| TSG Stock Market Letter February 1, 2008 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Monday, 04 February 2008 | ||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending February 1, 2008TradeSystemGuru.comTopics Discussed This Week:
Rally continuesStocks in the U.S. posted their biggest weekly gains in five years as the rate-cut driven rally helped lift stocks across the board. Falling oil prices added even more oomph to transport stocks. Technically SpeakingLeaders head higherFor the second consecutive week, Dan Zanger’s Sunday picks were in positive territory behind the major indexes. And for the second week in a row, the Dow Transports led the pack with a better than 7% gain. His 7 picks this week included Baidu (BIDU), Monsanto (MON), Petro Bras (ADR) (PBR), FirstSolar (FSLR, Apple (AAPL), and Potash (POT).
Major indexes continued to rally led by the Dow Transports. The test of this rally will be the 12,785 level on the Dow Industrials which is currently the next area of major resistance. Similar resistance for the S&P500 is 1405. Volatility settled this week as the Market Volatility Index (VIX) dropped to 24.02 down from above 30 last week. After retracing Monday thru Wednesday the 17 commodities represented by the NYFE CRB Index continued higher to close at 502.26 up from 492.02 last week pushing the index well above its upper 2-standard deviation trend channel for the seventh consecutive week. It was a volatile week for gold. After closing at $930 on Wednesday, the yellow metal dropped to end the week at $913.10 from $910.70 last week. Given the increasing downward pressure on the U.S. dollar thanks to dropping rates, upward pressure on gold should remain. Speaking of the dollar, it dropped this week in the wake of another 50 basis-point cut in the Fed funds rate the U.S. Dollar Index dropped to close at 75.57 from 76.11 last week. The NYMEX crude oil (continuous) contract slid a little more again this week closing at $88.96/bbl from $90.71/bbl last week and $89.92/bbl two weeks ago. While falling oil is good for transports, it is another indication of the weakening economy. This week, the U.S. prime bank rate dropped again to 6.00% thanks to latest Fed funds 50 basis-point cut in the Fed funds rate to 3.0% Wednesday. The 3-month London Interbank Offered Rate (LIBOR) fell in sympathy to 3.095% from 3.3% last week and 3.894% two weeks ago. However, Freddie Mac mortgage rates rose to 5.68% from 5.48% last week the 30-year fixed mortgage while the rate rose to 5.05% for the one-year adjustable rate (ARM) from 4.99% last week. EarningsEarnings still a concernQ4-07 reporting season ended its fourth week as it neared the half-way point. With a total of 1453 companies having reported so far (883 last week), average earnings were down 45% compared to -52% last week). A total of 4205 companies reported Q3-07 results and average earnings fell 21% from the same quarter the year before compared to a 13% jump in Q2-07. Economic ReportsHere are the reports we were following this week. New homes sales and price dive continues Chart 1 – Chart showing month-over-month new home price changes. New homes sales fell 4.7% in December and have fallen 41% in the last year. We again had to go back and revise the last three months due to data revisions. To show you just how these data are month to month, October sales was revised from -0.7% to + 4.6% and November sales revised from -9% to -13%. On a year-over-year basis, median prices dropped 8.3% in October, rose 2.4% in November and fell 10.4% in December!? From their peak in March 2007 when median prices hit $262,600, the price fell to $219,200 in December – a 13.2% drop in nine months. Such wide variations are generally caused by a relatively low number of data points but with 604,000 sales (annual rate) and 42,000 homes sold in December for example, this should not be a problem. But no matter which way you look at the charts, the trend remains strongly negative. According to RealtyTrac Inc., the number of U.S. homeowners entering foreclosure climbed 75% in 2007 from 2006. According to the company, more than 1% of U.S. households were in some stage of foreclosure last year versus 0.58% in 2006. According to Bloomberg, U.S. foreclosures are on track to top 1 million this year as home price declines rival those last seen during the Great Depression.
Chart 2 – A much more reliable and credible metric of the housing market, the Case-Shiller home price index showed in November the home price drops continue to accelerate for their eleventh consecutive month. The 20-City Composite index registered a year-over-year decline of 7.7% while the 10-City Composite posted an 8.4% decline in November. As you can see from the chart, the rate of decline is now greater than it was at the height of the last housing recession in 1991 – when home prices declined for more than three years. “We reached another grim milestone in the housing market in November,” Dr. Robert Shiller said in the most recent release. “Not only did the 10-City Composite post another record [growth rate] low, but 13 of the 20 metro areas, each with data back to 1991, did the same.” Fourteen of the 20 metro areas also recorded their single largest monthly decline on record in November according to Dr. Shiller. Miami was the weakest metro area posting an annual decline of 15.1% followed by San Diego (-13.4%), Las Vegas (-13.2%) and Detroit (-13%). Charlotte NC, Portland and Seattle were the only three areas showing annual price gains. GDP takes hit in Q4
Chart 3 – On Wednesday, the same day the Fed announced another 50-basis point Fed funds rate cut, news was released that the economy grew by a puny 0.6% in Q4-07. It surprised many including Ben Bernanke and it was a huge drop from the final Q3-07 growth rate of 4.9%. Bear in mind, this number will change over time and could potentially be revised for up to 6 months. A growing number of analysts are saying the number in Q1-08 will be negative but few expected the Q4-07 number to be so bad. Did we enter recession last quarter? Only time and more data will tell.
Chart 4 – Analysts were again surprised as non-farm payrolls in January dropped 17,000 for the first drop in more than four years. There were two rays of hope however – first the overall unemployment rate dropped from 5% reported last month to 4.9% and the December non-farm payrolls was revised upward from 18,000 to 82,000. However, this was more than offset by the downward revisions in eight of the last twelve months that removed 332,000 jobs. It was one more nail in the coffin of the “no recession” argument. Since employment and the unemployment rate are lagging and subject to revisions many months later, they are of little value in forecasting a real economic slowing or market turnaround however.
Chart 5 – Construction spending dropped 1.1% in December and spending has fallen 2.3% in the last year. Construction employment dropped 27,000 in January. Since its February 2006 peak, construction employment has fallen 284,000 according to the Wall Street Journal.
Chart 6 – Finally, the ISM number moved back into expansion range if only just barely at 50.7 from a contraction reading of 47.7 in December but the trend remains strongly negative as we see from this chart. Next WeekIt will be much more active next week. Here are the reports we’ll be watching. · Tuesday, January ISM Non-Manufacturing Business Index (previous 53.9).· Thursday, December Pending Home Sales (previous -2.6%), December Consumer Credit (previous $15.5 billion).· Friday, December Wholesale Trade (previous 0.6%).SynopsisStock outlook positive short-termLooks like the capitulation signal we got last week has so far been accurate. The Fed funds rate cuts have had a positive impact on everything from financials to housing stocks. We are cautiously optimistic that in lieu of any more earth shattering negative news on the credit front that this rally has a reasonable chance of continuing assuming that buying volumes remain strong. Stories of interest this week… Wall Street Embraces Government to Avoid Recession Subprime, CDO Bank Losses May Exceed $265 Billion Global Recession Risk Grows as U.S. `Damage' Spreads Shiller of Yale Says U.S. Is in `Historic Housing Bust' (Video) Kerviel Sought Recognition as Star Trader at Societe Generale ------------------------------------------------------------------------------------------------------ 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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