Monday, March 31, 2008

Monday Morning Musings

The markets are mixed in early trading, with energy stocks moving higher and drug stocks moving lower.

Treasury Secretary Paulson is speaking about a plan to increase the Fed's power. I am always leery of giving the govt. more power, but considering the housing mess that they sat by and watched, maybe this wouldn't be such a bad thing.

Drug stocks are under pressure after a panel questioned the effectiveness of cholesterol-lowering drugs. The stocks getting hit the hardest are Merck (MRK) and Schering Plough (SGP).

Today is the last day of the quarter, and so far, the S&P 500 is down -10.2% ytd, while the Nasdaq 100 is off more than -15%. Nasty.

Asian markets were mostly lower overnight; oil is up by roughly $1, around $106.70; and bond yields are lower, with the 10-year yield down to 3.41%.

The big economic report this week will be the March jobs report. Estimates are for a decline of -70k jobs. During the last recession, this figure ran above -200k, fwiw.

Now can we please get some quarter-end buying?

Friday, March 28, 2008

What Happened To Good Ol Fashioned 'Window Dressing'?

The market is getting a small boost at the open, but nothing to write home about.

Lehman (LEH) was upgraded to Buy at Citi, a rare buy rating to be slapped on one of the brokers. Especially when rumors are swirling about more writedowns at Merrill (MER). The analyst at Citi said LEH has ample liquidity.

JCPenney (JCP) warned that its profits would come in below expectations this quarter, and that is weighing on the retail stocks. Tech is higher across the board, as are biotechs again.

Asian stocks were higher overnight; oil is trading lower today, just under $106; bond yields are down slightly, with the 10-year yield down to 3.50%; and the put/call is starting out elevated at 1.14.

The last 2 days have been a bit rough for the market, but we are now getting very close to quarter end. Considering how bad this quarter has been, I don't think anyone is going to make much of a fuss if some big funds do some good old fashioned window dressing. I hope that fund managers decide to put cash to work going into quarter end. Wishful thinking?

Thursday, March 27, 2008

Tech Under Pressure This Morning After Oracle (ORCL) Comments

The market is under selling pressure in early trading, despite a relatively positive economic report.

Last night, Oracle (ORCL) reported a so-so quarter, and made comments that its customers got a little more cautious at the end of its quarter. That started the selling in tech, and a report that showed Google's (GOOG) paid clicks didn't grow as fast as hoped for hit that stock as well.

In economic news, Q407 GDP was left unchanged at +0.6%. Many feared it would be revised lower. But the consumer spending component was actually revised higher, and the inflation component was revised lower. So those are net positives.

Asian markets were mostly lower overnight; oil is roughly flat around $106; and bond yields are steady, with the 10-year yield at 3.50%.

Biotechs are bucking the early weakness and trading higher, along with drug stocks. Banks and brokers are down the most after more downgrades and talk of further writedowns.

Wednesday, March 26, 2008

Chart of the Day: Goldman Sachs (GS)

The banks and brokers are lower today, and GS is flirting with support in the form of a recent trend line dating back to its October highs.

I am watching this trendline to see if it holds, but I still like GS fundamentally. I think they should be able to take advantage of the collapse of Bear Stearns, and strengthen their position within the industry.

Their conference call was pretty bullish, given the current investment landscape. While their earning power will certainly be lower this year, I still think the stock should be able to work its way higher as the year progresses.

long GS

Sentiment Remains Subdued at Midday

The market is still trying to bounce off its lows of the session. Most of the trends I mentioned in my opening post are still in place. But bond yields have firmed, with the 10-yr yield bouncing to 3.50%.

Sentiment is still downbeat. The ARMS Index is high at 1.40; the put/call ratio is elevated at 1.08; and the ISEE Index is subdued at 111. Most participants remain more skeptical of the recent market advance than optimistic.

There are very few stocks rising on good volume today. Here are few:

But there are lots of stocks declining on above-average volume:


Bank Concerns Back In The Headlines

There are lots of crosscurrents this morning, but the negative bank headlines are back in the news today, and weighing on financial stocks.

Last night, rumors swirled that the Clear Channel (CCU) deal may be in jeopardy. Then, early this morning, Deutsche Bank (DB) said that it may not meet its full year profit projections. No shocker there, but that knocked the futures lower and set a negative tone for the morning.

Oppenheimer analyst Meredith Whitney cut estimates again for the big 4 banks (Citi, BofA, JPM, etc), and that sparked some additional selling in the bank stocks.

Jabil (JBL) warned about its profits also, and the stock is down significantly. JBL is heavily involved in tech supply chain, so its comments hit tech stocks and took most of them lower. But the RAG triumvirate (RIMM, AAPL, GOOG) are bucking the weakness and are all higher this morning.

Asia was mixed overnight, while the Yen is higher again today. The dollar is lower, which is also pushing up gold and commodities again. Oil is surging over $3 to $104.50 on a report that inventories didn't expand as expected. This is pushing energy stocks higher.

And a disappointing durable goods report is hitting bond yields, with the 10-year yield slipping to 3.46%.

After the big run the market has had, it is normal to have a pullback day. The put/call ratio is high at 1.27, which could help things stabilize. I don't mind some profit taking, but I don't want to see things get out of hand today. A benign consolidation day on moderate volume would be perfect.


Tuesday, March 25, 2008

Consumer Confidence Hits Lowest Level Since 1973

The market fared very well today, imo. After yesterday's outsized rally, I would not have been surprised to see some minor profit taking. But instead, investors used the brief dips today to put more money to work, yours truly included.

Biotechs were the strongest group today (+1.34%), while retailers were the biggest laggard (-1.08%). The Nasdaq outperformed the S&P, while the Dow was slightly lower.

Oil also rebounded from its declines this morning, and finished slightly higher at $101.54. Boone Pickens was on CNBC today talking his book and saying that he thinks oil will go higher in Q2.

The dollar was lower vs. the Yen and Euro today, which helped boost gold and other commodities. Basically all of the energy and materials sectors were higher today.

The expectations component of the Consumer Confidence report this morning hit its lowest level since the oil embargo of 1973. That's pretty shocking. Consumers are more downbeat currently than they have been in 35 years.

My Stock of the Day is BE Aerospace (BEAV). I have owned this stock for a couple years, and it has done very well. Recently, it has come way down due to concerns about the global economy and access to credit for the big airlines.

Today, the company announced it had won an international airline program, initially valued at approx $215 mln. That's a nice order, with the potential to be even bigger.

The company is still executing, and I think the recent dip is another buying opportunity. I recently added to my positions.

long BEAV

Another Step In The Right Direction

Yesterday's price action was very bullish, even though volume was not as high as I would have liked to see. If you look at this chart, the S&P 500 Index broke above its downtrending 50-day average for the first time since 12/27. Ditto the Nasdaq. This is a big technical improvement, and a step in the right direction.

This morning's consumer confidence report was awful, but that is to be expected with all of the talk about a bear market and recession. Nonetheless, it took the market lower when it was released, in addition to a weak housing price report from the CaseShiller index, which showed home prices down -10.7% yr/yr.

Gold is up this morning, as are most commodities. Monsanto (MON) raised its earnings guidance nicely, which is boosting the ag group. Oil prices are lower, dipping below $100 for the first time in a while.

Asian markets soared overnight, led by Hong Kong, which gained +6.4%. Bond yields are slightly lower, witht the 10-year yield at 3.49%. I think yields will continue to drift higher.

The market feels pretty firm right now, and is shaking off the early weakness. Growth stocks look good, led by biotechs.

Monday, March 24, 2008

Monday Morning Musings

The market is getting a strong boost in early trading on the heels of no negative financial headlines over the weekend, and some positive developments on the housing front this morning.

JPM said it may raise its offer for Bear Stearns (BSC) from $2 to $10. BSC is trading up over 100% on the news, and has been as high as $13.

The Federal Housing Finance Board raised the home loan bank limit, which should help boost the housing market and provide liquidity to the ailing mortgage sector. Also, existing home sales came in better than expected this morning, and prices actually rose for the first time in 7 months. All of this has the housing index trading +5.2% higher so far.

You know how I always say that I don't like strong market opens. Given that I felt we bottomed last week, I am hoping that this early strength holds. But I would prefer it to settle down for a while and rally towards the close. Right now, the Dow is already up +215 points.

Asian was mostly higher overnight, on the heels of a positive election in Taiwan. And the Yen is nicely lower, which helps. Oil is down a little, near $101. And the 10-year yield is up 16 basis points to 3.49%.

Gold is also higher, after a huge drop last week. The CRB Commodity Index fell -8.3% last week, which was its largest weekly decline in its 52 year history. Wow. That tells me that there is likely more downside to come in the commodity complex, after a requisite bounce.

Friday, March 21, 2008

Four Reasons To Believe In A Bottom

When I originally penned this piece on Monday night, after informally polling most of my contacts and asking them if they thought last Monday was the bottom, the response was almost universally "no." (65% of the respondents to a "Fast Money" poll on CNBC said the same thing.)

I wrote on my blog on Monday that I thought it was likely we had seen the lows. Still, I wanted to see how the market fared on Tuesday, so I held off submitting my column. I never thought Tuesday would see such a huge rally, but it just reinforces my view.

Technical Evidence

Doug Kass had a good piece on Tuesday about his lunch with "Greg from Mega". The points he raised resonated with me, but they were almost all of the valuation variety. They speak to how cheap the market is on a host of measures of both relative and absolute valuation.

I follow many of these valuation models, and they have been flashing undervaluation for some time now. But they are not great timing tools. And when the markets get this bad, many fundamentalists go to the charts.

The technicals often do a better job of highlighting bottoms, even though you never truly know without hindsight. That said, I think that the odds are high that Monday marked the lows for this bear market. I had been looking for the S&P 500 Index to test 1250 as a reasonable area to bottom, and Monday saw the SPX touch 1256. This is close enough for government work.

Also, last Tuesday we saw a 90% up day (90% advancing stocks & 90% upside volume). Along with the 3% rally in the S&P that day, this was only the fourth time in the last 28 years that we saw this combination.

And the last three occurrences were all significant market bottoms, including August 1982 and October 1987 (according to Merrill Lynch). Last, although the SPX breached its January lows, we saw the number of new lows on the NYSE contract meaningfully -- a positive divergence.

So the technical setup looks solid to me, but do we have enough extreme bearish sentiment to solidify a bottom?

Sentiment Evidence

Again, as a timing tool, sentiment does a pretty decent job, but it's not great. This is because negative sentiment takes a while to build, but if you look back at any major market bottom in financial history, you will see that bearish sentiment always hits extreme levels. I saw that last Monday.

The 10-day CBOE put/call ratio hit 1.27, the third-highest reading since 1995 (as far back as my data goes). The 10-day ISE Sentiment Index hit 80 (put/call equivalent of 1.25), its lowest reading since the inception of this index. So bearish investors have been loading up on put options as the market bottomed, and these negative bets could provide upside fuel for the market as they get unwound.

The investor surveys show even more bearishness. The Investors Intelligence survey showed the most bears (43%) since 1998, more than at any time during the bear market of 2000-02. And that low in 1998 was so bad that even our own Jim Cramer penned a piece that said "Get Out!" For its part, the AAII survey showed the most bears (59%) since 1990. That's pretty incredible.

And the volatility index (VIX) also showed its usual pattern. The VIX nearly reached 36 on Monday and closed at one of its highest levels since 2002. Then on Tuesday's rally, it plunged 20%. This action looks like a peak in volatility, which would coincide well with a bottom in the overall market. So I think sentiment is lined up well to support the technical action, as well as the notion of a bottom here.

Anecdotal Evidence

I heard a lot of people saying that Monday's action didn't represent the type of capitulation lows that often mark significant bottoms. But the flip side of this argument is that when investors are braced for a cataclysmic session, and the market acts in the opposite fashion to expectations, maybe it is speaking just as loudly. Heck, on Sunday night, Hong Kong was down 1,000 points and CNBC changed its schedule to cover the Asian markets (and U.S. futures) for three hours Sunday night. Talk about getting everyone worked up into a frenzy.

So the collapse of Bear Stearns (BSC) over the weekend should have resulted in a horrendous session on Monday. Instead, the market bottomed early, and the Dow actually reversed and finished in positive territory. If the collapse of the fifth-largest investment bank can't take the SPX below 1250, I think it is unlikely that future events will be able to do so, even though there may be more negative headlines to unfold.

Bear markets are often punctuated by a major financial crisis that occurs right at the lows. I thought that Countrywide (CFC) being taken under for roughly $7 might be the example this time around, but the Bear Stearns saga fits the bill even better. History will likely dump this event of market lore into the same category as Penn Central in 1970, Continental Illinois in 1984, Citibank in 1990, and LTCM in 1998. And all of those events marked significant bottoms. According to Merrill Lynch, the average return for the SPX in the 12 months following these events was +17.3%. Not bad.

Monetary Evidence

The mantra "Don't Fight the Fed" exists for a reason, and I think it has now kicked in. The Fed has injected huge liquidity into the market and put in place ample loan programs to provide a backstop for financial institutions to prevent further bank runs. This is huge, and when the Fed says, "I've got your back," you should probably cover your short positions.

I am not advocating a "V" bottom here, because I don't think the market will run away on the upside. There is lots of overhead resistance ahead of us, and it will take time for the market to work its way out of this morass. We could be in a multimonth trading-range market, which would still be preferable to the last five months. But I think we will look back at the "Bear Stearns Bottom" as the lows for this period, even if they are tested soon.

Thursday, March 20, 2008

Update On The Negativity Bubble

Yesterday I penned a column for on the negativity bubble, and how I felt Monday was likely the bottom for this decline. (I will post it on my blog tomorrow) No sooner did my post appear than the market swooned nearly 300 points.

Many readers asked me whether I had altered my stance? The answer is no, but felt a little silly for sticking my neck out. There will likely be many tests, but my thesis is that the negativity peaked on Monday, and future negative headlines will be less likely to result in new lows.

Additionally, there are a few datapoints I'd like to share that update my examples:
  • The bears in this weeks Investor's Intelligence poll rose to 45%. That's the highest level since Sept. 98, eclipsing all readings during the 2000-02 bear market.
  • The bears have outnumbered bulls in the AAII poll for 14 consecutive weeks. That ties the longest streak on record since 1990. The last one ended in Aug. 06, and preceded a huge rally.
  • The 10-day ISEE Sentiment Index made a new record low yesterday, since its inception.
  • Tuesday's rally was the 2nd 90% up day in a week; historically, this has been a very bullish signal

With the ag/energy/commodity complex getting taken out to the woodshed over the last few days, I am wondering where the leadership will come from in any new upleg. Tech is still the biggest lagging sector, so I am leaning toward this area for renewed strength.

Will The Early Bounce Last Ahead of Holiday Weekend?

The market is getting a bounce in early trading. The Philly Fed report came in above expectations, which gave the market a boost. Also, bellwether GE was upgraded to Buy at Merrill Lynch (MER).

The dollar is gaining today, posting its biggest one-day gain vs. the euro since Aug. 04. This is putting additional pressure on both oil and gold, as well as commodities in general. Oil is trading down -3% to just below $100, while gold is down an equal amount near $925.

I am willing to let this commodity correction play out, but will likely look to add some exposure and get back into my ag trade at lower prices.

Asia was down overnight, with large declines in Hong Kong and Australia. Japan was closed. The 10-year yield is stable at 3.37%.

The analyst from Punk Ziegel who warned about Bear Stears believes the financial crisis is over, and that although there will be more negative developments, they will be meaningless.

He says an environment has been created that will pump profits into the American banking system. He believes the last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990. The next time will be in 20 years. He believes this is a "once in a generation" opportunity. Interesting.

Wednesday, March 19, 2008

The Downside of Commodities Trading

There was some heavy selling in the market today, which centered around anything commodity related. I could have picked a lot of charts to post above, and they all would have looked similar. This chart is of the DB Agriculture commodity ETF (DBA).

Energy, materials, and commodity stocks have been on a tear in recent months. As the rest of the market sold off, anything related to oil, gold, etc. continued to go higher. And tons of investors who have never traded commodities before piled into these investments, simply because they were going up.

That's all fine, as long as your realize the risks involved. Commodities can be very volatile, and we saw some of that on the downside today. Oil plunged over -4%, even as it is still above $100. And gold plummeted roughly $40 on surging volume.

As the ETF above shows, many of the related stocks were sold off on heavy volume, as traders moved quickly to lock in profits. Since these areas had been leading the market, when you lose that leadership, it usually drags down the whole market initially.

But as those proceeds eventually get reinvested, they should begin to flow into other sectors that have not runup so much. From my perch, I think tech looks attractive, as it had been the hardest hit sector so far this year.

I would have liked to see a more benign pullback today, but it is what it is. The observations I made earlier this week are still valid, as long as we hold above Monday's lows. But investors are still very skittish, as can be seen in the investor sentiment indicators.

Midday Check: The Day After

The markets are pulling back today, after yesterday's huge rally. The big culprit today is the energy and commodity complex. Profit taking is underway in these sectors, and all of the stocks are down big.

Oil and gold are down -3.4% and -3.9%, respectively. This is causing big declines in the energy stocks, and even bigger declines in the agriculture and mining names. Take a look at the DBA commodity ETF to see what I am talking about.

It is piercing below its 50-day moving average on surging volume. These stocks have been so strong for so long that this unwind could last awhile. It remains to be seen where the proceeds will flow into. I am leaning toward the tech sector to be an eventual beneficiary.

It is normal to see a pullback after yesterday's rally, let's just hope it doesn't get out of hand. In terms of investor anxiety, the put/call ratios are high again today, showing no signs of complacency.

Tuesday, March 18, 2008

Market Reaction to Fed Rate Cut: Another 400-point Rally

Now that's what I call a rally. The S&P 500 surged +4.2% today, its biggest one-day gain since October 2002. Remember that date? It was the bottom of the last bear market.

Yesterday, I went out on a limb and said that it was likely that the "Bear Stearns Bottom" would mark the lows for the market. Today's action solidifies my views.

From a technical standpoint, I think that the SPX came close enough to my 1250 target to satisfy me. We also had a 90% up day (90% upside volume on NYSE) last Tuesday, and then again today. Those are rare, so 2 in a week is significant.

Also, the Fed has lowered rates from 5.25% t0 2.25% today. That is a huge injection of liquidity. And the loan facility measures they have put in place to provide a backstop to financial institutions mean that the "Don't Fight the Fed" mantra is now in full force.

And we have certainly seen extreme bearish sentiment to help the market bottom:
  • The 10-day CBOE put/call ratio hit 1.27, it's 3rd highest reading since 1995
  • The 10-day ISEE hit 80, its lowest reading since the inception of this index
  • The Investor's Intelligence survey showed the most bears (43%) since 1998, more than during the great bear market of 2000-02
  • The AAII survey showed the most bears (59%) since 1990. wow.
  • The volatility index (VIX) spiked to 36 before plunging 20% today; this action is typical of past market bottoms

I don't think the market is about to runaway on the upside. More likely, we will be in a trading range for awhile as rallies reach resistance and get sold into, and more negative headlines lead to future selling.

But if the collapse of the 5th largest investment bank can't take the S&P 500 below the 1250 level, I doubt that future headlines will be able to either. And with the Fed on our side, I think that the market continues to heal itself with each passing day. If the Fed would actually step up and buy some Fannie/Freddie paper, then we could improve sentiment in the housing industry in a heartbeat. And that is really what's at the root of all our problems.

Fed Lowers Rates 75 basis points

Many market participants were looking for 100 basis point cut, which I think the Fed should have done, moral hazards aside. But I don't think that Bernanke could have gotten enough votes from the other memebers, so the market will have to settle for 75 bps.

Here are the headlines from the FOMC announcement:
  • FOMC lowers Fed Funds rate by 75 bps to 2.25%
  • Fed cuts the discount rate 75 bps to 2.50%; move follows the emergency 25 bps cut over the weekend
  • Fed says will act in timely manner to promote growth, price stability
  • Fed says tight credit, housing contraction likely to weigh on growth
  • Fed says Inflation Should Moderate Over Coming Quarters
  • Fed says uncertainty over inflation outlook has increased
  • Fed says outlook for economic activity has 'weakened further'
  • Fed says financial markets remain under considerable stress
  • Fed says 'downside risks to growth remain'

President Bush is also saying that they will take further action to help the economy if needed.

The Dow was up +300 points before the announcement, but has given back about 100 points so far. There is still a ton of time left in the session, so we'll just have to see how the market holds up into the close.

Many people I speak with are still calling this just another oversold bounce. I think the recent lows will prove more meaningful.

Markets Surge Ahead of Fed Meeting

After a strong close yesterday, markets around the globe are trading higher. Asian markets finished with gains across the board, and Europe is nicely higher this morning as well. The Dow is currently up +222 points, ahead of this morning's FOMC meeting.

The fed funds market is currently pricing in a full 100 basis point cut byt the Fed. I think this is a good call, as the Fed needs to err on the side of too much liquidity in the current environment. This would take the overnight lending rate from 3.00% down to 2.00%. Yet T-bill rates are still below even this low level.

Financials are surging this morning after both Lehman (LEH) and Goldman (GS) beat earnings expectations and made positive comments about their liquidity positions and future prospects. GS is up +9% and LEH is surging +24% right now. If you were brave enough to wade into LEH yesterday when in opened near $20, you nearly have a double on your hand.

PPI was a little higher than expected this morning, but housing starts were also higher than consensus. So the economic data this morning was a mixed bag.

Oil is trading up a bit to $106.70; The Yen is down a touch after a multi-day parabolic move higher; the 10-year yield is up a little to 3.41%; and the volatility index (VIX) is plunging -10% to 29, another good sign.

Let's hope the Fed comes through and this rally holds. No one I spoke with yesterday thought we saw the bottom, but I think that may have been the case. There will be plenty of time to put money to work, but I think the negativity bubble peaked yesterday.

long GS

Monday, March 17, 2008

Has The Market Discounted The Credit Crisis?

Today was about as good as can be expected. If I had told you that Bear Stearns (BSC) was bailed out for $2, Asian stocks were plunging, and the futures were pointing to an ugly day, you likely would have assumed the Dow was going to be down big.

But after falling "only" 200 points early on, the market rallied back late in the day, and it looked like the Dow might close up over 100 points until a last minute selloff took back some of the gains.

This was a far better than exepcted outcome, and has to be viewed as a victory for the bulls. The market's ability to take this watershed event in stride, at least today, is comforting. And there were many large-cap stocks that bucked today's weakness and closed higher on the session.

Also, the VIX spiked to nearly 36, a very high level. The put/call ratios and investor surveys also showed extreme bearishness, which are necessary ingredients for a market bottom.

The S&P 500 broke its January lows on an intraday basis, but there were fewer new lows on the NYSE - a positive divergence. I have not started putting cash to work yet, as I would like to see how the market reacts to the FOMC meeting tomorrow. But I am one of the few people I spoke with all day who thinks we may have seen the bottom.

Nice Market To Come Home To

It has already been a wild day, and the market has only been open for an hour!

Last night, when I got home from Wyoming, I learned that Bear Stearns (BSC) had been "bought" out by JPMorgan (JPM) for $2. I thought it was a typo. $249 million? Given the hard assets of the firm, this basically placed a negative value on the investment bank.

What a stunning turn of events. BSC was the 5th largest brokerage firm in the U.S., and its stock has now lost 95% of its value since Jan. 1. This was a true "run on the bank". As confidence eroded last week, big investors at the firm pulled their money, and the bank could no longer meet its obligations.

This is the type of crisis of confidence that the Fed needs to guard against. And any argument that the Fed should not step in and help is silly. If Bear can collapse in a matter of days, it highlights the risks in the financial system. I hope the Fed cuts 100 basis points tomorrow.

Of course, the Fed also enacted a new loan program aimed at investment banks, so I doubt this will happen to any of the remaining players. Those stocks are all well off of their early lows.

As for the market, it was down big early, but not as much as you might have guessed given the turn of events. But withing an hour or so of trading, the Dow had worked its way all the way back to positive territory. Go figure.

There is still a lot of trading left today, so we will have to see how the market closes. But looking at history, this is the type of high profile event that usually punctuates these financial crises and occurs right at market bottoms. I'm just saying--

Oil is trading lower, as is the dollar. Bond yields are also lower on the flight to safety, pushing the 10-year yield down to 3.36%. Asian markets were down significantly overnight.

Thursday, March 13, 2008

Gone Skiin'

I am taking off for Jackson Hole to do some heli-skiing.

Most people I have told this to look at me like I'm crazy. But I have been skiing since I was 4, and have gone heli-skiing before. So the helicopter rides, steep terrain, deep powder, avalanche warnings-- none of that phases me.

My biggest concern is if my tired legs can hack it anymore. When I was in my 20s, this wasn't even a consideration. So I have been working out, running the stairs in Santa Monica, etc. Let's hope it helps.

I doubt I will be making any blog posts today and tommorrow. Check back Sunday or Monday for an update.

Wednesday, March 12, 2008

Benign Consolidation

The market gave back some of its outsized gains from yesterday, but just a little bit. Considering the S&P gained +47 points yesterday, I am not too fazed by giving back 11 today. And volume shrank, which is what you want to see on a pullback.

The Investor's Intelligence poll came out today, and it showed more bearishness that it has at any time since October 2002 - the bottom of the last great bear market. The market bottomed that month, and a new bull market began several months later.

Today, the put/call ratio remained high, indicating that there are still plenty of skeptics looking for new lows in the near future.

I will admit that there are a lot of cross currents right now. The market had been higher most of the day, but bond yields started to plummet, which likely worried traders. Also, the dollar plunged today, and the euro and yen spiked to new highs.

It will be hard for the market to bottom without some stabilization in the dollar. And gold and oil were also up today, although the energy stocks were down on the day. So lots of crosscurrents right now, which makes it tough to get any real clarity on the markets.

For now, the markets remain oversold and I think we continue to build on yesterday's rally, at least up to next week's FOMC meeting. One step at a time.

Monthly Update

Our most recent Monthly Market Monitor has been posted on our website. There is always a lag for this piece to get posted, as it has to go through compliance first.

To read our thoughts, click here.

Market Adds To Yesterday's Sizeable Gains

The market was down briefly this morning, but quickly came roaring back. This adds to yesterday's huge rally, the biggest in 5 years.

When the market roars back like this after a big day, it usually means there are still shorts trying to cover, as well as underinvested managers scrambling to put some money to work for fear of missing more upside.

The dollar is lower again this morning, which is helping gold move higher but interestingly it is not helping oil today. Oil is down near $107, and is likely due for a breather after the huge run it has enjoyed.

Catepillar (CAT) raised its long-term guidance , and the stock gapped higher this morning. In housing, the Freddie Mac (FRE) CEO said that the current housing market is the worst "in about 100 years".

Asian markets were up across the board overnight. The 10-year yield is down a touch to 3.55%. And the volatility index (VIX) is down another 4.8%, breaking below its 50-day average.

Tuesday, March 11, 2008

Stocks Soar On Big Fed Liquidity Injection

The market was up big at the open, then faded around midday, but regained its footing and rallied strongly into the close. The markets had their biggest percentage gains since October 2002. The S&P 500 surged +3.71% and the Nasdaq 100 gained +4.06%. Volume was also very strong, which is an encouraging sign.

Now before you ask, "Is this the bottom?", let me just say-- maybe. You never really know when the final bottom is made until after the fact. Yesterday the S&P 500 declined and retested its January lows. So today's bounce looks like a double-bottom formation. But follow-through is the key.

I have been saying that the markets were oversold, sentiment was highly bearish, and that any good news could send stocks soaring. That is exactly what happened today. I doubt this Fed news would have had the same impact if it came a few weeks ago.

So I think this strength could persist for awhile, but once the market gets overbought again, we will simply have to see if it again fades toward new lows, or if the recent lows hold. It is what it is.

Financials soared today, with the bank index +7.83%, and the broker index +7.29%. And I saw dozens of stocks on my screen up +6-12%. But traders have become accustomed to selling into any market strength, so we absolutely need to see strong follow through buying for this to hold.

The VIX fell -10.28% today, another good sign. And the dollar rallied, which is a nice change in response to recent Fed actions. At least the Fed is being more creative, and not simply relying on lowering the fed funds rate, which has been hurting the dollar and boosting commodities.

Oil touched $109 today, and I am hearing a lot of people calling for a near-term top in oil. This makes sense to me, and I might even consider shorting oil for a trade.

It's 81 and sunny here in LA, so I'd better go out and enjoy myself a bit. The markets have been depressing lately, so let's enjoy this moment.

Options Players Remain A Skeptical Bunch

Despite the market holding onto its rally, option players remain skeptical. The Dow is up +250 points currently, while the Nasdaq is up +2.2%.

But the CBOE put/call is still high at 1.25, and the ISEE remains very depressed at 58.

The 10-day averages for both of these sentiment indicators are in extreme territory, which has normally been associated with rallies in the market.

If the market can hold onto these gains, or even build into the close, it could spark additional short covering.

Do You Believe The Yield Curve?

The above graph shows the spread between the 10-year Treasury Bond and 3-month T-Bills. It is basically a numerical representation of the yield curve, showing the severity (or lack thereof) of the slope of the curve.

The slope of the yield curve is often looked at as a forward indicator of the economy. It generally has a lag-time of about a year. Thus, when the yield curve inverts, and has a negative slope (short-term rates higher than long-term rates) it is a sign that the economy could weaken over the next 12 months. At its extreme, it forecasts recession.

The last time the yield curve inverted was the year 2000. But with the stock market booming, most investors ignored the signal. But by 2001, a recession did come. I know there were other circumstances, but the signal was still validated.

More recently, the yield curve inverted last summer of last year, 2007. Again, most investors brushed off the signal, as the credit crunch seemed to be exacerbating the yield curve and putting downward pressure on long-term yields. Remember the "conundrum"?

Also, there were a lot of people that I speak with who were of the opinion that the bond market was just trying to send a message to the Fed that they were too tight with monetary policy, and that the inversion of the curve would only be temporary.

Well lo and behold, here we are a little more than a year later and every economist I know of is talking about recession. Go figure. But what is the yield curve saying now?

The yield curve has returned to a very positive slope, as T-bill rates have come way down. If you subscribe to the forecasting power of the yield curve, then you have to conclude that the yield curve is predicting a much strong economy next year.

So do you believe the yield curve? Or are you dismissing it the same way investors did in 2000 and 2007?

Fed Extends Lifeline to Mortgage Industry, Stocks Soar

The Fed announced a new creative lending structure to help the ailing mortgage industry, and stocks took off.

Bernanke's latest idea is a Term Securities Lending Facility (TSFL), which will lend up to $200 billion of Treasury Securities to primary dealers (banks) secured for a term of 28 days, rather than overnight. The borrowers will be able to pledge a variety of collateral, including AAA rated residential mortgage-backed securities.

This is a direct attempt to inject liquidity into the mortgage market, and help the ailing housing industry. On its face, it seems like a good idea, and the markets are certainly applauding the effort. But it remains to be seen how effective it will actually be.

For the time being, bond yields are rising across the board, which is a good sign. The 10-year yield is up 19 basis points to 3.62%. And credit spreads are narrowing for the first time in a while. Other central banks have also taken measures to increase liquidity.

Banks and brokers are rallying the most, +5.2% and +4.7% respectively. Healthcare and biotech is lagging, after WLP warned of lower earnings.

Asian markets were higher last night, despite yesterday's poor showing of U.S. markets. And the Yen is sharply lower this morning, -1.8%, a good sign. Oil is lower, but still above $107. And the volatility index (VIX) is down -5.9%.

I still hate strong market opens, so let's hope this doesn't fade. I fully expect the bears to take a swipe at this rally, but hopefully short-covering into the close will help, in addition to the fact that the markets are very oversold.

Engine room...more steam!

Monday, March 10, 2008

When Will This Market Bottom?

Today was another disheartening session where the indexes worked their way slowly lower into the close. Right now, it seems that this market is being driven by the technicals, and both good news and bad are used as a reason to sell stocks.

Sentiment was highly bearish today. The VIX surged +7%; the ISEE was near a record low at 56; and the CBOE put/call finished near 1.41. Also, the markets are now deeply oversold, making a near-term bounce more likely.

We have started to get more calls from clients concerned about the continued decline in the market, which begs the question: When will this market bottom?

In our recent Monthly Market Monitor newsletter, we looked at the last 2 recessions, and found that the lag between when the monetary and fiscal stimulus began and when it had its effect on the market was roughly a 9-10 month lag.

If we apply that to today's environment, that would put the time frame roughly around July or so. And this time around, the interest rate cuts (monetary) have been bigger and faster, and the rebate checks (fiscal) are going to be twice as big. That makes it more likey they will again work their magic on the economy, and thus the markets.

Sentiment is moving in the right direction, as we know it takes extreme levels of bearishness for the market to bottom, a contrarian signal. Unfortunately, it doesn't feel too good for the long-term investor to endure the damage in the market that is required to get to that bottom, but the payoff is worth it.

One of the positive divergences we got today was that, although the markets came down and tested their January lows, the number of stocks making new lows on the NYSE (361) paled in comparison with the January lows (1141) - a positive divergence.

Anecdotally, last week we saw several high profile CEOs trotted out in front of Congress to testify on the mortgage markets. The last time we saw these high profile congressional testimonies was in 2002, around the time of the last market bottom.

But stocks are far cheaper this time around, with relative valuations near multi-decade lows. This makes it more likely that the eventual declines will be far less than the last bear market, when we were coming off a stock bubble.

If I had to handicap the risk/reward in the current market, I would put it at 3-5% downisde risk from here, with +20-30% upside potential over the next 12-18 months. And that is pretty good odds.

Investor Sentiment Check

The markets remain in the red, and are testing their January lows. As for investor sentiment, it remains at very high (bearish) levels. While sentiment alone can't make the market bottom, the market is getting very oversold, and the bearish sentiment should help make for a stronger bounce at some point.

Here are what some of the indicators are showing:
  • The volatility index (VIX) is up +5% at 29
  • The ARMS Index has been above 1.30 all day, indicative of heavy selling pressure
  • The CBOE put/call hit an elevated level of 1.41 today
  • The ISEE is extremely low at 74, which is the put/call equivalent of 1.35
  • The 10-day ISEE made an all-time low on Friday, since this index's inception

The technicals seem totally in charge here, and the market continues to go down on bad news. But there are also plenty of brightspots in the bullish argument. I will try to expand on some of them later.

Monday Morning Musings

Not a ton of news this morning making the headlines.

The markets opened under some selling pressure again, after the FBI said it is investigating Countrywide (CFC) and 15 other subprime lenders.

Also, Fitch lowered its long-term ratings for Wamu(WM). And Citi again cuts its earnings estimates for several of the big brokers. All of this has the financials trading lower, while the semis are surprisingly higher.

Oil is up well over $106, which is starting to help the energy complex. The 10-year yield is down a touch to 3.51%.

Asian markets were lower across the board overnight on further worries about the U.S. recession. The Yen is also making more new highs.

The put/call ratio is very high again this morning, opening at 1.24. Bearish sentiment has really been building in the last few weeks, and when combined with an oversold market, should make for a strong rally at some point.

I will have more on the sentiment indicators coming up in a bit--

Friday, March 07, 2008

Market Wrap: Late Day Rally Trims Losses

The market was down pretty big midday, and with the weekend looming, it looked like it could get ugly. But a late day rally brought the market off of its lows. The S&P 500 finished down -0.84%, while the Nasdaq closed -0.36%. I suppose it could have been worse, given the poor jobs data.

Investor anxiety was high all day. The ISEE closed at a terribly depressed level of 65, which is the equivalent of a put/call ratio of 1.53. That's a lot of pessism. For those folks who have said that pessimism isn't as high as previous corrections, I would point out that the 10-day ISEE just hit a new all-time low today, at 87.

I suspect that a lot of the buying late in the day was short covering, as people covered their shorts ahead of the weekend in case there is any surprising good news. There was chatter about an emergency Fed rate cut, but I don't think we will see one.

Banks, brokers, and semis actually finished higher on the day, while energy and commodity stocks lagged. Commodity stocks have been up so much, that they were overdue for a bout of profit taking.

The market is pretty oversold at these levels, and should bounce. But it is hard to see what that catalyst is that makes it bounce. Maybe the Treasury can come up with something creative to help the ailing housing market. Wishful thinking? Prolly.

Morning Look: Surprising Bounce After Weak Jobs Report

The much anticipated jobs report was weaker than expected, with nonfarm payrolls falling by -63,000 (vs. +20k consensus). The S&P 500 broke below the 1300 level soon after the market opened, but the selling didn't last long.

The market bottomed and began to move higher, quickly erasing all its losses. There is still a lot of time left in the session. Either the shorts will cover into the weekend and keep the markets elevated, or this early rally could still fade.

There was some speculation that the Fed could step in on a weak jobs report and cut rates again. Instead, the Fed announced it was increasing the size of its TAF auctions to $100 billion to help improve liquidity.

It remains to be seen how much this will help, but improving liquidity should be the highest priority for the Fed right now. This is the worst credit crunch I can ever remember.

Asian markets were down big overnight, from -1% to -4% in India. The Yen is lower today, but needs to be down for more than just one day. The CBOE put/call ratio was very high again this morning, at 1.33. And the ISEE was depressed at 78.

Thursday, March 06, 2008

Morning Look: More Housing Woes

The market is lower this morning, despite what on the surface looked like a mixed bag of news. The housing data was mixed, financial news was bad, and retailers were mixed.

In housing, mortgage delinquencies reached their highest levels since 1985. January pending home sales were flat, which was above expectations. But if home prices continue to drop, the sector and the consumer will remain under pressure.

Initial jobless claims were 351,000, which was below forecasts, and still below levels that are normally associated with recessions.

Wal-Mart (WMT) and Target (TGT) reported solid same-store sales for February, while many other retailers were mixed.

But the news among the financials was not good, and is weighing on the market. Wamu (WM) had its credit rating downgraded by S&P, and its CreditWatch placed on negative watch. Also, Merrill (MER) was forced to amend some liquid yield option notes. I don't even know what those are, but it highlights the lingering credit crunch.

Tech is actually holding up well, with AAPL, BIDU, GOOG, and RIMM all trading higher. Go figure.

Asian markets were higher across the board overnight. But the Yen is higher again today, which isn't helping. Oil is up slightly, touching $105. And the 10-year yield is lower by 8 basis points to 3.61%.

As for the sentiment indicators, they are once again highly bearish. The CBOE put/call is running at 1.21, a high level. The ISEE is a very depressed 75. And the ARMS Index hit a whopping 2.16, indicating heavy selling pressure.

For the last few days, the high put/call ratios have helped put a floor under the market. But the more times the market probes those lower levels, the more likely they are to eventually give way. I am keeping my eye on the S&P 500 1320 level as my maginot line.


Wednesday, March 05, 2008

Market Gives Back Some Early Gains, But Still Closes Higher

I didn't get a chance to post a morning update today, but you can bet that I would have mentioned that I am always skeptical of strong market opens. And lo and behold, after midday, the market had given back all of those early gains.

Fortunately, a late day rally helped the indexes finish in positive territory. Energy led the way, up +1.98%, followed by semis +1.02%. Biotechs lagged the most, -2.17%, followed by banks -0.92%.

The market peaked when Ambac (ABK) was halted pending news. The rumors were that a major bailout that had been in the works for weeks would finally materialize. When the announcement came that all they were doing was raising some capital, the stock sold off sharply, and much of the air came out of the stock market.

One of the big surprises on the day was the sharp turnaround in oil and gold. Yesterday, I showed the charts of the big reversal that took place in those commodities. So today, I would have expected either some follow through on the downside, or maybe a small rally.

Instead, both of these commodities came roaring back, and went on to make new highs. That helped energy stocks soar, gold stocks spike, and agric and solar stocks to come back strong also.

The fact that the S&P 500 held the 1320 level over the last few days is an incremental positive. But the proof is in the pudding, and it remains to be seen if the index can rally through any major resistance levels, like its downsloping 50-day average.

Tuesday, March 04, 2008

Stocks Reverse From Early Lows; Nasdaq Gains

This morning I wrote that the put/call ratios were again very high, and that likel yesterday, they could come into play. A friend IM'd me with about 2 hours to go and chuckled at that call. But then, lo and behold, the market bottomed and rallied into the close.

It was a pretty surprising turnaround, triggered by rumors that the Ambac (ABK) deal could be close again, and also comments from CSCO CEO John Chambers who raised his long-term growth outlook for the company.

That sparked a short-covering rally that basically lasted into the close. The S&P 500 almost made it back to positive territory, losing -0.34% on the day. But the Nasdaq 100 rallied the most, and finished with a gain of +0.60%.

Amazon (AMZN) rallied 5% on comments out of a West Coast tech conference. AAPL also rallied today, after they said that the company will begin selling iPhones in both China and India this year. I had also hoped they would say something about a buyback, but for some reason they like sitting on billions of cash. Go figure.

Getting to the charts at the top of this post, one of the big themes for the day was the turnaround in the energy and commodity stocks. The charts above are of the oil ETF (USO) and the gold ETF (GLD), both of which had surprising down days after a prolonged runup.

This is completely normal, as traders with big gains look to lock-in some profits, and the extended rallies correct themselves. These stories likely still have room to run, and both oil and gold probably make good buys on a further pullback.

The Yen fell for the first time in 6 days. Let's hope that one continues. And the VIX was also down on the day, despite the elevated intraday volatility.

This market is so crazy that anything can happen on a given day, but the action of the last 2 days would lead me to believe that a bit more of a bounce is in order.


Stock of the Day: BE Aerospace (BEAV)

My Stock of the Day is BE Aerospace (BEAV).

I have been bullish on this stock and owned it for clients for a couple of years. But rather than running its course, I felt the story continued to get better.

Profitability continued to improve; the company paid down huge debt; and it continued to win more and more contracts and grow its backlog. Moreover, the upgrade cycle for airliners is a long-dated cycle, and doesn't run its course overnight.

The stock has been under pressure recently, even though the company reported solid results in its latest quarter, and said its outlook remains very positive. I think that investors are still worried with the potential slowdown in the overall global economy.

Today, the company said it won $200 million worth of contracts from unnamed airlines to refurbish wide-body cabins and put in new first-class suites. These are profitable contracts for them.

The CEO said that these contracts along with continued "robust market conditions" strengthened its expectation for continued growth in their backlog and "superior" earnings growth over the next three years.

And the stock reacted very well, rising 9% today on a big pickup in volume. This is bullish action, and I would be looking to add shares where I didn't already have a full weighting.

long BEAV

Opening Look: Bernanke Fails To Sooth Markets

Has the market ever gone up when Bernanke speaks publicly? This morning he made comments indicating that mortgage delinquencies and foreclosures will continue, and that housing prices could see further declines. Thanks for reiterating the obvious, Ben.

Intel (INTC) trimmed Q1 gross margin guidance last night, citing lower flash memory prices. This pressured tech stocks early on. Although it should be noted that Apple (AAPL) should benefit from falling flash prices, and its stock is actually up this morning.

Financials are also weak again, led by Citi (C). Dubai International said they believe Citi will likely need more capital than it has already received.

Asian markets were mixed overnight, while the international ETFs are all lower this morning. The Yen is higher again today, which doesn't help.

Bond yields are steady, with the 10-year yeild at 3.53%. The high put/call ratios helped the market bottom yesterday, and they are extremely high again today. The CBOE put/call opened at 1.21, while the ISEE just hit a near record low of 36. Both of these indicate extreme bearishness.

long AAPL

Monday, March 03, 2008

Investor Sentiment Check

The market is still hovering near the flat line on the day, at least for the S&P 500. The Nasdaq has not been able to bounce as much, as some tech stocks remain under pressure.

I think what helped the market bottom early this morning was the extreme put buying that was going on.

  • The CBOE put/call ratio opened at 1.54 this morning, and is still hovering near 1.21. These are very high readings.
  • The ISEE opened at a depressed level of 48, one of the lowest readings on record. And it is still only at 78 as of now.
  • And the ARMS Index has been above 1.0 all day, and as high as 1.30 this morning. It closed at a whopping 2.74 on Friday.

The sentiment indicators are all flashing signs of extreme bearishness. We know from past corrections that the sentiment indicators don't call bottoms very well, but they do help give investors confidence that when the market does bottom and reverse higher, the unwind of these positions usually adds upside fuel to the fire.

The calls for a retest are growing louder, with Merrill (MER) basically saying it is a certainty in the next few weeks.

Monday Morning Musings

The market opened on a weak note, following large losses in Asian, but has rebounded from its lows.

Asian markets were down big overnight, with Hong Kong falling -3.1% and Japan declining -4.5% on new highs in the Yen which pressured stocks.

Oil and gold are also making new highs this morning, with gold touching $991 and oil nearly hitting $104. This weighed on our markets in early trading.

There was also some negative headlines in the mortgage market, with Thornburg Mortgage (TMA) saying it had some liquidity issues, and is seeing margin calls. And Ambac (ABK) cut its dividend, as the much anticipated bailout has not yet materialized.

In deal news, Northrop Grumman (NOC) beat out Boeing (BA) for a $40 billion Air Force contract. Also, United Tech (UTX) made a $2.6 billion bid for Diebold (DBD).

The 10-year yeild is up slightly, at 3.55%. My relative valuation models are showing that stocks are the most undervalued relative to bonds that they have been in several decades.

Biotechs are higher this morning, along with energy stocks. All other sectors are currently lower.

The volatility index (VIX) is higher this morning, after a huge spike on Friday. The put/call ratios are also very elevated again today.

Sunday, March 02, 2008

Weekly Wrap

Here is a copy of's Weekly Recap:

If you remove Friday from this week's trading action, it was a reasonably good week for the market. However, unlike some economic reports, there are no exclusions when computing the returns that matter for equity investors. Friday counts just like the other days, and because it does, this week will go down as a losing one in the record books.

The week certainly began on a good enough note, as the major indices rallied Monday on the news Standard & Poor's took bond insurer MBIA (MBI) off CreditWatch and affirmed the triple A ratings for MBIA and Ambac Financial (ABK).

Bullish investors kept charging on Tuesday thanks to IBM (IBM), which announced a $15 billion buyback plan and raised its full-year earnings per share guidance.

The market had a roller coaster day on Wednesday before finishing roughly flat on the session. Fed Chairman Bernanke was in the spotlight all day, as he provided testimony on the economy and monetary policy before the House Financial Services Committee.

While Mr. Bernanke made note of the recent rise in inflation, he emphasized the Fed's view that growth risks remain the greater threat right now to the economy. The takeaway from his testimony was that the Fed will be cutting rates again at the March 18 FOMC meeting.

The stock market was on the defensive when the Fed Chairman began his testimony Wednesday. A weak new home sales report didn't help matters much either (more on this week's data in just a bit). Buyers, however, jumped back into the action following word from the Office of Federal Housing Enterprise Oversight that it would be removing the portfolio caps on Fannie Mae (FNM) and Freddie Mac (FRE). Removing the caps, presumably, will improve liquidity in the secondary mortgage market and help promote increased mortgage lending.

The latter news came shortly after Fannie Mae reported a $2.1 billion loss for 2007 and warned that it expects further housing market weakness in 2008 to lead to increased delinquencies, defaults and foreclosures on mortgage loans. On Thursday Freddie Mac followed suit, reporting a $3.1 billion loss and also warning about the housing outlook for 2008.

Unlike Wednesday, the stock market suffered a noticeable setback on Thursday. The retreat was driven by an inclination to sell into the previous strength and was attributed in part to concerns about the banking industry that were sparked by Fed Chairman Bernanke's observation before the Senate Banking Committee that there will probably be some bank failures as a result of the financial market turmoil. Interestingly, the market all but ignored his more important qualification that capital ratios remain good among the largest banks.

Thursday's weakness spilled over to Friday where the trading action reflected the release of pent-up angst about the financial sector's problems specifically and the economy in general.
This week saw several economic reports come in worse than expected. The new home sales report was referenced above and was joined in the disappointing category by the producer price index, consumer confidence, durable orders, weekly initial claims, and the Chicago purchasing manager's index. However, a closer examination of this week's data in aggregate, which also included better than expected reports for existing home sales and personal income and spending, reflected an economy that has clearly slowed but not one that is in recession.

Qualitative assessments didn't matter much, though, on Friday as a negative bias took root early on following disappointing earnings reports from Dell (DELL) and AIG (AIG), research from UBS that suggested total losses related to the subprime meltdown will reach at least $600 billion for financial firms, news that a bailout of Ambac Financial had hit a "snag," and reports of forced selling in the municipal bond market by hedge funds needing to meet margin calls.

The latter touched off a new wave of uncertainty that led to a 2.7% decline in the S&P 500 on Friday and a noteworthy flight-to-quality bid in the U.S. Treasury market where the benchmark 10-year note gained more than a point and saw its yield drop to 3.53%, down from 3.80% at the close of the prior week.

Aside from Treasuries, commodities were the other big winner on the week. The CRB Index surged 3.5%, led again by increases in oil and gold prices, both of which hit new, non-inflation adjusted highs during the week. Weakness in the dollar, which hit a new low against a basket of major currencies, fed the rally in dollar-denominated commodities.

Friday's session capped off another losing month for the market, which has now suffered a decline in each of the last four months. With a streak like that, it is easier to fear the worst, but as we noted in our Page One column Friday, the market needs time to stabilize until a better future emerges. Fortunately, time will bring the benefits of perhaps the most aggressive Fed policy easing ever and the boost from the huge fiscal stimulus package starting in early May.