| TSG Weekly Market Watch July 3, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 05 July 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending July 3, 2009Topics Discussed This Week:
Stocks suffer another tough week… Leaders head down again PEs ignite as earnings deteriorate Home price drops decline, credit card debt soars & payrolls disappoint Hyperinflation – Could it happen again? Elliott Wave SPX Perspective
Last Week
Quote of the week “It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.” — Friedrich Kessler, Harvard law professor discussing his experiences during the Weimar Republic hyperinflation from Ralph Foster’s new book Fiat Paper Currency: The History and Evolution of Our Money (see links below). Stocks suffer another challenging week… Things this week were moving along nicely and if the week had ended Wednesday it would have been another flat week. But then came Thursday and a more depressing non-farm payrolls report than expected frightened investors into the woodwork. But maybe it was just an excuse to start the Independence Day weekend early. The good news is that the price drops occurred on low volume making them less bearish. Best wishes for an enjoyable Independence Day long weekend! Technically Speaking Leaders head down again Of the fourteen stocks in Dan Zanger’s Sunday June 28 newsletter, again only three stocks were threatening new or recent highs, Cornerstone Therapeutics (CRTX), China Housing and Land (CHLN) and Vanceinfo Tech Ads (VIT). But by the end of the week, these stocks had dropped an average 4.92% which is bearish. Q2-09 earnings reporting season begins next week which has the potential to strongly influence index movement short-term.
Figure 1 – Weekly chart of the S&P500 showing the beginning of the uptrend in March and breakdown last week (red arrow) with retest and failure of the lower trend channel support line this week. Green arrow shows the “golden cross” of the 50-day moving average crossing above the 200-day in the last week of May. Another week of losses will result in a “death cross” with the 50-day breaking down through the 200-day. Also note that volume this week was half of the average volume. Chart provided courtesy GenesisFT.com Weekly volumes for the major indexes were about half of their 50-day moving averages this holiday shortened week that officially marks the beginning of summer. The fact that prices moved down on falling volume is generally bullish as it shows a lack of selling but that indexes failed to break back above trendline support is bearish. We will have to wait till next week to see if this rally can re-ignite. Not surprisingly, the Market Volatility Index (VIX) ticked up this week to close at 27.85 from 25.93 last week as a little more fear crept into the market. This week the CRB Index slipped again to 398.79 from 400.70 last week, down from 417.04 May 29. Since bottoming December 5, the CRB index is still up 25%. Gold slipped to $929.40/oz this week. Since surging to a high of $1001.10 February 20, the precious metal has made two serious attempts at the peak but has failed each time. Volume and open interest continue to look anemic and that is also bearish. Gold normally has a seasonal low in July and then rallies into year-end so there is a good chance it will mount a third attempt at $1000/oz. Meanwhile, the U.S. Dollar Index held its own this week to close at 80.30. It as struggled since March, closing at 79.87 last week down from 80.35 the previous week. A steadily weakening dollar is inflationary and generally bullish for commodities, interest rates and U.S. multinational corporations with a larger share of their revenues derived from overseas sales but bearish for stocks overall. Crude oil futures also weakened again this week to close at $67.42/bbl down from $69.16 last week and $70.02 two weeks ago. July 11 marks the one-year anniversary of the all time high in crude futures of $147.90/bbl and crude is still down more than 50% from that high. The Baltic Dry Index, an indicator that tracks the cost of shipping dry goods by sea, slipped again this week to 3672 down from 3703 last week. Continued strength in this index is bullish for oil and the economy. The U.S. bank prime rate and the Fed funds target rate held steady at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate firmed to 0.20% (from 0.19% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) continued to fall closing at 0.5775% (from 0.5975% last week) to another new 52-week low. This compares to LIBOR 52-week high of 4.81875% last October. On the mortgage front, Freddie Mac mortgage rates slipped this week to 5.32% (from 5.42% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) firmed to 4.94% (from 4.93% 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. PEs re-ignite as earnings deteriorate again June 5, 2009 still holds the record for the highest average Price/Earnings ratio for the 8,011 US stocks of the VectorVest Composite Index (VVC) of 155.58 with average earnings of just $0.13/share. Over the next three weeks earnings began to firm hitting $0.14 then $0.15 two weeks ago. But that trend reversed this week as earnings retraced to $0.13/share pushing the average PE back up to nearly 150. The problem is that earnings growth has remained the lowest in at least 15 years at an anemic 1%. These highs compare to a previous peak PE of 60.51 in mid-May 2003 during the last recovery. But the difference is that during that period, earnings growth remained much healthier 8% and earnings had begun improving nearly a year prior after hitting a low of 3%. The next chart shows how the 50-week moving average (purple line) acted as support (green arrows) during the last rally and has acted as resistance (red arrows) since October 2007. Looking back to the price peaks in March 2000, average PEs were 32 and earnings growth was 11%.
Figure 2 – Chart showing weekly prices, average Price/Earnings ratios for 8011 US stocks tracked by VectorVest. As the chart shows, the average PE for the broad range of publicly trading companies moved up again this week as overall earnings fell which is very near it all-time high two weeks ago. Chart courtesy of VectorVest.com Meanwhile earnings for the 2,969 stocks in the Canadian Toronto Stock Exchange (TSX) tracked by VectorVest fell this week to -$0.03/share from -$0.01 last week holding the average PEs for Canadian stocks covered by the index in negative territory. Earnings peaked at an average $0.73 per share in September 2005 and have steadily fallen since. By the week of March 6, 2009 they had fallen to $0.16/share and on June 12 to -$0.02/share during a period in which the TSX exchange index rose more than 40%. This is extremely bearish for Canadian stocks and the economy, contrary to what a brigade of Pollyanna economists would have you believe about the ability of Canada to weather the downturn better. The only difference is that the Canadian economy lags the U.S. so problems are arising later. Economic Reports Home prices drops moderate, credit card debt soars and payrolls disappoint On Tuesday, the Case-Shiller housing price index showed that national home prices were still falling in April, down 0.6% since March, but that they did so at the slowest monthly rate since June 2008. On a year-over-year basis, the 20-city composite index fell 18.1% which is back to the decline rate in October 2008. So while the good news is that home prices are falling less quickly, it will be a while before they stop falling altogether. The index is still above the long-term linear regression trend indicating that prices have a way to go just to get back to trend. From their peak in July 2006 national home prices are down 32.6% according to the 20-city index. We also learned Tuesday that delinquencies on the list risky mortgages more than doubled in Q1-09 versus a year earlier according to the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). Prime loans 60 or more days past due climbed 2.9% from 1.1% a year earlier.
Tuesday also marked the first day of trading for the Major Metro Housing Up (UMM) ETF which began trading at $20/share and the Major Metro Housing Down (DMM) ETF that began trading at $30.97 that allow investors to hedge (or profit) against rising or falling home prices without having to purchase property. For more information on these new issues, please go to http://www.macroshares.com/public/macro/macrohome.aspx On Wednesday, we learned that construction spending dropped 0.9% in May compared to a 0.6% rise in April. It was the worst showing since a 3.4% drop in January. From January 2005 the trend for construction spending remains strongly negative.
On Thursday June non-farm payrolls disappointed the street as another 467,000 jobs were lost pushing the unemployment rate to 9.5% which is the highest level since 1983. This follows a loss of 322,000 in May. Due to a number of statistical tricks to make the data look better than they really are including a “adjustment” during the Clinton years that took discouraged worker or those who had given up looking for jobs out of the statistic, the unemployment rates before the 1990s and now cannot be credibly compared according to John Williams of ShadowStats.com. By calculating the unemployment rate as it was pre-1982 reveals the true unemployment rate of 20.6% according to Williams. This compares to a peak rate of 25% during the worst years of the Great Depression.
In a Bloomberg interview, Harvard economics professor Jeffrey Frankel said that he has found average hours worked per week to be a leading indicator of employment versus payrolls, which is a lagging indicator. So we decided to take a look.
This chart of seasonally-adjusted average hours worked per week was still above trend in January 2008 (first orange arrow) compared to the above chart of non-farm payrolls which first turned negative January 2008. The second orange arrow for hours worked shows what happened when payrolls registered their worst loss of 741,000 jobs. But although jobs losses have moderated since, the number of hours worked has continued to drop. According to the Bureau of Labor Statistics (BLS), hours worked dropped to 33.0 which is the lowest level since records began in 1964. Although the jury is still out regarding how effective this statistic is as a leading indicator, it does provide another prospective on jobs activity. Finally, we learned this week that credit card defaults in both the U.S. and Canada rose to record highs in May. Credit card debt has the very real potential to be the next big shoe to drop and one that could be especially damaging to the bottom lines of banks on both sides of the border (see two articles in Suggested Reading). Synopsis Hyperinflation – Could it happen again? Last week we were mired in technical trading territory squeezed between weak fundamentals and optimism that the worst was over. That optimism took a hit this week with the worse than expected non-payrolls jobs and consumer debt default numbers amid growing evidence that the “green shoots” we were seeing have begun to turn brown. In our upcoming monthly TSG Report, we examine the real risks of inflation. Do indicators such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) provide an accurate inflation picture? In the latest Labor Department report, CPI dropped 1.3% for the year ending in May which was the largest drop since 1950. But other than fuel, how much have your costs of food, lodging and other living expenses gone down in the last year? Exactly – they haven’t gone down. Calculate CPI like it was calculated in 1980 and you get a very different and much more disturbing inflation picture. As traders and investors, can we afford to ignore the risks of rising inflation and the potential of rapid rise in interest rates this will cause? Here are a couple of points to consider. In his brand new book Fiat Paper Currency: The History and Evolution of Our Money (see link below), Ralph Foster traces the course of the various fiat currencies (currencies with no asset backing such as gold or silver) from 11th century Szechwan, China to Zimbabwe issued throughout history and each has suffered the same fate. In every case, hyperinflation was the final stage as officials responsible for the currency printed increasing amounts to pay debts that the civilization was unable to repay. Is there a risk of this happening in the U.S.? This next chart provides a clue.
-Chart courtesy of www.ShadowStats.com It promises to be an interesting journey. In the meantime, we highly recommend the three short videos produced by Inflation.us as an introduction to the topic. Links can be found in Suggested Reading below. Elliott Wave S&P500 Perspective Last week, the highest probability wave count on the SPX showed a Zigzag with the top of Wave 5 forming the end of Wave A on June 11 followed by the retracement with the longer-term target between 770 and 870. That take proved close to the mark this week as the S&P500 shed more than 22 points to close below the psychologically important level of 900 again. The next two charts show the highest probability short and longer-term EW counts and probable targets (darkest areas in vertical histograms).
S&P500 one-minute chart showing the Zigzag from the June 11 high with the end of Wave A June 23. This chart shows the highest probability move is lower degree Zigzag bounce into a range between 910 and 930 short-term (dark magenta vertical histogram).
S&P500 30-minute chart showing the highest probability move longer-term with a bounce back to around 925 followed by a resumption of the downtrend to the high probability target area (vertical dark gold histogram) between 775 and 875 later. On the lighter side… Here are some actual maintenance issues in gripe sheets from pilots (P) of a well-known air cargo carrier and the response from maintenance engineers (S). It may take a college degree to fly a plane and only a high school diploma to fix one but it’s a good thing that humor doesn’t require a university education! P: Left inside main tire almost needs replacement.
Stories of interest this week… U.S. credit card defaults rise to record in May… http://www.reuters.com/article/businessNews/idUSTRE55E5GQ20090615?sp=true …and Consumer debt rises sharply in Canada http://www.financialpost.com/story.html?id=1758432 Bond Dealers Say Worst Over as Demand Soars at Sales http://www.bloomberg.com/apps/news?pid=20601087&sid=abfcxoyxoisw "Annoying" Green Shoots Phrase Takes Over the Lexicon, If Not Economy http://www.bloomberg.com/apps/news?pid=20601109&sid=aVBKus1dis34 Mortgage Delinquencies Double on Least-Risky Loans http://www.bloomberg.com/apps/news?pid=20601087&sid=aZaaKZlwiKFE Housing in Peril as Obama Fails to Get Financing Breakthrough http://www.bloomberg.com/apps/news?pid=20601109&sid=aiZMzULhjTIo Banks `Burned Once' by Home Bonds Raise Holdings 5.6% http://www.bloomberg.com/apps/news?pid=20601087&sid=aImf5u463oUc FICO Scores Show Flaws as U.S. Banks Cut Credit Lines http://www.bloomberg.com/apps/news?pid=20601213&sid=aDdhtcEykjR8 Banks Falling 23% Since May Foreshadow S&P 500 Slump (after $12.8 Trillion in Bailouts) http://www.bloomberg.com/apps/news?pid=20601087&sid=aGDhz5w8ODrY Sterling Crisis Looms as U.K. Unraveling Points to Budget Cuts http://www.bloomberg.com/apps/news?pid=20601109&sid=aptnrMueIerQ America's Best And Worst Cities For Families http://www.forbes.com/2009/06/29/cities-family-affordable-lifestyle-real-estate-cities-family.html Discussion of the Weimar Republic hyperinflation http://www.globalresearch.ca/index.php?context=va&aid=13673 Link to Ralph Foster’s Fiat Paper Currency: The History and Evolution of Our Money VIDEOS Hyperinflation Movie (Three parts) w/ Ron Paul, Peter Schiff, Jim Rogers, Tom Woods, Marc Faber that is definitely worth a watch, especially after reading the quote at the top of the newsletter. 1. http://www.youtube.com/watch?v=Yd0b5XIhCkM 2. http://www.youtube.com/watch?v=1O7jRfCqwSc 3. http://www.youtube.com/watch?v=vvc2GDgkAkQ
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