| TSG Weekly Market Watch December 5 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 07 December 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending December 5, 2008Topics Discussed This Week:
Post holiday hangover, but the Fed still buying drinks Leaders leading lower Q3 earnings – scant signs of life Economy falling out of bed, recession confirmed Mass manipulation changing the rules
Last week
Quote of the week “Take an official U.S. recession, stir in a collapse in profits, add a fistful of higher borrowing costs for companies and you have a recipe for global economic disaster. Season with lashings of tasteless central bank cash.” Mark Gilbert – author of Bloomberg article Borrowers Elbow for Position Post-holiday hangover hits market but the Fed still buying the drinksAfter the holiday-shortened week of stellar gains, the bad-news bear returned this week with a satchel-full of rotten reports. Monday began with bad news from Asia as markets there took it on the chin in the wake of deteriorating manufacturing reports. That was followed by the worst ISM manufacturing report in this country in 26 years. And other than an MBA report that contained a possible hint of hope, the reports that followed were equally depressing. But even though we had the worst jobs report since 1982 a funny thing happened. Investors are either not listening to bad news or have chosen to ignore it as evidenced by the 260 point rise on the Dow on Friday. Since bottoming November 20, the major indexes have put in a series of higher lows. Does this mean the rally is finally gaining traction thanks to ceaseless Fed efforts to throw money around or is it simply another bear market rally?Technically SpeakingLeaders still downLast week, Dan Zanger’s Sunday pix gained 8.3% but because they trailed the indexes, was determined as mildly bearish. This week his pix registered the biggest drop of the group by a wide margin losing more than 13% which is bearish for next week. That being said, the rampant manipulation taking place by the Fed and government has thrown a major monkey-wrench into how markets should work, and has proven an effective bear repellent. This week Dan’s portfolio dropped from 11 to 8 stocks that included EOG Resources (EOG), Devon Energy (DVN), streetTracks Gold (GLD), Devon Energy (DVN), ProShares Ultra Oil & Gas (DIG), Apple (AAPL), Sohu.com (SOHU) and Holders Oil Services (OIH).
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 for the major indexes jumped this week but even though prices fell, they closed well off the lows and the 8000 level for the Dow again held. As long as support holds, short sellers should exercise caution. But although selling has been contained, so has buying in spite of the trillions being spent to push markets higher and it will take rising volumes on rising prices to indicate buyers are entering the market in increasing numbers. After falling to 55.28 last week, the Market Volatility Index (VIX) spent the week rising then falling to end the week at 59.93. However, any value this or most other indexes for that matter has had in the past has gone up in smoke as we discuss in our synopsis. After surging last week, the 19 commodity NYFE CRB Index fell again to close at 323.20 from 361.74 last week. We have discussed the possible bottom building for commodities over the last three weeks but it is still too early to take action. We need to see prices level off and a series of higher lows and higher highs. Since hitting a high of 611.51 three months ago, the CRB Index is down 47% from its peak. Gold took as big hit this week to close at $752.30/oz, down from $815 last week. Although we are clearly in a deflationary period, investors appear to still be seeking a haven in gold amid the economic turmoil even though the U.S. dollar has strengthened and in spite of efforts from some big players to shake them out. (Be sure to read The Manipulation of Gold below). What is amazing is how well the greenback has held up amid all the printing and dumping of it from helicopters as the U.S. Dollar Index closed at 86.87 this week up from 86.52 last week. Our dollar has been labeled the tallest midget in the room when compared to other currencies and central bank efforts to devalue their currencies. But given the propensity of Fed to spend money, this midget is on shaky stilts. Many analysts believe it is only a matter of time before markets wake up and realize just how vulnerable the dollar is and react accordingly. Since bottoming in July, the U.S. Dollar Index has seen its gain pared to 20%. A barrel of crude tanked this week to close at $42.93 down from $55.03 last week, its lowest level since October 2005. Oil is now down and incredible 70% from its halcyon mid-summer high of $147.20. This has been the most volatile year for crude in nearly two decades when it dropped from a high of $40.10 to a low $17.61 between September 1990 and February 1991. The U.S. bank prime rate and the Fed funds target rate held at 4.0% and 1.0% respectively but the effective Fed funds rate dropped again to 0.16% (from 0.63% last week). Credit markets have leveled off as the 3-month London Interbank Offered Rate (LIBOR) slipped to 2.1856% (from 2.2168% last week). And thanks to help from the Fed in continuing to buy at the long end of the yield curve, Freddie Mac mortgage rates slipped again to 5.53% (from 5.97% last week and 6.04% two weeks ago) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) slipped to 5.02% (from 5.18% 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. About 6 million U.S. mortgages, including the vast majority of subprime home loans as well as 41% of prime ARMs are linked to LIBOR. EarningsEarnings – Still moribundIn the ninth week of Q3-08 reporting season with a total of 3872 companies having reported (up from 3806 companies last week), average earnings firmed slightly -62% (from -63% last week, -38% four weeks ago and -13% in the season opener) versus Q3-07. This compares to a year-over-year 36% drop in Q2-08 earnings, a 30% decline for Q1-08, a fall of 57% for Q4-07, a 21% drop for Q3-07 and a 13% jump for Q2-07. Q3-08 also marks the fifth quarter that earnings have deteriorated as the season matured. Earnings are now experiencing their biggest drops since first turning negative in Q3-07. Economic ReportsEconomy falling out of bedIt was another brutal week for economic reports. We learned Monday that October construction spending fell another 1.2% compared to unchanged the month before but the gravity of this report was insignificant compared to what was to follow. The Institute of Supply Management manufacturing index dropped to a multi-year low of 36.2 in November compared to 38.9 in October. It was the lowest reading since 1982. And we finally had confirmation from the National Bureau of Economic Research (NBER) that we have been in recession since December 2007. It was about as useful as the kid who tells you that you just hit something as you crawl out of your car after the accident.
This was followed by an equally depressing ISM service index reading of 37.3 down from 44.4 in October as both manufacturing and the much more economically important service sector reflected the tough economic times. Then came the very depressing non-farm payrolls loss of another 533,000 jobs in November versus the expected 310,000 with the double whammy that both October and September numbers were revised downward for the loss of another 199,000 jobs. Not surprisingly, the unemployment rate also dropped to 6.7% from 6.5% in October but this number will get significantly worse in the months to come since it lags the economy by about six months.
We did get one bit of good news as the Mortgage Bankers Association (MBA) weekly survey showed a jump in refinancings of 203% versus the previous week thanks to lower rates pushed by the Fed. But given the volatility of this statistic, it means very little. Unfortunately new mortgage applications, which are much more important in determining a pickup in home sales, remained weak. But other than give those in the housing and real estate industries a short-term lift, the jump is insignificant until we see follow through. But it also shows that consumers are again able to use their homes as ATMs to pay bills, which was no doubt the intention of the Fed is driving down rates. However, news on Friday that mortgage holders behind on their payments soared to a record 7% of total loans outstanding in Q3 according to the MBA up from 6.41% for Q2 and 5.6% a year ago shows that any significant housing price bottom may still be sometime in coming. SynopsisMass market manipulation changing the rulesJames Grant was interviewed this week on the Business News Network about his new book – Mr. Market Miscalculates: The Bubble Years and Beyond. Grant didn’t mention the word manipulation but that is exactly what is going on if you really listened to what he is saying (see Video of Grant’s interview below). The Fed, which exhausted its $800 billion asset base months ago, had doled out or promised something in the order of $4.74 trillion as of November 24 according to Bloomberg. And that doesn’t include any commitments made since. According to Grant, that works out to an annualized growth rate in Fed assets of more than 2000%. In his zeal to play Robin Hood to Wall Street banks and brokers, Bernanke has effectively changed the rules for doing business in markets. Stocks that should plummet are soaring and those that should outperform but are not privy to special TARP or bailout benefits are getting hammered. Treasuries and bond performances are equally perplexing for the same reason. That Bernanke and company have refused to be transparent about who gets Fed money and the terms of the loans makes the bailouts as well as the massive amounts involved all the more suspicious (see article "Bernanke..." below). Neither the Fed nor government will tell us where this money is coming from but it isn’t hard to figure out the answer. Trading rules will have to be re-written as long as the government and Fed play buyer of last resort bailing out poorly run companies at taxpayer expense. But the unintended consequence is that it will keep those investors and traders who normally jump in during a market correction in the hunt for bargains on the sidelines, at least until they understand how to play the game now that the law of market gravity has been repealed. What's the smart money doing?Based on the action in the Vanguard broad market ETF (VTI), volume spread analysis is saying that the smart money is again testing the market. As we see from the weekly chart, this is the third bullish signal in the last three weeks and indicates that the mark down to new lows with a return to close higher on bad news that occurred this week is bullish. It is all the better if it happens on low volume.
Chart by TradeGuider.com Athough volumes can't be considered low (they were above average), and the lows weren't new lows, the signal is still bullish. And the news could not have been much worse. With the Fed on their side, an upmove might just be enough to get other investors to join in on the rally if it comes this week. Weekly volume spread analysis charts of the S&P500 and Dow Industrials aren't quite so bullish however but that doesn't mean we won't get a rally. Never bet against the smart money and while we don't consider the Fed to be all that smart, they are throwing around obscene amounts of money. It probably won't pay to bet against it, at least until they run out of money and financial gravity returns. Stories of interest this week… U.S. May Be in for ‘Great Recession,’ Longest Postwar http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar0v6PP3HCpk Calls for a $1 Trillion Stimulus Package Grow as Economy Tumbles http://www.bloomberg.com/apps/news?pid=20601110&sid=afWnxP9Dzv0M The Manipulation of Gold Prices http://seekingalpha.com/article/109210-the-manipulation-of-gold-prices China Property Slump Threatens Global Economy as Growth Slows http://www.bloomberg.com/apps/news?pid=20601109&sid=ay7HZbCLGLEA&refer=exclusive Switzerland Feels Iceland's Pain With Banks Teetering http://www.bloomberg.com/apps/news?pid=20601109&sid=aAd7rF18UuX4&refer=exclusive Dubai Speculators Quit as Lending Drought Bursts Desert Bubble http://www.bloomberg.com/apps/news?pid=20601109&sid=a2jrSPqYhVzY&refer=home Oil Set for Biggest Weekly Fall Since March 2003 on Demand Drop http://www.bloomberg.com/apps/news?pid=20601087&sid=a_mf8IRqnIRE&refer=home Mortgage Delinquencies, Foreclosures Rise to Record http://www.bloomberg.com/apps/news?pid=20601068&sid=acuPdrV_UdoQ&refer=home Citigroup Needs to Confess Its Writedowns Now: Jonathan Weil http://www.bloomberg.com/apps/news?pid=20601110&sid=aGjLvBU8S6lE Fed Takes a $3 Trillion Gamble to Spur Lending: John M. Berry http://www.bloomberg.com/apps/news?pid=20601039&sid=aohbHGXFYtKU&refer=home Bernanke Says Federal Reserve Won't Reveal Details on Loans Videos Zandi Says Jobs Data `Ensure' U.S. Aid for Automakers http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vMJqMKSIG8ro.asf James Grant BNN Interview http://watch.bnn.ca/squeezeplay/december-2008/squeezeplay-december-4-2008/#clip118806 --------------------------------------------------------------------------------------------------------------------- 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 have it sent to them each week). DisclaimerTradeSystemGuru.com obtains information from sources deemed to be reliable; |
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