| TSG Weekly Market Watch July 13, 2007 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||
| Monday, 16 July 2007 | |||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending July 13, 2007TradeSystemGuru.com Topics Discussed This Week:
SummaryParaskavedekatriaphobia (fear of Friday the 13th - triskaidekaphobia is fear of the number 13) was no problem for stocks this week as the Dow broke out of its bullish flag chart pattern this week with a vengeance and in the process hit another new all-time high. It is now on track to hit 14,000. Ditto for the S&P500 as it closed Friday at another new all-time high. Meanwhile, the Dow Transport and Russell 2000 also hit new highs and the Nasdaq Composite continued to extend its move as it retook territory not seen since February 2001. The Dow Transports was again the best performing major index as it also made a new all-time high in spite of surging oil prices – a good indicator of economic strength in a number of sectors. Technically SpeakingWe mentioned last week that action in the markets resembled that in past summers. But this week, the normally moribund summer rally came alive. Bull flag patterns were broken to the upside in a number of indexes and stocks which bodes well for further gains in the weeks ahead. Necklines for the Dow at 13,270 and S&P500 of 1490 – levels that if broken would spell trouble – now seem like distant memories. And the Nasdaq Composite continues to look unstoppable as tech stocks lead the charge. We mentioned Dan Zanger’s (www.ChartPattern.com ) market leaders like Google, Apple and Research in Motion last week. They again led the drive higher and in the process pulled the whole market along in their wake. Watch these stocks going forward even if you have no plans of ever buying these frisky highly volatile puppies. They will flash advanced signals of where the market is headed. Commodities also rallied again this week pushing the NYFE CRB Index up to 423.39 from 416.07 last week and 410.36 two weeks ago. As surging commodity prices indicate, inflationary pressure is still very much alive and well and not only a problem in far away places like China, Iceland and New Zealand (whose economies continue to fight and lose the inflation battle). Inflation in the United States has been exacerbated by a falling greenback. Gold put in another good week as it broke above its 50-day moving average but more interestingly, looks to be in the process of forming a bullish ‘W’ bottom chart pattern. The yellow metal closed Friday at $667.30 up from $654.70 last week and $651.60 two weeks ago but it still well off its April high close of $695.60. According to our research, gold is entering a period of strong historical performance from the end of July to the end of September but this period of strength can also last till the end of the year, especially if the dollar continues its downtrend. And speaking of the buck, it was another disappointing week as the U.S. Dollar Index closed the week at 80.39 down from 81.26 last week and 81.69 two weeks ago. This was a twelve-year low touched briefly in April 1995 and before that, breached for nine days in July 1992. Continued weakness will further motivate currency traders and central banks to buy the euro and other strong currencies in an effort to protect themselves. But a falling dollar is inflationary and puts added pressure on the Fed to raise rates in the United States, especially given similar moves by other central banks around the world over in the last few weeks. Unfortunately, this trend does not bode well for banks, lenders, CDO bond holders and homeowners plagued by sub-prime and mortgage woes (see Synopsis below). Higher rates are the last thing they need. It was the fifth strong week for oil as the NYMEX crude oil (continuous) surged to close at $74.13 up from $73.15 last week and $70.68 two weeks ago. The current rally began following the January 18th low of $51.81 and if recent retail figures are any guide, higher energy prices are crimping spending in other areas. The MSCI Emerging Market Index ETF (EEM) also continued to rock and roll this week as it to close at 142.75 from 138.30 last week and 131.65 two weeks ago highlighting continued emerging market strength in spite of the challenges. EarningsQ2-07 earnings reporting season kicked off this week and with the first 440 companies out of the gate, net improvements from operations over Q2-06 was up 4% compared to 8% for Q1-07 (versus the year before). Earnings improvements have rapidly decelerated since there most recent peak in Q4-06 (see chart below). These data are not just from S&P500 companies but more than 4000 companies that report earnings tracked by the Wall Street Journal, so a broader look at corporate health.
Chart A – Quarterly corporate earnings improvements of more than 4400 companies tracked by the Wall Street Journal showing rapid deceleration. Economic ReportsHere’s what the charts had to say this week.
Chart 1 – Consumer credit swelled 6.4% in May thanks to a jump in credit card use. Revolving credit, the largest percentage of which is credit card use rose at an annual rate of nearly 10% in May which non-revolving credit (car and boat loans) rose 4.4%. Chart 2 – May’s trade gap grew by $1.3 billion on the back of rising oil prices and a weak dollar. The good news is that for other goods, the deficit remained the same. The bad news is that it didn’t drop either. Meanwhile, the deficit with China hit $20 billion in May up from $17.8 billion in April. Chart 3 – One big reason for America’s continuing trade deficit lies at the feet of one nation with the largest foreign reserves in the world. This month it was announced that China’s foreign reserves swelled to $1.33 trillion in the first half of the year contributing to an acceleration of money flow in that country. This compares to an accumulation of foreign reserves of $247.3 billion for all of 2006. This phenomenal increase indicates the surge in economic growth and inflationary pressures in the Asian tiger and the government’s lack of success in cooling it despite a raft of new taxes and regulatory controls. Chart 4 – Import prices rose again in June for the fifth consecutive month also no-doubt because of increased credit card use highlighting the ability of the consumer to shrug off subprime woes and just keep on spending.
Chart 5 – On Friday we learned that food and retail sales dropped 0.9% in June while food and retail sales ex-autos fell -0.4% showing that consumer spending focused on imported goods instead of domestic products. Auto sales took it on the chin with a 2.9% drop while housing goods such as furniture, electronics and building materials led the drop. Next Week
SynopsisStocks remain in rally mode but boy have they been climbing a wall of worry – the greatest of which is the growing lending catastrophe in the housing market. This week Ohio Attorney General Marc Dann gave notice that he was also investigating rating agencies for their part in the fraud that has riddled mortgage lending practices to determine what part overly generous ratings of traunches that make up mortgage backed securities and specifically collateral debt obligation (CDO) bonds were responsible for the growing tsunami of defaults. Another nail was hammered into the housing-market coffin this week with the revelation that national mortgage foreclosures surged 87% in June from June 2006 according to the National Association of Realtors. But the organization also announced that they expected the real estate prices to drop 1.4% this year. Who are they trying to kid? Inventories of unsold homes have surged past two-years in Florida and other parts of the country and cancellation rates grow. Just how accurate are reported selling prices? According to Commerce Department statistics reported last week, national median home prices actually rose 0.9% in May from May 2006 but that seems to belie all other housing-related data. The reason is that prices are often artificially inflated by generous builder incentives and cash rebates (including under-the-table and not reported to mortgage lenders) back to buyers that are included in the selling price. Incentives offered by one of the nations’ largest homebuilders, Lennar Corp. averaged $43,700 a home in Q2-07 up from $24,700 in Q2-06. Since existing homes represent 85% of the market, a practice responsible for further skewing reported prices came to light in…yes you guessed it, Florida, the foreclosure capital of America. According to Nancy Hogan, a member of the Florida Real Estate Commission, who gives presentations to realtors about artificial pricing schemes, “every time I go and give one of my presentations and there are 100 Realtors there and I say, ‘Has any one seen an offer asking for $100,000 going back to the buyer and 50 percent of them raise their hands’ . . . it's that rampant…The average person in a neighborhood full of fraud is paying higher taxes because of an artificial [price] base,” she said in a July 1 Miami Herald article. One agent interviewed for the same article admitted to raising the price of a home in foreclosure by $375,000 to $1.2 million. That means the price reported to the Multiple Listing Service upon which the mortgage is given and other homes in the neighborhood are priced was more than 30% higher that it was in reality. Since this latter practice is often illegal and therefore unreported, estimating its true scope is nearly impossible. We won’t get an accurate picture of true selling prices until these practices stop, either as a result of regulator action or when the fraud that often occurs in re-sale home price setting becomes a priority target for law enforcement agencies. Signs are growing that the sub-prime type fiasco is not limited to the U.S. as it was revealed this week that similar problems exist in the U.K. according to the country’s financial regulator. All of the sub-prime lenders examined failed to apply responsible lending standards and five of 34 lending intermediaries (brokers) being investigated and may be punished the U.K. Financial Services Authority said in a statement last Wednesday according to Bloomberg. Like their American counterparts, the number of U.K. bankruptcies surged to a record and were up 24% in Q1-07 as borrowing costs surged. It was the highest reading since records began in 1960. The difference is that until very recently housing prices were still rising in Britain. Meanwhile back on this side of the pond, even with all the pricing funny business going one, the Mortgage Bankers Association announced that the U.S. is suffering its worst house-price decline since the 1930s. The disturbing difference is that unlike that black period in history nearly 80 years ago, the country is not in a depression or even a recession. There is growing concern that fallout from the fiasco will begin spilling over into other parts of the economy. Loans requiring little or no documentation made of 46% of all U.S. sub-prime loans and defaults on these loans hit 13% in February according to the report. Just how we can avoid an ultimate serious spill over effect from this one defies imagination. And what happens when we do enter a recession? ------------------------------------------------------------------------------------------------------ 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 added). DisclaimerTradeSystemGuru.com obtains information from sources deemed to be reliable; |
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