| TSG Stock Market Letter September 14, 2007 |
|
|
|
| Written by Matt Blackman | |||||||||||||||||||||||||||||||
| Sunday, 16 September 2007 | |||||||||||||||||||||||||||||||
|
TSG Stock Market LetterWeek Ending September 14, 2007TradeSystemGuru.com Topics Discussed This Week:
Here is what happened in the markets this week.
Market awaits decision from Benny and the FedIt was the fourth week in a row of below average trading volumes as the pros and their cash kept to the sidelines pending Tuesday’s Fed funds rate (FFR) decision from Beleaguered Benny and his Fed rock’n rollers. But whatever tune they choose, the response will be loud. If they play their standard tune “Gonna Hold the Course,” there will be a chorus of boos and charge for the exits on stocks short-term. If they play “Givin’ You a Quarter,” which would be a new tune for them, boos will not be as loud but foreigners and the currency savvy will head for the exits to avoid a falling dollar. If Benny and the band completely cave and play “Trying to Please the World” with a 50 basis-point drop, stocks may rally but foreigners and the currency smart will get the hell out of Dodge in a hurry before the buck falls out of bed. Then watch the price of energy, commodities and import prices to take off. But it will darken the longer-term outlook and make sales of U.S. Treasuries at future Fed auctions more difficult which will mean higher market-driven rates and some real long-term pain. I can just hear Dr. Bernanke’s saying to himself, “Alan, this is another fine mess you’ve gotten us into… and left me to clean up.” If Ben chooses option one, he loses credibility with the general public and politicians. If he opts for option two or three in an effort to keep the many bubbles from bursting and appease politicians, he loses the respect of savvy traders and economists. Adding insult to injury, whatever the outcome, it will be good publicity for his predecessor’s new book as it hits bookstores. And on that note, it appears that Mr. Greenspan is shouldering at least some of the blame for the current situation with a mea culpa about the way he handled the last economic slowdown by throwing money at it (see link to article entitled “Greenspan’s subprime slip” at the bottom of this newsletter). According to the article, the “Bubble King” as he has become known in economic circles admitted his error in his new book. (Well worth reading the article and maybe even the book...) But why he waited this long to make the admission is no surprise – it will boost book sales but it also re-opens wounds encountered by those who took his bad advice to opt for adjustable rate mortgages (ARMS) in 2004 and 2005 as rates began to rise in earnest, many of whom now find themselves having to renew at much higher rates. Technically SpeakingIf the effective Fed funds rate (EFFR) is any indication, the Fed at least is still juicing the system with cash. The average EFFR for July was 5.26% or about the current 5.25% target rate. In August, it dropped to 5.02% and so far in September the average EFFR has been 5.01% (to Sept 12) although it did rise to 5.18% on Wednesday. Does the recent jump mean that Bernanke will hold the course on Tuesday? Here is what the technicals are saying. Market leaders take off again… Although the indexes performed well this week, Dan Zanger’s composite of market leaders listed in his Wednesday newsletter did better with a weekly gain of 5% compared to 1.9% for the S&P Depository Receipts SPYDR (SPY), 2.5% for the Dow Jones Industrial Average (DJX) and 1.4% for the Nadaq Composite (IXIC). The other good news for the market is that Dan is still bullish and opting for long trades only based on what he sees. His leaders this week consisted of 11 stocks including past bullish favorites Garmin (GRMN), Baidu.com (BIDU), Dryships (DRYS), Oil Holders (OIH) and Research in Motion (RIMM) as well as past favorites Crocs (CROX), Transocean Inc. (RIG), Dryships (DRYS), MasterCard (MA) and Foster Wheeler (FWLT) as well as Wynn Resorts (WYNN) and iSharesFTSE/China (FXI). As we see from Figure 1, his leaders are again performing very strongly with a monthly gain of more than 16% - more than four times that of the major indexes over the same period. This bodes well for the market going forward and indicates that stock traders are expecting at least a 25 basis-point drop in the FFR.
Figure 1 – Monthly performance of Zanger’s market leaders compared to the SPY (proxy for the S&P500), the Dow Jones Industrial Average (DJX) and Nasdaq Composite (IXIC). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com. Trading volumes remained low so it’s a mug’s game trying to guess what index movements meant this week. Very little has changed regarding the technical outlook for the Dow Industrials, S&P500, NYSE still engaged in bullish catapult or ‘W’ patterns discussed over the last couple of weeks. On a weekly basis, after surging to a multi-year high August 17 the Market Volatility Index (VIX) settled down but then surged again. It ended the week at 24.92 well above the 52-week moving average of 14.53. Volatility has remained high and fear is still in the stock market. Commodities surged this week and the NYFE CRB Index sits well above the 2-standard deviation trend channel midline and 50-day moving average as closed at 428.54 up from 418.53 last week and 413.49 two weeks ago. Gold also had another good week as the yellow metal closed at $711.00 up from $703.00 last week and $675.80 two weeks ago. Watch gold accelerate if the Fed drops the Fed funds rate 25 or 50 basis points on Tuesday. No surprise that the dollar has been taking it on the chin after Bernanke’s surprise 50 basis-point drop of the discount rate and talk of a drop in the FFR. For the first time in 15 years, the U.S. Dollar Index fell below significant support at 80 last week. It fell further this week to 79.14 intraday before recovering to close the week at 79.46 down from 79.72 last week and 80.79 two weeks ago. Still strongly mired in a downtrend that began in 2002, there are scant signs either technical or fundamental (with the possible exception of a volume capitulation spike as trading hit a new all time high this week) that this dollar trend will change anytime soon. Pushed higher by a falling dollar, NYMEX crude oil (continuous) again surged this week closing at $78.09/bbl up from $75.62 last week and $74.04 two weeks ago. A drop in the FFR on Tuesday may be good for stocks but it will be decidedly bad for consumers as it will push energy prices higher. Another beneficiary of a falling dollar, emerging markets, again performed well as the MSCI Emerging Market Index ETF (EEM) gained nearly 4% as it ended the week at 137.17 up from 132.15 last week. In the process it appears to have broken its resistance band between 133.75 and 135 so expect higher prices ahead. EarningsWith 4092 companies having now reported Q2 earnings (up from 4041 last week) earnings improvement held steady at 13%. This compares to an 8% improvement for Q1-07 versus the same quarter the year before. Economic ReportsHere’s what the charts had to say this week. Consumer credit takes hit
Chart 1 – Consumer credit was cut nearly in half in July to $7.5 billion from the originally reported number of $13.1 billion in June and that was revised down to $11.9 billion. It is clear that the economic uncertainties and mounting job losses are having an impact but consumers continue to borrow more money to go to the mall. It will be very interesting to see how much August and September consumer credit has been impacted by the growing credit crunch and this will in turn give us an indication of how bullish the all-important consumer is feeling. August and September figures will also tell us how hard the rise in oil prices to nearly $80/bbl hit the consumer. More evidence of a slowing economy Chart 2 – The trade gap widened in July to $59.25 billion and was revised upward in June which will continue as long as the dollar weakens, that is unless consumer spending suddenly falls out of bed. But as we mentioned last week, we expect that to happen in the next year or so as the economy slows further.
Chart 3 – Another sign of a weakening economy came with the release of August import prices showing a 0.3% drop – the first decline since January. As we see, the trend has been negative so no real surprise here.
Chart 4 – While food and retail sales climbed 0.3% thanks in part to a step-up in incentives by automobile companies struggling to keep sales growing with limited success, food and retail sales ex-autos dropped 0.4% in August. Again, the trend has been negative and getting steeper so no surprise here either.
Chart 5 – A benefit of a slowing economy is that our deficits decline and this was the case as the current account deficit – a wider look at the overall trade deficit with the rest of the world than chart 2 – as it declined to $190.8 billion or 5.5% of GDP in Q2-07 from nearly 6% in Q1. The Q1 deficit was also revised upward from $192.6 billion to $197.1 billion. However, expect this trend to reverse in Q3 thanks to rising energy prices and if the U.S. dollar continues to be weak. Next WeekIt’s a much anticipated week for economic reports. Here are the ones we’ll be watching. - Tuesday, August Producer Price Index (previous 0.6%), August PPI, ex-food & energy (previous 0.1%), July Treasury international capital flows (previous $107 billion), September NAHB Housing Market Index (previous 22), FOMC interest rate decision (2:15 Eastern). - Wednesday, August Consumer Price Index (previous 0.1%), August CPI, ex-food & energy (previous 0.2%), August housing starts (previous -6.1%). - Thursday, September Philadelphia Fed Business Index. SynopsisThe world on hold…It has been quite a while since markets have so eagerly (perhaps nervously is a better word) awaited the outcome of an FOMC meeting. I have expressed my views as to what the possible outcomes could mean. But no one really knows exactly how traders and investors will ultimately react. For the longer-term market outlook however, how Bernanke deals with this crisis will speak volumes. If he stands his ground and does the right thing, there is still hope for a soft landing no matter how slim that chance may be. But if he caves to market and political pressure, markets may perform better in the short term but there will be hell to pay in the next year or so. (Remember that TV ad for oil filters when the mechanic says you can pay me (a little for an oil filter change) now or you can pay me (a lot more for an engine rebuild) later?) Bank runs similar to what is happening with another banking victim of the sub-prime debacle, fifth largest British mortgage lender Northern Rock, may be just a taste of what we’ve got to look forward to. While the Bank of England stepped in to bail the bank out, how many more lenders can central banks bailout or nationalize especially given that we are still in the early innings of the sub-prime and Alt-A mortgage fallout? (see http://tinyurl.com/3yu6vn ) Is it any wonder that investors (and just about everyone else in financial markets) are so nervous? Financial Wisdom Radio...On a final note, I had the pleasure of being a guest on the Gabriel Wisdom show Financial Wisdom on the Business Talk Radio Network. I was being interviewed about the latest article Mike Carr and I wrote for SFO magazine on discovering undervalued stocks... Here is a link to download it in MP3 format http://tradesystemguru.com/audio/091207-MB.mp3 Links Greenspan’s subprime slip – National Post ------------------------------------------------------------------------------------------------------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; |
|||||||||||||||||||||||||||||||
| Last Updated ( Sunday, 23 September 2007 ) | |||||||||||||||||||||||||||||||
| < Prev | Next > |
|---|