| TSG Weekly Market Watch February 22, 2008 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Sunday, 24 February 2008 | ||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending February 22, 2008Topics Discussed This Week:
Still mired in no-man’s land It was another lackluster week for stocks but the important takeaway is that key support levels for the S&P500, the Dow Industrials and Nasdaq held again for the sixth week. However, the overriding optimism was again evident in a week that saw oil breach $100 again as the Dow rallied more than 200 points in the last 30 minutes of the day on Friday on a rumor that monoline bond insurer Ambac would be getting a much needed bailout. But the danger for stocks is far from over as Friday’s credit relief rally demonstrated. Investors hopes remain firmly pinned on the success of bailout efforts. Technically SpeakingLeaders continue to surge Dan Zanger’s Sunday portfolio led the pack for the second consecutive week with a gain of 3.3% (more than 4% last week) compared to 0.2% for the S&P500 and 0.3% for the Dow. His 12 picks this week again included Mosaic (MOS), Research in Motion (RIMM), Petro Bras (PBR), Hess Corp (HES), CF Industries (CF), Transocean (RIG), First Solar (FSLR), SolarFun (SOLF), Potash (POT), Intuitive Surgical (ISRG) as well as Mechel Open (MTL) and Devon Energy (DVN).
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. This week most major indexes rose, but this time the Russell 2000 small cap index was the worst performer falling -0.9%. As mentioned, the major indexes failed to break down through key support levels and this is good news as long as it lasts. This week’s action occurred on below average volume and the volume Friday for the NYSE was the fifth lowest of the year – not a huge endorsement for any major upside from buyers. Volatility continued to recede this week as the Market Volatility Index (VIX) fell to 24.06 from 25.02 last week 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 546.32 from 526.28 last week and 518.47 two weeks ago. It pushed the index further above its upper 2-standard deviation trend channel, a level it has closed above now for ten consecutive weeks. Gold joined the commodity party closing at $947.40 up from $906.10 last week. It is well into its strong seasonal performance period between the end of January and end of June and has now broken key resistance at $930. The dollar also dropped again this week with the U.S. Dollar Index dropping to 75.57 from 76.21 last week and 76.82 two weeks ago. Meanwhile the NYMEX crude oil (continuous) breached $100 Wednesday but backed off slightly to close the week at $98.81/bbl versus $95.45/bbl last week and $91.77/bbl two weeks ago. 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) rose to 3.08% (3.07% last week) and 3.3% four weeks ago. Freddie Mac mortgage rates rose to 6.04% (5.72% last week) for the 30-year fixed mortgage while the rate fell to 4.98% (5.0% last week) for the one-year adjustable rate (ARM) – evidence that lending standards continue to remain tight. Earnings Earnings still trending lower This week as earnings season approached the three-quarter mark with 2786 companies having reported, Q4-07 earnings improvements remained stubbornly negative with a 36% drop over the same quarter a year ago versus 37% last week. This compares to a drop of 21% (4205 companies) at the end of Q3-07 reporting season and a 13% jump in Q2-07. Economic ReportsHere are the reports we were following this week. On Thursday the January Philadelphia Fed Index, which tracks the direction of manufacturing orders and production, fell to its lowest level since the recession of 1991 with a reading of -24 is bearish. Any reading below zero signals contraction. We won’t bother discussing the Consumer Price Index since other than exerting a very short-term impact on markets is of little use to the investor or swing trader. Our two-year chart shows that the index is flat but that belies the huge inflation in everyday items like food and fuel. We instead prefer to track the CRB Index as a gauge of real inflationary pressures which is discussed above. Builder confidence tips up
Chart 1 – Builder confidence gained one point in February to 20 according to the National Association of Home Builders on Monday. It was about half the reading a year ago. Builder’s were buoyed by the fact that the index of prospective buyer traffic picked up from a reading of 14 to 19 while the expectation for sales over the next six months slid from 28 to 27. Current sales of new single family homes moved up to 20 from 19 in January. But permits continue to fall
Chart 2 – The media highlighted the fact that housing starts improved 0.8% to 1.012 million (seasonally adjusted annual rate) in January but the more important and leading metric, housing permits fell 3% (1.012 million). Highlighting this point, housing starts are now at a 16 year low. But this compares to a new all-time housing permit low since records began in 1959. Not sure why the media focuses on starts because that number is subject to seasonal and demand vagaries of weather, builder crew retention and permit expiry deadlines. What do I mean? Starts are often delayed by poor weather and jump when weather improves but more challenging to measure is how many homes are commenced to just to keep crews working or when permits approach their expiry date – none of these factors relate to demand. Housing permits are the real indicator of demand. On a year-over-year basis permits were down 23% in January while starts were down 28%. From their peaks in January 2006 permits have fallen 53% while starts are down 56%. And as we see from the above chart, there is no indication of a bottom yet. Another metric we are watching closely – lumber futures prices. Next Week Here are the reports we’ll be watching. - Monday, January Existing Home Sales (previous -2.2%). - Tuesday, January Producer Price Index (previous -0.1%) ,PPI, ex-Food & energy (previous 0.2%). - Wednesday, January Durable Goods Orders (previous 5.2%), January New Home Sales (previous -4.7%). - Thursday, Preliminary Q4-GDP (previous 0.6%). - Friday, January Personal Income (previous 0.5%), January Personal Spending (previous 0.2%), February Chicago PMI (previous 51.5). Synopsis Two more housing kickers As if stubbornly high mortgage rates and tightening credit weren’t enough to worry about, here are two interesting housing points to ponder. According to Stuart Saft partner in real estate legal firm Dewey & LeBoeuf interviewed on Bloomberg Friday, once a bank has started foreclosure proceedings, home prices drop an average 25% to 35% and the longer the process takes, the further prices fall. Rick Sharga of RealtyTrac estimates that 1.5 million Americans will be foreclosed upon this year and that number will only rise as the economy cools. As we mentioned two weeks ago, foreclosures climbed 75% in 2007 from 2006. But a problem becoming evident and one that has the potential to prolong the housing market downturn is the fact that approximately $1.2 trillion in mortgages were converted to various types of structured investment vehicle derivatives (CDOs etc) and sold on Wall Street. It turns out that in many cases appropriate mortgage documents were not included which is preventing banks and lenders from being granted foreclosure in the courts. While a benefit for homeowners who get to live mortgage free until their situations are resolved, it means that a growing number of homes will be occupied without taxes, interest and maintenance being paid which will negatively impact home values in subject and surrounding homes. This promises to be an interesting topic to follow.... (see article Banks Lose to Deadbeat Homeowners below ) Another unknown kicker to home prices will be the drops resulting once incentives expire as foreclosures become a larger percentage of unsold inventories. Cash bonuses and builder incentives currently represent 20% of the average purchase price in new home. More difficult to estimate are similar incentives and under the table kick backs in existing homes sales. Neither should be included in the purchase price and could be skewing home prices upward across the board (and across the nation) by 10% or more. Unless this time is different, we will see incentives dwindle as the rising number of foreclosures with no incentives attached hit the market. Stocks continue to walk the line Overall, the outlook for stocks looks cloudy. Zanger’s zingers heading higher is bullish as is the fact that support has so far held for most of the major indexes. But we are far from being out of the woods yet and Friday’s rally on low volume is indicative of explosive rallies that can punctuate bear markets. Stories of interest this week… Bond Insurer Split Threatens $580 Billion of Notes The $280bn question: where are the rest of the subprime bodies? Recession Claims Its Next Victim: Commercial Construction Bank’s bad news is canary in the coal mine Banks Lose to Deadbeat Homeowners 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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