| TSG-Weekly Market Watch February 20, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 22 February 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending February 20, 2009Topics Discussed This Week:Stocks sink deeper… Leaders slip for second week Earnings just keep deteriorating Scant signs of recovery in the new home market Traders and investors – the latest government targets Elliott Wave outlook for the Dow...
Last Week
Quote of the week “The borrowers that really stretched to buy their house and lied the most about their income receive the largest break in payments,” Laurie Goodman and Roger Ashworth analysts for Amherst Securities on the Obama mortgage bailout plan. Stocks sink deeper into moral hazard morass It was no surprise that the Dow dropped 6.2% with the Transports dropping nearly 9% and emerging markets more than 10% again this week, given the anti-Wall Street-free market tsunamis emanating from Capital Hill. It was the worst President’s Day week performance since the holiday was officially introduced in 1971 but given the trend, it was a good thing that the week was short. Major indexes also broke significant support levels, which has serious bearish implications. It’s become crystal clear that the markets have good reason to fear the new Washington ‘politocracy’ demonstrated by the way stocks have been reacting with each sound bite from the Hill. Introduction of H.R. 1068 on Friday the 13th (see Synopsis) didn’t help. This Democrat-sponsored bill that proposes a trading/investing tax on buying and selling major financial instruments further exposes the political disdain for anything profitable. It is just me or does this smack of the McCarthy era crusade in the late 1950s against communism? Except this time the target is capitalism itself. Adam Smith is rolling over in his grave. Makes you wonder how much longer our economy and markets can withstand the steady parade of dimwitted economically-destructive policies from these Congressional and Senate clowns... Maybe next week I’ll say what I really think… On that note, be sure to watch Rick Santelli’s government bailout rant in the Videos section below. Technically Speaking Leaders slide lower for second consecutive week This week Dan’s portfolio included Apple (AAPL), Baidu.com (BIDU), CF Industries (CF), Energy ConDev (ENER), Google (GOOG), Mosaic (MOS), Potash (POT), Sohu.com (SOHU), Vornado Realty (VNO). While they again outperformed the major indexes this week, the group was down 2.4% versus -3% last week. Indexes that led to the downside were the Emerging Markets (ETF-EEM), Dow Transports and Russell 2000 small caps. Taken together, this is again 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 just below average this week for the major indexes, as key support levels at 7530 for the Dow Industrials and 800 for the S&P500 (the 2002 weekly lows for both indexes) as well as 775 for the S&P (the cycle low) were broken across the board. The 2002 weekly low of 1135 for the Nasdaq and 2020 for the Dow Transports still hold. A break on high volume would have been more bearish but a slow descent on moderate volume shows a slow but painful attrition of buyers. But it could also signal a dangerous fake-down – an attempt to suck a bunch of shorts into selling the market. Extreme volume on large down moves often indicates seller capitulation making way for a rally but that certainly didn’t happen this week.
Figure 2 – Weekly charts of the Dow Industrials and Dow Transports showing that the former has now broken through both its November 20 and November 2002 lows (see red arrows). Both indexes are again moving in the same direction (see blue dashed trend lines), confirming the downtrend from a Dow Theory perspective. Chart by GenesisFT.com Not surprisingly, the Market Volatility Index (VIX) jumped this week to close at 49.30 from 42.83 last week. Based on the action this week, the heightened levels of investor fear indicated by this index have been justified. Since bottoming December 5, then rebounding, the 19 commodity NYFE CRB Index fell in sympathy with stocks this week to close at 345.94 up from 359.45 last week and 368.64 two weeks ago. Since hitting a high of 611.51 in July the index is down 43% from its peak. Gold surged again this week to close at $1001.10/oz up from $941.10 last week. But volume and open interest continued to decline and that is bearish on a rally, especially at a potential double top which is where we are now. Given this scenario, gold has the potential to drop rapidly and significantly in the coming weeks in spite of what the fundamental gold pundits would have you believe. Meanwhile the dollar continued to defy economic and government-policy gravity this week as the U.S. Dollar Index stretched to close at 86.59 up from 86.11 last week and 85.30 two weeks ago. Luckily, although economic policy in the U.S. has been anything but responsible, economies elsewhere are even more challenging and their policies equally ill-conceived. Since bottoming in July, the U.S. Dollar Index is up more than 20%. Crude slipped again this week to close at $39.80/bbl from $42.10 last week and $46/bbl two weeks ago. Volume was again extreme this week further supporting the presence of capitulation point from which prices rally. Oil is down more than 70% from its mid-summer high of $147.20. The 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 to 0.21% (from 0.24% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) firmed to 1.24875% (from 1.2375% last week). This compares to LIBOR 52-week high of 4.81875% last October. Meanwhile Freddie Mac mortgage rates dropped again this week to 5.04% (from 5.16% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) slipped to 4.8% (from 4.94% 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.
The Baltic Dry Index, an indicator that tracks the cost of shipping dry goods by sea, continued to increase this week to 2099 (1908 last week), now up 217% from its December 5, 2008 low. This is bullish as it shows that demand for cargo transport has been climbing which is bullish for oil prices. It is important to point that some of the industry market leading shipping stocks tend to move ahead of the BDI when demand really starts to pick up and the BDI is not a reliable trading indicator. In the VectorVest index of 47 ship transport companies (which includes tankers as well as dry bulk shippers), the top five performing stocks this week are Stealthgas (GASS), Teekay LNG Partners (TGP), Knightsbridge (VLCFF), Navios Maritime (NMM), and Double Hull Tanker (DHT). Earnings Q4 earnings – just keep deteriorating With a total of 2328 companies having reported Q4-08 earnings in the seventh week of this reporting season (2006 last week), the net (loss) on continuing operations widened to -$93.12 billion (from -$79.64 billion last week) which works out to a change of -171.7% from Q4-07. This compares to -156.4% last week, -150.7% two weeks ago, -144% three weeks ago and -80% four weeks ago. The final result for Q3-08 was -62% from Q3-07. The largest percent drops in Q4 earnings have occurred in the following sectors: Basic Materials (100 companies) down 380%, Financials (563 companies) down 320%, Consumer Services down 268% and Oil & Gas (85 companies) down 180% since 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. The good news (if there is any) is that the huge drop increases the likelihood that we are now experiencing the worst earnings declines and although profits may not recover quickly, we are hopefully close to some sort of bottom in the rate of decline. Takeaway – any improvement in earnings which will include smaller losses, will be viewed as positive by the markets. Economic Reports Still scant signs of life in new housing markets… In a brutal week for stocks and earnings, the economic news was no better. On Monday we learned that the National Association of Home Builders housing market index moved one point higher to 9 from 8 but remains mired in the basement and continues to show that builders are as pessimistic as they have ever been about the outlook for their industry. This was confirmed Tuesday when new home permits and starts numbers dropped significantly again with starts falling off 16.8% from last month. On a year-over-year basis which provides a more accurate assessment, permits and starts are off 51.6% and 56.2% respectively and off 76.6% and 79.7% from their peak in January 2006. We won’t bother discussing CPI or PPI because both have proven to have little practical investing or trading value and worse probably provide an unrealistic picture of the situation. Perhaps most importantly, Treasury international capital flows which show the net change in funds into and out of US Treasuries from abroad ticked up slightly from last month to $74 billion which was just above the average $64.6 billion per month foreigners have purchased over the last three years. But based on the latest estimate from the Congressional Budget Office, the 2009 deficit (not including the most recent $787 billion bailout) is estimated to rise to $1.2 trillion, nearly triple the most recent estimate of $455 billion for 2008. The means that Treasury will have to sell $100 billion in bonds just to pay the bills! (At least the math is easy…) As another point of reference, the tally so far to rescue Fannie Mae and Freddie Mac hit $238 billion (not including the additional $18 billion that Treasury is expected to lend to the terrible twins this year), which is more than the entire federal budget deficit in 2007. To add insult to injury, it was only six months ago that the Congressional Budget Office put a $25 price tag on the bailout of these two government sponsored enterprises, that included the rather ridiculous assurance from then CBO Director Peter Orszag that there was “probably better than a 50% chance that the government would never have to spend a dime to shore up the giants,” according to the Wall Street Journal.
Yellow dashed line shows the $100 billion amount the U.S. Treasury will have to be able to sell in bonds in the coming year just to pay the bills. The orange solid line shows the declining trend over the last three years. Synopsis Traders and investors targeted… On Friday, February 13, U.S. Democratic Congressman Peter DeFazio, introduced H.R. 1068: “Let Wall Street Pay for Wall Street's Bailout Act of 2009”, which aims to impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stock, options, and futures.” For example, the 0.25 percent financial-transaction tax on $100 million (relatively small by professional management standards) on sales AND purchases equals an additional tax of $500,000 per round trip for all stock, futures and options trades! This tax would be due even if you lose money on those trades!! It shows just how out of touch these bureaucrats are with market reality and sets a dangerous capital tax precedent. We agree with trader Dan Zanger, who made us aware of this bill in his Zanger Report newsletter this week, that those who have managed their assets well enough to be able to trade the market, should not have to pay for the mistakes of poorly managed institutions and individuals. It also has the potential to seriously damage the image of the United States as a reliable and just financial investment center for foreigners. Please visit the following links to sign this online petition and get more information: http://www.rallycongress.com/no2tradertax/1536/ Please contact your local senators and voice your disapproval: http://www.senate.gov/general/contact_information/senators_cfm.cfm Please contact your local Representatives and speak your mind: http://www.house.gov/house/MemberWWW.shtml I urge you to vote NO on H.R. 1068 Elliott Wave outlook on the Dow Last week, we discussed the current Elliott wave count on the INDU showing it in an intermediate Wave 5 (impulse in the direction of the major trend) from the January 6 high with first target around 7500. We said it had the potential to rally but that did not happen and our downside target was hit. Although still in an intermediate Wave 5 (down), and minor Wave 3 (down), the minute Wave 3 looks to have ended at the Friday low at which time the current ZigZig corrective pattern began now in the process of forming a Wave B (down). This should be followed by an impulse Wave C (up) which has a projected probable target according to my analysis of around 7600 but Wave C could also be short and sweet with the bear trend resuming sooner.
Figure 3 – Thirteen minute chart of the Dow Jones Industrial Average (INDU) showing intermediate Wave 5, Minor Wave 3 (pink) and bottom of Minute Wave 5 and start of ZigZag corrective up. The near term (upside) target on this count is around 7600 which should then be followed by a resumption of the bear to below 7000. Chart produced in Refined Elliott Trader courtesy Elliottician.com Please see disclaimer below. We maintain our projected longer-term target of 6800 and possibly lower before Intermediate Wave 5 and the first phase of the current bear market is over. The good news is that once Wave 5 has finished, we expect the rally (of the bear market variety) which could be impressive to follow later this year. Stay tuned!
Stories of interest this week… Dodd Says Short-Term Bank Takeovers May Be Necessary http://www.bloomberg.com/apps/news?pid=20601087&sid=a402k68PAWUA&refer=home Obama Pledges $275 Billion to Stem Foreclosures, Help Borrowers http://www.bloomberg.com/apps/news?pid=20601087&sid=a7W_kzfPZbzw&refer=home Obama’s Economic Stimulus Bill Most Ambitious Since Roosevelt http://www.bloomberg.com/apps/news?pid=20601087&sid=ajHfW4awsaho&refer=home Mortgage Plan Aids Liars About Income, Amherst Says http://www.bloomberg.com/apps/news?pid=20601110&sid=a2LYydiGs1YU Mexico Bond Risk Tops Brazil for 1st Time Since 2001 http://www.bloomberg.com/apps/news?pid=20601110&sid=aESieRoxQc2c Bond Trading Highest Since ‘07 as Credit Freeze Thaws http://www.bloomberg.com/apps/news?pid=20601110&sid=auDDvgLYYik0 Living in the shadow of Japan's falling prices Japan Economy Goes From Best to Worst on Export Slump http://www.bloomberg.com/apps/news?pid=20601109&sid=aOJtExdGoqu0&refer=home Shipping Index Surge Signals Commodity Currency Gains http://www.bloomberg.com/apps/news?pid=20601109&sid=agVgG8lEahnI&refer=home Swiss Re Downgraded by S&P After ‘Capital Depletion’ http://www.bloomberg.com/apps/news?pid=20601110&sid=aDsfr1dRjlJg U.S. Wants UBS to Break Swiss Law, Bank Lawyers Says http://www.bloomberg.com/apps/news?pid=20601110&sid=aNM40swqVjPs VIDEOS Rogers Says Geithner Caused Crisis, Must Let Banks Fail Inside the Meltdown http://www.pbs.org/wgbh/pages/frontline/meltdown/ Rick Santelli strikes a cord with his take on the government bailouts http://www.youtube.com/watch?v=bEZB4taSEoA
On the lighter side… Give a man a fish and he will eat for a day. Teach him how to fish, and he will sit in a boat and drink beer all day.
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