David Moenning's Daily State of the Markets: 08/17
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The Cavalry Rides Again!
With stock down more than -340 points, the S&P negative on the year, and the phones starting to ring with panicked clients yesterday morning, the outlook wasn’t exactly bright and the fear was palpable. But then it happened; something positive occurred and the shorts started to run for cover in the financials. And when it was all said and done, the bulls had generated an impressive recovery which erased all but 15 points of the early plunge.
At mid-morning though, stocks appeared to have no support whatsoever. With rumors flying and the situation seemingly worsening by the minute, there were no buyers to be found and it looked like only a matter of time before we’d be down 500 points.
The crux of the problem yesterday, once again, was fear of the unknown. Countrywide had made headlines by drawing down its entire credit line of $11 billion. And although the decision actually makes good business sense as the company now has the liquidity to fund its mortgages through 2008, some saw the move as a sign of desperation. Thus, it wasn’t long before the rumors started to flow and it didn’t help that Moody’s dropped their rating on the company’s debt by three notches.
And before you could come up with an acronym for asset-backed commercial paper, more rumors cropped up with more selling accompanying them. We heard that the Fed was ready to call an emergency meeting which sparked fears that the Fed too was panic stricken. We heard that more than one major hedge fund was in trouble and would soon be forced to close. And finally, we heard that since the E-Trade website was down, they must be freezing accounts. Of course, all the rumors were false, but with investors on edge, it was a “sell first and ask questions later” environment – and it felt ugly.
But as I told worried clients yesterday, from a big-picture standpoint, the economy is not on the brink of recession, there is no inflation to worry about, the Fed isn’t likely to raise rates any time soon, earnings continue to be solid, the consumer is still shopping, and stocks are not overvalued. And in light of the fact that most bear markets need at least one of the above to trigger a grizzlier environment, it’s tough to see how the current mess turns into a bear market. I said that in reality, we’ve got a correction on our hands, which at least at the present time, is running almost entirely on fear.
Speaking of fear, most experienced investors know that during these types of markets, the shorts have a tendency to overdo it and on occasion things get just plain stupid. And so, with stocks looking very bad yesterday, it was like someone rang a bell and the shorts started to cover. It didn’t hurt that Fannie Mae said they were in talks to expand their caps or that Treasury Secretary Paulsen said that the government is looking at all policy levers available to help the credit situation.
But enough about yesterday, turning to this morning, it looks like the Bernanke Cavalry is riding once again. This morning, the Fed announced that they have cut the Discount Rate by 0.50% to 5.75%. In the statement, the FOMC said that the downside risks to growth have increased appreciably and that the Fed says it is prepared to act as needed to mitigate the adverse effects on the economy. Bernanke also says that financial conditions have deteriorated and could restrain economic growth.
This move has taken the focus off of worries over the unwinding of the Yen-Carry trade, which helped push Japan down more than -5% overnight. Traders obviously like the Fed’s move as it shows that the Fed IS paying attention and WILL help if things get tough. Stock futures have soared on the news and for now at least, the bulls are smiling.
Running through the rest of the pre-game indicators, the overseas markets were down across the board once again. Crude futures are higher by $1.07 with the latest quote at $72.07. Interest rates are rising this morning as the 10-yr is trading with a yield of 4.67% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to move significantly higher. The Dow futures are currently ahead by about 200 points; the S&Ps are up by about 26 points, and the NASDAQ looks to be about 40 points above fair value at the moment.
Stocks "In Play" This Morning:
Yesterday’s Earnings After the Bell:
Autodesk (Nasdaq: ADSK) – Reported $0.44 vs. $0.43
Hewlett Packard (NYSE: HPQ) – Reported $0.71 vs. $0.66, Guides higher
Nordstrom (NYSE: JWN) – Reported $0.71 vs. $0.70
Kohls (NYSE: KSS) – Reported $0.83 vs. $0.82
News, Upgrades/Downgrades/Brokerage Research:
Exelon (NYSE: EXC) – Upgraded at BofA
Countrywide Financial (NYSE: CFC) – Upgraded at BofA
Autodesk (Nasdaq: ADSK) – Upgraded at Bear Stearns
Darden Restaurants (NYSE: DRI) – Upgraded at Bear Stearns
Kohls (NYSE: KSS) – Upgraded at Deutsche Bank
Abercrombie & Fitch (NYSE: ANF) – Upgraded at Friedman Billings
Autonation (NYSE: AN) – Downgraded at Goldman
Blockbuster (NYSE: BBI) – Upgraded at JP Morgan
Avalon Bay (NYSE: AVB) – Upgraded at Morgan Stanley
Essex Property Trust (NYSE: ESS) – Upgraded at Morgan Stanley
Vornado Realty Trust (NYSE: VNO) – Upgraded at Morgan Stanley
Home Depot (NYSE: HD) – Upgraded at UBS
Mr. Moenning holds Long positions in stocks mentioned: HPQ
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.
With stock down more than -340 points, the S&P negative on the year, and the phones starting to ring with panicked clients yesterday morning, the outlook wasn’t exactly bright and the fear was palpable. But then it happened; something positive occurred and the shorts started to run for cover in the financials. And when it was all said and done, the bulls had generated an impressive recovery which erased all but 15 points of the early plunge.
At mid-morning though, stocks appeared to have no support whatsoever. With rumors flying and the situation seemingly worsening by the minute, there were no buyers to be found and it looked like only a matter of time before we’d be down 500 points.
The crux of the problem yesterday, once again, was fear of the unknown. Countrywide had made headlines by drawing down its entire credit line of $11 billion. And although the decision actually makes good business sense as the company now has the liquidity to fund its mortgages through 2008, some saw the move as a sign of desperation. Thus, it wasn’t long before the rumors started to flow and it didn’t help that Moody’s dropped their rating on the company’s debt by three notches.
And before you could come up with an acronym for asset-backed commercial paper, more rumors cropped up with more selling accompanying them. We heard that the Fed was ready to call an emergency meeting which sparked fears that the Fed too was panic stricken. We heard that more than one major hedge fund was in trouble and would soon be forced to close. And finally, we heard that since the E-Trade website was down, they must be freezing accounts. Of course, all the rumors were false, but with investors on edge, it was a “sell first and ask questions later” environment – and it felt ugly.
But as I told worried clients yesterday, from a big-picture standpoint, the economy is not on the brink of recession, there is no inflation to worry about, the Fed isn’t likely to raise rates any time soon, earnings continue to be solid, the consumer is still shopping, and stocks are not overvalued. And in light of the fact that most bear markets need at least one of the above to trigger a grizzlier environment, it’s tough to see how the current mess turns into a bear market. I said that in reality, we’ve got a correction on our hands, which at least at the present time, is running almost entirely on fear.
Speaking of fear, most experienced investors know that during these types of markets, the shorts have a tendency to overdo it and on occasion things get just plain stupid. And so, with stocks looking very bad yesterday, it was like someone rang a bell and the shorts started to cover. It didn’t hurt that Fannie Mae said they were in talks to expand their caps or that Treasury Secretary Paulsen said that the government is looking at all policy levers available to help the credit situation.
But enough about yesterday, turning to this morning, it looks like the Bernanke Cavalry is riding once again. This morning, the Fed announced that they have cut the Discount Rate by 0.50% to 5.75%. In the statement, the FOMC said that the downside risks to growth have increased appreciably and that the Fed says it is prepared to act as needed to mitigate the adverse effects on the economy. Bernanke also says that financial conditions have deteriorated and could restrain economic growth.
This move has taken the focus off of worries over the unwinding of the Yen-Carry trade, which helped push Japan down more than -5% overnight. Traders obviously like the Fed’s move as it shows that the Fed IS paying attention and WILL help if things get tough. Stock futures have soared on the news and for now at least, the bulls are smiling.
Running through the rest of the pre-game indicators, the overseas markets were down across the board once again. Crude futures are higher by $1.07 with the latest quote at $72.07. Interest rates are rising this morning as the 10-yr is trading with a yield of 4.67% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to move significantly higher. The Dow futures are currently ahead by about 200 points; the S&Ps are up by about 26 points, and the NASDAQ looks to be about 40 points above fair value at the moment.
Stocks "In Play" This Morning:
Yesterday’s Earnings After the Bell:
Autodesk (Nasdaq: ADSK) – Reported $0.44 vs. $0.43
Hewlett Packard (NYSE: HPQ) – Reported $0.71 vs. $0.66, Guides higher
Nordstrom (NYSE: JWN) – Reported $0.71 vs. $0.70
Kohls (NYSE: KSS) – Reported $0.83 vs. $0.82
News, Upgrades/Downgrades/Brokerage Research:
Exelon (NYSE: EXC) – Upgraded at BofA
Countrywide Financial (NYSE: CFC) – Upgraded at BofA
Autodesk (Nasdaq: ADSK) – Upgraded at Bear Stearns
Darden Restaurants (NYSE: DRI) – Upgraded at Bear Stearns
Kohls (NYSE: KSS) – Upgraded at Deutsche Bank
Abercrombie & Fitch (NYSE: ANF) – Upgraded at Friedman Billings
Autonation (NYSE: AN) – Downgraded at Goldman
Blockbuster (NYSE: BBI) – Upgraded at JP Morgan
Avalon Bay (NYSE: AVB) – Upgraded at Morgan Stanley
Essex Property Trust (NYSE: ESS) – Upgraded at Morgan Stanley
Vornado Realty Trust (NYSE: VNO) – Upgraded at Morgan Stanley
Home Depot (NYSE: HD) – Upgraded at UBS
Mr. Moenning holds Long positions in stocks mentioned: HPQ
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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