| TSG Weekly Market Watch December 14, 2007 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 16 December 2007 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending December 14, 2007Topics Discussed This Week:
Last two months…
Yet another shoe drops…It was back to all-red for the major indexes this week with emerging markets followed by the Dow Transports then Russell 2000 taking the worst hit. Not exactly what investors who were hoping for the Christmas rally to come early had in mind and the situation was not helped by news Tuesday that the Fed was only cutting the Fed funds and discount rates by 25 basis points. More bad news that beleaguered Citigroup was downgraded again by Moody’s because the rater expects continued losses at the world’s largest bank (and SIV manager) hit markets Friday. Both pieces of news are interesting. Investors have made in clear that they have zero concern for inflation preferring to keep the rally train going at all costs. But Friday’s news is bad for both Citigroup and the banking world for a number of reasons. Not only does it cast more intense light on off-balance sheet cockroaches courtesy of its complex derivatives that seem to have no end of troubles, it puts Citigroup’s treasured 7% dividend at risk. If this gets cut, it will be negative news for Citi and banking sector stocks. As I understand it, the problem centers on the estimated $49 billion in structured investment vehicle (SIV) assets that it may have to bring unto its books which could seriously threaten not only the bank’s first tier bank status, but cut the cash to total asset ratio necessary to function as a major bank fomenting further credit downgrades. The speed at which the credit situation has deteriorated is something no one thought possible just a few months ago in part because no one but those few who created these SIVs knows at what point they effectively become worthless. This development should also give pause to those who believed comments by Countrywide Financial management that their Q3 losses would magically reverse in Q4 based on the expectation for a rebound in the housing and mortgage market. Technically SpeakingLeaders drop for first time in four weeksThis week, Dan Zanger’s market leaders as of his Sunday newsletter fell 1.3% compared to - 2.1% for the Dow Industrials, -2.4% for the S&P500, -2.6% for the Nasdaq and -4.7% for the Dow Transports. We will track his Sunday picks from now on since they provide a more realistic idea of market direction for the week ahead than his mid-week picks that he changes if the market reverses during the week. This is evident on Monday when his picks moved higher but then his stocks broke down hard on Tuesday and Friday. His picks this week included past favorites Apple (AAPL), First Solar (FSLR), Intuitive Surgical (ISRG), Solarfun Power (SOLF), LDK Solar (LDK), Amazon (AMZN), Dryships (DRYS) as well as Sunpower Corp (SPWR) and United Therapeutics (UTHR). Although his leaders have moved higher for the last three weeks that came to an end this week which has bearish implications for the wider market.
Figure 1 – Weekly performance of Zanger’s market leaders compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX) and Nasdaq Composite (IXIC). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com. Weekly trading volumes were below average for the S&P500, Dow Industrial Average and Nasdaq Composite as stocks moved lower. However, the Dow Transports again was the hardest hit and remains in a downtrend that began in late July. Meanwhile, with the exception of the Russell 2000 that has broken below its lower 2-standard deviation trend channel, the other indexes are still technically in an uptrend and it is too early to say that the bear market has started, even though it may feel like it at times. Volatility settled back a little more again this week as the Market Volatility Index (VIX) closed at 23.27 up from 20.85 last week and the volatility chart over the last four months looks like the ECG of an over-excited athlete. With each jolt of negative financial or credit news, the VIX goes berserk in a wild display of investor nervousness. Even as Dr. copper, lead and oil have weakened, the 17 commodities represented by the NYFE CRB Index surged yet higher again ending the week at 465.94 from 460.16 last week and 451.26 two weeks ago. This index is now above its upper 2-standard deviation trend channel. Gold struggled again this week dropping down to $798.10.oz down from $800/oz. no doubt due to the recent strength in the dollar. Meanwhile, the recovery of the U.S. Dollar Index gathered more momentum this week closing at 77.45 up from 76.34 and 75.07 three weeks ago despite of the fact that the Fed dropped both the Fed funds and Discount rates 25 basis-points this week. Oil held more or less steady this week as the NYMEX crude oil (continuous) contract ended the week at $91.55/bbl up from $88.28 last week but still well off its weekly high of $98.18/bbl three weeks ago. The MSCI Emerging Market Index ETF (EEM) took the biggest hit of all the major indexes this week dropping to 149.69 from 160 last week. This suggests that emerging markets are under increasing market strain. This week, borrowers got some good news as the U.S. prime bank rate dropped to 7.25% thanks to a cut in the discount rate while the 3-month London Interbank Offered Rate also fell to 4.966% from 5.14% last week. LIBOR is used in computing approximately 90% of mortgage rates so an important number to watch. Freddie Mac mortgage rates ranged from a high for the 30-year fixed mortgage of 6.11% (up from 5.96% last week) to a low of 5.5% (up from 5.46% last week) for the one-year adjustable rate (ARM). EarningsQ3-07 – An earnings write-offAnother 52 companies reported Q3-07 results this week bringing the total to 4161 companies that have reported as this earnings season winds to a close. Earnings improvements held steady at -20% versus Q3-06 (from -19% four weeks ago). This compares to an average earnings improvement of +13% for Q2-07. This week the financials group earnings improvements held steady at -28% with a total of 861 companies reporting (from -27% two weeks ago) which is negative given that financials have a habit of leading the broader market. One more quarter of negative earnings growth and we will have an official corporate earnings recession. Economic ReportsHere are the reports we were following this week. Pending home sales rise for second month
Chart 1 – Pending homes sales, which are contracts for sales that are firm but that have not close yet, increased 0.6% in October according to the National Association of Realtors.
Chart 2 – This chart more accurately depicts the sales picture and shows that pending home sales are off 18.4% from where they were in October 2006 and off 32.4% from their peak in August 2005. Trade gap narrowing
Chart 3 – Thanks to a weaker dollar, the trade gap continues to decline hitting -$57.8 billion in October, up from -$56.45 in September.
Chart 4 – Inflation is beginning to creep in to even the Fed’s re-engineered indicators (re-engineered to show the results desired) which means they may have to re-engineer them again. Import prices jumped 2.7% in November, the Producer Price Index (PPI) rose 3.2%, the November Consumer Price Index (CPI) jumped 0.8% and November retail and food sales index (ex-autos) was up 1.8% according to reports this week. It’s more evidence that a falling dollar is indeed inflationary contrary to what the talking heads on Wall Street and Capital Hill would have us believe. Next WeekHere are the reports we’ll be watching next week.
SynopsisHow much worse can it get?The last thing markets needed this week was more bad news from Citigroup on structured investment vehicles. (Isn’t it more than a little ironic that the acronym adopted years ago was in retrospect so prophetic? Structured investment vehicles were nothing more than giant sieves through which their creators sifted money from hapless investors.) If the world’s largest bank and SIV pioneer is in trouble, it makes you wonder how much mortgage doodoo other less visible banks have still to reveal. This credit crisis is anything but contained on this side of the Atlantic (or Pacific for that matter). Remember reading about the lines around the block in Britain last month of those who wanted to get their money out of Northern Rock? An article in Financial Times this week heralded that British government is drawing up plans to nationalize the bank highlighting just how quickly this financial crisis has escalated (see ‘Northern Rock’ article below). This article came on the heals of another FT piece on December 13 entitled ‘Need for action before bubble bursts’ (see article below) in which Paul Tucker, head of markets at the venerable Bank of England, highlighting the British talent for understatement opined that it was “distinctly uncomfortable” for the world’s central banks to simply mop up the mess after a bubble burst without acting to prevent the trouble in the first place. It was a highly visible and very public denouncement of ‘Bubble King’ Alan Greenspan’s incredible lethargy in raising interest rates back in 2004-06 – action (or at least lack of which) that is credited with creating the global asset bubble through which we now must suffer. Ben, are you listening? Market summaryIt is always interesting how quickly general market sentiment can turn and this week is a clear example of this. We will be watching market action Monday to see if Friday’s meltdown has follow-through. This continues to be a risky environment and those not in possession of iron-clad coveralls (to protect their posteriors) and unlimited capital, would be well advised to wait for calmer waters before wading in on the long side. Stories of interest this week… Moody's cuts Citi debt as subprime fallout spreads Need for action before bubble bursts – FT Northern Rock nationalisation threat – FT U.S. Housing Crash Will Deepen in 2008 After Record Drop ------------------------------------------------------------------------------------------------------ If you find this newsletter insightful, please feel free to forward this newsletter and share it with a friend (or simply have them opt-in free from our home page http://www.tradesystemguru.com to be added). DisclaimerTradeSystemGuru.com obtains information from sources deemed to be reliable; |
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