| TSG Weekly Market Watch - February 13, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 15 February 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending February 13, 2009Topics Discussed This Week:
TARP 2 – Much ado about nothing… Leaders outperform but still lose ground Earnings – looking for new adjectives A slow week eclipsed by the circus…
Last Week
Quote of the week “The biggest reason [mortgage] modifications end up re-defaulting is because they are in markets where prices have continued to go down. When people are underwater and don’t see an end to it, a lot of them just walk away, even if they can make their payments, because they don’t want to be wiped out financially.” — Norm Miller, director of real estate programs, University of San Diego Much pomp, ceremony and cost about nothing… Stock markets were in a holding pattern awaiting details on Obama’s stimulus package dubbed TARP 2 by the media. If Treasury Secretary Tim Geithner’s speech Tuesday was aimed at providing details on the plan, it was a dismal failure. It became clear that if the government has a definitive plan or any clue what they are doing, both are well guarded secrets. Republican Senator Richard Shelby, one of the few stalwarts who believes government should keep its nose out of the nations boardrooms, complained that Geithner “wasted about three or four hours of the Senate’s time” in trying to describe TARP2, “the specifics are, he doesn’t have them.” As a result, Tuesday was just another really bad day on Wall Street with the Dow shedding more than 420 points before hobbling moderately higher by the close. Criticisms of prior bailouts and claims by the new Administration that the latest list of giveaways is a significant improvement over past programs ring hollow. What we do know is that no real new ideas have so far been put forward. Obama’s goal of a bi-partisan solution has also failed to materialize. Not one Republican voted for the stimulus package thanks to efforts by Pelosi & company to effectively exclude them from the decision making process. The costliest single item of the plan is a tax credit of up to $400 for individuals earning less than $75,000 and up to $800 for couples earning less than $150,000 at a cost to taxpayers of $116 billion. But isn’t this a repeat of the $100 plus billion tax rebate program offered by the last Administration that most intelligent economists and analysts agree was a colossal failure and waste of money? Unfortunately, this is a government that so strongly believes that the New Deal from 1933 – 1938 was a success that they are doing everything possible to repeat it. And this in spite of clear claims to the contrary by FDR’s Secretary Treasurer Henry Morgenthau from 1933 to 1945, who penned in a 1939 diary entry, “We have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!” What is that well known saying by Santayana about those who ignore the lessons of history? Technically Speaking Leaders move up for third week This week Dan’s portfolio of 14 stocks included Agrium (AGU), Apple (AAPL), AutoZone (AZO), CF Industries (CF), Chemical & Mining (SQM),Genco Shipping (GNK), Goldman Sachs (GS), Google (GOOG), International Business Machines (IBM), MasterCard (MA), Research in Motion (RIMM), Rio Tinto (RTP) and Visa (V). While they outperformed the most of the major indexes, the group was down more than 3% on the week. Groups that led to the downside were the Dow Transports, Dow Industrials and small caps of the Russell 2000. Taken together, this is 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. Weekly volumes were about average this week for the major indexes, with the Dow Jones Industrials exhibiting an engulfing bear chart pattern on the weekly chart. It is often a short-term precursor of lower prices. That volume was at least average on falling prices is mildly bearish as well. This week the Market Volatility Index (VIX) continued to meander around 40 which it has done now for nearly two months. The VIX ended the week at 42.83 down slightly from 43.37 last week. This is still historically high and shows that fear is still present in the markets. Since bottoming December 5, the 19 commodity NYFE CRB Index slipped this week to close at 359.45 down from 368.64 last week. Since hitting a high of 611.51 in July the index is still down 40% from its peak. Gold surged again this week to close at $941.10/oz up from $914.00last week. But volume continues to steadily decline and that is bearish in a rally. Meanwhile the dollar also made another attempt to run higher as the U.S. Dollar Index rose to 86.11 from 85.30 last week. Since bottoming in July, the U.S. Dollar Index is up 19%. Crude slipped again this week to close at $42.10 down from $46/bbl last week but just above $41.75 where it closed two weeks ago. Volume again was extreme further supporting the presence of capitulation point from which prices will rally. Oil is down more than 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 slipped back down to 0.24% (from 0.27% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) slipped to 1.2375% (from 1.24125% last week). This compares to LIBOR 52-week high of 4.81875% last October. Meanwhile Freddie Mac mortgage rates also dropped to 5.16% (from 5.25% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) firmed to 4.94% (from 4.92% last week).
The Baltic Dry Index, an indicator that tracks the cost of transporting dry goods by ship, continued to increase this week to 1908 Friday, up 188% from its December 5, 2008 low. This is bullish as it shows that demand for cargo transport has been continually increasing in the last two months. As we discussed last week, this is also bullish for oil prices. Question is, will this trend continue? *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 – looking for new words to describe ‘ugly’ With a total of 2006 companies having reported Q4-08 earnings in the sixth week of this reporting season (1550 last week), the net (loss) on continuing operations widened to -$79.64 billion ( from -$42.769 billion last week) which works out to a change in earnings of -156.4% from Q4-07. This compares to -150.7% last week, -144% two weeks ago and -80% three weeks ago. The final result for Q3-08 was -62% from Q3-07. The hardest hit sectors so far have been Financials (504 companies) in which the net on continuing operations has fallen from $6.44 billion in Q4-07 to -$40.3 billion (loss) in Q4-08 for a -725% change, Basic Materials (84 companies) with an earnings change of -341.9%, Consumer Services (246 companies) with -263% change and Oil & Gas (63 companies) with a -176% change versus Q4-07.
Given that earnings continue to experience their biggest drops since first turning negative, we expect this trend to continue at least into the next reporting season. Economic Reports A slow week eclipsed by the circus in Washington… Not a lot happened this week and what did was lost in the bailout coverage on Capital Hill. While we were patiently waiting for the Geithner Ultimatum (that never came), we learned that December wholesale trade dropped 1.4% (-0.6% in November), the January federal budget deficit rose to $83.82 billion (from -$83.6 billion in December) and January retail sales rose 1% (0.9% ex-autos) versus -2.7% (and -3.1%) in December.
But what is clear is that efforts by governments around the world have so far failed to work – a situation that should surprise no one with a reasonable handle on economic history. As we see from this chart below from John Mauldin’s Frontline Weekly, world trade has fallen off sharply in the last year, especially in the closing months of 2008. It harkens back to the chilling effect the Smoot-Hawley Act of 1930 had on trade at the beginning of the Great Depression. More of a concern here at home, U.S. exports fell 6% in December (more than imports) and many economists now expect Q4 GDP growth will be revised downward to a -5% from the initial estimate of -3.8%. Protectionist policies in Washington aren’t helping nor are Geithner’s comments immediately after taking over as Secretary Treasurer challenging the Chinese monetary policies. Wave 3 of Wave 5… From an Elliott Wave perspective, the Dow Industrial Average ($INDU) appears to have put in the top of an Intermediate corrective Wave 4 on January 6 and is now in an impulse Wave 5 (down). On a smaller degree, it is in a Minor Wave 3, Minute Wave 3, (down) and Minuette Wave 2 (up). The Intermediate Wave 3 first target (T1 on the chart) is around 7500 but given the time this has taken to develop is a broad target only since the trade time has past optimal (see horizontal gold histogram at the bottom of the chart). Given that it is now in a Minuette Wave 2, the Dow has the potential to rally to a maximum of 8315 but then from its peak should resume the impulsive (direction of the primary trend) down move. We will update our count next week.
Figure 2 – Three-minute chart of the INDU showing Elliott Wave patterns and projected targets. Chart generated by Refined Elliott Trader (RET) courtesy of Elliottician.com Stay tuned for our upcoming monthly newsletter coming your way next week.
Stories of interest this week… Individual Income Tax Credit Is Biggest Chunk of Stimulus Plan http://www.bloomberg.com/apps/news?pid=20601087&sid=aMwkEUADJWsM&refer=home Geithner Bank-Lending Push Thwarted by `Nervous' Borrowers Spurning Debt http://www.bloomberg.com/apps/news?pid=20601109&sid=anccctVJnemE&refer=exclusive Fixing Foreclosures: Lots Of Plans, Murky Strategy http://finance.yahoo.com/news/Fixing-Foreclosures-Lots-Of-cnbc-14339135.html Home Prices in U.S. Slid 12% in Fourth Quarter, Most on Record http://www.bloomberg.com/apps/news?pid=20601087&sid=aY8hiszeIlbU&refer=home http://money.cnn.com/2009/02/12/real_estate/Latest_median_prices/index.htm?postversion=2009021210 Mortgage Rescues Fail as Price Drops Spur Defaults http://www.bloomberg.com/apps/news?pid=20601213&sid=aIex9YRATOo8&refer=home Fed: Americans' net worth hammered by recession http://finance.yahoo.com/news/Fed-Americans-net-worth-apf-14343966.html Four More U.S. Banks Are Shut, Bringing Total for Year to 13 http://www.bloomberg.com/apps/news?pid=20601087&sid=aIWdoV2ckATQ&refer=home Mission Impossible? G-7 Vows To Restore Confidence in Bank System, World Economy http://www.bloomberg.com/apps/news?pid=20601087&sid=aQSyq1mTw63A&refer=home Laid-Off Foreigners Flee as Dubai Spirals Down On the lighter side… If you lend someone $20 and never see that person again, it was probably well worth it. --------------------------------------------------------------------------------------------------------------------- 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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