David Moenning's Daily State of the Markets: 1/13

Back to Banking?

At first blush, it sounded as if Citigroup’s (C) goal in trying to merge their Smith Barney unit with Morgan Stanley was to give up on the financial supermarket concept and get back to banking. However, once it became clear that the merger was more of a government-mandated breakup than a strategic maneuver, the worries about the banking industry returned.

As we’ve been saying for some time, the current game is about expectations versus reality. And given that stocks have fallen about -45% since last October, it is safe to say that traders have effectively discounted a great deal of bad news relating to the future. Thus, the current challenge is to figure out what has been priced in and what has not.

The recent thought process as it relates to the banking industry had traders looking for signs of stability. The hope has been that with all of the turmoil, mergers, and closures, the writeoffs would soon come to and end -- along with the need for additional capital.

However, word that Citi was being forced to divest itself of Smith Barney, which apparently is a handsomely profitable unit, raised the question of why the move was being made. Was there some new problem going on that we haven’t heard about? Was another shoe and/or another bomb about to drop?

It didn’t take long before Oppenheimer’s rock star analyst Meredith Whitney provided the answer. Ms. Whitney opined yesterday that Citi’s projected operating loss of $10 billion in Q4 means that the firm will have to raise additional capital.

In short, the three words Wall Street does not want to hear any company utter ever again are: additional capital required. The bottom line is the market has assumed that we are close to getting past this phase and yesterday’s announcement that the capital raising game is likely to resume was not welcome news.

So, while the popular press talked about the uneasiness over the upcoming earnings season as the reason for yesterday’s fourth straight decline in the stock market, you should know that the move was really all about banking and the fear of what might come next.

Speaking of earnings, Alcoa (AA) kicked things off with a thud yesterday after the close. While AA is known as a serial disappointer, the loss of $0.28 was double the consensus, which acted as a reminder that things are not going at all well in the aftermath of the collapse of the commodity bubble.

Turning to this morning, in keeping with our banking theme, Fed Chairman Bernanke has just announced that banks may need additional injections of capital from the Fed. Bernanke says the timing and the strength of the global economy is highly uncertain but that the Fed still has "powerful tools at its disposal." Bernanke mentioned the ideas of providing short-term liquidity to sound financial institutions, providing liquidity directly to borrowers and investors in the credit markets, and the purchase of longer-term securities by the Fed.

Running through the rest of the pre-game indicators, the major foreign markets are lower across the board. Crude futures are also lower with the latest quote showing oil futures trading down by $0.69 to $36.90. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.33%, the yield on the 3-month T-Bill is at 0.11%, and overnight LIBOR is at 0.10%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing lower again. The Dow futures are currently off by about 40 points; the S&P’s are down by about 4 points, while the NASDAQ looks to be about 7 points below fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Alcoa (NYSE: AA) – Reported -$0.28 vs. -$0.14

Today’s Earnings Before the Bell:

Infosys (Nasdaq:INFY) – Reported $0.56 vs. $0.55
Mesa Air Group (Nasdaq:MESA) – Reported -$0.83 vs. $0.15

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

Coca-Cola FEMSA (NYSE: KOF) – Downgraded at Bank of America Merrill Lynch
Amphenol (NYSE: APH) – Downgraded at Bank of America Merrill Lynch
Corning (NYSE: GLW) – Downgraded at Bank of America Merrill Lynch
Newell Rubbermaid (NYSE: NWL) – Downgraded at Bank of America Merrill Lynch
Energizer Holdings (NYSE: ENR) – Downgraded at Bank of America Merrill Lynch
Kimberly Clark (NYSE: KMB) – Upgraded at Bank of America Merrill Lynch
Alberto Culver (NYSE: ACV) – Upgraded at Bank of America Merrill Lynch
American Intl Group (NYSE: AIG) – Target reduced at Citi
WellPoint Health (NYSE: WLP) – Downgraded at Citi
First Solar (Nasdaq:FSLR) – Downgraded at Citi
CIGNA (NYSE: CI) – Downgraded at Citi
Boeing (NYSE: BA) – Downgraded at Credit Suisse
Northrop Grumman (NYSE: NOC) – Downgraded at Credit Suisse
L-3 (NYSE: LLL) – Downgraded at Credit Suisse
Precision Castparts (NYSE: PCP) – Downgraded at Credit Suisse
Raytheon (NYSE: RTN) – Upgraded at Credit Suisse
Ryland Group (NYSE: RYL) – Downgraded at Deutsche Bank
PG&E Corp (NYSE: PCG) – Downgraded at Goldman
Apartment Inv & Mgmt (NYSE: AIV) – Downgraded at JP Morgan
Prologis (NYSE: PLD) – Downgraded at JP Morgan
Public Storage (NYSE: PSA) – Downgraded at JP Morgan
Boston Properties (NYSE: BXP) – Upgraded at JP Morgan
Macerich Co (NYSE: MAC) – Upgraded at JP Morgan
Deere & Co (NYSE: DE) – Downgraded at JP Morgan
Banco Itau Holding (NYSE: ITU) – Downgraded at Morgan Stanley
Unibanco (NYSE: UBB) – Downgraded at Morgan Stanley
Palm Inc (Nasdaq: PALM) – Upgraded at UBS
France Telecom (NYSE: FTE) – Downgraded at UBS
Ericsson (Nasdaq:ERIC) – Downgraded at UBS
NVIDIA (Nasdaq:NVDA) – Estimates reduced 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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