David Moenning's Daily State of the Markets: 3/17

Are There Buyers Waiting?

After four and one-half days and nearly 850 points of gains, it appears that the bears had finally seen enough yesterday afternoon. And although nobody in their right mind was expecting the “master trust” data from American Express (AXP) to have been positive, it was the announcement that the credit card company’s net charge-offs came in a full percentage point higher than expected (9.3% vs. expectations for 8.3%) that opened the door for the bear camp.

Stocks initially rallied yesterday morning on the back of the warm fuzzies provided by Ben Bernanke’s prime time pitch to the public. As I’m sure you’ve heard by now, the Fed Chairman is of the mind that if the banking crisis can be arrested, then the economy should recover sooner rather than later.

And speaking of the banks, the Financial Accounting Standards Board – or FASB – lent the bulls a hand (er, I mean hoof) yesterday by publically stating that there might be some official wiggle room on the whole mark-to-market issue. In case staying on top of this stuff isn’t your full-time job, the idea of relaxing the mark-to-market rules would be a boon to the big banks that have already written down the value of the toxic assets still on their books.

Speaking of toxic assets, we got word yesterday that Mr. Geithner’s plan to create public/private investment partnerships (aka the P-PIPs) designed to compete for the privilege of buying up the very assets at the epicenter of this mess was approved by President Obama. Word is that we should get an official announcement this week or next.

So, let’s see where this leaves us on the topic of the banking crisis, which, as Mr. Bernanke pointed out last night, came VERY close to causing a collapse of the banking system. First, let’s remember that the big banks are making money on the “borrow at 0% and lend at 5%” game the Fed has set up for them. Then it looks like FASB is going to call a timeout on the process of writing down toxic assets, which ought to buy enough time to allow the P-PIP’s to swoop in and buy up a bunch of this stuff nobody wants.

If our crystal ball is working at all, this combination should mean that we’ve seen the nadir in the banking crisis. And if this is indeed the case, then as Mr. Bernanke pronounced in prime time, an economic recovery should commence yet this year.

As you might have concluded, there is indeed a smidge of speculation involved with the above scenario. However, as we opined yesterday, the bottom line is if we start to see improvement in the banking sector, then there may not be much more downside for the stock market to discount.

Reeling things back in to the here and now, yesterday was the start of what the bulls hope will be a dip in the uptrend. Therefore, the tape action over the next couple of days will speak volumes as to what we can look forward to next. The bulls will argue that there are lots of institutional investors looking to “buy the dip.” Yet, on the other side of the aisle, the bears suggest that yesterday’s reversal means the recent bounce is now over.

So, the question of the day is this: Are there buyers of the dip to be found? And while we don’t know for sure (but we’re leaning toward the yes vote) you may want to stay tuned, because this is going to be interesting.

Turning to this morning, we’ve got some more economic data to review in the form of the PPI and Housing Starts. The government reported that the Producer Price Index rose for the second month in a row but came in below expectations at +0.1% vs. +0.4%. The Core rate also showed an increase – but this one was higher than expected at +0.2% vs. +0.1%. Next up, Housing Starts were reported at 583,000 in February, which was higher than the consensus for 450k and Permits also came in a bit better at 547K vs. 510K.

Running through the rest of the pre-game indicators, with the exception of Japan, the overseas markets are down across the board. Crude futures are lower with the latest quote showing oil trading down by $0.26 to $47.09. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.95%, while 3-month LIBOR is at 1.30% and the yield on the 3-month T-Bill is trading at 0.23%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly higher open. The Dow futures are currently ahead by about 15 points; the S&P’s are up by about 3 points, while the NASDAQ looks to be about 7 points above fair value at the moment on an upgrade in Cisco (CSCO).

Stocks “In Play” This Morning:

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

JP Morgan Chase (NYSE: JPM) – Upgraded at BAC/MER
Morgan Stanley (NYSE: MS) – Downgraded at BAC/MER, Estimates reduced at UBS
United Technologies (NYSE: UTX) – Estimates reduced at Bernstein
UnitedHealth Group (NYSE: UNH) – Upgraded at Bernstein
Ensco Intl (NYSE: ESV) – Upgraded at Deutsche Bank
Covance (NYSE: CVD) – Downgraded at Goldman
Molson Coors (NYSE: TAP) – Removed from Conviction Buy list at Goldman
Cisco Systems (Nasdaq: CSCO) – Target increased at Goldman, Added to Conviction Buy list
Best Buy (NYSE: BBY) – Upgraded at Jefferies
Costco (Nasdaq: COST) – Upgraded at Jefferies
Kohl’s (NYSE: KSS) – Upgraded at Jefferies
Lowes (NYSE: LOW) – Upgraded at Jefferies
Target (NYSE: TGT) – Upgraded at Jefferies
Home Depot (NYSE: HD) – Upgraded at Jefferies
Goldman Sachs (NYSE: GS) – Downgraded at Keefe, Bruyette Woods, Estimates increased at UBS General Electric (NYSE: GE) – Estimates reduced at Oppenheimer
Strayer Education (Nasdaq: STRA) – Upgraded at Piper Jaffray
CA Inc (NYSE: CA) – Downgraded at RBC Capital

Disclosure: Mr. Moenning and/or related firms hold long positions in: CA

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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