| TSG Weekly Market Watch February 6, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 08 February 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending February 6, 2009Topics Discussed This Week:
The (next) party begins… Leaders gain ground for third week Earnings – gone the way of the dinosaur No light at the end of the tunnel just yet On rallies, corrections and the price of oil Looking at the larger picture...
Last Week
Quote of the week "The current economic crisis is a direct consequence of continuous U.S. government intervention into the economy through fiscal and monetary policies that have been designed to never have a recession. Never having a recession is like someone who never sleeps – you need to sleep so you can recover... It is not a failure of the free market that brought about the crisis. It's the continuous intervention by government. And now the same people that brought about the crisis want to solve it with more intervention." — Marc Faber in a Bloomberg interview this week. Cash taps thrown open, another party begins… As usual Mark Faber, author of the Gloom, Boom & Doom Report, did not mince words when asked in an interview this week about whether the latest stimulus passage was the right approach. He, like Einstein, clearly sees the insanity in trying to fix the problem by doing more of what caused it in the first place. This week’s rally was as illogical as is the expectation that more bailouts will provide a long-term solution to our sinking economy. In driving stocks higher Friday, investors and traders were hoping that the abysmal jobs report would insure the bailout passes. In a strange twist that could only happen in markets, the worse the news, the greater the expectation for higher profits implied by rising stock prices. There is little doubt that the bad jobs report put a fire under congress and the senate to put an eleventh hour stimulus package (minus about $100 billion) together at an estimated prices tag still north of $780 billion next week. Stocks were led higher by emerging markets and the transports and that is at least short-term bullish. I am again reminded about what George Soros said about trends. “Economic history is a never-ending series of falsehoods and lies, not truths. It represents that path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.” It would seem to explain this week’s rally as well as the current rally in the U.S. dollar. But as Faber pointed out, few have noticed the 94 basis-point rise in 10-year Treasury yields to Friday from year-end 2008. Clearly bond traders are very aware of the rising cost of money amid soaring levels of debt. Unfortunately, the dire economic reality in which we now find ourselves is becoming increasingly more difficult to ignore thereby insuring that present and future trends based on false premises will more quickly be discredited.
Technically Speaking Leaders move up for third week This week Dan’s portfolio of 11 stocks included Amazon (AMZN), Baidu.com (BIDU), Google (GOOG), Holders Oil Servs (OIH), Hess Corp (HESS), iShares DJTA (IYT), Research in Motion (RIMM), ProSharesUltraShort Financials (SKF), ProShares UltraShort RE (SRS), US Oil Fund (USO). That would normally be considered bullish except this time, the Zanger portfolio lagged the rest of the market and that is mildly bearish.
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. For the first time since October 17, weekly volumes moved back above average on an up week for the major indexes, with the exception of the emerging market ETF. And for those indexes (except for EEM) this is considered bullish. However, falling volume on the strong upmove in the EEM is a concern. It indicates that buying is drying up. This week the Market Volatility Index (VIX) dropped slightly but remained stubbornly above 40 ending the week at 43.37 down from 44.84 last week. This is historically high and shows that while fear is abating, it is still present. Since bottoming December 5, the 19 commodity NYFE CRB Index continued to firm closing at 368.64 up from 364.5 last week and 365.56 two weeks ago. Since hitting a high of 611.51 in July then losing nearly 50%, the CRB Index has pared its loss to 40% from its peak. Gold slipped this week to close at $914.00/oz from $926.80 last week and $895.60 two weeks ago. Although we are still in a deflationary period and investors continue to seek a haven in gold, volume continues to steadily decline and that is bearish. Meanwhile the dollar also took a break this week with the U.S. Dollar Index closing at 85.30 down from 85.86 last week. Since bottoming in July, the U.S. Dollar Index has gained 19%. Since bottoming at the end of December, crude moved higher again this week to close at $46/bbl up from $41.75 last week. Volume again was extreme further supporting the presence of capitulation point from which prices will rally. Oil is still down nearly 70% from its mid-summer high of $147.20. U.S. bank prime rate and the Fed funds target rate held steady again this week at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate moved up again to 0.27% (from 0.24% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) firmed again to 1.24125% (from 1.18438% last week and 1.16938% two weeks ago). This compares to LIBOR 52-week high of 4.81875% last October. Meanwhile Freddie Mac mortgage rates rose to 5.25% (from 5.10% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) firmed to 4.92% (from 4.90% 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. Earnings Q4 earnings just keep getting uglier Last week we reported that the WSJ did not post the change in earnings from the same quarter last year. After contacting the Journal, we received the following explanation. Up until last week, net earnings on continuing operations were still positive for those companies that had reported so far and even with earnings having fallen 80% two weeks ago, companies were still making money. However, last week that all changed when net income turned into a net loss. The paper has a policy not to post the percentage change when earnings turn negative (exceed a decline of 100%). But what happens when companies starting losing money? In the interests of continuing our reporting we are now doing the calculations of earnings changes using the formula employed by the Wall Street Journal. And the results aren’t pretty. Last week with 1055 companies having reported Q4 earnings, net of continuing operations was -$42.769 billion down from +$97,074 billion in Q4-07 which works out to a drop of 144%. This week in the fifth week of Q4-08 reporting season and with a total of 1550 companies having reported, average earnings are now down 150.7% from Q4-07, versus -80% two weeks ago and -60% three weeks ago. This compares to -62% between Q3-08 and Q3-07.
Given that earnings are now experiencing their biggest drops since first turning negative and that results have deteriorated as reporting seasons have progressed, we expect this trend to continue next quarter.
Economic Reports No light from the end of the tunnel yet And if more bad earnings news wasn’t enough, the economic news this week wasn’t any better. Pending home sales ticked up in December, but that so called “leading indicator” by the National Association of Realtors has proven so far to be of little use to anyone other than real estate agents vainly searching for straws to entice reluctant buyers to part with their money. In the more credible indicator department, the Institute of Supply Management reported that the ISM manufacturing index moved up to 35.6 in January from 32.9 in December but remained well entrenched in recession territory. The ISM non-manufacturing (service) index also ticked up to 42.9 from 40.1 but like manufacturing, the trend remains strongly negative.
Construction spending is also showing no signs of a recovery yet as spending dropped 1.4% in December after a 0.6% drop in November. Since turning negative in mid-2008, the trend has continued to get increasingly negative. Consumer credit also dropped again in December down another $6.6 billion after falling $11 billion in November and $3.5 billion in October. It is further evidence that consumers are pulling back on all fronts adding to our economic woes. Consumer spending accounts for more than 70% of our economy so when they pull back, our economy contracts and will continue to do so until this changes. According to Sung Won Sohn of the Smith School of Business, the loss of 3.6 million jobs since the peak of the business cycle in December 2007 translates to a loss of $360 billion in buying power from our economy – a situation that our political leaders seem hell-bent to rectify even if they have to write blank checks to do so.
Finally, we got the report all were waiting for with the release of non-farm payrolls which confirmed economists’ worst expectations with the loss of another 598,000 jobs in January. Bureau of Labor revisions added another 491,000 job losses since September. According to the BLS, the official unemployment rate was 7.6% in January but the real number according to ShadowStats.com is far worse at 18% up from a low of 10.6% in November 1999. Canada, which was believed by some (mostly Canadians) to be relatively immune from economic woes south, east and west of their border, registered a loss of 129,000 jobs in January. Considering Canada’s population of about one-tenth the U.S. population, that is very bad news indeed for the country.
On rallies, corrections and the price of oil… Last week we discussed the Elliott Wave perspective on markets and mentioned that the Dow Industrials were stuck in a corrective pattern that could result in higher prices short-term. We also opined that if we did get a rally next week, the EEM would likely rally more which is exactly what happened. And this week the emerging market ETF EEM, Nasdaq Composite and Russell 2000 small caps continued to lead higher which is bullish. However, once the correction is over we expect the Dow to resume its down trend taking it to around 7550 before attempting the next rally. In a notice to subscribers this week, Bespoke Investment Group highlighted an interesting relationship between the Baltic Dry Index and the price of crude oil. As of Wednesday, the BDI had gained 125% since bottoming in early December. As of Friday’s close it was up 147%, an impressive gain in two months to say the least. They also mentioned that correlation between the BDI and oil was an impressive 85% (with 100% being perfectly correlated). We double checked the relationship and found that over the last few months the correlation has indeed been good and has gotten better since September when we lagged the price of oil by thirty days. This suggests that if the rally in the Baltic Dry Index continues, there is a good chance that oil prices will follow breaking out of the $40 range.
Figure 2 – Daily chart of the Baltic Dry Index and Light Sweet Crude showing the correlation between the two in the upper graph. Chart by Metastock.com Looking at the larger picture... On top of bearish declining volume on the EEM, the charts for the Dow Industrial Average also look somewhat bearish. First, the weekly is showing a descending triangle pattern that is getting long in the tooth and it looks like it is getting ready to break down. Second, the shorter term Elliott Wave charts (intraday and daily) show an upside corrective pattern that's near an end with an upper limit at 8400. When it does finally resolve, we expect the Dow to drop heavily in an intermediate degree Wave 3 with first target at 7550. The caveat is that if the Dow does rally above 8400, it will mean this wave count is incorrect but so far this approach has been quite reliable.
Figure 3 – Five-minute chart of the Dow Jones Industrial Average (INDU) showing Zigzag pattern from the January 6 high with lower degree IM from Jan 28 high with Wave 1 bottom Feb 2. If this count is correct, Wave 2 cannot move above the start of Wave 1 at 8405.87 or the pattern will be invalidated. Chart by Refined Elliott Trader courtesy Elliottician.com Stories of interest this week… Senate Set to Vote Next Week on U.S. Stimulus Bill http://www.bloomberg.com/apps/news?pid=20601087&sid=ajAIeMxnTmg8&refer=home Treasuries Drop as Record Debt Auctions Overshadow Job Losses http://www.bloomberg.com/apps/news?pid=20601087&sid=aStoHZRPLJa0&refer=worldwide IMF Says Advanced Economies Already in Depression http://www.bloomberg.com/apps/news?pid=20601087&sid=a6aaWZ8ab8yU&refer=home Soros Imitators Reap Riches in Financial Crisis on Macro Funds http://www.bloomberg.com/apps/news?pid=20601109&sid=ay.jqGduLoH8&refer=exclusive Record 19 Million U.S. Homes Stood Vacant in 2008 http://www.bloomberg.com/apps/news?pid=20601087&sid=a8SoNNq.FFoM&refer=home Fed Calls Consultants to Treat AIG, Stricken Markets http://www.bloomberg.com/apps/news?pid=20601109&sid=a2T0fD4Ri17E&refer=home Syndicated Loan Decline Drives European Borrowers Into `Forward Starts' http://www.bloomberg.com/apps/news?pid=20601109&sid=aH3YdyE6mRU4&refer=exclusive Shrinking U.S. Options Market Lifts Costs to Hedge http://www.bloomberg.com/apps/news?pid=20601109&sid=aWQ5lofm_vzc&refer=exclusive ‘Failed’ Wall Street Forces Biggest Rewrite of Rules http://www.bloomberg.com/apps/news?pid=20601109&sid=aLEgJag69K8U&refer=exclusive Cheap Crops Won’t Last, Credit Suisse Says http://www.bloomberg.com/apps/news?pid=20601109&sid=aQdyxItDD8Mk&refer=exclusive Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps http://www.bloomberg.com/apps/news?pid=20601109&sid=azVLk.22AkLI&refer=exclusive Madoff ‘Cold Shower’ Makes Geneva Bankers Forgo Two-Star Meals http://www.bloomberg.com/apps/news?pid=20601109&sid=aPkZp3BpxrV4&refer=exclusive
VIDEOS Faber Says U.S. Stimulus May Lead to `Dire Consequences' http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vJxYIrQzGc8Q.asf
On the lighter side… Cohen's Laws of Politics – The Law of Lawmaking Those who express random thoughts to legislative committees are often surprised and appalled to find themselves the instigators of law. --------------------------------------------------------------------------------------------------------------------- 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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