It was so odd in fact that many long-time market watchers are up in arms and calling for resignations at the Fed.

If you will recall, this was supposed to be the Fed that was MORE transparent. And yet, for some unknown reason this new Fed wound up completely misleading the markets. Surely, they should have known that their lackluster effort on Tuesday would have been a problem. So, why, oh why, would they not hint that there was a new big idea to help global liquidity coming? (Oh that’s right, because timing doesn’t matter in the academic world.)

So while the jury may still be out on whether the TAF will actually help anybody, the timing of the announcement created a crisis of confidence of sorts in the financial markets yesterday.

This, coupled with new problems for some big name banks and oil prices soaring by more than $4, pretty much put the kibosh on the bulls’ early fun. It will suffice to say that the highs of the day occurred in the first 15 minutes and then it was downhill from there. In fact, with an hour to go the DJIA found itself down more than 110 points, which put the daily volatility range at a staggering 383 points.

While the major indices did recover a bit into the close, this is not a case of all’s well that ends well. There was some damage done here and therefore, it will be interesting to see whether the bulls will be able to tough it out into year-end or succumb to the massive uncertainty created by the Fed.

Turning to this morning, we've got a bevy of economic data to sift through, so let's get right to it. The government reported that the Producer Price Index for November came in with a surprising gain of +3.2%, which was more than double the expectations for an increase of +1.5%. When you take out food and energy, the Core Rate showed an increase of +0.4%, which again was double than the consensus expectation for an increase of +0.2%. And on a year-over-year basis, the PPI now sports a whopping increase of +7.2% while the Core Rate sits with a gain of +2.0%, which, by the way, is right at the Fed's stated comfort zone.

We also got word that Retail Sales grew by 1.2%, which, again, was double the expectations for an increase of +0.6%. And when you strip out Autos, the increase was an impressive 1.8%, which, this time, was triple the consensus.

So, all in all, we've got inflation coming in a bit hotter than expected and an economy that is showing no signs of a slowdown. Maybe the Fed's got it right after all.

Running through the rest of the pre-game indicators; the overseas markets are down hard across the board. Crude futures are up again with the latest quote showing the January contract lower by $0.12 to $94.27. Interest rates are higher with the 10-yr trading at a yield of 4.09% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing down hard. The Dow futures are currently off by about 110 points; the S&Ps are down by about 14 points, while the NASDAQ looks to be about 18 points below fair value at the moment.

Stocks "In Play" This Morning:


Today's Earnings Before the Bell:

Costco Wholesale Club (Nasdaq: COST) – Reported $0.59 vs. $0.59
Ciena Corp (Nasdaq: CIEN) – Reported $0.48 vs. $0.43
Lehman Brothers (LEH) – Reported $1.54 vs. $1.42

News, Upgrades/Downgrades/Brokerage Research:

Mosaic (NYSE: MOS) – Estimates increased at Bank of America
Red Hat (NYSE: RHT) – Downgraded at Bank of America
Washington Mutual (NYSE: WM) – Downgraded at Bank of America
Assurant Inc (NYSE: AIZ) – Target increased at Citibank
BMC Software (NYSE: BMC) – Upgrade at Credit Suisse
Biogen Idec (Nasdaq: BIIB) – Upgraded at Credit Suisse
Sunoco (NYSE: SUN) – Upgraded at Deutsche Bank
Comp Vale do Rio Doce (NYSE: RIO) – Downgraded at Goldman Sachs
Capital One Financial (NYSE: COF) – Downgraded at Jefferies
Qualcomm (Nasdaq: QCOM) – Downgraded at Merrill Lynch
SLM Corp (NYSE: SLM) – Downgraded at Thomas Weisel
ADC Telecom (Nasdaq: ADCT) – Target increased 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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