| TSG - Week ending August 21, 2009 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 22 August 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 TSG Stock Market LetterWeek Ending August 21, 2009Topics Discussed This Week:
Stocks resume uptrend Earnings still weak, PEs up again Market at a glance Yup, more good news but… Elliott Wave take
Last week
Quotes of the week "If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory." --- Warren Buffett in an op-ed article this week "But let’s be charitable and assume that the herd is correct this time around [and the recession is really over] — a 49% rally from the lows and the degree of multiple expansion suggests that the S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is not our view, and even if it is attainable, guess what? It’s priced in. Corporate bonds (and Treasuries too) are discounting around a 2.0% GDP trend, which looks more realistic." -- Economist David Rosenberg of Gluskin, Sheff Aug 20-09 And their off…again… After taking a break last week, stocks resumed their upward march despite weakness in China in the last couple of weeks. So instead of rolling over like the Chinese indexes did, U.S. stocks took off with their Chinese counterparts in hot pursuit. As the next chart shows, the Shanghai Comp (SSE) recovered after being down 20% Wednesday and other international markets are also following those in the US. But while SPX volume was well above average Friday, it was below average for the week which is bearish. But if Friday is an indication, additional (real or perceived) good news could bring more bulls into the game next week.
Figure 1 – Daily chart showing performances for the Shanghai Composite (SSE), Indian Nifty (NIFTY), German DAX (GX) and S&P500 (SPX) Index since the March lows in the DAX and SPX and November low in the SSE after which it rallied 103%. Chart courtesy of GenesisFT.com However, there is one interesting theory that five stocks are responsible for this positive volume and the rally so far that bears consideration... Market at a Glance Here is this week’s table of commodity, shipping and interest rates indicators that we are tracking. In the last column, the trend is marked in green if positive for the market, red if negative and black if neutral. This week, the VIX ticked higher, crude moved up another $4/bbl and the Baltic Dry Index, a useful measure of global product demand and trade, dropped another 10%. That the index has given back more than 42% since peaking in June shows how much global trade has cooled (see article Global Trade Collapsing below) which was a factor in helping drive Chinese stocks lower. Volume has also been strangely absent throughout this rally and we got an interesting explanation of the possible reason for it and for this rally so far. Be sure to read our first story of the week that comes to us courtesy of ZeroHedge.com (see Five Financial Stocks Dominating Market Volume below). Mortgage rates and LIBOR also fell which is bullish for real estate.
* 52-Week High / Low †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 still weak This week, earnings for the 8,013 US stocks of the VectorVest Composite Index (VVC) held an average $0.17/share up from $0.16 two weeks ago and an all-time low of $0.13/share in May through early July. This week the VVC PE was 128.56 up from 126.20 last week. Earnings growth was 1% again this week, the lowest growth rate in at least 15 years.
Figure 1 – Chart showing weekly prices, average Price/Earnings ratios (blue), earnings per share (black) and earnings growth (GRT in red) for 8,013 US stocks tracked by VectorVest showing the average PE for the broad range of publicly trading companies. The purple line is the 50-week moving average (MA). Chart courtesy of VectorVest.com PEs hit an all-time high of 155.58 for the VVC Index June 5. This compares to the 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 at 8% and earnings had begun improving nearly a year prior after hitting a low of 3%. In March 2000, average PEs were 32 and earnings growth was 11%. Economic Reports Yup, more good news or at least that’s the way the market saw it… Even with stocks dropping briefly into bear market territory in China (SSE was down 20% as of Wednesday) stocks managed to rally through the week propelled even higher by better than expected existing home sales Friday. Reports kicked off Monday with news that builders were getting less pessimistic about their industry as the NAHB housing market index kicked up another point to 18 in August for their third consecutive gain. We also learned that Treasury international capital flows are dropping (line 30 of the U.S. Treasury report) as we see in chart 2. This chart at least shows a growing gap between U.S. demand and international supply of money to finance our debt.
Chart 1 – Bloomberg chart courtesy of ZeroHedge.com showing loan delinquencies hitting 9.24% in Q2-09 (ending June 30), their highest level by a wide margin in thirty years. Although this chart doesn’t show it, I’d guess it’s the highest level since the Great Depression.
Chart 2 – Chart showing monthly changes Treasury international capital flows (net foreign purchases of U.S. Treasuries) together with the amount required monthly to finance the budget deficit since 2005 (red line). June was another month of net losses with foreigners further reducing their net holding of Treasuries. This year’s budget deficit estimated by the White House (www.whitehouse.gov) works out to more than $140 billion per month. Also shown is the trend of foreign net Treasury capital flows (yellow line). Source – U.S. Treasury
Chart 3 – Data from the pro-business group, the National Association of Realtors showing July changes in existing home sales, median prices and the overall trend. But is it sustainable? It will be as long as the government continues to pump trillions into the economy. Tuesday we got more housing news with the housing permits and starts data showing the former down 1.8% and the latter slipping 1% in July from June. Annual rates for permits were 560,000 and starts were 581,000 units. Year-over-year, permits were down 39.4% and starts down 37.7% from last July. In the housing department, we learned Friday that July existing home sales surged more than expected to an annual rate of 5.24 million up 7.2% from June and t was enough to help power the Dow 1.7% higher on Friday. As we have said before, that statistic has to be taken with a big grain of salt due to volatility and the unreliable way in which it works. For example, existing sales have surged but less than a third of the sales are “non-distressed.” The inventory of unsold existing homes rose to 4.1 million, a 9.4 month supply unchanged from last month and median prices also showed another decline, this time of 2% from last month to $178,400. One interesting factoid is that cash sales now make up 16% of home sales compared to a long-term average of 10% showing two things – cash is being used to scoop up foreclosure bargains and financing is harder to obtain for the rest of the market. But as chart 3 shows, it was the fourth consecutive month of improving sales and prices appear to be off the most recent bottom. The Case-Shiller home price index will provide a more realistic view of home prices on Tuesday. If you want to see the other side of the real estate story look at overall and commercial loan default rates and be sure to read the property market-related articles below including our first chart that clearly shows consumers under stress. Elliott Wave Take In our last EW report two weeks ago http://tradesystemguru.com/content/view/284/58/ , the highest probability pattern was very similar to the large Double Zigzag off the March 6 low below with a target between 1120 and 1150 for the SPX. That remains the most likely target and interestingly, after correcting and rallying again, the SPX is almost exactly where it was two weeks ago point-wise.
Figure 2 – Hourly chart of the S&P500 showing highest probability pattern. Courtesy of Elliottician.com The second most probable pattern shows a potential shorter-term retracement first into a range of 920-975 before the index powers higher.
On the lighter side… More Murphy’s Laws… Law of Airports The distance to the gate is inversely proportional to the time available to catch the flight. Airplane Law When the plane you are on is late, the plane you want to transfer to is on time.
Stories of the week… Five Financial Stocks Dominating Market Volume http://www.zerohedge.com/article/five-financial-stocks-dominating-market-volume Pension Plans’ Private-Equity Cash Depleted as Profits Shrink http://www.bloomberg.com/apps/news?pid=20601109&sid=acWVaiPjU5iw In New Phase of Crisis, Securities Sink Banks http://finance.yahoo.com/news/In-New-Phase-of-Crisis-wallstreet-1020317667.html?x=0&.v=4 Mortgage delinquency rate hits all time high in 2Q http://www.breitbart.com/article.php?id=D9A4Q7H00&show_article=1 Corporate bond defaults hit record http://www.ft.com/cms/s/0/28aa86cc-8cef-11de-a540-00144feabdc0.html?nclick_check=1 The rising and falling default rate http://blogs.reuters.com/reuters-dealzone/2009/08/20/the-rising-and-falling-default-rate/ Jump of 4% in US office prices raises hope for commercial property http://www.ft.com/cms/s/0/cacd8266-8d20-11de-a540-00144feabdc0.html Global Trade Collapsing, China Now Japan's Top Trade Partner http://www.zerohedge.com/article/global-trade-collapsing-china-now-japans-top-trade-partner BBC dramatizes Lehman collapse in TV movie http://www.reuters.com/article/ousiv/idUSTRE57I31M20090819 Buffett Says Federal Debt Poses Risks to Economy http://www.bloomberg.com/apps/news?pid=20601087&sid=ay3ayJvt3t3s Federal Reserve Balance Sheet Update http://www.zerohedge.com/article/federal-reserve-balance-sheet-update-week-august-19 Janet Tavakoli "Talks Her Book" And Cashes Out http://www.zerohedge.com/article/janet-tavakoli-talks-her-book-and-cashes-out 'Cash for clunkers' running out of gas - fast http://content.usatoday.com/communities/driveon/post/2009/08/68497269/1 A pessimist's prediction: Hyperinflation VIDEOS Meredith Whitney – Bank failures will rise above 300
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| Last Updated ( Sunday, 30 August 2009 ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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