| TSG Weekly Market Watch April 25, 2008 |
|
|
|
| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Saturday, 26 April 2008 | ||||||||||||||||||||||||||||||||||||
|
TSG Stock Market LetterWeek Ending April 25, 2008Topics Discussed This Week: Stocks mired in a trading range…
Quote of the week – “In this crisis, a number of times people have seen a light at the end of the tunnel and it has ended up being a train coming down the tracks,” Credit Suisse Chief Executive Brady Dougan to reporters this week following the company’s announcement of another $5.26 billion write-down (see article ‘Credit Suisse’ below). Mired in a trading range… Monday – Another up and down day for stocks driven by first positive then disappointing earnings news as the Dow slipped 24 points. Tuesday – Oil moved above $119/bbl and the dollar faltered further as the Dow fell 105 points on the day. High oil was the culprit in a quarterly loss for United Airlines causing the stock to fall nearly 40%. Wednesday – Thanks to positive earnings news from techs and Boeing, the Dow tagged on 43 points even though there was also news that consumers were increasingly feeling the pinch. Thursday – The rally continued as financials moved up on hopes that the Fed was done cutting for the time being as the Dow surged another 86 points. Optimism again prompted investors to buy beaten down homebuilder stocks even though housing news continues to be grim. Friday – Crude rose to $118.52/bbl amid a rumor of a tussle between a US and Iranian ships in the Persian Gulf. But in spite of this the Dow ended the day 43 points higher which basically represented the overall weekly gain. Although marginally, it was another winning week thanks largely to earnings relief. Investors had low earnings expectations coming into reporting season and anytime there is an upside surprise, stocks rally. But it was also another week of money managers and brokers ‘talking up their books’ as evidenced by the continual stream of calls of an end in the credit crunch with each new negative revelation (see ‘Miller’ article below). I put it down to that age-old truism that misery loves company. Could it be that pros in losing positions are doing their best to encourage others to join them so they’ll have company? OK when the market is rallying but it is important to beat a hasty exit when conditions turn. Technically Speaking Leaders hang in In his Sunday (April 20) newsletter, Dan Zanger commented on the big moves in his market leaders, many of which are techs but there were fertilizer and energy stocks as well this week. His 16 Sunday picks this week included Google (GOOG), Apple (AAPL), Baidu.com (BIDU), Research in Motion (RIMM), Apache (APA), Mosaic (MOS) and Potash (POT) as well as Agrium (AGU), Mosaic (MOS), Monsanto (MON), CF Industries (CF) plus energy plays Hess Corp (HES), Transocean (RIG), Petro Bras (PBR) and CONSOL Energy (CNX). Back on the list after a hiatus were Amazon (AMZN) and Mastercard (MA).
Volumes on the NYSE and Nasdaq were again lower than average for the sixth week which means that while stocks rose, they did so without much conviction. Volatility continued to fall this week as the Market Volatility Index (VIX) dropped to 19.59 from 23.46 last week. The 17 commodities that make up the NYFE CRB Index continued to rise ending the week at 542.68 from 537.81 last week and remains well above the 2 standard deviation top trendline. Gold fell again this week to $889.50 from $927.60 last week on the 100oz continuous contract. While gold is in its strong seasonal performance period between the end of January and end of June, it continues to show signs of weakness. The dollar spent its seventh week stuck in what looks to be a bearish flag chart pattern that generally implies lower prices ahead. This runs counter to the volume-volatility capitulation spike we observed last week which often accompanies a bottom The U.S. Dollar Index strengthened to 72.79 from 71.80. Crude continued to rock and roll as the NYMEX crude oil continuous contract surged again to close at $118.91/bbl up from $109.90/bbl last week. It was the eighth consecutive week that it remained above $100. This week the Fed funds target rate held at 2.25%. The 3-month London Interbank Offered Rate (LIBOR) moved up to 2.9125% (from 2.7131% last week) showing that commercial credit markets remain tight. LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. According to data company Dealogic, corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR. Rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. Freddie Mac mortgage rates moved up to 6.03% (from 5.88% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) rate rose to 5.29% from 5.18% last week. For all the talk about credit market premiums falling, this has yet to translate to lower mortgage and lending costs for consumers. Earnings Earnings weakness continues This week, it was the third week of Q1-08 earnings season and earnings for the broad spectrum of companies tracked by the Wall Street Journal showed a slight improvement from last week. A total of 1275 companies have now reported (up from 678 companies last week) and average earnings are down 20% from Q1-07. This compares to -22% last week and -17% two weeks ago (421 companies). Looking at past seasons, there was a drop of 57% for final Q4-07 (3900 companies), a 21% drop (4205 companies) for Q3-07 and a 13% jump for Q2-07. What does it mean? For the broad range of companies (as opposed to the cherry-picked companies in the S&P 500) earnings growth turned negative in Q3-07 while S&P earnings growth did not turn negative until February 2008. That the declines for the majority of companies are lessening is good news but it will take more time to see if this is just a temporary reprieve or the end of earnings deterioration. As we are still early in the trend of falling earnings, the latter outcome is highly unlikely.
Chart showing ‘waves’ in year-over-year earnings improvements with Q3-07 improvements turning negative, a trend of which we first became aware in October 2007. Q1-08 season is still young and it is too early to draw any reliable conclusions whether earnings are improving. Economic ReportsIt was a sparse week of economic reports and as anticipated, it was earnings that drove the news bus this week. Here are the reports we were following. Existing and new home sales still falling  Chart 1 – On Tuesday, we learned that existing home sales fell 2% in March on a month-over-month basis and were down 20% from March 2007. But as we see from this chart, the rate of decline has decreased which is good news. While it in no way means we are at a bottom, the rate of sales declines has decelerated at least for the time being. Median prices blipped up to $200,700 in March from $195,900 in February which again while not significant long-term may mean prices are beginning to stabilize for now at least. Since March 2007, median prices have fallen 8% but are down 13% from their peak in September 2006. The inventory of unsold homes also rose to 4.06 million homes, a 9.9 month supply at the current sales rate which will exert more downward pressure on prices. Next Week It’s a busier week this week for economic reports this week. - Wednesday, Q1-08 Advance GDP (Previous 0.6%), April Chicago PMI (previous 48.2). - Thursday, March Personal Income (previous 0.5%), March Personal Spending (previous 0.1%), April ISM Manufacturing Business Index (previous 48.6), March Construction Spending (previous -0.3%). - Friday, April Nonfarm Payrolls (previous -80,000), April Unemployment Rate (previous 5.1%). Synopsis Of election and seasonal cycles… We’ve all heard the expression “sell in May and go away.” Here is a composite chart showing how the S&P500 has performed November thru April (blue) and May thru October (gold). While this strategy has proven somewhat challenging over the last couple of years, the chart shows that since 1950, taking the latter period off would have worked quite well indeed.
Figure 2 – Logarithmic-scaled chart comparing S&P500 Index performance from November through April (blue) and May through October (gold) from ChartoftheDay.com In election years, there are other more powerful forces at work. In Figure 3 we see quarterly performance over the four-year election cycle. It shows that on average the first quarter has been basically flat while the second quarter (April – June) negative. However things begin to pick up as we head into the third quarter, which in the post-election and mid-term years were by far to be the most challenging. In election years, over the last 104 years, the third quarter was slightly positive while in anticipation of a new Administration and the end of uncertainty leading up to the election, stocks performed quite well indeed. This period has historically been the third best performing quarter of the cycle. Can we expect stellar stock performance from October through December this year? This election will be hard-fought if the battles so far are any indication. As it becomes clearer who will take the White House, there will undoubtedly be a massive market sigh of relief. It will then be up to the next President to chart the country through turbulent waters as the housing market continues to challenge and the economy fades. Not the sort of environment for either the faint of heart or the short on experience in dealing with tough economic situations as we head into the traditionally challenging post-election and mid-term years. Stories of interest this week… Bernanke Grapples With Greenspan as Volcker Scorns Fed Bailouts Bondholders Lucky to Get 10 Cents in Looming Defaults Bank of America Net Income Falls 77% on Writedowns Credit Suisse hit by another writedown Bank of England Swaps Bonds to Revive Bank Lending U.K. Rightmove Home Prices Drop on Dearth of Credit Sub-Prime Fallout - £50bn UK offer for mortgage securities Ambac Posts Loss on CDO Writedown, New Business Drop Miller Says Bear Stearns Sale Signaled End of Panic Barack Obama -- known by the company he keeps ---------------------------------------------------------------------------------------------------------------------- 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; |
||||||||||||||||||||||||||||||||||||
| Last Updated ( Sunday, 04 May 2008 ) | ||||||||||||||||||||||||||||||||||||
| < Prev | Next > |
|---|