| TSG Weekly Market Watch August 29, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 31 August 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending August 29, 2008Topics Discussed This Week:
Treading quicksand? While leaders drop Earnings: Over but the crying Home sales & inventories up, prices still falling Scant signs of subprime credit recovery
Last Week
Quotes of the week “We're still in a bear market for stocks. There may be some short- or intermediate-term strength, but we would really view those as opportunities to lighten up” [on stocks]. David James, Senior VP James Investment Research. Treading quicksand It was another week of volatile swings on low volume. We will have to wait to see what traders and investors do when they return to their jobs over the next couple of weeks to get a sense of where this market is really headed. Technically Speaking Leaders lead lower It was back to negative territory as Zanger’s Sunday shed more than 2% after a better than 2% gain last week. His week’s list of 16 stocks included last week’s pix Research in Motion (RIMM), Energy Conv (ENER), Apple (AAPL), Fuel Systems (FSYS), MBIA (MBI), Sunpower Energy (SPWR), Devon Energy (DVN), Sohu.com (SOHU), Agrium (AGU), Potash Corp (POT), Massey Energy (MEE), Suntech Power (STP), Ambak Financial (AMK), Chicago Merchantile (CME) and Patriot Coal (PCX). That these leaders are heading lower is bearish but as we said last week, anything can happen during the low volume summer doldrums.
Figure 1 –Five-day performance of Zanger’s last Sunday pix (green) compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX), Nasdaq Composite (IXIC), Russell 2000 (RUT) and MSCI Emerging Market ETF (EEM). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com. Weekly volumes continued to drop this week for the Dow Industrials, Dow Transports, Nasdaq Composite, Russell 2000 and NYSE Index this week. Falling volume is considered mildly bullish when price falls but we’ll have to wait until after Labor Day to see what the pros do when they return from their summer holidays. After spiking to 27.49 eight weeks ago, the Market Volatility Index (VIX) moved up to 20.65 from 18.81 last week. This compares to a VIX north of 31 when the Dow last bottomed during the week of March 14 and shows that fear is subsiding. But are investors becoming too complacent especially considering that September has a well-deserved reputation of being the worst month of the year? After hitting a high of 611.51 six weeks ago, the 19 commodities that make up the NYFE CRB Index settled some more this week to close at 516.47 from 519.39 last week. It is still too early to say whether the commodity correction is over or not. After hitting major support around $785 two weeks, gold continued to strengthen the week closing at $831/oz up from $828.50 last week but still below its $860.40 close three weeks ago. Gold exhibits a strong seasonal period from the end of July to the end of September so this might be a late seasonal move. August was the best monthly gain for the U.S. Dollar Index since 1999 according to Bloomberg as it closed at 77.40 up from 76.65 last week. Much of the dollar move has been due to apparent U.S. GDP growth compared to Europe, Canada and much of the OECD. Oil looks to have hit support around $115/bbl as a barrel of NYMEX crude contract closed at $115.92/bbl up from $114.78 last week, still off more than 20% from the weekly high of $145.15 July 11. But it is the twenty-sixth consecutive week that oil has remained above $100. Normally, oil hits a seasonal high in mid-October. The U.S. bank prime rate held again this week at 5% and the Fed funds target rate remained at 2%. The 3-month London Interbank Offered Rate (LIBOR) ticked up again to 2.8106% (from 2.81% last week). After holding steady for two weeks, Freddie Mac mortgage rates slipped to 6.40% (from 6.47% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) jumped to 5.33% (from 5.29% last week). LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. Corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. Earnings Earnings: All over but the crying In the eighth week and final week of Q2-08 reporting season, a total of 3883 companies (up from 3796 last week) have now reported and it’s all over but for the crying. Average earnings held steady at -39% (from -37% two weeks ago, -32% three weeks ago and -22% four weeks ago) versus Q2-07. Financial services were again the worst performers (-98%) followed (again) by consumer services (-37%). This compares to an overall 30% drop at the end of Q1-08 earnings season with a grand total of 4214 companies having reporting. This also marks the third quarter that earnings have shown a consistent trend to drop as more companies have reported. 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. Meanwhile, the Commerce Department also reported a durable goods increase 1.3% in July versus an expected drop of -0.3% due in part, the agency said, to stronger demand for aircraft. But even without this metric, durable goods increased 0.7% again thanks to stronger exports. Economic ReportsHere are the reports we were watching this week. We also learned that the U.S. Commerce Department moved up its Q2-08 preliminary GDP to a better than expected 3.3% from 1.9% in the previous estimate with trade contributing the most to that growth in decades. Growing exports and slowing imports combined to add 3.1 percentage points, thanks in large part to the weak dollar. But before getting too excited, remember it’s an election year and government agencies have demonstrated an ability to fluff the numbers with some very powerful tools to paint a more pleasing economic picture. Existing and new home sales up, but so are inventories
Chart 1 – The week kicked off with an existing home sales report from the National Association of Realtors and head cheerleader Lawrence Yun doing his best (even if it wasn’t convincing) attempt to put a positive spin on the situation. “Great time to buy…”) The NAR reported that existing home sales jumped 3.1% in July to an annually adjusted rate of 5 million homes from June but are down 13% from July 2007. However, unsold inventories increased to an 11.2 month supply. The median price of an existing home dropped to $212,400 down 7.1% from July 2007. However, while year-over-year median prices declines have moderated, the more reliable Case Shiller home price index is still showing prices falling with the 20 city index showing a year-over-year drop of 15.9% in June down from 15.8% in May. The good news is that prices in nine of the cities were up month-to-month compared to seven in May but according to Case-Shiller “not one market is showing a positive return over the past 12 months and seven of the metro areas are reporting declines in excess of 20%.”
Chart 2 – While the Census Bureau reported that July new home sales increased 2.4% from June that is not the whole story. An examination of the data shows major downward revisions over the last two months with sales being revised from 533,000 down to 514,000 (-3.6%) in May and from 530,000 to 503,000 (-5.1%) in June. As a result, the July number of 515,000 was an increase from June but we fully expect this number to also be revised lower as more data comes in. But as we see, year-over-year sales are down more than 35% and sales are off nearly 50% from their peak in December 2006. Inventories of unsold new homes fell from 10.7 to 10.1 months. The good news is that sales appear to be leveling off, at least for now. The median new home price is down 6.3% to $230,700 from July 2007 for what its worth (builders continue to artificially skew prices upward with generous incentives to make sales). Scants signs of recovery in subprime crisis
Chart 3 – We updated the ABX subprime mortgage index and as we see, things haven’t improved much since March. Valued at 100 in January 2007, the composite of 18 off-the-market subprime bonds is now valued at 32 cents on the dollar while the lowest rated bonds at 5 cents with no recovery yet in sight.
Chart 4 – On Friday we learned that the Chicago Purchasing Manager’s Index jumped from 50.8 in July to 57.9 in August as a combination of the low dollar, strong export demand and a one-time tax rebate supercharged demand for American products. Will this trend last? As we see from the chart, the trend remains strongly negative after the index spent six consecutive months in contraction territory. Next Week Here are the reports we’ll be watching next week. The ones emboldened are leading or useful indicators we are tracking, the others have the potential to impact markets short-term. - Tuesday, July Construction Spending (previous -0.4%), August ISM Manufacturing Business Index (previous 50.0). - Wednesday, July Factory Orders (previous 1.7%). - Thursday, Q2-08 Revised Productivity (previous 2.2%), August ISM Non-Manufacturing (Service) Index (previous 49.5). - Friday, August Nonfarm Payrolls (previous -51,000), August Unemployment Rate (previous 5.7%). Synopsis As the economy has cooled and the dollar rallied, crude oil prices have fallen. Lately oil appears to have formed at a minimum, a temporary support base. Whether it will fall further from here or rally remains to be seen but the fundamentals would seem to support firming energy prices. (Be sure to watch the two peak oil videos listed below.) But whatever happens to the price of oil, the price of natural gas relative to oil is at historic lows as pointed out this week by Bespoke Investments. Given that cooler weather will begin to make itself felt in the weeks to come, the prognosis for natural gas looks promising. While oil has lost just over 20% of its value since the end of July, natural gas is down 42% from its peak.
Figure 2 – Natural gas/crude oil ratio showing the best times to buy natural gas and sell oil (green zone bottom) and sell natural gas and buy oil (brown zone top). As we see from the chart, natural gas is cheaper in relation to oil than it’s been in sixteen years.
Figure 3 – The U.S. Natural Gas ETF symbol UNG is one way to play natural gas. Launched April 18, 2007 the daily chart shows the more than 40% drop in price from its July high and the major support band between $34 and $36. Also note the volume capitulation spike (see green arrow in volume subgraph), a Williams Capitulation spike (see green arrow in second subgraph) and strong positive divergence between the RSI (relative strength index) and price (see green line in RSI subgraph). Taken together with the historically low natural gas/oil ratio, this represents a potentially powerful buying signal. Chart by GenesisFT.com According to Steve Moore in his excellent The Encylopedia of Commodity and Financial Spreads (Wiley 2006) a NG strategy to buy Nov natural gas calls and sell Oct NG calls on Aug 29 (bull call spread buying a closer to the money option while selling a further from the money options simultaneously) with a Sept 14 exit has a 100% win ratio over the last 15 years. The natural gas/oil relationship does not guarantee that natural gas will rise tomorrow, next week or next month. Oil could drop further and so could natural gas. But if energy prices do begin firming in the near future, natural gas has the potential to significantly outperform crude oil. Stories of interest this week… U.S. Economy: Spending Slows, Inflation Accelerates http://www.bloomberg.com/apps/news?pid=20601087&sid=ave9IW1bnaLI&refer=home U.S. Economy: Spending Slows, Inflation Accelerates http://www.bloomberg.com/apps/news?pid=20601068&sid=ave9IW1bnaLI&refer=home U.K Economy at 60-year low, says Chancellor Darling. And it will get worse http://www.guardian.co.uk/politics/2008/aug/30/economy.alistairdarling Best Farm Economy Since 1970s Comes With Expense Risk http://www.bloomberg.com/apps/news?pid=20601109&sid=asozooq65xE0&refer=home Japan Goes on Buying Spree, Shrugging Off '80s Bubble http://www.bloomberg.com/apps/news?pid=20601109&sid=algDjo7dnXgs&refer=exclusive Commodities Hint of Bottom on Mine Closings, Supplies http://www.bloomberg.com/apps/news?pid=20601109&sid=aYfqSdetquJ8&refer=exclusive U.S. Economy: GDP Exceeds Initial Estimate on Exports http://www.bloomberg.com/apps/news?pid=20601087&sid=aMuMosauQxa4&refer=home Munis Gain as Tax Cuts Expire in Shift to 40% Bracket http://www.bloomberg.com/apps/news?pid=20601087&sid=a2plA5aVUFiQ&refer=home Spain May Suffer From ECB Loan Curbs as Economy Cools http://www.bloomberg.com/apps/news?pid=20601109&sid=azae4HCCn2z4&refer=home VIDEOSCase Sees 'Encouraging' Signs for U.S. Housing Peak Oil (Part A and B) – How close are we to the downhill slope? http://www.chrismartenson.com/peak_oil Fuzzy Numbers - How government agencies shamelessly distort economic statistics (16 mins) http://www.chrismartenson.com/fuzzy_numbers ---------------------------------------------------------------------------------------------------------------------- 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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