| TSG Weekly Market Watch August 10, 2007 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||
| Sunday, 12 August 2007 | |||||||||||||||||||||||||||||||
TSG Stock Market LetterWeek Ending August 10, 2007TradeSystemGuru.com Topics Discussed This Week:
Liquidity crunch pushes central bankers to open their vaultsThe numbers in the table above belie the strain placed on the global financial system and the tumultuous week for stocks. And the green across the board was only made possible by a cash injection from by central banks around the globe to help prevent a mass panic for the exits. As one veteran stock trader commented this week, “some of the wildest swings I’ve seen have taken place over the past few weeks and today [Wednesday] was right in there with a 150 point move up on the DJIA that was quickly erased to a 10-point loss only to be followed by another 150-point gain!” That was followed by the second biggest Dow 2007 drop of 387.18 points on Thursday. The largest drop was 392.3 points on February 27. If the numbers in the table are any indication, the banker’s ploy worked, but for how long? Technically SpeakingIt was a week that should have been negative but wasn’t thanks to the global plunge protection team. And since investors have been so far mollified, the technicals aren’t showing any signs of panic. A word of caution is necessary here. When manipulation like what happened in the markets this week occurs, technicals (which are used to show crowd sentiment) are pretty much useless. However there are some useful gems to be gleaned from the charts this week. Market Leaders Turn DownFirst let’s take a look at the market leading stocks. The eight stocks in Dan Zanger’s newsletter portfolio this week included NVDIA Corp, Research in Motion, Garmin, Baidu.com, Apple Computer and Goldman Sachs. It is interesting to note that Dan begins to include short candidates when the time is right and this causes his portfolio performance to drop as focuses those leading the drop. He included Goldman Sachs this week as a past short candidate but observed that long investors appeared to be capitulating. Such capitulations often signal a bounce or bottom. The challenge is in knowing which one…  Figure 1 –Two weeks ago, Dan Zanger’s portfolio of market leaders was up 23% last week over the last month, last week they were up 12% and this week they fell 3.9% while the SPY was down 4.1%. This does not bode well for stocks over the next few weeks. Market leaders courtesy of The Zanger Report. Late Breaking NewsIn his Sunday issue of The Zanger Report, Dan Zanger made these prescient comments. "Two of the most brutal and crushing trading days I've experienced since the market breaks of 2000 as the market opened with back to back days of massive opening gaps down with leading stocks plunging from $10 to $18 in just two days. By the way there were 3 massive down events in 2000, March, September and a brutal gap down on the leading stocks in November. And oh yeah, I remember John Chambers the CEO of Cisco Systems (CSCO) saying in November of 2000 that he saw no sign of slowing and business was as strong as ever. I believe he said this last week too. On the major index front, the Dow Jones Industrials is the only index still well above its 2-standard deviation trend channel mid-line: the S&P500, Dow Transports, Dow Utilities and Russell 2000 are near their bottom trend channels while the Nasdaq Composite and NYSE Index are around their mid-channels. This means that all indexes are still in healthy uptrends above trendline support. No signs on the charts yet of any potential trouble ahead. However, while the downturn in market leaders is bearish, the bounce in small caps as evidenced by the surge in the Russell 2000 is bullish. The same can be said for commodities and while down on the week (the NYFE CRB Index dropped to 415.83 from 423.16 last Friday), the index still hovers around its mid-channel uptrend line. Gold closed the week at $675.10 down slightly from $678.10 last week but quite respectable considering that it dropped more than $11 on Thursday before rebounding Friday and performed well even as the U.S. dollar rallied. After two months of poor performance, the U.S. Dollar Index staged a comeback this week as it closed the week at 80.60 after closing last week at 80.06. Meanwhile, NYMEX crude oil (continuous) experienced a tough week as the commodity closed at $71.25/bbl. from $75.37 last week and $77.02 two weeks ago. In the process, it gave summer drivers a much-needed break at the pumps. Like their developed country counterparts, emerging markets held up remarkably well as MSCI Emerging Market Index ETF (EEM) closed the week at 127.55, down marginally from its 127.75 close last week. As well, its uptrend that began in March 2003 remains very much alive and well. EarningsAs of Sunday, the Wall Street Journal had not updated its Q2-07 weekly earnings tally for public companies. As we reported last week 2109 companies have reported Q2-07 earnings and the improvement stands at 10% versus Q2-06 from 7% last report compared to 8% for Q1-07 versus the year before. However, after a rash of poor earnings reports have hammered homebuilder stocks over the last couple of weeks, it is interesting to note that Beazer Homes has delayed the filing of its most recent quarterly earnings report citing possible problems with how its former chief accounting officer recorded reserves and other liabilities. Since July 18 the stock has dropped 16%. Economic ReportsHere’s what the charts had to say this week. Consumer credit expands for eighth consecutive month
Chart 1 – If there was any tendency towards a fall in consumer credit, which includes household non-mortgage loans, it has yet to appear in this statistic. June consumer credit was $13.2 billion while the May number was revised upward to $15.9 billion from $12.9 billion. According to Briefing.com, credit cards or revolving credit make up 37% of total consumer credit. If consumers begin to crumple under rising energy and food prices as well as mortgage debt, we will see a sharp rise in credit card defaults which will have serious consumer spending implications. According the Mortgage Bankers Association, the number of credit-card delinquencies have been running around 4% over the last six years up from around 3% in the 1990s. But while delinquencies are rising in sub-prime and Alt-A mortgages, credit card defaults have been trending lower. Import prices expand for sixth consecutive month
Chart 2 – The Wall Street Journal posted an article on August 11 that proclaimed that the era of disinflation may have come to an end for the U.S. based on the fact that import prices had risen for the sixth straight month. The suggestion was that after another record increase of prices of products from China, the U.S. could no longer count on cheap overseas goods to offset domestic price pressures. While plainly sensationalistic, the journalist may have had a point other than just selling newspapers. Lost in translation however, is the fact that the U.S. dollar has taken a beating and that more than anything else is responsible for rising import prices (including oil). Next WeekHere are the economic reports we’ll be watching.
SynopsisDoes the global market bailout indicate a threat to economic stability?For years, traders have discussed the myth of the plunge protection team (PPT). It explained those days when markets were in a downward spiral and miraculously before close, someone or something would come to the rescue pushing prices into positive territory. Most have considered it just a wishful myth. This week however, we got powerful proof of its existence except instead of being an American phenomenon, it turned out to be much bigger than we’d imagined. It was kind of like believing in Santa Claus then seeing him, the Easter Bunny, Tooth Fairy, the Loch Ness Monster, Sasquatch and a leprechaun while sitting around a campfire with a few hundred sober friends. In our synopsis last week we discussed the Fed’s mission impossible in keeping the lid on inflation while containing the damage from reckless mortgage lending practices over the last three years. This week, the hangover from that party spread and only thanks to some very public intervention by global central bankers was a major meltdown averted. The myth-to-reality revelation came in the form of a more than $300 billion bailout by the central banker PPT on Thursday and Friday. But as we saw last week, now that they have shown themselves, they better stick around. The real pain for those who took out sub-prime and Alt-A mortgages begins next year with nearly $280 billion in mortgages resetting at higher rates during the first quarter of 2008 alone. This is more than half the value of all the resets in 2007. It will no doubt cause more fund defaults as large as or larger than the scale of what happened this week. Tremors from the sub-prime mortgage fallout are now spreading to other mortgage classes and being felt in places as far away as Australia as funds that jumped on board the sub-prime collateralized debt obligation (CDO) train begin to suffer the pains of overindulgence. Here is how the action played out this week. While investors in the U.S. have become conditioned to the litany of bad news revolving around the sub-prime debacle, their European counterparts aren’t so sanguine. The seriousness of the situation for European investors really hit them following a July 30 announcement from German Bank IKB Deutsche Industriebank that some of its sub-prime assets were haemorrhaging value prompting the German government to offer a bailout package to calm tattered nerves on August 2, according to report entitled The U.S. Subprime Crisis and the Pain to Come published by Stratfor this week. Up until that time, few Europeans appreciated the scope with which Euro-based funds had participated in the sub-prime free-for-all but this was a wake-up call. Investors began to pull out of stock markets en masse. Their fears were further validated on Thursday (Aug 9) by an announcement by French bank BNP Paribas that it was suspending (a euphemism for shutting down) three 3 funds valued at $2 billion on suspicions that their value had been diminished by sub-prime exposure. Panic began to spread but it was obvious that governments had no intention of letting the situation get worse. On Thursday and Friday, central banks injected some $323 billion of liquidity into markets according to the National Post. The International Monetary Fund (IMF) commented that global financial turmoil was “manageable” but there is little doubt that damage control required in those two days was been massive and swift. To put the situation into perspective, the €95 billion ($134 billion) that the European Central Bank alone injected into the market on Thursday was more than it did in the wake of the September 11, 2001 crisis according to Bloomberg News. And so far, the ECB has pumped in more than $210 billion. There is little doubt that the sub-prime and now alt-A problems are spreading and that it will get worse. But what does it mean on a macro-economic scale? Long-term subscribers will remember that last year we discussed the inverted yield curve (short-term Treasury yields drop below long-term) that began in December 2005 and then resumed in June 2006. Well, it has stayed inverted up until recently. Now the curve has reverted right-side up again. An inverted curve has been an accurate harbinger of recessions in the past and based on our research on two-year versus ten-year yields, an inversion has preceded each recession by as little as six and as much as 24 months. So have such metrics as a dramatic fall in fixed residential investment and a peak in real average hourly earnings. The biggest global bubble in history has also been discussed here at length and the fact that no bubble in history has ever had a happy ending. But so far, few analysts have been mentioning the “R” word of late. Maybe its time to re-open that discussion. We are now in the final half of the pre-election year when political powers do their damndest to put the economy and consumers (voters) in up mode. We got incontrovertible proof of that this week. (It may interest you to know that John Howard and his conservative party are also gearing up for an election. But they were dealt a blow this week when the Reserve Bank of Australia raised the overnight rate to an 11-year high of 6.5% in a move that broke an unspoken rule of not raising rates in an election year.) But the questions on every rational investor’s mind now should be 1) how long can the powers that be keep this game of musical chairs going, 2) what happens when they ultimately fail and the many bubbles percolating around the globe undergo their painful reversions to the mean? But most importantly to each and every one of us, 3) what can I do to protect myself? Stay tuned for more next week… ------------------------------------------------------------------------------------------------------ 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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