David Moenning's Daily State of the Markets: 3/3

Welcome To The Big One

Yesterday was another day that anyone holding any equity positions anywhere in the world wishes they could forget. On days like Monday, even a 30% invested position felt too heavy as the losses were non discriminatory and large. And with the DJIA now down -52.25% from its October 9, 2007 high, we now have the illustrious honor of pointing out that this is the worst bear market since… wait for it… 1932! Yep, that’s right, the current degree of damage exceeds that seen in 1938 (-49.1%), 1970 (-35.9%), 1974 (-45.1%), 1987 (-36.1%), and 2000-02 (-37.8%) – so, welcome to the Big Show!
After yet another thrashing in the stock market yesterday, battered and bruised investors want to know one thing: When will it end? It would appear that nobody really cares all that much about why the decline is happening or who is to blame. They just want the pain to stop.

However, as you are probably aware, I am kind of obsessed with understanding why things happen the way they do in the market. To my way of thinking, when the market moves 4% to 5% in a single day there is usually a pretty good reason why.

From where I sit, it appears that the reason for yesterday’s beat-down was a rather familiar theme: There is still no answer as to what to do about the toxic assets eating away at bank balance sheets. And in short, the recent events involving AIG (AIG) and Citi (C) have reminded investors that nobody has a clue as to how to value these things and/or what to do with them.

The problem is that even the third government rescue of Citi and a fourth visit to the treasury coffers for AIG hasn’t actually fixed the problem. And while everybody knows that the best thing to do is round up all the bad assets and then stick them somewhere so that the vultures can pick away, no one has figured out how best to accomplish this task. So, until this little issue is resolved, the death march to zero is likely to continue in the banking sector.

To be sure, the stock market WILL eventually look ahead to better days in the economy. The government IS spending a trillion here and a trillion there, which, in reality, ought to do the trick in terms of turning the economy around, regardless of where the money is actually spent. However, until we can get the focus off of the banks and onto the economy, things aren’t likely to improve a whole lot.

Speaking of things not improving, another topic of discussion yesterday was an oldie but a goodie: The deleveraging and redemptions in Hedgieland. Citing estimates from Morgan Stanley, the WSJ reported yesterday that the hedge fund industry will shrink by 30% this year because of withdrawals, which is on top of the 20% decline seen last year. Along those lines, TrimTabs noted that clients pulled $74 billion out of hedge funds in January, which is second only to December’s total withdrawals of $117 billion.

Turning to this morning, we don’t have any economic news before the bell and at least for now, the selling appears to have abated. On the news front, Citi’s new initiative to help homeowners recently laid off seems to helping the mood a bit.

Running through the rest of the pre-game indicators, the major foreign markets are mixed, but improving across the pond. Crude futures are up with the latest quote showing oil trading higher by $0.89 to $41.04. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.94%, while overnight LIBOR is at 0.32% and the yield on the 3-month T-Bill is trading at 0.27%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently higher by about 95 points; the S&P’s are up by about 13 points, while the NASDAQ looks to be about 16 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

AutoZone (NYSE: AZO) – Reported $2.30 vs. $1.05
Carrizo Oil (Nasdaq: CRZO) – Reported $0.21 vs. $0.20
Chicos FAS (NYSE: CHS) – Reported -$0.14 vs. 0.17

Today’s Corporate News, Upgrades/Downgrades/Brokerage Research:

UBS (NYSE: UBS) – Downgraded at Bernstein, – Upgraded at Citi
BP (NYSE: BP) – Downgraded at Bernstein
Credit Suisse (NYSE: CS) – Downgraded at Bernstein
Medicines Co (Nasdaq: MDCO) – Removed from Top Picks Live list at Citi
Centex (NYSE: CTX) – Downgraded at Credit Suisse
DR Horton (NYSE: DHI) – Downgraded at Credit Suisse
Noble Corp (NYSE: NE) – Target increased, added to Conviction Buy list at Goldman
Waste Management (NYSE: WMI) – Downgraded at Goldman
Banco Bilboa Vizcaya (NYSE: BBV) – Downgraded at Goldman
ITT Educational Services (NYSE: ESI) – Upgraded at Morgan Stanley
Strayer Education (Nasdaq: STRA) – Upgraded at Morgan Stanley
Career Education (Nasdaq: CECO) – Downgraded at Morgan Stanley
DreamWorks (NYSE: DWA) – Upgraded at Piper Jaffray
General Electric (NYSE: GE) – UBS expects credit downgrade
Genzyme (Nasdaq: GENZ) – Target reduced at UBS
Pioneer Drilling (NYSE: PDC) – Downgraded at UBS
Energizer Holdings (NYSE: ENR) – Upgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: AZO, GENZ

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.TopStockPortfolios.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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