David Moenning's Daily State of the Markets: 12/23

Even Santa Gets Downgraded

You know it’s been a tough year when one of the few things you can count on in this business – the Santa Claus Rally – gets blindsided by analysts deciding to pour on the downgrades at the last minute so as to, in some strange way, appear to have been right during one of the biggest market debacles in history.

Monday’s dive in the Dow was sponsored by your local car company. And this time it didn’t matter whether you were a dyed-in-the-wool, homeland lovin’ GM supporter or if you prefer your automobiles to come from the land of the rising sun, because both General Motors (GM) and Toyota (TM) had a hand in yesterday’s completely un-festive action.

Although there did appear to be some holiday tidings early on, thanks in no small part to the Chinese continuing to jump on the rate-cut bandwagon, by the time the lunch hour ended, things had turned ugly. Part of the problem was Toyota had announced they were slashing their earnings estimates for the second time in six weeks. While this hardly sounds like news these days, digging into the report was a bit of an eye-opener.

It turns out that Toyota cut their earnings estimate to just ¥50 billion for the fiscal year ending March 31st. While that sounds like a decent chunk of change regardless of the currency you might be tallying, the problem is the original estimate for the year was in the vicinity of ¥600 billion. And then when you factor in the fact that the company made ¥1.7 trillion the year before, you suddenly get a feel for just how bad this global slowdown is becoming.

Turning to GM, while this country’s largest car maker is fresh off its “Bridge to Obama” victory, the stock slid -21.6% yesterday in response to Credit Suisse downgrading the company to an "underperform" rating from "neutral." Frankly, I’m not sure which is more disturbing; the fact that a highly paid analyst is just now dropping the rating on GM or the fact that the stock actually tanked on this tardy call.

The Credit Suisse analyst said that GM could still find itself in a bankruptcy situation – which again isn’t exactly cutting edge analysis. However, the report went on to discuss that the shareholder could easily be wiped out once the new government gets in there and starts tinkering with a new bailout plan.

As if that wasn’t enough, there was also a great deal of chatter about the next round of hedgie redemptions in response to Bernie Madoff making off with $50 billion. In short, the thinking is that the woes in hedge-fund-land are likely to continue as people begin to rethink the overall safety of this largely unregulated asset class.

But on the surface at least, things didn’t end up too badly as a mad rally in the last 20 minutes kept the losses hardly noticeable on the Dow. And while the declines in the NASDAQ and S&P were more like 2%, the moves didn’t do any real damage to the charts. So, we will move forward in the hope that Santa might FINALLY reach his destination this year.

Turning to this morning, the final numbers for the third quarter’s GDP here in the U.S. came in unchanged and in line with expectations as the economy’s output shrank by -0.5%. The Price and Core PCE Indices – both of which are measures of inflation – both came in below consensus expectations and Personal Consumption was also, not surprisingly, weaker than expected.

Looking ahead, at 10:00 am Eastern, we’ll get the University of Michigan’s Confidence Index and the report on Existing Home sales.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region with Asia down and Europe up. Crude futures are lower with the latest quote showing oil futures trading off by $0.10 to $39.81. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.20%, the yield on the 3-month T-Bill is at 0.03%, and overnight LIBOR is at 0.12%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are now pointing to a quiet open. The Dow futures are currently ahead by about 50 points; the S&P’s are up about 4 points, while the NASDAQ looks to be about 2 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Red Hat (NYSE: RHT) – Reported $0.24 vs. $0.17
TIBCO Software (Nasdaq: TIBX) – Reported $0.23 vs. $0.19

Today’s Earnings Before the Bell:

American Greetings (NYSE: AM) – Reported $0.20 vs. $0.44

News, Upgrades/Downgrades/Brokerage Research:

Western Digital (NYSE: WDC) – Downgraded at Argus Research
FirstEnergy (NYSE: FE) – Downgraded at Bernstein
Zions Bancorp (Nasdaq: ZION) – Estimates reduced at Citi
Interpublic Group (NYSE: IPG) – Estimates reduced at JP Morgan
Omnicom Group (NYSE: OMC) – Estimates reduced at JP Morgan
Ford (NYSE: F) – Moody’s downgrades corporate family debt rating
Axsys Technologies (AXYS) – Upgraded at Morgan Keegan
Covance Inc (NYSE: CVD) – Initiated Buy at Piper Jaffray
Starwood Hotels (NYSE: HOT) – S&P downgrades corporate credit rating
WYNN Resorts (Nasdaq: WYNN) – Estimates reduced at Thomas Weisel
Caterpillar (NYSE: CAT) – Estimates reduced at Wachovia

Here’s wishing you and yours a joyous holiday season

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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