Daily State of the Markets 
Monday Morning – April 19, 2010  

Good morning. It was bound to happen. After six straight days of gains in a market that had been up for six straight weeks, the stock market had become extremely overbought and sentiment had gotten entirely too one-sided. As such, the bears were bound to come up with a raison d’être at some point. And at 10:38 am eastern time on Friday, the bears found exactly what they were looking for.

By now, you are likely aware of the fact that the SEC charged Goldman Sachs (GS) with fraud on Friday morning. The SEC alleges that Goldman failed to disclose the involvement of hedge fund manager John Paulson in the design of a sophisticated subprime mortgage security.

Why should anyone care if one of Goldman’s clients was involved in the design of a private placement product for sophisticated institutional investors, you ask? In short, Paulson made a cool $20 billion for his hedge fund by betting AGAINST the housing market and the financial sector. Thus, in effect, the SEC argues that this particular product was actually designed to fail. And fail it did when the credit crisis got rolling. Thus, the SEC figures that the investors on the other side of the trade might have appreciated knowing who helped put this thing together.

If you’ve ever dealt with the SEC (I’ve been through 4 regularly scheduled SEC audits over the years) you will know that disclosure is everything to this particular regulatory body. In essence, you can say and do almost anything (assuming it is legal, of course) as long as you disclose the dickens out of what you are doing or saying to investors. Thus, we can certainly understand the SEC’s point on this one.

The fact that the stock market responded negatively to the news was not at all surprising. In short, the market, like the synthetic CDO involved in the Goldman case, was set up to fall. We can argue until the cows come home about the validity of the market getting tagged for big losses on the back of a problem at a single company. However, the key point here is that after an impressive nine-week run, the bears may have FINALLY found a reason to be – at least for a while, anyway.

Our furry friends will argue that the charge against Goldman is the government’s latest effort to attack the banks and that there will undoubtedly be more of this to come. The bears also contend that the situation will cause uncertainty and create a lack of confidence about what to expect next – neither of which tends to be very good for the market.

On the other side of the aisle, the bull camp argues that this is an isolated incident that is likely to be contained. We shall see.

Turning to this morning… We don’t have any economic data to review before the bell, but we will get the report on the LEI at 10:00 am eastern. On the news front, it looks like Goldman’s troubles are long from over as both the UK and Germany are calling for investigations into the matter. In addition, the SEC has announced that they are looking deeper into bad mortgage deals. So, with markets around the globe down hard in reaction to the Goldman news, it appears that we are in for some more selling this morning.

Running through the rest of the pre-game indicators, the major overseas markets were down across the board. Crude futures are off $2.14 to $81.10. On the interest rate front, the yield on the 10-yr is currently trading at 3.77%. Next, gold is down $3.80 to $1133.10 and the dollar is lower against the Yen but higher against the Euro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 30 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 7 points below fair value at the moment.

Earnings Before The Bell



Citi C $0.14 $0.00
Halliburton HAL $0.28 $0.25
Hasbro HAS $0.26 $0.16
Eli Lilly LLY $1.18 $1.11
M&T Bank MTB $1.15 $1.00

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary


F5 Networks (FFIV) – Target increased at Canaccord Adams Lexington Realty Trust (LXP) – FBR Capital Universal Health (UHS) – Goldman Forest Oil (FST) – Goldman Pioneer Natural (PXD) – Target increased at Goldman Plains Exploration (PXP) – Target increased at Goldman AirTran (AAI) – Target increased at Goldman Continental (CAL) – Target increased at Goldman JetBlue (JBLU) – Target increased at Goldman UAL (UAUA) – Target increased at Goldman US Air (LCC) – Target increased at Goldman Allergan (AGN) – Goldman Endo Pharmaceuticals (ENDP) – Goldman T. Rowe Price (TROW) – JPMorgan Delta Air Lines (DAL) – JPMorgan Southwest Air (LUV) – JPMorgan Lincoln Electric (LECO) – Piper Jaffray JA Solar (JASO) – ThinkEquity Suntech Power (STP) – ThinkEquity Sprint Nextel (S) – Wells Fargo McDonalds (MCD) – Target increased at UBS Yum! Brands (YUM) – Target increased at UBS Starbucks (SBUX) – Target increased at UBS Burger King Holdings (BKC) – Target increased at UBS Wendy’s Arby’s (WEN) – Target increased at UBS Darden Restaurants (DRI) – Target increased at UBS Brinker Intl (EAT) – Target increased at UBS


First Horizon National (FHN) – BofA/Merrill Safeway (SWY) – Credit Suisse Goldman Sachs (GS) – Removed from Top Picks List at FBR Capital Lifepoint Hospitals (LPNT) – Goldman Medicis (MRX) – Goldman King Pharmaceuticals (KG) – Goldman Warner Chilcott (WCRX) – Target reduced at Goldman Janus Capital (JNS) – JPMorgan Alaska Air (ALK) – JPMorgan Airgas (ARG) – Piper Jaffray Calgon Carbon (CCC) – Piper Jaffray Continental Resources (CLR) – UBS

Long positions in stocks mentioned: none

Remember to smile at least once before lunch…

David D. Moenning
Founder TopStockPortfolios.com

For more “top stock” portfolios and research, visit TopStockPortfolios.com


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