David Moenning's Daily State of the Markets: 9/22

Bailout or Manipulation?

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

By now, I am fairly confident that just about anyone who is even remotely interested in the stock market has been apprised of the massive changes underway on Wall Street and of the efforts put forth by Washington to stem the tide of the financial crisis. In short, the administration has crafted a plan to buy up $700 billion in toxic mortgages, the Treasury Dept. has basically guaranteed money market funds, and the SEC has banned short selling altogether on some 800 financial institutions.

At first blush, Traders believed that all of the above were good ideas – at least in one form or another – and celebrated the government’s 1990-style bailout with gains of nearly 800 points from the time the rumors started flying on Thursday.

The concept of the bailout plan is fairly straightforward. The government will basically buy up bad mortgages so that these toxic securities can be removed from bank balance sheets. The thinking is that if banks can get their books in order in a timely fashion, they will once again have assets available to do what banks do – lend money.

However, the rest of the plan and the timing of the announcement of the plan itself are more than a little disconcerting to those who believe in free markets. First, to effectively blame short sellers for the problems on Wall Street seems to be more than a little misguided. I don’t think it was the short-selling bunch that put a gun to the heads of the likes of Bear, Lehman, and Merrill and then forced them to leverage questionable bonds to the tune of 40 to 1. And yet, by banning short sales on the financials the SEC is making those that prefer to ‘sell first and buy later’ the fall guys.

And to put it bluntly, when you combine the ban on short sales with the timing of the government’s announcement, the words ‘market manipulation’ spring to mind.

Yes, I know that the situation in the investment banking industry had become dire. And yes, I do recognize that the hundreds of billions of dollars that central bankers had pumped into the system over the last week had done next to nothing to unfreeze the system. However, in light of the fact that the powers-that-be in Washington had been purportedly working on this plan for months, it is rather curious that the announcement of the plan, which was a mere 2.5 pages in length, would come on a quadruple-witching expiration Friday. Hmmm….

Turning to this morning, there is yet another big change in the landscape on Wall Street to ponder. Both Morgan Stanley (MS) and Goldman Sachs (GS) have decided it is better to switch than fight. The last two big investment banks standing will now become bank-holding companies, which allows them to accept deposits as a way to bolster their balance sheets. The problem is that the move will mean a lot more regulation and lower returns.

Running through the rest of the pre-game indicators, the foreign markets are mixed by region with Asia up and Europe down a smidge. Crude futures are moving up again with the latest quote showing oil trading higher by $2.53 to $107.08. Interest rates are rising with the yield on the 10-yr currently trading at 3.88%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a down open. The Dow futures are currently off by about 70 points; the S&P’s are down by about 15 points, while the NASDAQ looks to be about 16 points below fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Health Management (NYSE: HMA) – Upgraded at Bank of America
Brinker Intl (NYSE: EAT) – Downgraded at Bank of America
Cisco Systems (Nasdaq: CSCO) – Mentioned positively at Citi
KLA Tencor (Nasdaq: KLAC) – Downgraded at Credit Suisse
Varian Semi (Nasdaq: VSEA) – Downgraded at Credit Suisse
Sovereign Bancorp (NYSE: SOV) – Downgraded at Friedman Billings
Arkansas Best (Nasdaq: ABFS) – Downgraded at JP Morgan
Con-Way (NYSE:CNW) – Downgraded at JP Morgan
YRC Worldwide (Nasdaq: YRCW) – Downgraded at JP Morgan
Logitech (Nasdaq: LOGI) – Upgraded at Merrill
Otter Tail (Nasdaq: OTTR) – Upgraded at RW Baird
Research In Motion (Nasdaq: RIMM) – Estimates increased 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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