David Moenning's Daily State of the Markets: 1/22

The Fed Steps In

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

We usually spend the first half of our morning report reviewing the previous day’s market action in an attempt to ensure that we have a solid grasp of what is driving the action on a short-term basis. The thinking here is if we can stay in tune with the action in the short-term, then we stand a decent chance of staying in line with the big-picture as well. However, this morning, we have much more pressing issues to contend with than Friday’s sloppy move of 59 points on the Dow.

While the U.S. took Monday off to honor Dr. Martin Luther King, the rest of the world’s stock markets plunged. Hong Kong dropped -5.5%, Japan fell -3.9%, France was down -6.8%, London’s FTSE plunged -5.5%, and Germany dove -7.2%. And to make matters worse, today, these same markets are down hard again. And as of 5:00 am, the Dow futures were down 500 points.

Although the problems in these indices are quite severe, the reasons behind the moves are actually very easy to understand. In short, the major markets of the world are beginning to worry that the U.S. is entering a recession. And as the saying goes, "When the U.S. sneezes; the world catches cold." Thus, there is concern that if the U.S. enters a recession, the major exporters of the world will be negatively affected as well.

Apparently, President Bush’s stimulus plan didn't inspire much confidence as the words, "too little, too late" were bandied about with regularity over the weekend. Then with the newbies on the Fed busy worrying about their reputations instead of the economy, the fear is that both the Fed and the Government are behind the curve in terms of the economic reality right now.

Turning to this morning's pre-market, there was nothing short of a panic happening in the early going. The Asian markets continued to freefall with Hong Kong dropping another -8.65% and Japan’s Nikkei losing 5.65% overnight.

With stocks set to plunge at the open, the message being sent was a rather emphatic plea to Mr. Bernanke’s Fed. The scene playing in my head was something along the lines of a student rally from the 1970’s with the crowd chanting, "Cut rates now! Cut rates now!"

As it turns out, the Fed was listening responded to the market's demands this morning with a meaningful interest rate cut of 0.75% on both the Fed Funds and Discount Rates. The FOMC met last evening and cited the weakening economic outlook for their decision to make a move before their regularly scheduled meeting. The statement accompanying the move stated that the Fed will continue to act in a decisive fashion if needed.

However, while the move has created some improvement in the pre-market futures here, we must recognize that the bears are on a roll and today could be very ugly in the early going. The good news is that shorts must be covered at some point and something along the lines of a "dead cat bounce" is inevitably close at hand. So, with the Fed cutting rates and Secretary Paulson applauding the move this morning, this may be exactly the type of “whoosh” down that traders look for to signal a short-term bottom.

Running through the rest of the pre-game indicators; as we have mentioned, the overseas markets are a sea of red ink. Crude futures are lower so far this morning on concerns over economic weakness. Interest rates are falling with the 10-yr trading at a yield of 3.60% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a significantly lower open. The Dow futures are currently off by almost 400 points; the S&Ps are down by more than 49, while the NASDAQ looks to be about 58 points below fair value at the moment.

Stocks "In Play" This Morning:

Today's Earnings Before the Bell:

Bank of America (NYSE: BAC) – Reported $0.05 vs. $0.19
BJ Services (NYSE: BJS) – Reported $0.58 vs. $0.59
CSX Corp (NYSE: CSX) – Reported $0.85 vs. $0.64
DuPont (NYSE: DD) – Reported $0.57 vs. $0.49
Fifth Third Bancorp (Nasdaq: FITB) – Reported $0.20 vs. $0.26
Jacobs Engineering (NYSE: JEC) – Reported $0.75 vs. $0.70
Johnson & Johnson (NYSE: JNJ) – Reported $0.88 vs. $0.86
UAL Corp (Nasdaq: UAUA) – Reported ($0.47) vs. ($0.96)
UnitedHealth Group (NYSE: UNH) – Reported $0.92 vs. $0.92
Waters (NYSE: WAT) – Reported $0.98 vs. $1.06
Wachovia (NYSE: WB) – Reported $0. vs. $0.

News, Upgrades/Downgrades/Brokerage Research:

Home Depot (NYSE: HD) – Upgraded at Bernstein
Lowes (NYSE: LOW) – Upgraded at Bernstein
Kohls (NYSE: KSS) – Upgraded at Bernstein
Valero (NYSE: VLO) – Upgraded at Bear Stearns
American Express (NYSE: AXP) – Downgraded at Citi
Deere & Co (NYSE: DE) – Target increased at Citi
Mobile TeleSystems (NYSE: MBT) – Downgraded at Credit Suisse, Target increased
Barrick Gold (NYSE: ABX) – Upgraded at Credit Suisse
Sony (NYSE: SNE) – Downgraded at Goldman
AFLAC (NYSE: AFL) – Upgraded at Goldman
Prudential (NYSE: PRU) – Downgraded at Goldman
CF Industries (NYSE: CF) – Upgraded at JP Morgan
NYMEX Holdings (NYSE: NMX) – Upgraded at JP Morgan
Netflix (Nasdaq: NFLX) – Upgraded at JP Morgan
Brinker Intl (NYSE: EAT) – Downgraded at Lehman
Darden Rest (NYSE: DRI) – Downgraded at Lehman
Wendy's (NYSE: WEN) – Downgraded at Lehman
CBS Corp (NYSE: CBS) – Downgraded at Merrill Lynch
JC Penney (NYSE: JCP) – Downgraded at Piper Jaffray
Motorola (NYSE: MOT) – Estimates reduced at UBS
Medco Health Solutions (NYSE: MHS) – Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: WAT, MBT, CF

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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