David Moenning's Daily State of the Markets: 3/6

Probably Not What You Think

Stocks initially fell yesterday on disappointment over the Chinese effectively saying, “Another stimulus? We’re growing at 8% per year – we don’t need another stimulus.” But from there, the move down may not have been simply more of the same… i.e. more concerns about the banks, GM’s viability (did anybody really think they’d avoid bankruptcy?), Obama’s plans for health care, or worries about this morning’s numbers on job losses. No, a big reason for yesterday’s decline probably had more to do with rumors of fund blowups than anything else.

The talking heads on TV spent much of the day yammering on yesterday about the administration’s programs, the lack of confidence, and the “bargains of a lifetime” that are out there right now in some big name stocks (which is probably true unless, of course, they go lower first). And one of my colleagues even joined the chorus by presenting me with a fairly convincing case that GE is a pound-the-table buy right now (something about being able to buy the entire company for less than $2 over the cash in the company’s coffers right now).

However, one of the most important things to remember about the ‘big bears’ is that, in the words of economist John Maynard Keynes, “the market can stay irrational longer than you can stay solvent.” And with word floating around that there was some forced selling going on yesterday, nobody was interested in buying much of anything, regardless of the price.

The talk on the street was that there were funds (note that the word is plural) blowing up yesterday. And while we’re fairly accustomed to hedge funds blowing up – which, in English means that they are being forced to shut down due to performance – we have NOT heard about any “major mutual funds” being forced to sell anything in a while.

In these situations, the problem is simple. Traders on the floor know when ‘forced sales’ are being made. So, if traders know that a big fund is being forced to dump, they are more likely to sell short than you are to buy since Wall Street is not exactly a friendly place when there is money on the line. So, it is our humble opinion that it was the concept of fund blowups that played a big role in yesterday’s shellacking.

To be fair, the ongoing trashing of the banks probably didn’t help the situation yesterday. Moody’s downgraded JP Morgan (JPM) and made some noise about downgrading the credit ratings of Wells Fargo (WFC) and Bank of America (BAC) due to rising credit costs. This resulted in a decline of -11.8% for the BKX, which is off a tidy -57.2% so far this year. (Mr. Geithner, are you watching any of this?)

Turning to this morning, Wells Fargo cut their dividend by 85% to $0.05 from $0.34, but with the stock down -72% so far this year, it is safe to say the news was in the stock.

On the economic front, we’ve got the Employment data everyone has been dreading so, let’s get to the numbers. The Labor Dept. reported that nonfarm payrolls fell by -651,000, which was spot on with the estimates for job losses of -650,000. The unemployment rate came in at 8.1%, which was significantly higher than expectations for a reading of 7.9% and once again, above last month’s level of 7.6%.

While these numbers are bad, the real problem in this report came in the form of revisions to both the January and December numbers. January’s nonfarm payrolls were revised down by 104,000 jobs to -655K and December’s totals were revised to a loss of -681K jobs from -577. This brings the total revisions to an additional 161,000 jobs lost. And from the beginning of the recession in December 2007, the economy has now shed -4.4 million jobs, with 2.9 million of those coming in the last 4 months alone.

Running through the rest of the pre-game indicators, Asian markets were down hard while European Bourses are seeing more modest declines. Crude futures are higher with the latest quote showing oil trading up by $0.59 to $44.20. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.81%, while overnight LIBOR is at 0.32% and the yield on the 3-month T-Bill is trading at 0.20%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly up open. The Dow futures are currently ahead by about 35 points; the S&P’s are up by about 4 points, while the NASDAQ looks to be about 7 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Dillard’s (NYSE: DDS) – Reported $0.31 vs. $0.28
Marvell Technology (Nasdaq: MRVL) – Reported $0.05 vs. $0.00

Today's Earnings Before the Bell:

Ann Taylor (NYSE: ANN) – Reported -$1.03 vs. -$0.55
H&R Block (NYSE: HRB) – Reported $0.20 vs. $0.09

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

Macy's (NYSE: M) – Upgraded at BAC/MER, Added to Conviction Buy list at Goldman
Canadian National Railway (NYSE: CNI) – Initiated Buy at Citi
Norfolk Southern (NYSE: NSC) – Initiated Buy at Citi
Burlington Northern (NYSE: BNI) – Initiated Hold at Citi
CSX Corp (NYSE: CSX) – Initiated Hold at Citi
Union Pacific (NYSE: UNP) – Initiated Hold at Citi
Ciena (Nasdaq: CIEN) – Upgraded at Credit Suisse
Vail Resorts (NYSE: MTN) – Target reduced at Deutsche Bank
Lowe's (NYSE: LOW) – Upgraded at Friedman Billings Ramsey
Genzyme (Nasdaq: GENZ) – Downgraded at Goldman
Rockwell Collins (NYSE: COL) – Upgraded at Goldman
Amgen (Nasdaq: AMGN) – Removed from�Buy list at Goldman
Navistar (NYSE: NAV) – Removed from�Buy list at Goldman
PACCAR (Nasdaq: PCAR) – Added to�Sell list at Goldman
Quest Diagnostics (NYSE: DGX) – Added to�Sell list at Goldman
CIGNA (NYSE: CI) – Estimates reduced due to Obama health care initiative
Coventry Health Care (NYSE :CVH) – Estimates reduced due to Obama health care initiative
Health Net (NYSE: HNT) – Estimates reduced due to Obama health care initiative
Humana (NYSE: HUM) – Estimates reduced due to Obama health care initiative
UnitedHealth Group (NYSE: UNH) – Estimates reduced due to Obama health care initiative
WellPoint (NYSE: WLP) – Estimates reduced due to Obama health care initiative
Apple (Nasdaq: AAPL) – Estimates reduced at JP Morgan
Harmony Gold (NYSE: HMY) – Downgraded at JP Morgan
Gold Fields (NYSE: GFI) – Upgraded at JP Morgan
Family Dollar (NYSE: FDO) – Upgraded at JP Morgan

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

Note: All earnings reports compared to Reuter’s consensus estimates

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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.


David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]

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