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

October 9, 2008 10:17 AM EDT

Sell What You Can...

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

Central Bankers around the globe mounted their white horses yesterday and attempted to ride to the rescue of the financial markets with an impressive display of coordinated rate cuts. Since this was one of the things we said we were looking for in this weekend’s big-picture missive, we will have to give credit to the Fed and their cohorts across the pond for doing just about everything they can to try and stop the bleeding in the markets.

While the point of yesterday’s surprise move may have been lost on the average investor, it should be noted that the goal of Mr. Bernanke and Co’s latest effort was to encourage banks to lend again. And what better way to do that than to wave a fistful of dollars – this time in the form of an ever increasing profit margin – in the faces of bankers everywhere? You see, by cutting the rate at which banks may borrow, the Fed effectively added another 50 basis points to the spread between borrowing and lending. So, since market rates continue to be “sticky” on the upside and the cost of capital is now even lower – boom; as a banker, you’ve got a higher profit margin on your hands and an additional 50 reasons to lend money.

What is perhaps most impressive about the move was the fact that Gentle Ben was able to round up some of his banker buddies to join him in his latest counteroffensive against the credit crisis. Heck, even the ECB’s enigmatic Jean-Claude Trichet managed to get on board and for the moment at least, set aside his paranoia regarding the potential for runaway inflation in Europe.

But, despite the massive global intervention, some surprisingly good news on the housing market, and several attempts at an intraday rally, stock market investors once again went home disappointed. For those of you keeping score at home (and who isn’t these days?) this was the fifth straight down day for stocks. Yesterday’s drop of 189 points brings the total bloodletting for the month to -14.7% on the Dow, -15.4% for the S&P 500, and -16.4% over in four-letterland. To which I can only say, wow, am I glad I’ve had a lot of cash on hand.

As long-time readers know, I have somewhat of an obsession about understanding why things happen the way they do in the stock market. And given that most would argue that the global rate cut was a good thing and not a reason for yet another plunge in stock prices, I feel it is especially important to understand why stock prices dove into the close.

We could say that the barrage of September Same-Store Sales data, which did not paint a pretty picture, was at fault. After all, except for Wal-Mart (WMT) and Costco (COST), the rest of the retailers didn’t fare well at all. But, we should keep in mind that nobody in their right mind was expecting these numbers to be strong, so we’ll have to put this aside as a reason for the selling.

We could also argue that it was earnings as the season got off to a shaky start. For example, Alcoa (AA) missed badly, Bank of America’s (BAC) results were disappointing, and the 48% year-over-year drop in earnings at MetLife (MET) was not well received. But again, there is nothing new here.

And then there was the fact that Hank Paulson had reminded investors that the crisis in credit is likely to last a while yet. But, in looking at the tape, stocks didn’t start dropping until after he was done speaking. So, just about the time I was ready to blame the fast money traders and call it a day, I was reminded of the fact that hedge fund managers are facing redemptions right now and the public is likely to start yanking their money out of mutual funds very shortly. Thus, the old saw “sell what you can, not what you have to” seems to fit the situation.

If you are a fund manager responsible for several billion dollars and you know you’ve got redemptions coming soon, you will sell your General Mills (GIS), your McDonalds (MCD), your Kraft (KFT), and your Colgate (CL) right now because you can – which makes a lot more sense than trying to sell the stuff that’s been beaten to a pulp or is illiquid.

Turning to this morning, IBM (IBM) is providing a bit of a lift as the company surprised investors after the close by reporting early that they had beaten the street’s estimates by $0.04. In addition, reports that the Treasury is considering taking ownership in banks is providing a little confidence in the pre-market.

Running through the rest of the pre-game indicators, with the exception of Japan, the foreign markets are seeing a nice bounce. Crude futures are little changed with the latest quote showing oil trading down $0.03 to $88.92. Interest rates are up so far with the yield on the 10-yr currently trading at 3.72% while the yield on the 3-month T-Bill is now 0.67%. And finally, with about 60 minutes before the bell, the futures are currently a nice shade of green. The Dow futures are currently ahead by about 60 points; the S&P’s are higher by about 7 points, while the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Abercrombie & Fitch (NYSE: ANF) – September same-store sales -14% vs. StreetAccount -7.5%
Gap Inc (NYSE: GAP) – September same-store sales -11% vs. StreetAccount -8.5%
TJX Cos (NYSE: TJX) – September same-store sales -1% vs. StreetAccount +0.9%
Baxter Intl (NYSE: BAX) – Price target cutat Citi
Covidien Ltd (NYSE: COV) – Price target cut at Citi
Medtronic (NYSE: MDT) – Price target cutat Citi
CEMEX (NYSE: CX) – Downgraded at Citi
Ruby Tuesday (NYSE: RT)– Downgraded at Credit Suisse
Eli Lilly (NYSE: LLY) – Downgraded at Credit Suisse
American Eagle Outfitters (NYSE: AEO) – Upgraded at Friedman Billings
US Steel (NYSE: X) – Downgraded at Goldman
Steel Dynamics (Nasdaq: STLD) – Downgraded at Goldman
AK Steel (NYSE: AKS) – Downgraded at Goldman
Commercial Metals (NYSE: CMC)– Upgraded at Goldman
Ternium (NYSE: TX) – Downgraded at Goldman
Pactiv (NYSE: PTV) – Upgraded at JP Morgan
Harris Corp (NYSE: HRS) – Upgraded at JP Morgan
Microsoft (Nasdaq: MSFT) – Target reduced at Morgan Stanley
Dynegy (NYSE: DYN) – Downgraded at UBS
Reliant Energy (NYSE: RRI) – Downgraded at UBS

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

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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