David Moenning's Daily State of the Markets: 12/10

Zero Percent Says It All

A quick perusal of the title to this morning’s missive may lead readers to believe that we’ve suddenly morphed into one of the Big Three automakers and are trying to entice you into the showroom with Zero Percent financing. And while the thought of trying to grab a little of the bailout money being tossed around these days is certainly appealing, in reality the title refers to the yield investors were willing to accept in return for lending the good ol’ USofA some cash for the next four weeks.

While we’ve been reporting on the rather skimpy yields on T-Bills, T-Notes, and overnight LIBOR for some time now, yesterday’s special auction of $30 billion in 4-week T-Bills has to be some sort of record because, like the purchase of a selected automobiles, the government got to finance its use of the money for nothing. Yep, that’s right; the yield to maturity on these securities was zero percent!

And if this wasn’t enough to make you question the collective intelligence of the financial community these days, the regular 3-month T-Bill auction actually produced a couple of trades with a negative return. So, I ask you – when things get to the point where big investors bid up T-Bills to the point where there is actually a loss on the 90-day investment, shouldn’t that tell you something?

In short, it tells me that the allure for managers to show abundant cash on their books for the end of the year is SO great, that these investors are willing to accept no interest and/or even accept a small loss. So, as one of the worst years for stocks comes to a close, the term, “window dressing” certainly seems appropriate here.

The other thing that one can take away from this historic event is that the concept of risk aversion (which is another way to say “negative sentiment”) has reached extreme levels. So, when you couple this type of event with the facts that (1) stocks have discounted anything short of the Great Depression, (2) there are massive stimulus events happening in the U.S. and around the globe, (3) inflation has suddenly disappeared with the commodity bust, (4) interest rates are exceptionally low and will stay that way for some time, (5) housing is still not great but may be showing signs of stabilizing, and (6) we have gotten some big-picture buy signals, in sum, it’s hard to get overly negative.

Please don’t misunderstand. We are not suggesting that things are suddenly hunky dory. We are not saying that the credit crisis is fixed or that banks are about to freely lend again. We are not even suggesting that a new bull market is about to begin. We are simply reminding everyone (but mostly ourselves) that there is a decent chance that it just might be time to go the other way for a while. Or at the very least, it might be time to cover those shorts!

Getting to the yesterday’s stock market action (finally), in short, the 243 point pullback was a necessary evil. It most certainly wasn’t any fun, and the news flow was once again painful, but it did take some of the froth out of the upside move. And unless we break down from here, we’ll call yesterday’s action an overbought pullback on light volume. Or in other words, just what the doctor ordered after a two-day 7% jaunt. And yes, I most certainly DO have my fingers crossed on this one.
Turning to this morning, there is no economic data to review before the bell. On the news front, be on the lookout for the House hearings on the TARP as there is likely to be a lot of mudslinging and finger pointing on how the TARP has been handled.

But, in the early going at least, stock futures are cheering the apparent deal to bail out the auto makers. While details are still being hammered out, it appears that the bridge loans will come from money already allocated to the Energy Department and will be overseen by an “Auto Czar.” The Czar will coordinate the restructuring of the companies with labor, banks, shareholders, etc. and will be forced to send the companies into Chapter 11 if agreements cannot be met by March 31st.

Running through the rest of the pre-game indicators, the major overseas markets are mostly higher with London being the lone ticker in the red. Crude futures are higher with the latest quote showing oil trading up $1.88 to $43.95 On the interest rate front, we’ve got the yield on the 10-yr currently trading at 2.70%, the yield on the 3-month T-Bill is at 0.005%, and overnight LIBOR is at 0.13%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a bit of a rebound at the open. The Dow futures are currently ahead by about 100 points; the S&P’s are up about 10 points, while the NASDAQ looks to be about 16 points above fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Electronic Arts (Nasdaq: ERTS) – Downgraded at Bank of America, Citi, Removed from Conviction Buy list at Goldman
Nike (NYSE: NKE) – Downgraded at Bank of America
Bristol-Myers (NYSE: BMY) – Upgraded at Citi
Capital One (NYSE: COF) – Initiated Hold at Citi
Discover Financial (NYSE: DFS) – Initiated Hold at Citi
American Express (NYSE: AXP) – Initiated Sell at Citi
MetLife (NYSE: MET) – Estimates reduced at Deutsche Bank
AT&T (NYSE: T) – Initiated Outperform at Friedman Billings Ramsey
Verizon (NYSE: VZ) – Initiated Outperform at Friedman Billings Ramsey
Kimberly-Clark (NYSE: KMB) – Removed from Conviction Buy list at Goldman
BJs Wholesale Club (NYSE: BJ) – Downgraded at JP Morgan
New York Times (NYSE: NYT) – Estimates reduced at JP Morgan
Wells Fargo (NYSE: WFC) – Downgraded at Merrill
Apple (Nasdaq: AAPL) – Target reduced at Morgan Stanley
FMC Technologies (NYSE: FTI) – Downgraded at UBS
Knight Transportation (NYSE: KNX) – Downgraded at UBS, Target reduced
Heartland Express (Nasdaq: HTLD) – Downgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: T, VZ

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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