Ignore The Pundits

On a slow day/week, I tend to gaze at CNBC more often. Lately, there have been a couple of things that annoy me. First are these so-called pundits who come on and say they expect the market to be "not as bad" next year as 2008.

Duh! 2008 was one of the worst years in history. I expect 2009 to be a double-digit up year, albeit it with above-average volatility. That is far better than "not as bad".

Second, many of these strategists say very matter of factly that "the market could go down a bit and retest the lows" in the near-term. Let's clarify. The lows on the SPX were 741. That means it would take a -18% plunge to retest those lows. I'm not saying that won't happen, but since when is an 18% dive a "little retest"?

Last, to me the notion that Madoff could have pulled off this whole ponzi scheme by himself is ludicrous. I can barely keep up with all the trades, reconciliation, statements, reports, etc. for my small firm. For one person to accomplish this while managing tens of billions of dollars is simply not humanly possible. Especially for a guy like Madoff who was always travelling, marketing, socializing, etc.

Memo to CNBC: get a clue.

Now that I got that off my chest, I want to wish a Happy New Year to everyone.

long SSO

Good Riddance to 2008

2008 will be a year that every investor would like to forget, but few ever will. The stock market had its worst year since 1931. But it wasn't just stocks, every asset class got pummeled. No one was saved from the relentless selling and decline in asset values.

And it certainly wasn't just in the U.S. Actually, the U.S. was one of the best performing markets. Many countries saw their markets experience even more dramatic declines. To wit:

• U.K.: -53.5%
• China: -65.2%
• Brazil: -58.2%
• Korea: -61.6%
• Russia: -74.3%
• Iceland: -97.3% (ouch)

You will hear a lot of pundits say they expect 2009 to be better. Duh! How could it not be?? I think not only will it be better, but the stock market will actually finish the year nicely higher than today's levels.

I expect plenty of volatility along the way, but by the end of the year the market will have 2010 in its sights, the stimulus plans will be kicking in, and confidence will likely have returned to the market place in some shape or form.

I was worried that the Santa Claus rally might not show up this year, but it has. From the close on 12/23, the S&P 500 is up +4.2% as of now. Of course, we need the first 2 days of January to stay strong so that we don't erase those meager gains.

Trading comment: One of the things I have been looking for was for the major indexes to break above their 50-day moving averages. The chart below shows that the SPX is accomplishing that today. The small- and mid-cap indexes broke above their respective moving averages yesterday.

This should embolden technicians who montior these bullish developments. Also, in the wildcard category, I would like to think that all of the tax-loss selling, window dressing, balance sheet adjustments, etc. have been accomplished by 12/31. Moreover, all of that cash that big funds are sitting on could begin to creep back in the market in early January.

If this bullish thesis is correct and comes to fruition, I would look for the SPX to work its way toward 1000. At that point, I would probably lock in gains and look to reinstate downside hedges. But that is miles away at this point, so I will continue to take it one day at a time.

long SSO

Bailout Nation Makes Another Handout

The market seems to be finding the silver lining in some weak economic numbers this morning. The Chicago Purchasing Manager Index came in at 34.1 in December. This is a pretty low number, but slightly higher than expected, and it also represents the 5th consecutive monthly increase in the reading.

In housing, the October Case-Shiller Home Price Index showed a drop of -18%, generally in-line with expectations. Nonetheless, the housing index is currently ralling +1.65%.

Seperately, the number of companies asking and receiving money from the TARP plan continues to grow. The U.S. Treasury will purchase $5 billion in senior preferred equity from auto financing unit GMAC, and lend up to $1 billion to General Motors (GM) to participate in GMAC's rights offering.

Oil prices rose above $40 yesterday, but are back below $39 today, despite continued tension in the Middle East. This is likely a reflection of the weak demand picture globally for oil. Six months ago this news would have pushed oil skyrocketing higher.

Asian markets were mixed overnight. The dollar is lower so far, but gold is down also. The 10-year yield is up slightly to 2.12%. And the VIX is down a bit to 43.5.

Trading comment: The put/call ratios are still too low for my taste. The ISEE closed at 206 yesterday (the p/c equivalent of 0.48), a new 52-week high. This likely means the market could take a hit in the near future.

For now, year-end buying might trump the put/call, that is if big funds decide to put some cash to work. But after putting some cash to work last week, I am in no hurry to invest more on the long-side until I see more signs of stabilization. The first sign I would like to see is the S&P 500 recapturing its 50-day average (near 888).

long SSO

Monday Morning Musings

The market is off to a weak start in early trading, which is kind of surprising given that Europe was doing well before our markets opened. Most sectors are trading lower, except for energy stocks, which are getting a bounce due to higher oil prices.

Oil prices are higher for a couple of reasons. First is that the dollar is lower this morning, which is boosting commodity prices. Second, the rising tensions in Israel are rattling the oil markets a bit. This has oil trading upwards of $39. Gold, natural gas, etc. are also higher so far.

Real estate stocks are trading lower amid continue worries about retailers going out of business, and an article this morning discussing the related issue of mall owners difficulties.

Outside of that, the newsflow remains relatively light, as does trading volume, as this is another holiday-shortened week of trading and some investors take the entire last week of December off. Not to mention that all the cash that has been raised in the last couple of months will likely continue to sit on the sidelines at least until the New Year.

Trading comment: Keep an eye on sentiment. It seems that traders got too bullish ahead of the potential Santa Claus rally. The CBOE put/call ratio opened at a low level of 0.74, and the ISEE just hit a really low level of 0.47. The ISEE made a new 52-week low last week (12/24) at 0.60, so this would be another new low.

The market often has a tough time rallying when sentiment is already this bullish. So in a contrarian sense, you want to see some pessimism grow so that the market can get back to climbing the proverbial wall of worry.

Like Watching Paint Dry

Maybe I should have stayed home this morning. My 4-yr old daughter crawled into my bed last night, and we were so warm and cozy when my alarm went off at 6am. Oh well.

Volume is really light as many investors remain on holiday vacation. Watching the ticks on the tape is painfully slow, like watching paint dry. I just hope things end on a positive note today.

Stores are opening early as they hope to lure in more shoppers looking for post-Christmas bargains. MasterCards's SpendingPulse said total retail sales dropped -5.5% yr/yr in November and another -8% in December (thru X-mas eve). Ouch. Bucking the trend is Amazon.com, who said it had its best holiday season ever.

The Fed approved GMAC's application to become a bank holding company. This should keep credit flowing at GM dealers as GMAC will have access to TARP funds. Maybe my firm can apply to become a bank holding company?

Asian markets were mixed overnight. The dollar is lower this morning, helping boost oil prices +5% to back above $37. The 10-year yield is lower to 2.15%. And the VIX is down another 1% to 43.77.

Banks Up, Oil Down On Holiday-Shortened Session

The market is getting a very small bounce in early trading. Banks stocks are leading the way, followed by retailers, while energy stocks are lagging.

Its amazing that oil can't even bounce. The new contract started trading this week above $40, and its now back down near $37.50. And oil is down today even thought the dollar is down, which usually props up commodities. This speaks to how weak demand is right now.

In economic news, November durable goods fell -1.0%, which was less than forecast. Personal consumption dropped -0.6% in November, reflecting a continued decline in consumer spending.

In corporate news, CME announced it has passed two regulatory hurdles to begin clearing over-the-counter credit default swaps (CDS).

And in 'bailout nation', property developers recently asked the govt. for financial assistance. Now, the country's largest retail trade association has asked for a series of sales tax-exempt shopping days to be added to the economic stimulus package.

Trading comment: Where's Santa? The market has been weak over the last 5 days since that big post-Fed mtg. spike. If the fabled Santa Claus rally is to emerge, today would be day one. According to the Stock Traders Almanac, the Santa Claus rally occurs over the last 5 trading days of the year and the first 2 trading days of the New Year.

I will be heading out early today, so Happy Holidays to all!

Midday Update: Market Fades In Quiet Trading

Volume is light again on the exchanges, and the market has given back its gains from early trading. There hasn't been a lot of news, but we did get a handful of economic reports this morning:

• November new home sales totaled 407,000 (vs. 415,000 consensus). This was a -2.9% m/m decrease
• November existing home sales totaled 4.49 million (vs. 4.93M consensus)
• December consumer sentiment came in at 60.1 (vs. 58.8 consensus)
• Final Q3 GDP showed the economy contracted -0.5%, which is unchanged from the previous estimate

Asian markets were lower overnight, following news that Toyota (TM) would post its first ever annual loss. The Yen is also lower for a second day. Oil is lower, trading near $38.25, and the energy stocks are weak as well.

The 10-year yield is up a bit to 2.17%. And the VIX is -3% lower to 43.

Trading comment: The market action yesterday and today has been a bit disheartening. The put/call ratio was very low yesterday and again today, indicating that there might be a bit too much complacency in the market right now. This doesn't bode well for the Santa Claus rally I have been looking for, but I'll give the market the benefit of the doubt for now.

Monday Morning Musings

The market is lower in early trading on very light volume. The newsflow and trading volume will likely be light all week as it typically the case for the Christmas week. Friday was options expiration, and there is often a post-options expiration hangover, which could be the case this morning.

In corporate news:

• Walgreens (WAG) missed profit expectations, and the stock is down -6%
• CVS Caremark (CVS) reaffirmed its 2008 outlook, but is slightly lower in sympathy with WAG
• Toyota (TM) warned of a loss for its fiscal year, which would be the company's first ever
• Canada will provide $3.3 billion in emergency loans to U.S. automakers' Canadian operations

In overseas news:

• Asian markets finished mixed overnight
• China's central bank cut interest rates and lowered the banks' reserve requirement ratio to stimulate economic activity
• Ireland will inject $7.7 billion into major Irish banks

Oil is trading lower, near $41.25. It was in the $30s last week, but that was for the old contract which expired last week, and the new front-month contract is priced in the 40s. The dollar is mixed, while the Yen is lower. And gold is higher, hovering below the $850 level.

The VIX is down another -4% today to 43.1. My colleague at TheStreet.com, Vince Farrell, wrote that in the almost 15,000 trading days since 1950 there have been about 66 days with a 4% move (up or down), and that almost 30 of them have occurred since September. That is a shocking statistic.

Trading comment: There doesn't seem to be much buying interest in the market this morning, but its still early. I did some buying last week, although I still have plenty of cash, as I continue to think this market has more upside in the near-term. I am looking for a bounce of at least SPX 1000 in the next few weeks/months. Engine room...more steam!

Weekend Links of Interest

• Paulson Wants Rest of TARP Funds From Congress
  
  
• More companies want a piece of the stimulus package
  
  
• The Hedge Fund Collapse
  
  
• Hedge fund failures to hit record as investors flee
  
  
• No prenup, Madonna?
  
  
• Wall Street's top strategists see stocks starting to recover in 2009
  
  
• Obama promises to bolster financial regulation
  
  
• Trichet sounds cautious note on quantitative easing
  
  
• Japan May Buy 20 Trillion Yen of Bank-Held Stocks
  
  
• Turmoil in Markets Takes Toll on ETFs
  
  
• Mexico Sells $2 Billion of 10-Year Bonds Abroad
  
  
• Madoff's Victims
  
  
• Madoff Misled SEC in '06, Got Off
  
  
• The Rise of the Four-Day Work Week?
  
  
• Cheap money: The Fed rate cut and you

Midday Update: Automakers Get Their Lifeline

The market is hanging in pretty well at midday. Last night, Standard & Poor's downgraded the ratings of a handful of financials, including Goldman Sachs (GS), Wells Fargo (WFC), JPMorgan (JPM), etc.

This knocked the futres lower overnight, but early word this morning that the automakers would get money from the TARP turned things around. The plan will give the automakers $13.4 billion up front, with another $4 billion to be available by February. I don't think most people are happy to see them get this money, but I also don't think the economy can handle a major bankruptcy right now without a lot of damage.

Now that the first $350 billion of TARP money has been allocated, Treasury Secretary Paulson has stated that Congress needs to release the remainder of the TARP funds. I think Alan Greenspan supported this notion in an article in The Economist recently.

Asian markets closed lower overnight, despite the Bank of Japan lowering its key policy rate to 0.10% from 0.30%.

Research In Motion (RIMM) and Oracle (ORCL) reported in-line earnings last night, and both stocks are +7.9% higher today.

The 10-year yield is holding in at 2.10%; the dollar is up sharply today vs. the Euro, which is weighing on commodities; and the VIX is down another -8.3% to 43.4. Getting there, getting there.

The fallout from the Madoff scandal continues to astound me. I'll put up a link to the list of victims this weekend. What amazes me is that so many people had all of their eggs in one basket. If you run a big charity, you simply have to diversify and have multiple managers. Ditto for a fund of funds. Tremont deserves to be sued. Stupid, plain and simple.

Obama Talking Stimulus Package

Here is an item on Obama's stimulus package from Briefing.com:

WSJ reports President-elect Barack Obama's economic team is crafting an economic stimulus package to send to Congress worth between $675 billion and $775 billion over two years, according to economic officials familiar with the package. The transition team has conveyed the figures to Capitol Hill - and expects the final price tag to grow as it works its way through the House and Senate.

An Obama adviser familiar with the planning said the plan could top out at around $850 billion. Democratic leadership aides said it could easily exceed that before the package gets back to Obama's desk in final form. "The biggest fear is that people will do too little," said one Democratic leadership aide, "like a startup that fails because it didn't do enough."

Obama aides hope to keep the package below the trillion-dollar mark, a psychological threshold that could carry political consequences, as they fear being accused of adding too much to the country's long-term budget deficit.

Obama advisers and Democratic aides in Congress are accelerating their work on the massive economic recovery package this week, ahead of Obama's two-week holiday in Hawaii and the break between the disbanding of the 110th Congress and the forming of the 111th. Both sides in the talks want a package ready when Congress returns Jan. 6, so legislation can reach the House and Senate floors before Obama's Jan. 20 inauguration.

Oil Continues To Fall, Benefitting The Consumer

The market is hovering near positive territory in early trading, while oil continues to fall to new lows. The lower prices at the pump, in heating oil, and for transportation companies like airlines definitely benefits the consumer, even as it might not feel that way.

GM denied it has resumed merger talks with Chrysler, while the White House said that it is moving closer to an announcement regarding the automakers. The govt. mentioned the notion of a managed bankruptcy in their press release, which has some thinking their announcement could have a little surprise twist in it.

In corporate news:

• FedEx topped earnings expectations and reaffirmed its 2009 outlook
• Nike also topped expectations, and the stock is moving higher
• Coca-Cola Enterprises (CCE) is also moving higher after boosting its 2008 outlook
• Ingersoll Rand (IR) lowered its Q4 outlook, and the stock is slightly lower
• MEMC Elec (WFR) also lowere its outlook, and the stock is getting hit by -10%
• Equity Residential (EQR) is also down -10%, though it looks like the only news is an analyst downgrade

Asian markets were higher overnight, led by China and India; the dollar is mixed, while the Yen is sharply lower amid rumors that the Bank of Japan could cut rates; oil is down near $38.50; the 10-year yield is back down to 2.09%; and the VIX is plunging another -6.8% all the way to 46.5, a nice sign.

Trading Comment: More pieces of the puzzle continue to fall into place for a year-end rally. The S&P 500 is above its 50-day average for the third day; after Tuesday's big spike higher, the market pulled back yesterday in lighter volume, a good sign; and the VIX has fallen convincingly below the 50 level, and a new downtrend is developing (bullish for stocks).

I put some money to work yesterday, and will continue to add on weakness.

long SSO

Bond Yields Fall To Record Lows After Historic Fed Move

Bond yields are plunging this morning on the heels of the historic FOMC move yesterday to take interest rates close to zero. The yield on the 10-year Note is down 27 basis points to below 2.10%. I am pretty sure that is near record lows.

The Fed said yesterday that it would basically pull out all the stops to bolster economic growth. This morning, the WSJ is reporting that the incoming Administration is considering their own additional moves, including injecting more capital into banks, creating a market for illiquid securities, and helping troubled borrowers.

Separately, OPEC met this morning to vote on a production cut. A cut of roughly 2 million barrels per day was expected, but this morning OPEC announced a much bigger 4.2 million bpd cut. This helped oil spike higher, but the message is that global demand is terribly weak, and I think oil will have a hard time making much headway on the upside.

In corporate news:

• General Mills (GIS) and ConAgra (CAG) posted better-than-expected earnings results
• Fifth Third Bancorp (FITB) slashed its quarterly dividend for a 2nd time in a year
• Honda (HMC) lowered its profit outlook and cuts its dividend, as the auto makers continue to struggle
• Apple (AAPL) is trading lower after the company said Steve Jobs would not give the keynote at the upcoming MacWorld convention

The market is pulling back this morning, after yesterday's huge rally. I think this is just a normal pullback, and I am looking to put some cash to work this morning.

long AAPL

Chart of the Day: SPX Breaks Above 50-day Average

The S&P 500 Index closed above its 50-day average today for the first time since September 3rd. That's quite a time span. This was one of the technical conditions I was looking for to become more constructive on the market.

While the market could always pullback, and lately it has, I think the trend has changed such that the year-end rally should push the SPX back to the 1000 level over the next few weeks.




Today's rally picked up steam into the close. Here is what Briefing.com had to say about the rally, which sums it up pretty well:

As we stated at 11:19, expectations were relatively muted going into the Fed statement, with futures predicting a certain 50 to 75 basis point cut, which would have brought the Fed Funds rate down to 0.5% or 0.25%, respectively.

Instead, the Fed threw out the incremental rate cut playbook and instead issued a Fed Funds rate "target" of 0% to 0.25%, which brings it squarely in-line with where prevailing market rates had been (the effective fed funds rate, which is the benchmark overnight rate at which banks lend to each other, was 0.18% before the announcement).

This was an unprecedented move. Moreover, the Fed confirmed its new course of "quantitative easing", saying that over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and is also evaluating the potential benefits of purchasing longer-term Treasury securities.

The markets surged following these Fed actions, as investors viewed the Fed's action as ditching its incremental rate-cut approach and essentially coming out with both guns blazing, saying it would do whatever it takes to keep the economy from sliding further into recession.

Fed Cuts Rates By More Than Expected

The Fed met today and announced an interest rate cut that was larger than expected. This has the market rallying sharply on the news, as investors are hopeful that the increased liquidity will unfreeze the credit markets sooner, rather than later.

Here are some of the highlights from their statement:

• The Federal Open Market Committee decided to establish a target range for the federal funds rate of 0% to 1/4%.
• Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.
• Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
• Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
• The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
• The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level.
• As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.
• The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.
• The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

These comments basically imply that the Fed is ready and willing to pull out ALL the stops to unlock the credit markets, help put a floor under housing prices, and keep interest rates as low as possible for a long-time to ease the pressure on consumers and borrowers.

Hurry Up And Wait

Although the market is getting a bounce in early trading, the real move for today won't come until after the Fed meets and cuts interest rates later today. It is pretty much a done deal that the Fed will cut rates by 50 bps to 0.50%, but the commentary that comes with its statement will be closely scrutinized.

The dollar is lower again, likely reflecting the fact that interest rates are going lower and could stay there for a while. This is helping boost the price of gold lately, which often trades inversely with the dollar. Ditto for oil, which has had a hard time staying up lately, but is slightly higher again this morning (near $ 45.50).

In corporate news:

• Goldman Sachs (GS) reported a larger-than-expected loss, but the stock is rallying +8% on the news. This is another indication that the worst news is priced in, at least for the near-term. Brokers in general are higher today as well.
• Best Buy (BBY) reported better-than-expected results, albeit it on lowered expectations. Although it also reaffirmed its 2009 forecast, management said that the range is wide due to the fact that this is the most challenging consumer environment it has ever seen.
• Automakers could receive their bailout as early as tomorrow.

In economic news:

• Headline CPI fell -1.7% in November, a huge drop. This report shows inflation pressures at the consumer level are nonexistent, and that deflation is the bigger concern right now. This also gives the Fed increased leeway to cut rates and hold them at lower levels for longer.
• Housing starts for November declined by -18.9% to a rate of 625,000 (vs. 736,000 consensus). Although this is a weak report, the silver lining is that lower housing starts should help sop up the excess inventory as supply continues to run below the level of new home formations for the overall economy.

Asian markets were mixed overnight; the 10-year yield is lower again to an amazing 2.52%; and the VIX is slightly lower to 55.96, hovering just above recent support levels.

Monday Morning Musings

After a bounce near the open, the indexes are lower in the first hour of trading on economic concerns as well as investors awaiting further developments regarding the possible bailout for the automakers.

The FOMC begins its 2-day meeting today, and will announce its rate cut decision tommorrow. The market is roughly split between expecting a 50 basis point or 75 basis point cut. Either way, that will take the fed funds rate well below 1.0%, a rate I never thought I would see in my lifetime.

In corporate news:

• Aetna (AET) reaffirmed its earnings outlook for 2008
• Totota (TM) said will will cut its sales goals by roughly 1 million vehicles in 2009
• Honeywell (HON) reaffirmed its outlook for 2009
• Beijing unveiled a plan for easing financial conditions that could include increasing the money supply

Oil is spiking this morning, trading as high as $49.50, aided by dollar weakness. Gold is also trading higher. The 10-year is another 5 basis points lower to 2.53%. And the VIX is +5% higher to 57.18.

The market closed on a positive note Friday, and continues to consolidate just below its overhead 50-day moving average. The market is getting closer to working off its overbought condition, and the setup still looks favorable for a year-end rally. This week is options expiration week, which means there could be a couple of volatile days, but I am readying my buy list.

Weekend Links of Interest

• Quantitative easing by the Fed
  
  
• More fallout from the Bernie Madoff scam
  
  
• White House: No immediate auto aid deal
  
  
• Obama stimulus could reach $1 trillion: report
  
  
• Apple Tweaks App Store Interface After Complaints
  
  
• Report: Saudi's Prince Alwaleed lost $4B this year
  
  
• No-Carb Diets May Impair Memory
  
  
• A Long and Painful Consumer Slowdown
  
  
• Sentiment Overview: Week Of December 12th, 2008
  
  
• Should You Refinance Your Mortgage Now?
  
  
• Recession May Be an Ideal Time to Start Up a Bank
  
  
• New Credit Scoring System Ready for '09
  
  
• Americans' debt shrinks - 1st time ever
  
  
• The Federal Reserve and the Velocity of Money

Market Shrugging Off More Bad News In Early Trading

Last night, bailout talks for the automakers broke down when the Senate voted it down. Also, there was a huge fraud uncovered involving Madoff Securities, which looks like $17 billion of investors' funds has vanished.

The news hit the Asian markets hard, with Japan and Hong Kong falling more than -5% overnight. The futures on our markets were also deeply in the red. When our markets opened this morning, the indexes were down more than -2.5% each.

But then the White House and Treasury said they would step in to prevent the automakers from failing. This helped put a floor under stocks, and they have continued to crawl their way back. As of this post, the Nasdaq, mid-cap, and small-cap indexes are all back in positive territory. You can't make this stuff up.

Tech stocks are leading the way (GOOG, AAPL, RIMM, BIDU, AMZN, etc), followed by housing stocks and biotechs. Energy stocks are lagging after oil dropped over $3 to near $44.50 after yesterday's sharp bounce.

It is still very early in the day, but it is looking promising that this session could be characterized as another example of the market reacting positively to negative news. This is the change in character I have commented on, and bodes well for the market breaking out of its recent trading range.

A few of the financials are starting to firm up, and if those stocks can stay green today, we could have a good day. Stay tuned.

long AAPL, GOOG, RIMM

Oil Moves Above $45, Energy Stocks Rally

Oil is getting another bounce this morning, moving +5% higher to just north of $45. This is still well off the summer highs, but oil is at least showing some signs of stemming its recent declines.

The IEA has forecast a drop in global oil demand for 2008, which would be the first time demand has shrunk in 25 years. But OPEC has said that it will cut outuput in order to address supply and support prices.

In corporate news:

• The House voted to approve a $14 billion aid package for the automakers. But the Senate has yet to vote.
• AIG is planning to sell $15 billion in assets by year end (FT.com)
• Costco (COST) reported better-than-expected earnings, although revenues were a bit light
• PG will confirm its earnings outlook at its analyst meeting today
• Eli Lilly (LLY) reaffirmed its outlook for 2008, and raised guidance for 2009

Asian markets were mostly higher overnight; the dollar is lower today, helping push gold and commodities higher; the 10-year yield is lower to 2.64%; and the VIX is -1.6% lower to 54.83.

The market continues to hold up remarkably well. In recent months, if the market had rallied 9 out of 11 days, it would have then staged a huge correction. Also, the market recently became deeply overbought. Again, this probably would have led to a big plunge in short order. But for the last few days, the market has been consolidating its recent gains by moving sideways in quiet volume. This is textbook bullish action, and it looks like the next move will be higher from here.

The S&P 500 is hovering just below its overhead 50-day moving average. A move above this resistance level would be a nice bullish sign, and probably get more investors excited about the prospects of a further year-end rally.

Gold Moves Higher on Dollar Weakness, Inflation Concerns

The dollar is a bit lower this morning, which is helping commodities bounce. Oil was back up near $44, but has fallen back since an inventory report came out. Gold has also spiked higher, hitting the $800 level again.

Inflation hawks keep saying that with all of the money global central banks are printing, we are going to be dealing with inflation down the road, and that will move gold higher. My only concern is that we have to get through this bout of deflation first, so I think that trade is premature. Although I do plan on adding back some gold exposure sometime next year.

Asian markets bucked the weakness in the U.S. yesterday, and rallied overnight. Hong Kong spike more than +5% higher. The Yen is also lower today, after making a new high yesterday. I would like to see the Yen come waaaaay down.

Reports say that the Democrats and White House have reached a $15 billion financial aid package for the automakers. The rumors are that GM and Chrysler will get money now, while Ford will not. I am against this bailout in principle, and think these companies need to restructure and materially downsize going forward, but I admit the economy is too fragile right now to let this happen today.

In corporate news, Electronic Arts (ERTS) lowered its earnings and revenue guidance due to what is describes as weak holiday sales. Rio Tinto (RIO) is cutting a whopping 14,000 jobs worldwide in an effort to reduce 30% of its workforce. This is a glaring example of the bursting of the commodity bubble, and its aftermath.

The 10-year yield is only slightly higher at 2.67%; the VIX is another -3.8% lower today to 56.6, but I still want to see it below the 50 level for starters (then 40, then 30).

The semis are up again today, leading the way. Banks stocks are the laggards so far.

A Low Volume Pullback, Not So Bad

The market pulled back today, which shouldn't be that surprising given that it had been up for 9 out of the last 11 sessions.

Also, volume declined today, which is an incremental positive. The S&P 500 logged back-to-back accumulation days (gains on higher volume) the last 2 days, and the Nazz has shown accumulation for 4 of the last 5 days.

So the market had gotten pretty overbought, which made it likely that a pullback was in the works. What was nice to see was that the selloff came on lower volume. Low volume pullbacks and high volume rallies are very bullish, so let's hope the pattern holds.

The financials were the weakest group today, while the semis actually bucked the weakness and gained +4.8% on the day. That helped the Nasdaq outperform relative to the other indexes (-1.5%), while small caps were down the most (-3.26%).

In addition to the semis, Apple (AAPL) and Google (GOOG) were also higher today, which is nice to see. Energy and materials stocks were also higher on the day, despite oil closing lower. I'm not sure what to make of this exactly, other than those groups were severly oversold.

The VIX was barely higher today (+0.7%), and closed below its 50-day average for the third consecutive day. A move to even lower levels would be welcomed by the bulls, but it looks like the top is behind us.

long AAPL, GOOG, UWM

Bill Fleckenstein Hanging It Up

Well-known short seller Bill Fleckenstein is hanging it up and shutting down his short-focused hedge fund. Here is the story from Hedgefund.net:

Manager burnout is in. Andrew Lahde started the trend. Now Bill Fleckenstein is telling people that stress factored large in his decision to close his hedge fund. Fleckenstein called running a short only hedge fund "Very stressful, nerve-wracking and generally not very much fun," on his Web site.

Fleckenstein launched the short only fund in 1996 when "[then-Federal Reserve Bank Chairman Alan] Greenspan was fomenting an environment that would lead to disaster." The "reckless behavior" driving the stock market "lasted much, much longer than I ever imagined it could," prompting Fleckenstein to keep the fund open for over a decade and reap profit.

But now, the "recent carnage" has diminished shorting opportunity, he wrote. His weary tone recalled Andrew Lahde, another short bias hedge fund manager whose bet against subprime mortgage earned him close to 1,000%. Lahde in a much publicized letter announcing the closure of his hedge fund bemoaned the toll the job had taken on his health.

But unlike Lahde, who emphasized he had no inclination to return to investing, Fleckenstein enthused about a plan to open a long only investment fund. While running a short only hedge fund "entailed an intense focus on the short term to effect risk control" a long only portfolio would help "widen" his focus, he wrote.

"My wife is especially happy about this change," he wrote.

Market Shrugs Off More Bad News

The market is showing its resilience again after a strong rally yesterday. Last night, several companies lowered guidance and talked about the difficult economic conditions. That had the market opening up much lower, but the S&P 500 has climbed back to even in the first hour, and the Nasdaq is actually higher by +1.0%.

The semiconductor group is the most surprising. Four companies lowered guidance last night, including Texas Instruments, Agilent, Broadcom, and Corning. It was a strong sign of how weak things are in the semi industry. But guess what? All 4 stocks are higher this morning, and the semi index is ramping +7.0%. That is a bear's nightmare (if you're short those stocks).

Ditto for steelmaker Nucor (NUE), which lowered its guidance materially and said that the current dropoff in steel demand is worse than it has ever seen, and that many customers continue to reduce their inventories due to liquidity concerns. The stock opened lower, but has reversed higher, and is now +2.6%.

In another sign of liquidity injections, the Bank of Canada cuts its benchmark rate by 75 basis points to 1.50%, larger than the 50 bps cut that was expected.

Separately, Ford (F) is in talks with China Changan to sell its Volvo brand.

Asian markets were mixed overnight; the dollar is slightly lower this morning, while oil is a bit higher to $44; the 10-year yield is up a touch to 2.75%; and the VIX is -3% lower to 56.85, its 3rd day below its 50-day average.

long QLD

The Short Squeeze Continues

Late Friday we saw a stampede of buying. Many strategists said this was likely a short-covering rally, as traders who were short the market moved quickly to lock in profits. Well, this morning the buying panic continues as the Dow surges +300 points in the first hour of trading.

And again, there was more negative news reports before the open this morning, but the market is shrugging them off and acting positively. 3M lowered guidance for next year as announced job cuts; Dow Chemical also said it will layoff 11% of its global workforce; and MetLife (MET) issued downside guidance as well. But both DOW and MET stocks are trading higher this morning.

President-elect Obama said over the weekend that he is going to push for a massive fiscal stimulus plan. Several other countries over the weekend are considering more stimulus plans, and that helped the Asian markets enjoy strong gains of +5-8%. Europe is also up big this morning.

The dollar is lower vs. the Euro, which is helping commodities. Gold is up +4%, and oil is rallying to $44. The energy and materials stocks are bouncing sharply, and are leading the market so far.

The 10-year yield is a bit higher to 2.72%. And the VIX is another -3% lower to 58.15. More pieces of the puzzle appear to be falling into place, one step at a time.

long TBT

A Picture Perfect End To The Week: Outside Reversals Galore

The market action today was textbook bullish. The news before the bell was terrible, and the market opened weak. But as I mentioned in my opening post, it was not as weak as you would have thought, or as weak as that same news might have caused a couple months ago. And as the session wore on, the market began to firm up.

By the end of the day, a full buyers panic had developed, and the market soared +3-4%. That's huge. Remember, its not the news itself but how the market reacts to that news that is important to investors.

The fact that the market was able to rally in the face of the negative jobs report shows that, at least for the moment, the negative news flow has been priced into stocks at current levels. This raises my confidence that the market can continue to work its way higher into year-end.

The bullish action today was evident in a number of different areas and asset classes. I talk about "outside days", where the chart of a given stock/index falls below the prior day's low, but then rallies to close above the prior day's high. You can see plenty of examples of these outside reversals: SPY, QQQQ, IHI, XBI, XLF, TBT, FXY, VIX, etc, etc.

I mentioned that I was dipping my toe back in the water earlier this week with some ETF buys. I'm feeling better about them now, and will likely look to use upcoming pullbacks to put more cash to work. I said I wanted to see the S&P 500 consolidate and hold the 850 level, which it has done. It also closed above that downtrend line I showed yesterday, on good volume.

Some Perspective On Largest Payrolls Drop Since 1974

The headlines in the media today and all weekend will highlight the huge drop in jobs. November nonfarm payrolls fell be 533,000 (vs. 335k consensus), the largest drop since December of 1974. The unemployment rate rose to 6.7% (vs. 6.8% consensus).

I have a lot to say about this, but I will try to be succinct. First off, if this figure had hit the wires a couple of months ago, the Dow would be down by 500 points. This morning, it fell by roughly 150 points after the open. This tells me that a negative figure was pretty widely expected, as well it should be. We should expect more bleak economic data to hit the wires in the near future as well.

Second, employment is a lagging indicator, not a leading one (stocks are a leading indicator). Unemployment will peak well after the economy has bottomed. So the worst thing an investor can do is say that he or she is going to wait until the economy bottoms and the jobs numbers improve before they decide to invest. By then, stocks will likely be 25% higher, at least.

Third, the media will harp on the 1974 figure, and say how amazing it is that job cuts haven't been this severe in 35 years. But let's go back and look at 1974. That's right, my friend sent me this chart that shows how the S&P 500 fared around that time.

You'll notice a couple of things. One is that the market had experienced a dramatic plunge from its highs going into Q4 of that year. But by the time those payroll figures came out in December of that year, the market had already seen its lows. I'm sure most people didn't believe it back then either. But by 1975, the market began to move sharply higher.

Who knows if the analog will play out similarly this time around, but it is worth paying attention to. I never want to sound pollyannish, and I have advised keeping your powder dry, but I don't want to be blind to the potential for a big rally in 2009.

Chart of the Day: SPX Struggles To Break Downtrend

I wanted to see the S&P 500 (SPX) hold above the 850 level, but 845 is close enough. The market really fell out of bed late in the day, after holding up reasonable well for most of the trading session.

The SPX is running into resistance right at that downtrend line I highlighted above. Depending on how thick you draw your trendline, you could argue that we are a little above or below the line. But what's important is that the market doesn't break back down materially below this trendline.

The ideal scenario would be for the market to mark time for a little while, on low volume, and then make a stab to convincingly break above this downtrend line that has acted as a ceiling for the market since mid-September.

I think the late-day selling was a combination of factors: first, traders are worried that tomorrow's jobs report is going to show a surprisingly big number that could spook investors. So they probably took profts and loaded up some shorts to try to game the report.

Second, there were a lot of rumors swirling today, as well as substantiated reports, that hedge funds are seeing high levels of redemptions. Citadel fell -13% in November, and is down -47% ytd. That's brutal, and investors will likely want out. Many of these funds had to enact "gates", which freeze investors from being able to make withdrawals, and give the managers more time to wind down their positions in an orderly manner.

But the late day selling felt like there was some redemption selling going on today nonetheless. The only silver lining was that today's pullback came on lighter volume than the last few days. Bulls want to see rallies on higher volume, and pullbacks on light volume.

Market Continues To React Positively To Bad News

There is a saying in the market that its not the news that's important, but how stocks react to that news. For most of this decline, bad news sent stocks spiraling lower. But recently, stocks have started to shrugg off bad news and move higher. This is a noticeable change in character.

Yesterday morning there was a lot of bad news, economic reports, etc. The Dow opened down 180 points, but by the close it was up +270. This morning we have seen more bad news reported, and the Dow opened down -100 but is now back in positive territory.

Moreover, the nations's biggest retailers reported terrible same-store sales results for November. Many of them posted double-digit declines. Yet the retail index is +5.0% higher this morning. That is a huge move, and indicative that maybe stocks have fully discounted all the bad news that is out there right now.

In central bank news, the Bank of England cuts its target lending rate by 100 basis points to 2.00%; the ECB cut its rate by 75 basis points to 2.50%; and Sweden's central bank cut its target rate by 175 bps to 2.00%. So its clear that central banks around the globe are working together to pump liquidity into the system to stimulate growth. I continue to think these efforts will be successful in time.

Capital One (COF) is buying Maryland-based Chevy Chase Bank for $520 million in cash and stock.

And the big news last night was this plan that leaked from the Treasury of a big effort to buy Fannie/Freddie paper and bring mortgage rates down to 4.5% which would stimulate the purchase of new and existing homes. The details of any such plan are still unclear.

Asian markets were mixed overnight. The Yen is higher again this morning (I want to see it move lower). Oil is also lower, trading around $45.50. The 10-year yield is also a bit lower to 2.65%. And the VIX is up slightly to 61.0, sitting right on its 50-day support.

Weak Employment Data Weighs On Stocks, But Bounce Looks Promising

The market is lower in early trading after some weak employment data, which we should all be expecting as the norm right now. The ADP payrolls report showed employment fell by 250,000 in November (vs. -205k consensus). That's pretty weak, but Friday's govt. report is the one that counts. The consensus for Friday is -325,000 jobs. Ouch.

The November ISM services report was alos weak, dropping to 37.3 (vs. 42.0 consensus). But the 3Q productivity report was revised higher to +1.3% and unit labor costs revised lower to +2.8%, both of which are positive in terms of lower inflation.

Materials stocks are weak this morning after warnings from Freeport-McMoran (FCX) in the copper space and Alpha Natural (ANR) in the coal industry. Both companies are lowering their outlooks due to sharp price drops in the underlying commodity as well as weaker end markets.

RIMM also lowered its Q3 outlook, citing the stronger dollar and lower-than-expected unit shipments. But the stock has recovered its early losses and is currently in positive territory. I think the stock could continue to bounce into year-end.

Asian markets were higher overnight. The Yen has been up the last 2 days, but is currently moving slightly lower. The 10-year yield is up a bit to 2.76%. And the VIX is down -2% to 61.7, still above its 50-day average.

Since I started writing this post, the market has reversed its earlier losses, and is now in positive territory. This is a nice showing, if it lasts into the close.

The S&P 500 continues to hover around that downtrend line that I posted a chart of last week. I think if it can hold the 850 level for the remainder of the week, that puts the market in good shape for a year-end rally. I am looking for the SPX to rally up to the 1000 level over the next couple of months, and will look to start dipping my toe in with all the cash I have built up.

Chart of the Day

Someone sent me this chart, which I thought was fairly interesting. It shows the stock performance during recessions dating all the way back to 1926.

The most interesting stat is the one that shows how much the market bounces from its low to the end of the recession. That means, that on average, the stock market bounces +25% before the recession is even over.

The hard part, of course, is figuring out both when that low in the market is, as well as how long the recession will last.

I think the declines over the last year have discounted a ton of economic weakness already. Moreover, the historic amount of stimulus that has been thrown at the markets and the economy will, in my opinion, achieve their desired effect.

I just think that most people are not willing to give these programs the appropriate amount of time to kick in and work. Heck, I like instant gratification as much as the next guy, but these programs always work with a lag time, not immediately. For this reason, I think that 2009 will be a much different year in the stock market than 2008.

Automakers Will Go Back to Capitol Hill For Money

The market action yesterday was pathetic. I am usually not so blunt, but there is no other way to sugar coat it. Most people want to know "what happened"? But there was no real smoking gun. It was a pure buyers strike.

Stocks plummeted on relatively low volume. And if you don't believe me about the buyers strike, take a look at the ARMS Index (a measure of buying vs. selling pressure), which hit a near record 9.89 in the closing minutes.

The market is bouncing this morning, but when you have such a huge one-day plunge, the market would have to stage quite a rally for the rest of the month just to erase yesterday's damage. Frustrating.

Several stocks are higher this morning after reporting weak earnings news, which is a good sign. You want to see stocks react positively to bad news. Sears Holdings (SHLD) reported a big loss, but the stock is higher. Staples (SPLS) beat estimates slightly, and Beazer Homes (BZH) reported a massive loss. And GE said EPS would come in at the low end of guidance. It also said it would maintain its $1.24 dividend in 2009, which equates to nearly an 8.0% yield. The stock is up +9.5% on the news, which is helping the broader market.

The automakers will go back before lawmakers today to outline how they would use the potential $25 billion loan. They will also release November sales results later today. I fear the drops will be horrific.

California declared a fiscal state of emergency to deal with its budget crisis, which enables them to act in 45 days, a shorter time period that under normal circumstances. The state budget is a mess, and needs to be seriously addressed.

Asian markets were lower across the board overnight, despite another rate cut in Australia. The dollar is lower this morning vs. the Euro. Oil is slightly higher, but still below $50 after yesterday's sharp plunge.

The 10-year yield is up a bit to 2.74%, an amazing low level that has not been seen since 1955. The VIX is falling -7% to 63.72, back above its 50-day average that we hoped would offer stiffer resistance.

NBER Finally Admits U.S. in Recession

The agency charged with officially dating recessions in the U.S. finally came out and said that the U.S. officially entered the recent recession in December 2007. That means we are roughly 1 year into the current recession.

I have no idea what took them so long to come to this conclusion, but better late than never I guess.

Here are the comments from their press release:

• The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions.
• The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007.
• The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.
• A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.
• Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity.
• The committee identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession. Payroll employment, the number of filled jobs in the economy based on the Bureau of Labor Statistics' large survey of employers, reached a peak in December 2007 and has declined in every month since then.

Monday Morning Musings

The market is sharply lower in early trading on the heels of profit taking from last week's multi-day bounce, as well as lower oil prices after OPEC decided to leave output unchanged at its meeting over the weekend.

Oil is down nearly -7% to below $51, and this is weighing on the energy and materials sectors. The dollar is higher vs. the Euro today, which is weighing on other commodity prices as well.

According to ShoperTrack RCT, Black Friday sales actually rose +3.0%, which was better than many had feared. But I am hearing people calling it a "profitless prosperity" as retailers had to heavily mark down items to get consumers to open their wallets. This means that although sales were up, margins were likely down, and profts when these companies report should reflect that.

In deal news, JNJ will acquire Mentor (MNT) for $31, which is a whopping +90% premium to Friday's closing price. This is nice to see, at least someone is taking advnatage of the depressed stock prices.

Bernanke and Paulson are both speaking seperately today. Unfortunately, these two have not been able to make the markets rally on days they speak in public.

Asian markets were mixed overnight. The Yen is higher this morning, which is not what we want to see.

The 10-year yield is down another 14 basis points to 2.81%, a shockingly low level. Some of this might be a continued flight-to-safety, but some of it is also a reflection of expectations of a sharply slowing economy.

And the VIX is up +12% to 62.1, back above its 50-day average. So most of the indicators I'm watching are not moving in the bulls' favor today. But it's still early, so let's see how the trading session unfolds.