| TSG Weekly Market Watch April 11, 2008 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Saturday, 12 April 2008 | ||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending April 11, 2008Topics Discussed This Week:
Quote of the week – “Waiting for a recession to tell you when to sell stocks is about as handy as having a pocket in your underpants.” Garry Shilling (see Gary’s most recent Bloomberg interview below). GE results confirm it – Street still way too optimistic on credit crunch outcome Monday – It seems the continued weakness in earnings has suddenly dawned in the minds of investors in spite of the fact that there were growing signs months ago. But the Street is still bullish as evidenced by the fact that the Dow ended in positive territory if only just barely Monday on news of a $5 billion injection to shore up capital for Washington Mutual. Not surprisingly Alcoa, the first out of the earnings season gate this week reported weaker than expected earnings causing the stock to drop 4% on the day. Why investors discounted this news and instead interpreted the WaMu news as good is beyond me… Tuesday – The Dow fell 36 points Tuesday partly due to disappointment on Alcoa news and increasing earnings jitters. The greater than expected drop in pending home sales didn’t help (see below). Wednesday – It was a good day for traders long oil but bad for the economy as oil futures surged to another record causing the Dow to slide 49 points. Thursday – After four tough days, the Dow rose 53 points which was more relief rally than based on positive fundamentals although there was some positive earnings outlooks from Wal-Mart and Dupont. That fact that crude dropped three-bits also helped. Friday – But then the deteriorating earnings situation finally came home to roost as GE recorded a 5.8% drop in first quarter net income. The stock dropped 13% on the day amputating roughly $47 billion from its market cap in one day for the biggest single-day drop for the stock in 26 years. The Dow fell 257 points. Technically SpeakingBut leaders hold on Dan Zanger’s Sunday picks again led the pack but instead of the 9% gain registered last week, they were barely in positive territory after the big sell-off Friday. Dan and his group of traders have been enjoying some very exhilarating rides on his high beta stocks and he remains optimistic that the game will again come alive this coming week. Dan’s 13 Sunday picks again included Transocean (RIG), Research in Motion (RIMM), MasterCard (MA), Mercadolibre (MELI), Intuitive Surgical (ISRG) as well as solar winners First Solar (FSLR), SunPower (SPWR). Back on the list are fertilizer flyers Potash (POT), CF Industries (CF), Mosaic (MOS) as well as Southern Copper (PCU) and Apache Corp (APA).
Figure 1 – Weekly five-day 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. Volumes on the NYSE again dropped for the fifth consecutive week but since this week it was lower negative volume that is actually a good thing. Nasdaq volume was also lower than last week. Meanwhile, the MSCI Emerging Markets ETF (EEM) took a break closing at 139.34 down from 140.77 last week. Volatility remained contained this week as the Market Volatility Index (VIX) ticked up to 23.46 from 22.45 last week, still well off the 25.76 two weeks and 31.16 four weeks ago. The 17 commodities that make up the NYFE CRB Index continued to rise ending the week at 537.81 up from 527.22 last week and 523.80 three weeks ago. Gold rebounded this week hitting $927.60 on the 100oz continuous contract up from $917.90 last week. Gold remains in its strong seasonal performance period between the end of January and end of June. The dollar weakened again this week as the U.S. Dollar Index fell to 71.80 from 72.02 last week. And after the NYMEX crude oil continuous contract remained above $100 for the seventh consecutive week closing at $109.90/bbl from $104.90 last week. This week the Fed funds target rate held at 2.25%. The 3-month London Interbank Offered Rate (LIBOR) slid slightly to 2.7131% (from 2.7275% last week and 2.6975% two weeks ago) showing that commercial credit markets remain tight. Freddie Mac mortgage rates held steady at 5.88% from last week (and from 6.13% three weeks ago) for the 30-year fixed mortgage while the rate slid to 5.18% (from 5.19% last week and 5.24% two weeks ago) for the-year adjustable rate (ARM). All the liquidity being pumping into financial markets has yet to filter down into lower mortgage and credit costs for the public. Earnings A weak start to Q1-08 reporting season It was the first week of earnings reporting season and with a total of 421 companies having reported, earnings fell 17% over the same quarter the year before. This compares to a drop of 57% for Q4-07 with a total of 3900 companies reporting, a 21% drop with 4205 companies at the end of Q3-07 reporting season and a 13% jump in Q2-07. The fact that analysts have been guilty of generating overly complimentary forecasts became clear this week with the big GE disappointment. Economic ReportsIt was a relatively lackluster week for economic reports this week as the beginning of earnings reporting season stole the show. This may not be such a bad thing given that investors are probably not too keen to hear anymore bad news. And here are the charts we are following.
Chart 1 – On Monday, we learned that even as consumer sentiment has been falling, credit continues to swell. The problem is that we don’t know whether consumers are borrowing increasing amounts to buy stuff at the mall or pay monthly bills. Based on the current trend is is less of the former and more of the latter.
Chart 2 – Then on Tuesday, we learned that February pending home sales dropped 1.9%, more than expected since January. Here is the year-over-year chart showing that this metric has fallen 23% since February 07 and is down 34% from the peak in August 2005. Next Week Here are the reports we’ll be watching. - Monday, March Retail Sales (previous -0.6%) and ex-autos (previous -0.2%). - Tuesday, March Producer Price Index (previous 0.3%) and PPI ex-food & energy (previous 0.5%). February Treasury International Capital Flows (previous: $47.2 billion). April NAHB Housing Market Index (previous 20). - Wednesday, March Consumer Price Index (previous 0.2%) and CPI ex-food and energy (previous 0.2%). March Housing Starts (previous -0.6%), Federal Reserve's Beige Book. - Thursday, April Philadelphia Fed Business Index (previous -17.4%). Synopsis So are investors being unrealistically optimistic? There is little doubt that the big profit miss by GE was a reality check for analysts and investors alike. Stocks prices have remained resilient in the face of worsening credit news and if hopes for improving earnings have been the reason for this ebullience, it is misguided. This begs the obvious question. If credit is continuing to tighten and earnings deteriorate, what is keeping stock prices from falling? Washington Mutual’s $5 billion bailout news Monday that buoyed markets turned negative by Friday when it was learned that the company’s losses would be wider than estimated will not impress the Street. It prompted at least one broker – Goldman Sachs – to recommend selling WaMu shares short. This turn of events speaks volumes. I don’t remember ever hearing a major brokerage firm issuing such a call. Sell maybe but sell short? WaMu shares have fallen more than 70% is the last 12 months and this unusual recommendation has the potential to decimate the company’s market cap. But even with the melt and bad news Friday, charts of the major indexes look surprisingly bullish. As we see from Figure 2, although the S&P500 suffered an 18% peak-to-trough drawdown between late October and January 20, it has held its ground surprisingly well. Given that this has occurred on lower than average volume is even more bullish.
Figure 2 – Weekly chart of the S&P500 Index showing peak in October and drop to January 20 but it is still holding above support. Chart by GenesisFT.com The question remains, if negative earnings news continues to build, how much longer can stocks be expected to hold their ground? Big drops on Fridays are a concern since it indicates fear of holding stocks over the weekend in anticipation of more bad news. And given the earnings news we've been getting, that is a very realistic worry... Stories of interest this week… Schwab Asks Who Needs Analysts After Biggest Flub WaMu Estimates Cut by Goldman, Short Sale Recommended GE Says Profit Fall, Stock Suffers Biggest Drop Since 1987 IMF Says Financial Losses May Swell to $945 Billion Gary Shilling Bloomberg Interview April 11 Lenders Swamped By Foreclosures Let Homeowners Stay Bank of England May Cut as Mortgage `Panic' Spreads New Zealand Business Confidence Slumps to 33-Year Low Iceland Obsesses Over Currency as Duck Breasts, Fuel Costs Soar Fed's New Loan Auctions Failed to Reduce Premiums, Study Finds U.S. Economy: Consumer Sentiment Drops to 26-Year Low ---------------------------------------------------------------------------------------------------------------------- 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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