David Moenning's Daily State of the Markets: 10/16

�“Cash and Fetal”

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

With stocks plunging into the close once again yesterday I was reminded of my absolute favorite line describing the current stock market mess. Mr. Jeff Macke, one of the traders on CNBC’s Fast Money who, when asked about the best positions for this market, responded without missing a beat with the words, “Cash and fetal.”

In all honesty, the 250 point dive that occurred in the last 15 minutes of the day probably was enough to send most investors not in a heavy cash position underneath their desks into the latter position described by Mr. Macke. Yes, I know that the bounce–reverse–retest pattern that is playing out is exactly what the Crash Playbook has been calling for. But, with things moving so fast and the action having become so violent, it is hard to stand your ground here – even when you know what’s coming!

So, the questions of the day include: (1) Why, oh why, did the Dow Jones Industrial Average give back another 733 points yesterday? (2) Why did the NASDAQ fall a jaw-dropping 8.5%? And (3) why did the S&P 500 plummet to a loss of 9% which is within a whisker of a new low?

The popular press would have you believe that the latest plunge was caused by worries over the state of the economy. But, we should probably keep in mind that while Wall Street isn’t looking terribly intelligent these days, the concept of a slowdown in the economy isn’t exactly taking traders by surprise.

No, I think yesterday’s tank-job was really more about the two positions mentioned by Mr. Macke. Taking the latter first, my guess is that investors have now reached the out-and-out fear stage of the decline. You see, it is nearly impossible right now for any sane individual to think about buying anything because every time you turn around, you discover another industry that has been infected by the credit crisis or another company that may go bankrupt in the next 20 minutes. And while we all know that this episode will eventually pass, the fetal position is where investors may be most comfortable these days.

Speaking of comfort, let’s turn our attention back to that cash position. Putting all fun and sarcasm aside, it appears that even the biggest of the big boys are now on a do-or-die quest for the coveted safety of cold, hard cash (or in this case, anything with the U.S. Treasury’s stamp of approval on it).

And speaking of redemptions… This just in… TrimTabs reports some big name hedge funds are now moving to an all cash position in preparation for the massive redemptions that are taking place. Don’t think redemptions matter? We have just learned that investors yanked $43 billion out of hedge funds in the month of September – which is almost seven times the old monthly record. And remember, this was BEFORE the market plunged 22% in the first six trading days of October.

But let’s not just pick on the hedge funds because mutual funds are seeing massive redemptions as well. TrimTabs reports that the public pulled $8.8 billion out of stock funds last Friday alone and redemptions for the month, which wasn’t even half over when the tally was taken, were running at more than $56 billion – and yes, that is another record.

Getting back to yesterday’s problem, the combination of margin calls, forced liquidations, and managers raising some cash to meet redemptions means, in the very simplest of terms, that there are just too many sellers right now.

So, while the economy is no picnic at the present time, until either the selling slows or buyers emerge from their fetal positions, the volatility and the need for a cash position probably isn’t going to go away.

Turning to this morning, we’ve got some more inflation data to look at. The Consumer Price Index for September came in unchanged, which was a tenth better than the consensus estimates. And when you strip out those relatively unimportant things such as food and energy, the Core CPI rose by +0.1%, which again was a tenth better than the estimates.

Running through the rest of the pre-game indicators, the overseas markets are lower across the board despite growing expectations for another globally coordinated rate cut. Crude futures are down with the latest quote showing oil trading lower by $0.88 to $73.70. On the interest rates board, we’ve got the yield on the 10-yr currently trading at 4.00% while the yield on the 3-month T-Bill is at 0.28% and overnight LIBOR is at 1.94%, which is down from 2.14% yesterday – and the lowest level since November 2004. And finally, with about 45 minutes before the bell, the futures in the U.S. are pointing to a little better open. The Dow futures are currently ahead by about 80 points; the S&P’s are up by about 12 points, while the NASDAQ looks to be about 2 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Baxter (NYSE: BAX) – Reported $0.88 vs. $0.82
Bank of New York Mellon (NYSE: BK) – Reported $0.72 vs. $0.66
Peabody Energy (NYSE: BTU) – Reported $1.38 vs. $0.87
Citigroup (NYSE: C) – Reported -$0.71 vs. -$0.70
Continental Airlines (NYSE: CAL) – Reported -$1.32 vs. -$1.55
Danaher (NYSE: DHR) – Reported $1.11 vs. $1.13
Harley Davidson (NYSE: HOG) – Reported $0.71 vs. $0.79
Hershey (NYSE: HSY) – Reported $0.64 vs. $0.64
Southwest Airlines (NYSE: LUV) – Reported $0.09 vs. $0.07
Merrill Lynch (NYSE: MER) – Reported -$5.56 vs. -$5.18
PNC Financial (NYSE: PNC) – Reported $0.71 vs. $0.84
Textron (NYSE: TXT) – Reported $0.85 vs. $0.86
UnitedHealth Group (NYSE: UNH) – Reported $0.73 vs. $0.73
United Technologies (NYSE: UTX) – Reported $1.33 vs. $1.32
Werner Ent (Nasdaq:WERN) – Reported $0.31 vs. $0.26

News, Upgrades/Downgrades/Brokerage Research:

Forest Labs (NYSE: FRX) – Upgraded at Bernstein
Telefonica (NYSE: TEF) – Downgraded at Bernstein
Energen (NYSE: EGN) – Upgraded at Citi
MDU Resources (NYSE: MDU) – Downgraded at Citi
Norsk Hydro (NYSE: NHY) – Upgraded at Goldman
Kimberly Clark (NYSE: KMB) – Added to Conviction Buy list at Goldman
eBay (Nasdaq: EBAY) – Downgraded at JP Morgan, Piper Jaffray
CEMEX (NYSE: CX) – Upgraded at Merrill
Novartis (NYSE: NVS) – Upgraded at Merrill
GlaxoSmithKline (NYSE: GSK) – Upgraded at Merrill
Archer Daniels (NYSE: ADM) – Upgraded at Merrill
Wells Fargo (NYSE: WFC) – Upgraded at Morgan Stanley
US Steel (NYSE: X) – Target reduced t0 $60 from $110 at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: none

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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