TSG Stock Market Letter
Week Ending February 29, 2008
Topics Discussed This Week:
- Stock picture clears…
- Leaders continue higher but…
- Earnings take a another turn for the worse
- New and existing homes continue to drop
- Financials face $600 billion in credit losses?
| INDEX | Weekly Close | Last Week | Change | Change% |
| INDU | 12,266.39 | 12,381.02 | -114.63 | -0.93% |
| DJT | 4,550.58 | 4,680.59 | -130.01 | -2.78% |
| SPX | 1,330.63 | 1,353.11 | -22.48 | -1.66% |
| COMPX | 2,271.48 | 2,303.35 | -31.87 | -1.38% |
| RUT | 686.18 | 695.43 | -9.25 | -1.33% |
| EEM | 139.90 | 141.25 | -1.35 | -0.96% |
Stock picture gets a little clearer but…
Lackluster performance last week was replaced by a drop this week thanks to greater than 2.5% drops on Friday for the S&P500, the Dow Industrials and Nasdaq. The week started with a positive response from investors on news that rating agency S&P would maintain its AAA credit rating on Ambac Financial even though it was overly optimistic ratings in the past that got us into this credit mess in the first place. But it was enough to push the Dow 189 points higher Monday. This was followed by a positive response to a plan by IBM to buy back $15 billion worth of their shares Tuesday.
But by Wednesday, the positive momentum had run its course as markets ended basically flat. Oil prices surging above $100 and fears of a bad report from Dow component AIG hit stocks Thursday. As it turns out the AIG fears were justified and the company reported a more than $11 billion write-down for the biggest loss in its long history. This combined with a poor Chicago PMI report put investors in a bad mood but it was the revelation from UBS estimating that credit losses could top $600 billion and mounting inflation worries that really did the trick as the Dow lost than 300 points Friday.
Technically Speaking
Leaders still higher
Dan Zanger’s Sunday portfolio led the pack again for the third consecutive week but the gain was half of last week’s at 1.6% compared to losses of 1.7% for the S&P500 and 0.9% for the Dow.
His 11 picks this week again included Mosaic (MOS), Research in Motion (RIMM), CF Industries (CF), Transocean (RIG), First Solar (FSLR), Potash (POT) as well as Mechel Open (MTL) and Devon Energy (DVN), Deere & Co (DE), Apache Corp (APA) and EOG Resources (EOG).
Figure 1 – Weekly performance of Zanger’s market leaders compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX) and Nasdaq Composite (IXIC). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com.
As indexes fell this week, they were led to the downside by the Dow Transports with a nearly 3% drop. As one analyst correctly pointed out this week, it is nearly impossible for markets to enjoy any long-term rally when both the financials and transports are breaking down which has been clearly demonstrated over the last few months.
Volatility took another jump this week as the Market Volatility Index (VIX) rose to 26.54 from 24.06 last week from 25.02 two weeks ago and 28.01 the week before.
But it was another strong week for the 17 commodities that make up the NYFE CRB Index, which soared to close at 565.65 from 546.32 last week and 526.28 two weeks ago. It pushed the index further above its upper 2-standard deviation trend channel, a level it has closed above now for eleven consecutive weeks.
Gold continued moving up closing at $974.30 from $947.40 last week and $906.10 two weeks ago. It is well into its strong seasonal performance period between the end of January and end of June.
The dollar also dropped to a new all-time low on expectations of more rate cuts by the Fed combined with weak economic news pushing the U.S. Dollar Index down to 73.75 from 75.57 two weeks ago and 76.21 two weeks ago.
Meanwhile the NYMEX crude oil (continuous) breached $100 again to end the week at $101.84 from $98.81/bbl last week and in the process put some serious pressure on transports as we saw in the index performances.
This week, the U.S. prime bank rate again held steady at 6.00% as did the Fed funds rate at 3.0%. The 3-month London Interbank Offered Rate (LIBOR) fell to 5.0575% (3.08% last week) and 3.3% five weeks ago. Freddie Mac mortgage rates jumped to 6.24% (from 6.04% last week) for the 30-year fixed mortgage while the rate rose to 5.11% (from 4.98% last week) for the one-year adjustable rate (ARM) – evidence that mortgage lending standards continue to tighten in spite of Fed efforts to the contrary.
Earnings
Earnings falling faster
With of 3155 companies now having reported Q4-07 results (2786 last week) improvements fell to -54% versus -36% last week. A thousand companies still have to report but this late collapse is not good news for stocks. It compares to a drop of 21% (4205 companies) at the end of Q3-07 reporting season and a 13% jump in Q2-07.
Economic Reports
We got more bad economic news on Thursday as preliminary GDP held steady at an anemic 0.6% gain for Q4-07 thereby increasing the probability that growth will be negative when final figures come in. Also not shown in our charts below is the Chicago Purchasing Manager’s Index which unexpectedly fell to 44.5 in January from 56.5 in December. While of less economic importance than the Purchasing Manager’s Index (reported this Monday), this showed that manufacturing levels in the Chicago area had fallen below expansion levels. Consumer sentiment is also slipping which is no surprise given the credit fallout.
New home sales still falling
Chart 1 – New home sales fell 2.8% to an annually adjusted rate of 588,000 in January as 43,000 homes sold while the median price of a new home dropped to $216,000. That is down nearly 18% from the peak of $262,600 in March 2007. Meanwhile, inventories have surged to an 11.3 month supply up from 8.2 months in January 2007. The big question is how much of the current price represents builder incentives that are not included in price if the property goes into foreclosure?
Existing home sales and prices continue to plummet
Chart 2 – Chart of month-over-month changes in existing home sales showing the National Association of Realtors reported 0.41% drop in January to an annually adjusted rate of 4.89 million. Other than the trendline we have included, the drops look relatively benign. After dipping briefly, the inventory of unsold existing homes is back on the rise and hit 4.19 million (10.3 months) in January
Chart 3 – But sales have quickly plummeted on a year-over-year basis with sales down more than 24% since January 2007. How has the drop in sales impacted median home prices?
Chart 4 – Median prices have fluctuated wildly in the last year as this chart shows. The median price dropped to $201,900 down 12.3% from their peak of $230,200 in July 2006 but of greater concern is the fact that after staging a comeback in mid-2007, they have dropped quickly in the last seven months dropping nearly 12%. A similar early 2007 rise did not occur in the more reliable Case-Shiller home price index so was more related to changes in the makeup in home sales rather than any real rise in prices. As reported by the NAR, median prices are down 4.3% on a year-over-year basis but this does not accurately reflect real price declines as this chart shows. The moral of the story is that no matter which metric you use, they all eventually rhyme once enough time and data have elapsed. However, those (including the Fed) who relied on median data to tell them when prices were dropping were way behind the curve.
Chart 5 – The Case-Shiller home price index registered a year-over-year decline for the 20-city composite of 9.1%. From their peak in July 2006, this index has fallen 10.5%. What is interesting is that while the CS index initially showed falling prices long before median prices did, the latter now leads the former. But the most important takeaway is that prices are showing no sign whatsoever of leveling off and are in fact falling at a faster rate. It was the twelfth consecutive month of price declines. Of the 20 cities, Miami remained the weakest market with an annual decline of 17.5% followed by Las Vegas and Phoenix (-15.3% each). Charlotte, Portland and Seattle are the only three cities where prices aren’t falling. The Case-Shiller Home Price Index is reported on the last Tuesday of every month.
Next Week
Here are the reports we’ll be watching.
- Monday, January Construction Spending (previous -1.1%), February ISM Manufacturing Business Index (previous 50.7).
- Wednesday, February ISM Non-Manufacturing Business Index (previous 41.9), Federal Reserve Beige Book.- Thursday, January Pending Home Sales (previous -1.5%).
- Friday, February Nonfarm Payrolls (previous -17,000), February Unemployment Rate (previous 4.9%), January Consumer Credit (previous $4.5 billion).
Synopsis
Stocks continue to wade into the land of credit uncertainty
Even as markets celebrated the confirmation of a AAA rating for Ambac from Standard & Poor’s, evidence was coming to light that the credit losses for the world’s financiers were mounting. What is troubling is that the global housing markets upon which many of the loans are based are just beginning to be felt. So far, financial institutions have disclosed $181 billion in credit losses and writedowns. But this is low and could total more than $600 billion if a new estimate by UBS is any guide.
Why the increase? So far losses have represented subprime mortgage write-downs. But on Thursday, it was announced that London-based hedge fund Peloton Partners said that it is being forced to liquidate a $1.8 billion fund because of tighter lending standards. But this is just the tip of the hedge iceberg. But more importantly perhaps is the fact that the next level of mortgages are beginning to show signs of trouble – Alt-A. Not only is the Alt-A a larger market than subprime, it also crosses the important boundary from subprime borrowers into the prime market.
So game one is still in play but the Alt-A game has just begun as the credit crunch spreads to new and parts of the market previously believed unaffected.
As far as stocks are concerned, we are still waiting for the much anticipated bounce. Volumes have returned to normal but every time a rally looks to be building, bad news derails it and this bear market takes on more ominous undertones in the process.
Stories of interest this week…
All-Markets Index shows liquidity still rising
Financial Firms Face $600 Billion of Losses, UBS Says
Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns
------------------------------------------------------------------------------------------------------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).
Disclaimer
TradeSystemGuru.com obtains information from sources deemed to be reliable;
however, TradeSystemGuru.com. does not guarantee the accuracy of any of the
information provided. TradeSystemGuru.com makes no warranties, expressed
or implied, as to the fitness of the information for any purpose, or to results
obtained by individuals using the information. We may or may not be invested
in any investments cited above.
In no event shall TradeSystemGuru.com. be liable for direct, indirect, or incidental
damages resulting from the use of the information found on or distributed through
this website. TradeSystemGuru.com shall be indemnified and held harmless from
any actions, claims, proceedings, or liabilities with respect to the information
and its use. TradeSystemGuru.com does not make specific trading recommendations
or provide individualized market advice. All information provided is only to be
construed as opinions and to be used as an information service only. We encourage
investors to contact a registered securities representative prior to making any
investment or related decisions.