David Moenning's Daily State of the Markets: 9/9

An End To The Misery?

Here’s a link to listen to an Audio Version of the report

As we’ve been reporting, the bulls received a shot in the arm this weekend when Hank Paulson announced that the government was stepping in to take the reins of Fannie Mae (FNM) and Freddie Mac (FRE). Stocks initially celebrated wildly around the globe as the takeovers removed a great deal of uncertainty from the market. But, in the U.S., some traders were not sure the move changed much of anything in the big picture and stocks struggled a bit midday before rallying into the close.

Although there are plenty of people up in arms over the government’s move because it doesn’t exactly fit in with our free market society, the bull camp argues that the takeover is a net positive as it should help mortgage rates to finally come down a bit. The bottom line here is lower rates will go a long way toward helping with the market’s other macro problems, namely the housing decline and the economic slowdown.

As you are no doubt aware, although Bernanke & Co. have cut rates something like seven times since the middle of 2007, mortgage rates have stayed high due to the capital crisis experienced by the banks. In short, instead of capital being available for loans, it has been tied up covering or offsetting the declining value of mortgage backed securities. Therefore, lending activity has slowed to a crawl.

But, as we’ve opined, with the paper from Fannie and Freddie now becoming the equivalent of treasury securities, bank balance sheets have instantly improved. I know that we covered this concept yesterday, but it is important to understand that this, when coupled with the spread available to banks right now, means that lending activity should begin to pick up soon.

While it is true that the takeover Fannie and Freddie doesn’t do much to impact the global slowdown, you do have to admit that the move dampens one of the bears’ major themes – the threat of a financial catastrophe. And with the commodity-driven inflation theme no longer as compelling as it was just a couple of months ago, the bulls are suggesting that the bear camp might be running out of ammunition.

Does this mean that we’ll see an end to the miserable stock market action sometime soon? Frankly, the bailout of Fannie and Freddie doesn’t cure all the market’s ills. However, in light of the fact that the stock market tends to be a discounting mechanism of the future, the bulls can be heard suggesting that we’ve seen the worst of the bear market. But I probably don’t need to remind you that we’ve heard this before.

Turning to this morning, once again we don’t have any economic data to review before the bell. On the news front, the Korea Development Bank has announced that it has ended its talks to invest in Lehman (LEH).

Running through the rest of the pre-game indicators, the foreign markets are mixed with Asian markets not so sure about the Fannie/Freddie deal while European markets are higher. Crude futures are moving down with the latest quote showing oil trading lower by $1.54 to $104.80. Interest rates are a smidge higher with the yield on the 10-yr currently trading at 3.68%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a modestly positive open. The Dow futures are currently ahead by about 20 points; the S&P’s are up by about 3 points, while the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Convergys (NYSE: CVG) – Estimate increased at Bank of America
Monster Worldwide (Nasdaq: MNST) – Estimates and target reduced at Bank of America
Manpower (NYSE: MAN) – Estimates and target reduced at Bank of America
Kimberly Clark (NYSE: KMB) – Upgraded at Citi
TW Telecom (Nasdaq: TWTC) – Downgraded at Citi
TD Ameritrade (Nasdaq: AMTD) – Downgraded at Credit Suisse
Toll Brothers (NYSE: TOL) – Downgraded at Credit Suisse
KB Home (NYSE: KBH) – Downgraded at Credit Suisse
Pulte Home (NYSE: PBH) – Downgraded at Credit Suisse
DR Horton (NYSE: DHI) – Downgraded at Credit Suisse
Entergy (NYSE: ETR) – Upgraded at Goldman
Gartner (NYSE: IT) – Downgraded at JP Morgan
Goldman Sachs (NYSE: GS) – Estimates reduced at JP Morgan
Wachovia (NYSE: WB) – Downgraded at Merrill
Procter & Gamble (NYSE: PG) – Downgraded at Merrill
UST Inc (NYSE: UST) – Upgraded at Morgan Stanley
Best Buy (NYSE: BBY) – Downgraded at Piper Jaffray

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

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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