| TSG Weekly Market Watch August 15, 2008 |
|
|
|
| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 17 August 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
TSG Stock Market LetterWeek Ending August 15, 2008Topics Discussed This Week:
Rally meets resistance…again Leaders swing lower Earnings fall further Inflation accelerating on all fronts Home sales hit 10-year quarterly low Large caps swimming upstream
Last Week
Quotes of the week “Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.” George Soros. Rally hits resistance … again This week’s quote is an oldie but goodie, especially given how bi-polar markets have become over the last year. Discrediting the current lie has become a regular occurrence. One popular lie has been that inflation remains benign. But it looks to be about time to step off that one as it appears to have been discredited (see article below “Consumer Prices…”). Could it be that the average investor is learning that the periods leading up to each election have been driven by each incumbent party in an effort to ‘create’ prosperity by generating inflation to get re-elected? Inflation is decidedly not good for stocks over the longer-term, a lesson many are being forced to re-learn the hard way. So what is the latest big lie Wall Street is trying to perpetuate now? If you listen to the financial media, it is that markets have bottomed and now is a good time to buy. But as we have witnessed, the majority of pundits who have been buying this argument since the beginning of the year have been mauled. Warren Buffet is perhaps the best known example of someone who has been buying this argument if the feature article in the August Bloomberg magazine entitled “Why Buffet is Buying” is any indication. It discussed the Buffet success paradox – the fact that the longer he works at it, the harder it is to sustain. Berkshire increased an average 26.1% per year during the 1990s compared to 10.3% in the last eight years. Granted the S&P500 more than quadrupled during the 1990s and is below where it was in 2000 (not including dividends) so he has outperformed the market since 2000. But it demonstrates that the Oracle is struggling along with the rest of us. A well-known contrarian, he buys when there is blood in the streets and everybody else is selling. So how has his Berkshire Hathaway (BRK.A) stock done in the last nine months? As of Friday’s close, BRK.A was down 19.5% from its December 10 peak (compared to a 13.7% drop for the SPX). While that is up from the 21.6% it had shed as of July 28, he is now underperforming the market. No matter what your strategy, a 20% drawdown is not easy to stomach and now Berkshire must rise 25% just to get back to where it was trading in Q4-07. That means it will take him two years based on his new millennium performance. It doesn’t help that his most recently announced purchase of 3.24 million NRG Energy (NRG) shares had fallen another 8.2% from its lowest price in Q2 when Buffet bought them. Success in buying when there is blood in the streets depends on the market recovering in relatively short order. You are buying the premise that the bear market is the big lie but if you are wrong and the market is instead in a secular bear, it will prove to be an extremely expensive lesson. By the time you realize that you are wrong and are down 50%, you are faced with the daunting and nearly impossible task of generating a 100% return just to get your money back. The moral? Be careful which lie you rely upon to invest. But more importantly, be quick to step off the trend the moment it looks like its being discredited. And from both a technical and fundamental perspective, it is far too early to tell if this bear market is a lie or the cruel truth in clever drag. Technically Speaking Leaders drop while large caps rise Last week, Zanger’s Sunday pix fell more than 6% as most indexes rose. This week, his list of ‘lucky’ 13 stocks included last week’s pix Research in Motion (RIMM), Energy Conv (ENER), Apple (AAPL), Continental Airlines (CAL), Delta Airlines (DAL), Union Pacific (UNP) and Goldman Sachs (GS) as well as new additions Fuel Systems (FSYS), US Airways (LCC), Burlington Northern (BNI), Amylin Pharm (AMLN), UAL (UAUA), Valero Energy (VLO) and Tesoro Petro (TSO). However, Zanger’s Sunday pix dropped nearly 1%, compared to a nearly 3% rise for the Russell 2000 and just under 2% for the Nasdaq. But as we see, the Emerging Markets ETF (EEM) again took the biggest hit losing nearly 3% on the week and the Dow Transports didn’t fare much better. That the Russell was the biggest gainer followed by the Nasdaq is positive but it is clear that the drop in commodities is an increasing drag on the market. In the last two years of exploding energy prices, a larger segment of the indexes are composed of energy stocks and as oil and gas prices fall, these companies are becoming an increasing drag. Ditto for emerging markets. And transports are looking increasing bearish even as fuel prices have fallen – not a positive sign.
Figure 1 –Five-day performance of Zanger’s last Sunday pix (green) compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX), Nasdaq Composite (IXIC), Russell 2000 (RUT) and MSCI Emerging Market ETF (EEM). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com. Weekly volumes on fell again for the Dow Industrials, Dow Transports and NYSE Index this week, which is bearish since it shows a lack of commitment from buyers. Nasdaq Composite volume has also fallen which brings its rally into question. The NYSE Index has also seen its volume fall over four weeks which puts the recent rally in question as well and it has now spent the last five weeks below the critical head & shoulders neckline resistance level compared to eight weeks for the Dow Industrials. Falling volume during rallies is decidedly bearish and shows that fewer and fewer buyers are joining the rally. Stocks can fall of their own weight but need steadily increasing volume to drive them higher. That volume increases on down days is bearish as it signals that sellers in control. Meanwhile, after spiking to 27.49 six weeks ago, the Market Volatility Index (VIX) settled down for a fifth week to 19.58 (from 20.66 last week) dropping further below the 52-week moving average. This compares to a VIX north of 31 when the Dow last bottomed during the week of March 14 and shows that fear is subsiding. But after hitting a high of 611.51 six weeks ago the 19 commodities that make up the NYFE CRB Index resumed its fall to close at 499.11 (from 510.68 last week). Usually moving in the opposite direction of stocks, the CRB Index shows how quickly the air continues to leak out of the commodity bubble. But as we are now seeing, energy stocks are also taking a hit which is translating to trouble for some of the large cap indexes (like the Dow Jones Industrials and NYSE). Gold took a big hit this week dropped again to close the week at $788.10/oz (from $860.40 last week and $957.50 four weeks ago). Gold should have begun enjoying its strong seasonal period from the end of July to the end of September and that it isn’t speaks loudly. One big reason for gold’s weakness has been the incredible dollar strength. It was the fifth consecutive week that the U.S. Dollar Index gained, and this week the rally continued as it closed at 77.12 (from 75.85 last week). This is up more than 8% from its daily all-time low of 71.33 was put in on April 22. And as the economy continues to weaken and an election approaches, it is looking increasingly unlikely that the Fed will raise rates to try to support it even though inflation is becoming a bigger problem. Drops in oil and commodities have been a big dollar plus. Now a new question arises, how much will the rapid dollar rise negatively impact exports that have been the principle driver of recent U.S. GDP growth especially now that GDP growth in the EU has turned negative (see article link below “Europe Economy Shrinks...”)? Another victim of the strong dollar, oil dropper further this week as the price of a barrel of NYMEX crude contract fell to $113.95/bbl (from $115.42 last week). This is a drop of more than 21% from the weekly high of $145.15 July 11. But it is the twenty-fourth consecutive week that oil has remained above $100. Normally, oil hits a seasonal high in mid-October but like gold, seasonality appears to have given way to economic forces. The U.S. bank prime rate held again this week at 5% and the Fed funds target rate remained at 2%. The 3-month London Interbank Offered Rate (LIBOR) ticked up again to 2.8088% (from 2.804% last week and 2.794% two weeks ago). Freddie Mac mortgage rates held steady again this week at 6.52% (from 6.63% three weeks ago) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) dropped again to 5.18% (from 5.22% last week). LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. Corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. Despite the Fed’s determined and significant efforts to flood the market with liquidity over the last nine months, lending rates remain stubbornly high. Earnings Earnings still falling… In the sixth week of Q2-08 reporting season and with a total of 3413 companies (up from 2750 last week) having reported, average earnings took another big hit dropping to -37% (from -32% last week and -22% two weeks ago) versus Q2-07. This compares to an overall 30% drop at the end of Q1-08 earnings season with a grand total of 4214 companies having reporting. This marks the third quarter that earnings have shown a consistent trend to drop as more companies have reported. Looking at past seasons, there was a drop of 57% for final Q4-07 (3900 companies), a 21% drop (4205 companies) for Q3-07 and a 13% jump for Q2-07. Economic ReportsHere are the reports we were watching this week. The June U.S. trade deficit continued to decline to -$56.8 billion from -$59.2 billion in May, down from the peak of -$69 billion August 2006. But that was to be expected given the weakening economy. We also learned this week that fuel use in the U.S. fell to a five-year low for the first seven months of the year and auto sales fell to a 15-year low as consumers tightened their belts. Inflation pace accelerating on all fronts
Chart 1 – We got further proof this week of the alarming rate at which inflation is accelerating with two pieces of data. Consumer prices (CPI) rose 0.8% in July, up 5.6% from a year earlier, the fastest rate in 17 years. Further evidence came as we also learned that import prices in July had risen 1.7% from June for a whopping 21.6% increase from July 2007 as consumers continued to get squeezed by slowing employment and rising costs. Non-petroleum import prices were up 8% from a year ago versus a 79.2% jump in petroleum product import prices from July 2007.
Chart 2 – Thanks to more recent data this month, May net Treasury income flows (TICs) were revised up from -$2.5 billion to $12.5 billion but March flows were again revised downward (to -$52.9 billion from -$51.2 billion). In June TICs hit $51.1 billion thanks at least in part to the strengthening of the U.S. dollar. But there is a troubling negative trend (sloping purple line) that is exerting upward pressure on interest rates. The Treasury Department must sell more than $30 billion per month (yellow dashed line) just to cover the budget deficit and this deficit is increasing. Given that both national and state tax revenues are falling, deficits will continue to widen in lieu of serious budget cuts – not an option for which Democrat or Republican politicians have shown a willingness to consider. Home sales hit 10-year low We got another perspective of the existing home market with the most recent quarterly report and the outlook remains grim. According to the National Association of Realtors, existing home sales (single family and condos) fell 16% to a 10-year low of 4.913 million (annualized) in Q2-08 as the median price fell 7.6% from a year earlier to $206,500. Foreclosures continued to exert a strong downward pressure on prices as bank repossessions tripled in July from July 07 with foreclosures and short sales (homes for which lenders agree to take a loss) accounting for one-third of all sales. Bank seizures rose 184% in July according to RealtyTrac and more than 272,000 homes received default notices warning of pending foreclosure action with the highest rates occurring in Florida and California. Foreclosure filings rose 8% in July, up 55% from a year ago. A Credit Suisse report said that foreclosures could put 8.4% of all U.S. homeowners or 12.7% of those with mortgages out of their homes. Credit Suisse estimated that about 53% of subprime borrowers will have negative equity in their homes this year, rising to 63% next year. Finally, exports have been the tail holding up the economic dog, even though exports only account for around 12% of economic growth, thanks to a weak dollar. A strengthening dollar will help reign in inflation and make it easier on the beleagured US consumer but there is a cost and that will be on exports as they become more expensive. Next Week Here are the reports we’ll be watching next week. The ones emboldened are leading or useful indicators we are tracking, the others have the potential to impact markets short-term. - Monday, August NAHB Housing Market Index (previous 16). - Tuesday, July Producer Price Index (previous 1.8%), July PPI ex-food & energy (previous 0.2%), July Housing Starts (previous 9.1%). - Thursday, August Philadelphia Fed Business Index (previous -16.3), July Conference Board Leading Indicators (previous -0.1%). Synopsis Large caps swimming upstream It was another non-performing week for large caps and given the lack of direction, we decided to take a look at some major index chart technicals. First and foremost, we’ll look at the granddaddy of them all, the Dow Jones Industrial Average. We have been keeping an eye on this index since it confirmed a bearish head & shoulders (H&S) top pattern in late June (see Figure 2). You will notice that the DJIA remains below its H&S neckline. Further bearish indications include the steady decline during the last month in volume (right most sloping purple line in volume subgraph) and note the bearish rising wedge chart pattern with the red down arrow showing neckline resistance. It will take some major buying to drive the DJIA above this level (11,800) and keep it there. The broader NYSE Index chart looks very similar with the bearish head & shoulders top pattern confirmed in the second week of July, and inability of the index to break above the neckline resistance line together with falling volume over the last four weeks. Ditto on falling volume and a bearish rising wedge for the Dow Jones Transports Average. Translation? We may have seen the large cap lows in mid-July (and maybe not) but failing a miracle, the charts are telling us that in lieu of some major buying volume, to expect more weakness ahead. And now emerging markets have joined the bear party.
Figure 2 – Large caps continue to struggle in the current market as this weekly chart of the Dow Jones Industrial Average shows. The bearish head & shoulders top pattern that was confirmed in the last week of June as the neckline (purple line) was decisively broken with a minimum projected downside target of 9870. Stories of interest this week… Europe Economy Shrinks as Spending, Investment Falter http://www.bloomberg.com/apps/news?pid=newsarchive&sid=almFjvikj1JU European Bonds Rise for Third Week on Signs Economy Shrinking http://www.bloomberg.com/apps/news?pid=20601085&sid=a4Faq.5xbyzg Copycats May Beat `Smart Guys' Buffett, Soros http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aW5UwbHVn4OQ Consumer Prices in U.S. Rise at Fastest Pace in 17 Years http://www.bloomberg.com/apps/news?pid=20601087&sid=aoOKMz5QYK9w&refer=home U.S. Fuel Use Falls to Lowest in Five Years, API Says http://www.bloomberg.com/apps/news?pid=20601110&sid=a2gG90ikFT5Y Housing Rebound in Cleveland Means Bad News for U.S. http://www.bloomberg.com/apps/news?pid=20601109&sid=aiCKiR.6xDtI&refer=exclusive U.S. Home Sales Fall to 10-Year Low as Prices Tumble http://www.bloomberg.com/apps/news?pid=20601087&sid=aouNA67vnvBE&refer=home OPINION It's Too Soon to Toast the End of Credit Crisis http://www.bloomberg.com/apps/news?pid=20601039&sid=aE0iSu3ZE1ys&refer=home ---------------------------------------------------------------------------------------------------------------------- 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 ( Saturday, 23 August 2008 ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| < Prev | Next > |
|---|