Monday, June 30, 2008

Monday Morning Musings

Not a lot of market moving news this morning to get the week started. It seems like more of the same right now, with financials trading heavy and energy leading the way.

H&R Block (HRB) beat earnings, and its stock is higher. Also, BUD announced it will be trimming its workforce by 10-15%. But those appear to be stock specific events, as opposed to market moving ones.

Oil is trading higher once again, topping $142 this morning. This has the energy complex up across the board. Coal stocks seem to be leading, with many making new highs. But nat gas stocks, ag, and steel stocks are also strong.

Asian stocks were lower overnight, as worries about high oil prices persist. The 10-year yield is lower at 3.96%. And the VIX is higher by +3% to 24.1.

This is the last trading day of the quarter, but as far as I can see, quarter-end has had little effect. Normally you see portfolio managers do some window dressing. If this has occurred, it probably only showed up in the form of furhter selling of losing stocks. But buying pressure has been non-existent, and we remain heavily oversold.

Friday, June 27, 2008

Another Oil Rise Keeps A Lid on Stocks

I keep hearing that there is not enough fear in the market because the volatility index (VIX) has not hit levels that it did during the Jan and March selloffs. But Merrill's technical analyst today said that it is normal for the VIX to make a lower high on the "retest" of the market lows.

Also, there are other indicators that are showing the same signs of fear. For one, the ProShares Ultrashort Financials ETF (SKF) traded 23M shares on March 17th. Yesterday, it traded 21.9M shares. Pretty close.

And take a look at the chart above. This is the Rydex Nova/Ursa ratio I write about a lot. It is a measure of the fund flows from Rydex's bullish market timing funds relative to its bearish funds.

The huge plunge in the indicator (in red) shows that money has come flying out of the bullish funds and moved into the bear funds in a hurry. This week, this indicator broke below its March lows.

The market couldn't get anything going on the upside today, as oil breaking above $140 stole the show. But there were a lot of stocks that worked today. The S&P 500 came close to breaking its March lows, but the number of stocks making new lows on the NYSE did not surpass March levels. This is what my colleague calls a positive divergence.

This was a terrible week for the market, and I was wrong in calling for a trading bounce. That said, we are now even more oversold, and next week could be the long awaited bounce. If you feel that you are not well positioned for this tough market, I would use any upcoming strength to reposition and adjust your exposure to something you can sleep with.

Stocks Bounce In Early Trading

Yesterday was a pretty brutal day, wasn't it? My screens were a sea of red, although some of our alternative funds actually fared pretty well.

Asian markets were down across the board overnight, some severly. That made me think that our markets might open under pressure again, but stocks have actually bounced in early trading. I wonder if some of this could be short covering ahead of the weekend. I know that if I had a ton of shorts on, I would be happy to take some profits after yesterday.

The dollar is mixed this morning. I think this morning would have been a perfect moment in time for Treasury to coordinate a currency intervention to support the dollar, but they seem completely uninterested in doing so.

Oil is higher again, now trading above $140. The energy and ag stocks are bouncing as well. I heard on the radio this morning that gas prices have ticked down, but I didn't notice it at the pumps. If it is true, it might be a good sign for oil.

The 10-year yield is lower at 4.00%, reflecting what I think is the bond market thinking that slower economic growth could result from current high commodity prices. But if inflation were the primary concern, I would think that yields would be moving higher.

Personal income came in at +1.9% in May, well above the +0.4% economists predicted. This should bode well for the consumer, who is also still getting stimulus checks in the mail.

Tech stocks remain one of the weak spots so far this morning.

Thursday, June 26, 2008

Downgrades On Financials Weigh Heavily On The Market

The market is taking it on the chin this morning, after a bevy of downgrades in the financial sector. Its amazing that these downgrades still have as much impact as they do, given that the financial sector is already down -28% this year alone.

Goldman Sachs (GS) downgraded a host of finanacials, but singled out Citi (C), Merrill (MER), and GM as the weakest. The analyst is looking for more writedowns and dividend cuts.

There has also been some negative reactions to earnings reports this morning. Nike (NKE) and Oracle (ORCL) are lower after beating estimates, and Research In Motion (RIMM) is down -12% after missing estimates by a penny. They also offered conservative guidance. These selloffs can take some time to find a solid bottom, but it will likely be another good buying opportunity at some point.

Existing home sales were better than expected at +2%, and final Q1 GDP was revised upward to +1.0%, but no one seems to care this morning.

The dollar is weak vs. the Yen and the Euro, and gold and oil are both spiking. Oil once again looked like it might break down yesterday, but today is is back all they way above $138, near another record. The up/down day-to-day moves in oil has been breathtaking lately, with volatility at historical records.

On the sentiment front, the AAII survey showed more bears (52%) than bulls (31%) for the 3rd straight week. The VIX is up +10% to 23.3, and the ARMS Index is high at 1.82.

So the selling pressure is pretty severe, such that I would expect the market to pare its losses later in the day.

long GS

Wednesday, June 25, 2008

Stocks Bounce Early, Ahead of FOMC Meeting

Stocks are enjoying a strong bounce on a better than expected housing report. But normally on a day when the FOMC meets, trading is pretty slow until after their policy announcement (2:15 EST).

May new home sales fell less than expected (-2.5%), while April sales were revised upward to +4.8%. Not bad, at least at the margin. But the total level of new home sales is still down -40% from last year. Ouch.

In the ag space, Monsanto (MON) reported better than expected earnings, and raised guidance again. But these stocks have come so far, that a bout of profit taking is a normal reaction. I still think these stocks remain buys on pullbacks, and am trading accordingly.

Darden Restaurants (DRI) also topped expectations in a tough environment, which is helping the overall retail sector.

Financials are also strong, with the bank index leading the way. I have commented on how hedge funds are massively short the financials, so this could be some short covering ahead of the Fed meeting.

Fed funds futures are forecasting a 90% chance of the Fed leaving rates unchanged at 2.00%. I think this is a good call. I don't beleive the Fed is about to raise rates, due to the weak economy and fragile financial system. I think the Fed is merely trying to jawbone the market and help support the dollar, as well as break the price of oil and commodities.

Asian markets were mixed overnight; the dollar is also mixed; the 10-year yield is up to 4.13%; and the VIX is 3% lower to 21.70

I have a meeting out of the office the rest of today, so I'll post my comments on the Fed meeting and the ensuing action tomorrow.

Tuesday, June 24, 2008

Investor Sentiment Check

I continue to hear people say that investors are too complacent currently. Huh? The S&P has declined in nearly a straight line since peaking on May 19th. That selling isn't a reflection of people having a rosy outlook.

I also hear them cite indicators like the VIX, which is well below the March highs. But the VIX doesn't have to make a higher high during every correction. The March bottom was a scary event, that resluted in a crescendo of fear. The current pullback is more garden variety.

But the market is sufficiently oversold here, and ripe for a bounce. Also, the majority of investor psychology indicators that I follow are deep in negative territory, highlighting pervasive bearish sentiment:
  • The bull/bear spread in the Investor's Intelligence survey is -1%, a rare event; moreover, Merrill Lynch looked at the 5-week moving average and said that when it is this oversold, the 3-month historical return for the market is +11.5%
  • The bull/bear spread in the AAII survey is -13%, and has been negative for 3 of the last 4 weeks
  • The Ticker Sense blogger poll has also showed more bears than bulls for 7 consecutive weeks, the longest stretch since its inception
  • The Public Short Ratio on the NYSE is a a new high of 73% (I cannot find another reading higher than this)
  • The 10-day put/call ratio is very elevated at 1.01; it has been higher during steep selloffs, but even at these levels, bearish sentiment prevails
  • The Rydex Nova/Ursa ratio of money flowing from bullish funds into bearish funds has had a steep decline, and is now back to levels seen during the March lows

I have said before, that sentiment in and of itself can't make the market bottom. It is but a secondary indicator. Price and volume action on the major indexes come first. But if we can get a rally in the market for any reason, then the buildup of bearish sentiment often adds upside fuel to the fire as these bearish bets get unwound.

Now all we need is a big catalyst for a rally!

Turnaround Tuesday

That was quick. I don't want to jinx anything, but 'Turnaround Tuesday' is already coming to fruition, as the S&P 500 has recouped all of its earlier losses.

There is still a lot of time left in today's session, so anything can happen. But this has been an impressive bounce so far--

Opening Look: Oil Up, Financials Weak

Boy, does this market feel heavy lately. This morning, oil is up again, above $137 and financials are weak. The April Case-Shiller Home Price Indexs fell -15.3% yr/yr, continuing the elusive bottom in the housing sector.

Last night, UPS lowered its earnings guidance due to rising fuel costs and a sluggish economy. This is not surprising, since FedEx told us the same thing last week. But the stock is down a lot nonetheless.

Also, June consumer confidence declined -13% to its lowest level (50.4) since 1992. Given the high gas prices and negative headlines, this is not surprising. If you go back and look at all of the past market bottoms, the news was always decidedly negative.

Asian markets were mostly lower overnight; the dollar is weaker this morning; the 10-year yield is lower at 4.11%. The put/call ratio is high at 1.11.

Is it too much of a longshot to look for a 'Turnaround Tuesday'?

Monday, June 23, 2008

Market Wrap: Energy Service Stocks Soar

The market felt pretty sluggish today overall, even as the financials were whacked once again. If that's where you are invested, you felt pretty bad today. But if you are overweight energy and industrials, it was quite a different story.

It is disheartening to see the resilience in oil prices. Each time they look like they are about to break lower, prices miraculously recover. And I worry that the longer prices hang around in this $130-137 trading range, the closer we are to an upside breakout over $140.

I still think that the market is sufficiently oversold, and should bounce this week. We also are nearing quarter-end, where fund managers "mark up" their stocks. That is, they often buy what have been winners for them, and sell their losers.

This makes their portfolios appear to be in better shape when they have to file their holdings reports, which their boards see. It's kind of disingenuous, but happens nonetheless.

I was swamped with calls and meetings today, so I did not get a chance to post my investor sentiment update. I will try to post on it tomorrow.

Monday Morning Musings

The market is only up slightly after the open, despite how oversold it became last week. There was some hope that oil prices would drop following the meeting in Saudi Arabia over the weekend.

The Saudis said they will increase output by 200,000 barrels/day starting in July, but oil is still up a bit near $136.

The dollar is stronger this morning, which is hitting gold by -2.2%. The 10-year yield is down slightly to 4.13%.

There were some mergers over the weekend. Bunge (BG) will buy Corn Products (CPO) for $4.8 billion, and Republic Services (RSG) will pay roughly $6 billion to acquire Allied Waste Industries (AW).

The financials are lower again this morning, after Citi (C) and Goldman Sachs (GS) both said they would cut their workforces by -10%. Goldman normally slashes its workforce by -5% each year, but these cuts are higher than normal. I don't think the shares should be lower, as this well make the company leaner and reduce its expenses a bit. So I would still be a buyer on weakness.

Energy shares are leading the way, with the oil service stocks up quite a bit. Tech is mostly mixed.

I expect the market to bounce this week, and have began to cover some of my trading shorts and add to my longs. I will recap the sentiment indicators later.

Finally, I was saddened to hear of comedian George Carlin's passing. He died in Santa Monica yesterday at the age of 71. Carlin was a pioneer in comedy, and a very funny man.

Sunday, June 22, 2008

Weekly Wrap

Below is's weekly recap:

The stock market tumbled 3.1% in a volatile week of trade, falling to its lowest level in nearly three months. Although weakness was broad-based, the financial sector was at the center of the market's decline, with concerns over further write-downs weighing on sentiment.

As expected, quarterly earnings from Lehman Brothers (LEH), Goldman Sachs (GS) and Morgan Stanley (MER) were poor compared to last year. But the results were better when compared to Wall Street's expectations; Goldman's earnings blew away forecasts, and Morgan Stanley beat estimates. Lehman's loss of $2.8 billion matched its preannouncement.

The stock market, and financials tanked on Tuesday despite Goldman's large beat. Ironically, the market sank when Goldman warned that U.S. banks may need to raise $65 billion in fresh capital in response to the subprime fallout. (U.S. financial companies have raised $159 billion so far).

Sure enough, the following day regional bank Fifth Third Bank (FITB) said it is going to raise $1 billion in fresh capital, sell $1 billion in assets and cut is dividend by 66% in an effort to shore up its balance sheet. Regional banks fell 9% for the week.

Citigroup compounded the financial sector's decline on Thursday, after announcing that it will face another barrage of write-downs in its second quarter, although the total amount should be less than its $19 billion first quarter write-down due decreased subprime exposure. Citi did note, however, that it will face a write-off on its bond insurer exposure similar to its first quarter amount ($1.5 billion), citing the widening in credit spreads of bond insurers -- which indicates the struggling bond insurers might not be able to pay claims on the assets they back up.

On a related note, Moody's cut its Aaa credit rating and put a negative outlook on the insurance units of both Ambac Financial (ABK) and MBIA (MBI ). Moody's lowered MBIA's unit by five notches and Ambac's unit by three notches, citing the difficulty the companies are having in writing new business and their limited ability to raise new capital.

Financials tumbled 4.7% for the week and is at its lowest level in five years.

Although financials were the driving force behind the negative sentiment this week, all ten economic sectors posted a decline and 86% of S&P 500 components fell.

Consumer discretionary tumbled 5%. Ford (F) and General Motors (GM) retreated 8% and 16% for the week, respectively, after Ford said it will be difficult for the company to "break-even" in 2009, and Standard & Poor's put a negative credit rating watch on both GM and Ford. Traders were also disappointed with earnings from retailers Best Buy (BBY), Circuit City (CC) and Pier 1 Imports (PIR).

FedEx (FDX) fell 6% after reporting quarterly earnings that missed the consensus estimate. The Memphis, Tenn.-based company issued fiscal year 2009 earnings guidance well below expectations, citing sluggish U.S. demand and record energy prices.

The managed health care group stumbled 11% after Coventry Health Care (CVH) slashed its earnings guidance well below expectations due to increases in its Medicare medical loss ratio and higher-than-expected outpatient utilization of its commercial business.

Economic data were largely overlooked as market participants focused on corporate news, although there were several notable releases.

May PPI rose by a higher-than-expected amount due to the spike in energy prices. However, core PPI -- which excludes food and energy -- was in-line with estimates. Weak consumer demand has limited the ability of producers to raise prices. The year-over-year increase in PPI is now 7.2%. The year-over-year increase in the core rate is 3.0%.

The housing industry is still depressed, but the pace of declines in housing starts is slowing -- which is a positive for the construction spending portion of GDP forecasts. Housing starts fell 3.3% from the prior month and building permits dipped 1.3%. Homebuilding stocks ended the week with a 1.3% gain.

Industrial production in May unexpectedly dipped, but the slowdown is still not near the levels seen during the 2001 recession. Specifically, production declined 0.2% from the prior month, which was worse than the forecast of a 0.1% increase. Capacity utilization slipped 0.2% to 79.4%.
The number of new unemployment claims held mostly steady from the prior week -- remaining elevated, but below the levels typically seen during recessionary environments.

In commodity trading, crude oil settled the week nearly unchanged at $134.62 per barrel after several wild swings, trading as high as $139.89 -- a new all-time high -- and as low as $131.19. Trading catalysts included the government's energy inventory report that showed a mixed picture of demand, news that China is increasing its price on gasoline and diesel, and reports that Israel performed a military exercise to simulate the bombing of nuclear facilities in Iran.

Commodities as a whole rose 2.1% as a weakening dollar (-1.5%) spurred some buying interest in gold (+3.6%) and silver (+5.1%).

The focal point next week will be the FOMC policy announcement on Wednesday. The market expects the fed funds rate to remain unchanged at 2.00%, but the uncertainty with respect to the wording of the policy directive means it has market-moving potential.

Friday, June 20, 2008

Deja Vu Friday?

This morning seems to be shaping up a lot like last Friday. Did everyone decide to just sell and head out to the beach?

Oil is spiking higher today, after really looking like it might start to break down yesterday. Oil has been hovering as high as $136 today, up nearly $4. The energy and ag stocks are mostly higher.

Moody's downgraded MBI and Ambak (ABK) further, and this seems to be weighing on the financial sector as a whole. There has also been some worries about the European banks, following the writedowns we have seen in the U.S. banks.

Asian markets were mostly lower overnight, while the dollar is weak this morning vs. the Yen and the Euro. And the 10-year yield is down to 4.14%.

Investor angst is high in the early going. The volatility index (VIX) is up 6% to 22.83; the ARMS Index hit 1.52 this morning, while the CBOE put/call ratio is high at 1.17. Like yesterday, this should help the market bounce at some point, but I am not sure how many buyers we can find on a summer Friday afternoon. We might have to wait until next week.

Thursday, June 19, 2008

Investor Sentiment Check

Investor sentiment is growing more bearish, with continued weakness in the financial headlines and the incessant rise in oil weighing adding to the angst.

But the market has been in a downtrend since peaking on May 19th, a month ago. Since then, the market has continued to work its way lower, and is pretty oversold judging by the oscillators.

Sentiment in and of itself usually doesn't lead to a market bottom, but when the market gets sufficiently oversold, even a little bit of good news helps the market rally. Maybe a bigger drop in oil could be the catalyst this time around? And when the market does rally, the unwinding of all of these bearish bets adds fuel to the fire and helps boost things on the upside.

The investor surveys are universally bearish right now. Here is a look at some of the indicators I follow:
  • The Investor's Intelligence poll shows more bears than bulls (36% bulls, 37% bears), which is a fairly rare occurrence
  • The spread in the AAII poll is -13% (33% bulls, 46% bears); bears have exceeded bulls for 3 of the last 4 weeks
  • The Ticker Sense blogger poll spread is -5% (37% bulls, 42% bears); bears have exceeded bulls for the past 6 consecutive weeks
  • Bulls on Market Vane are down to 48%; recently they were as high as 55%, and a year ago they were a whopping 71%
  • The 10-day CBOE put/call ratio is back above 1.0; this is often a sign of excessive bearishness
  • The 10-day ISE call/put is also bearish at 111; recent peaks have come below 100, but a year ago it was 160

In all, I think we are setting up for a nice relief rally. The financials are oversold again, and techs have been biding their time as well. I am putting more money to work today.

Stocks Shake Off Early Weakness: Turnaround Thursday?

The market opened under further selling pressure this morning, but has since recouped its losses and moved back into positive territory. I would not be surprised to see a 'turnaround Thursday' today, given how oversold the markets are short-term and how bearish sentiment has become.

I thought yesterday might see a rebound for the same reasons, and it was looking like I might have been right, but a midday turnaround in oil prices that drove them from under $133 to back over $136 killed any rally attempt and led to further selling into the close.

Today's action looks more mixed, with semis and retailers trading higher, while financials are again weak. Energy stocks are mixed. Oil is currently trading under $135, but for weeks it has held above this $130 level.

Today, China said that they will be raising prices on gas and diesel. It will be interesting to see how this affects global prices, if at all. China totally subsidizes gas for its citizens, so they have not felt the brunt of rising prices. But that costs the govt. quite a bit of money, and it seems they are passing a bit of that on to consumers now.

Mastercard (MA) said yesterday that retail gas purchases were down 7%. So I think we are already beginning to see some demand destruction from higher prices. This move in China could exacerbate that, as their consumers are not nearly as resilient as those in the U.S., who still drive no matter what, they just complain more.

Asian markets were down overnight, while the dollar is firm vs. the Euro and Yen; the 10-year yield is up to 4.18%.

Investor sentiment has grown more bearish, which should help lead to a bounce in the market. I will be back with an update on the indicators in a bit--

Wednesday, June 18, 2008

Weak Earnings From FedEx Weighs On Sentiment

The market is under more selling pressure this morning. The broker index is down the most, after Morgan Stanley (MS) reported earnings that beat estimates, but revenues fell short. FedEx (FDX) also reported disappointing results due to sluggish demand and soaring energy prices. The firm gave 2009 guidance that was well below consensus, hurting the stock.

Nearly every major sector is lower so far this morning. The Dept. of Energy said that crude inventories fell slightly last week, which would normally push oil prices higher. But oil is trading lower after the report, testing the $133 level.

The banks are also under pressure. Yesterday, Goldman (GS) made comments that U.S. banks still need to raise considerable amounts of capital. Today, Fifth Third Bancorp (FITB) announced that it is going to raise $1 billion in capital, sell some assets, and also cut its dividend by 66%. The financials continue to struggle, and I am not looking to bottom fish in these stocks.

Asian stocks were mostly higher overnight, led by a +5% surge in China on bargain hunting. The dollar is flat vs. the Yen and Euro, and the 10-year yield is lower at 4.16%.

Investor angst is running very high. The ARMS Index hit 2.24 this morning, and is still just below 1.50; the CBOE put/call is very high at 1.13, and the ISE call/put is equally bearish at 88. Combined with the weak open, I think this sets us up for a market that should erase some of its early losses into the close.

long GS

Tuesday, June 17, 2008

Financials Weigh On Market, Energy Stocks Buck Weakness

The market was flat most of the day, but a late day sell program knocked things down pretty hard into the close. The financials were weak all day on rumors that banks were going to have to raise more capital amid the ongoing credit crunch.

Energy and materials stocks bucked the weakness today, and soared despite crude oil prices declining on the day. Oil finished below $134, near the same levels it has closed at for the last 3 days. The longer oil hovers up in this area, the more I worry about another spike higher to new highs.

Ag stocks were again on fire, after comments in the industry about fertilizer shortages persist. MOS surged +5% today, and I took partial profits on my trading long. Natural gas stocks also had a very strong day, and continue to act as market leaders.

Investor angst was high all day. The ARMS Index closed at a high level of 1.25; the put/call ratio was also above average at 1.00; and the VIX was up slightly to 21.13.

The dollar was a bit lower today vs. the Yen and the Euro. And the 10-year yield was also lower at 4.22%.

Overall, I think the market is setting up for another push higher. I am looking to add long exposure on further weakness. Buy the dips, sell the rips continues to be the motto for trading success.

long MOS

Goldman Sachs Trounces Earnings Estimates

Goldman Sachs (GS) reported earnings this morning that were much better than expected. The firm beat consensus estimates by a whopping +34%.

To me, this highlights both the inability of analysts to accurately predict earnings for the brokers, and the fact that most of the Street continues to underestimate the execution at GS.

Here are some of the highlights from the quarter:

-Goldman ranked 1st in M&A ytd
-Equity underwriting rose +72% to hits highest level in 8 years
-Assets under management rose +18% to a record $895 billion
-Book value rose +5% to $97.49; ROTE was 23.5% for Q2
-Investment Banking revenues fell -2% to $1.69 billion
-Financial Advisory revenues rose +13% to $800 million
-FICC revenues were -29% lower to $2.38 billion
-Net revenues in Equities was flat at $2.49 billion
-Trading and Principal Investments overall was -16% lower ($5.59 billion)
-Securities Services rose +30% to $985 million due to strength in Prime Brokerage
-Comp and Benefits was -7% lower; comp ratio flat at 48%
-Ave. daily VaR increased to $184 million
-Mgt. repurchased 1.2 million shares (ave. price $173.85)

The stock already ran some +13% in the days ahead of their earnings announcement. There is a bit of a 'buy the rumer, sell the news' reaction going on. But this report gives me further confidence in management, and I will not look to use any further increase to add to my positions.

long GS

Monday, June 16, 2008

Oil Reverses Lower, Stocks Rebound

The market bounced back from its early lows this morning, after oil peaked early and faded as the day wore on.

After briefly touching $139 early this morning, oil reversed all of its gains and closed below $134. That's pretty bearish action, although follow through is key. We have yet to see anything that can knock oil down for more than a day or two.

Tech stocks led the way today, after RIMM rallied big time, GOOG finished positive, and AAPL reversed its early declines to close just shy of $177. The smartphone plays continue to impress.

Brokers were the strongest group on the day, led by LEH. GS reports earnings before the open tomorrow. I will go out on a limb and say that I bet they beat the consensus estimates.

The ARMS Index was above average at 1.11 at the close; the CBOE put/call was also above average at 0.93; and the ISEE was around average at 139. Sentiment has grown a bit more bearish in recent weeks, such that it would not be surprising to see the market continue to rally to keep bearish investors on their toes.

Monday Morning Musings

That certainly was a nice rally on Friday. I don't think most people were positioned for such a rally, which probably had a nice chunk of short covering included. If I had to complain about anything, it would be that volume was very low, which often means the rally lacked conviction.

Also, the rally did little to alter the technical backdrop of the market. So there is still plenty of work to do. That said, the financials are leading this morning, which is nice. Lehman (LEH) is holding its conference call, and the stock is up considerable. Since bottoming last Thursday, LEH has spiked +30%. Goldman Sachs (GS) has also bounced over the last few days, and they report earnings tomorrow.

Big-caps AIG and GE are both laggards this morning. The former ousted its CEO in response to poor performance, while the latter was downgraded at JPMorgan.

Asian markets were mostly higher, lead by solid gains in Japan and Hong Kong. Bond yields are flat, with the 10-year yield at 4.26%, after a big bounce on Friday. And oil is again higher, near $137.25, boosting energy shares.

I don't mind a weak market open, and the selling feels somewhat light to me so far. I would not be surprised to see the market find its footing and post a solid day today. We shall see.

Friday, June 13, 2008

********* Scheduling Conflict ***********

I will be out today, at the U.S. Open in La Jolla, CA. I will wrap up the week that was over the weekend. Have a great day--

Thursday, June 12, 2008 - Americans Still Blaming Oil Companies Over Congress

Below is an article that ran on today. It discusses a recent poll that showed that 62% of respondents blamed the oil & gas industry for today's high prices. Maybe they need to go back and read my piece on 'The Oil Bubble'.

Here is the article:

NEW YORK ( -- The question nags at Americans every time they fill up their gas tanks: Why is it costing $4 a gallon?

A poll released Wednesday finds that 62% of Americans blame "unethical behavior" by industry players, while 32% attribute the price increases to supply and demand.

The CNN/Opinion Research Poll highlights a growing debate among American consumers, policymakers and oil executives over the exact causes of skyrocketing gas prices. Retail gas rose to another record Wednesday, with half the states in the nation paying more than $4 a gallon on average, according to AAA. Gas prices have risen nearly 9% from $3.718 last month and are 32% higher than the $3.066 average price a year ago.

The poll reflects telephone interviews with 1,035 adults conducted June 4-5. The margin of error is plus or minus 3 percentage points

While gas prices have taken a toll on consumer budgets, oil companies have seen record profits. Last month, industry executives faced lawmakers on Capitol Hill to explain those profits, which critics claim are excessive. The executives testified that the price runups belie tight margins and reflect fundamental economic factors such as a weak dollar, increased demand abroad for oil and speculative investment.

The weaker dollar encourages buying by investors who view oil and other commodities as a hedge against inflation. It also increases the appeal of dollar-denominated commodities like oil to overseas investors.

Industry analysts agree that the increased gas prices reflect complicated market forces rather than deliberate actions by individuals or corporations looking for profit.

"There's a solid supply-and-demand model that indicates that production is not growing for myriad reasons and demand continues to grow," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

Looking ahead, Ritterbusch believes that gas prices will level off by the end of the summer, although he declined to forecast an exact figure.

"The prices are already starting to choke off demand in the United States," he said. "That's going to spread overseas and to the emerging economies. We're also going to see concerted efforts to strengthen the dollar and we are going to see higher interest rates."

BP PLC (BP) chairman Peter Sutherland said Wednesday oil companies never expected demand for oil to surge so quickly, and they failed to make the investments needed to clear the supply bottleneck.

Consumer sentiment on gas prices has become a major election issue. On Tuesday, Senate Republicans blocked a proposal to tax the profits of the five largest U.S. oil companies and rescind an expected $17 billion in tax breaks for the companies over the next decade.
Analysts said the U.S. could help ease future gas prices by lifting restrictions on domestic oil drilling.

"We need to develop more sources of oil, not only globally but also in the United States," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Conn. "The United States has done very little to boost its capacity."

Are Stimulus Checks Beginning To Work?

The economy is weak, gas prices are up, stocks are down, home prices are down, etc, etc. So who is out there spending, right? But lo and behold, the May retail sales report came in better than expected at +1.2%. Maybe some of those people are the ones who got early stimulus checks, something I hear few people discussing.

Stocks are getting a big bounce this morning on the retail sales report, and also on the pullback in oil prices. Qualcomm (QCOM) raised guidance, and that is helping the semi stocks. And financials are bouncing back, save for Lehman (LEH) which is down again after being absolutely pummeled yesterday. Their CFO Erin Callan finally got the boot this morning, but even that isn't helping.

Asian stocks were down overnight. The dollar is higher today vs. the Yen and the Euro. And bond yields are higher, with the 10-year yield hitting a new high for the year at 4.16%. The 10-year still doesn't seem to be pricing in recession to me, although bears would argue it is moving higher because of inflation expectations.

I am usually skeptical of strong market opens, but given how hard we have sold off the last several days, maybe this can hold.

Wednesday, June 11, 2008

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Investor Sentiment Check

The market has been trading in a fairly tight range since making its lows this morning. The SPX is hovering right around the 1340 level. Financials remain the weak spot, with Meredith Whitney just coming on CNBC and talking bearishly about them again. LEH is down nearly another -10% today. Ugly.

I still think the negative sentiment in GS sets up well for their report next Tuesday.

Here are how the sentiment indicators are looking:
  • The volatility index (VIX) is up +2% to 23.66
  • The ARMS Index is elevated at 1.09
  • The CBOE put/call is also high at 1.10
  • The ISEE call/put is extremely low at 73

The market is getting oversold, and sentiment is pretty bearish. I think the market should bounce in the near-term, but we sure could use some relief on the commodity front.

long GS

Oil Prices Bounce Back From Yesterday's Drubbing

Oil looked like it had maybe topped for a bit yesterday after it fell from $136 all the way down to $131. But today it is bouncing back, buoyed by a favorable inventory report that showed lean supply.

The rise in oil is likely weighing on sentiment today, as energy stocks are higher but the rest of the market is sharply lower. Financials are one of the weakest groups again, as Lehman (LEH) is down again, and the bears are trying to make a run at Goldman Sachs (GS) as well.

There were rumors this morning that GS would announce a massive writedown, similar to what some of the other investment banks have already done. I think given how GS has executed during this credit crunch, and the fact that they have not needed to raise any capital, that this rumor is highly unlikely. I have said that I am itching to add to this name, but I will wait until they report earnings on Tuesday. I am covering the conf. call for, and will update my blog with highlights from the call.

Ag stocks are also on fire after Agrium (AGU) raised its 2Q guidance by more than 35% and Monsanto (MON) had its estimates raised at UBS. The farmers are having a real rough go this planting season, and I think some may be scrambling to buy more fertilizer for a go at a second planting for the season.

Asian markets were mixed overnight, with Japan higher and China lower again. The dollar is lower today after a nice multi-day bounce. The 10-year yield is also lower, at 4.04%. The VIX is higher, near 23.95, and the CBOE put/call is also very high at 1.25.

I think the elevated put/call and ARMS Index should stem today's selling, and we should retrace some of the early decline by day's end. But I want to see some more positive technical action in the major indexes before putting more money to work.

** Also, please take a second to vote in my poll below. Thanks--

long GS

Tuesday, June 10, 2008

Bernanke Talks Tough On Inflation

The market is under some selling pressure this morning, after Bernanke made some hawkish comments about inflation. He said that policy makers will "strongly resist" any surge in inflation expectations.

This implies that the Fed is now supporting a stronger dollar, which could help ease oil prices. Yesterday, Treasury Sec. Paulson also made comments about supporting a stronger dollar. This has helped the dollar rally for a second day, while the Yen and Euro are both lower.

It has also pushed up bond yields. The 10-year yield is up another 5 bps today to 4.05%. And there is even chatter that the Fed might raise rates again later this year. I doubt it though, unless we are already seeing material improvement in the economy at that time. Canada left its benchmark rate unchanged today at 3.00%, even though most were expecting a rate cut by the central bank.

Financials are bucking this morning's weakness for a change, following yesterday's weak showing. Energy stocks are lower, despite oil trading higher today, back near $136. This could be due to the strong dollar talk.

Asia got spanked overnight, with Hong Kong down -4% and China down a whopping -8%. Ouch.

This recent selloff doesn't seem like it is going to test the March lows, imo. A 50% retracement from the March lows to the May highs would take the S&P 500 back down to 1348, and we touched 1351 this morning. So I am looking to put more money to work, although finding sectors that are working has admittedly become more difficult.

Monday, June 09, 2008

Monday Morning Musings

Strange market this morning. Lehman (LEH) announced a huge loss and had to raise more capital, but the other financials are hanging in. The energy stocks are on fire, even though oil is lower today, and the materials stocks are way up too. But tech is the big laggard on the day, and trading very heavy.

Oil is down around $136, natural gas is flat. The dollar is up vs. both the Yen and the Euro, and gold is roughly flat also.

There was a better-than-expected pending home sales report today, which showed a +6.3% bounce in the index. This is the highest reading since October, but still down -13% from year-ago levels.

Expectations are running high ahead of Apple's Worldwide Developers conference, with an announcement about the new iPhone expected. But the stock is trading lower this morning, along with the rest of tech.

I was sick all day yesterday, I think I caught something from the kids. So I am a bit under the weather, and my blogging may be light today.

Friday, June 06, 2008

The Oil Bubble – Part 3: Who Is To Blame?

In this last part of my series on the oil bubble, I am going to take a look at the supply side of the equation and touch upon why Congress might be as much to blame, or more so, than the oil companies at which they are currently pointing fingers.

(In case you missed parts one and two, here are the links to them: Part 1 and Part 2)

For decades, the U.S. has had no real energy policy with which to hang your hat on. I remember in the early 70s seeing funny commercials on TV rallying people to get more active in conserving energy. But conservation isn’t an active strategy for increasing supply.

Congress continues to search for scapegoats to blame for this mess, whether it is the big oil executives, financial speculators, or futures exchange regulators. But they continue to show their failure to grasp the bigger picture, which is to increase domestic supply. Just last week, the Senate refused to lift its ban on developing the oil shale in the Rockies. And estimates have put the amount of oil locked in this shale, stretching from the U.S. to Canada, at more than 1 trillion barrels. Can you imagine?

Congress has come up with a bevy of misguided “solutions”, including limits on CO2 output, restricting drilling on public land, windfall profits taxes on big oil, and trying to sue OPEC. None of these will help increase the supply that is needed to meet growing future demand. The primary solution should be tapping our own domestic supply sources, which remain out of reach.

The “windfall profit tax” is just another example of Congress’ inability to focus on supply and demand. Do you really think that the government would do something productive with those extra tax revenues if they got them? And why would you create a disincentive for the oil companies, when what we need is for them to invest more in exploration and drilling? A recent report from the IEA warned of a potential global supply crunch, but said that it could result from the failure of governments – not private oil companies – to open up their lands for more exploration and development.

Reports out of countries like China and Brazil show they are getting the message. China reported 10 new oil discoveries last year, and Brazil has reported some huge finds this year, all of which bode well for those countries. Europe too is increasing exploration in the North Sea, but our Congress is leaving billions of barrels untapped as it worries about the profits of the oil companies. According to Investors Business Daily, since 2002 the U.S. oil and gas industry has earned roughly 8 cents on each dollar of sales, which is about the same level as the U.S. manufacturing sector as a whole. It seems to me that the notion of windfall profits itself goes against the ideals of capitalism and free market economies.

I am not one to completely ignore the environment either. But I have read that Louisiana, where many of our drilling and refineries are located, is one of the top areas for fisheries, and that the fish have thrived amid the drilling infrastructure. So let’s stop putting the environmental lobby’s campaigns ahead of the national interest of the rest of the U.S. consumers. If we had started drilling in ANWR back in 1995, when President Clinton vetoed the proposal, we would be producing an extra million barrels of oil per day now.

The facts of the matter are that for the last 28 years, Congress has opposed our drilling in Alaska’s ANWR, which we know contains billions of barrels of oil. They have also prevented us from building any new oil refineries, prevented from drilling in the outer Continental shelf of the ocean, and halted the building of nuclear and clean coal power plants. Together, had these initiatives been promoted, they would have gone a long way toward alleviating the problems we are facing today.

The Institute for Energy Research estimated that the combined supply of oil contained in the sources mentioned above amount to as much as seven times the reserves of Saudi Arabia. This could be enough to meet current demand in the U.S. for hundreds of years. Moreover, The Heritage Foundation estimates that if full-scale production begins within five years, the U.S. could end its dependence on OPEC entirely by 2020. So Congress, what are you waiting for?

So ultimately, who is to blame for the oil bubble? To be fair, there are other factors that I have neglected to mention: China is likely hoarding resources, Iran is storing tons of oil in tankers, OPEC is running below peak production, and refineries are running below peak utilization rates as well. Remedying these situations would help, but their impact is less than the potential of the initiatives Congress has the power to green light. I can only hope that they somehow see the light and decide that it is more productive to start looking at solutions to the problem, rather than focusing on scapegoats.

As a last point, I probably could do a fourth part on the theory of “peak oil”, but I fear I am getting a bit verbose on the whole subject. Suffice it to say, I am not sure I believe in peak oil. Who is to say how much oil is still out there in previously hard to reach areas, or sources that were considered uneconomical to explore? But these arguments lose sight of what is really important, and that is how long will oil supplies last? I think as alternative energy sources continue to become mainstream, and as current transportation and industrial methods continue to use less energy for input sources, that we will deem the notion of running out of oil misplaced.

Midday Update: Rise in Unemployment Rate and Oil Whacks Market

What a difference a day makes, right? Yesterday, there were breakouts all over the place. Retail was strong, tech and financials were rising along with oil, and sentiment was growing bullish. Today, the polar opposite.

The unemployment rate jumped to 5.5% this morning, which took the market by surprise. The payrolls report showed a loss of -49k jobs (vs. -60k consensus). Looking deeper at the numbers, the jump in unemployment was actually a result of a larger number of people entering the workforce (espcially high school and college students), and does not really correlate to increased layoffs.

But the spike in oil really weighed on investor sentiment. Oil is surging another +5% today, on top of yesterday's big rise. The main culprits are a weak dollar today, comments from Israel that an attack on Iran may be unavoidable, and Morgan Stanley's view that crude prices could hit $150 by July 4th.

On the bearish side of the argument, demand destruction is really starting to show up. Several airlines have taken out capacity and reduced flights, and driving demand is also lower due to high prices at the pump. Add to that the possibility that the CFTC could do something to limit speculation in the futures markets and you have a real bull/bear debate.

Asian markets were mostly higher overnight, fwiw, while the dollar is lower vs. both the Yen and the Euro. Oil is still hovering above $134 (+6), and the markets are down roughly -1.8%, with every sector in the red. The 10-year yield is down 10 bps to 3.92% as the "R" word surfaces again. And the VIX is seeing a huge spike, +16% to 21.60.

Thursday, June 05, 2008

Was Today's Action Meaningful?

Today was a remarkably strong day. I don't think anyone anticipated the strength of this rally, which had the feeling like there was a lot of short covering going on as well. Oil was up huge today, but the market rallied anyway, and tech and retail stayed strong even as oil spiked.

Also, S&P downgraded Ambac (ABK) and MBIA (MBI) late in the day, and for a brief time the financials rolled over. But they quickly regained their footing, and the market rallied into the close to end the day at session highs.

But to me the "tell" of today's action was the technical action in some of the major indexes, and what it could be foreshadowing for growth stocks. Take a look at the graphs above (click on them to enlarge graphic) and you will see some major breakouts. The S&P Mid-cap index broke out to a new high for the year, and this index is home to many growth stocks. The Russell 2000 small-cap is also back to even for the year. And the Nasdaq 100, an unadulterated growth index, is also now positive for the year.

I think this bodes very well for growth stocks in the second half. I am not saying its going to be a straight-up affair from here, there will certainly be selloffs along the way. But I think everyone who was firmly planted in the "retest" camp must be rethinking their stance.

We know that there is still more than $1 trillion in retail money market funds, and short interest on the NYSE hit a new record. That is a lot of fuel that can still come into this market and help power it to higher levels. Even financials could rally, although I think they will remain laggards on the year.

Solid Retail Sales, Lower Job Losses Boost Market

The market is getting a big boost from the bulls in the early going, after a couple of reports this morning emboldened sentiment.

The same-store sales reports that came out had a lot of better-than-expected results, and that is giving a big boost to the retail sector. Wal-Mart (WMT) reported a +3.9% increase, and its stocks shot up to its highest level since April 2004. Costco (COST) also looked strong. I have to go throught the reports more, but it would seem that the discounters are doing better as consumers look to make their dollars go further in the face of record gas prices.

Also, weekly jobless claims fell 18k this week to 357,000. This was below the consensus for 375,000. Also, the 4-week moving average fell to 368,500, a level that is well below typical recessionary levels.

The 10-year yield got a boost from these reports, and is back above the 4% level (4.02%). The dollar is mixed this morning, with the Yen dropping again vs. the dollar, while the Euro is higher. ECB President Trichet said that the ECB might hike rates to counter inflationary pressures. I think he is risking a hard landing there, but that may be his goal.

Oil is trading higher this morning, back around the $123 level. The energy stocks are getting a nice bounce along with crude. And the steel stocks are big gainers after Nucor (NUE) raised guidance this morning.

I am always skeptical of strong opens, and we have seen a couple already this week fade into the close. So let's see if we can break the trend today. The Nasdaq looks to be in good technical shape as it breaks back above its 50-day.

Wednesday, June 04, 2008

ADP Jobs Report Shows Economy Actually Added Jobs Last Month

The market is getting a boost in early trading on some better than expected economic reports. ADP reported that private payrolls rose by 40,000 in May, vs. and expected loss of -30k jobs. Also, the ISM Services Index came in at 51.7, a reading that shows the services sector is expanding and not reflective of an economy in recession.

Oil is down again today, despite the DoE report that crude inventories fell again for the week ending May 30th. Normally, this report would send crude prices higher, so the weakness is notable. Oil prices are down near $122, after topping around $135 a couple of weeks ago.

Brokers are getting a bounce this morning on some analyst upgrades, and a rumor that Lehman (LEH) is buying back stock. The WSJ is reporting again that LEH is seeking capital from overseas. Also, I read that Dan Fuss, the bond mgr from Loomis Sayles whom I respect very much, is buying LEH debt saying that it is 'dirt cheap'. (And Merrill (MER) just upgraded LEH to Buy, $37 tgt)

Asian markets were mixed overnight; the dollar is relatively flat today vs. the Yen and Euro; the 10-year yield is up slightly to 3.92%; the VIX is right at 20; the CBOE put/call is slightly elevated at 0.95

Tuesday, June 03, 2008

Mr. Market Says Hi To Mr. Obama

Now you know why I distrust strong market opens. The market was trading well until about midday, and then the news hit that Obama would get the Democratic nod. Right about then, the market began to selloff, and never regained its footing.

If you wonder what investors think about Obama as our next President, today's action probably sums it up pretty well. They don't like him.

The market made its lows with about 90 minutes left in the session, and then stage a nice bounce, only to give a little of it back again. The SPX fell -0.6% while the Nasdaq shed -0.44%.

Oil was a big story, as it closed below $125 for the first time in a while. I mention this level because I hear lots of commodity technicians watching it. Gold also fell, as the dollar had a pretty good day.

The financials were the weakest, as the bear raid of Lehman (LEH) has been pretty successful. At one point, the stock was down -12% before the company made comments that its credit situation was not as dire as the rumors were making it out to be.

Ag stocks got back in gear today, with Monsanto (MON) surging to a new high. I added to one of the ag stocks today, even as these names have kind of become momentum favorites. I also added to a few international steel stocks (MT, PKX) and put on a long trade in GRMN.


Monday, June 02, 2008

Mutual Fund Monthly

Last month, growth outperformed value again. According to Morningstart, the large growth category gained +4.24% while large value declined -2.53%. Quite a big disparity. The growth outperformance theme was prevalent most of last year, but took a breather in Q1 of this year. It appears to be back on track.

We monitor a large group of mutual funds for use in our client accounts and 401k's we advise on. Here are some of the leaders and laggards so far this year:

Top 5

  • +10.7%: CGM Focus (CGMFX)
  • +9.5%: Stratton Small-cap (STSCX)
  • +8.7%: Ivy Natural Resources (IGNAX)
  • +8.2%: Rydex Mgd. Futures (RYMFX)
  • +5.8%: Quaker Strategic Growth (QUAGX)

Bottom 5

  • -17.0%: Winslow Green Growth (WGGFX)
  • -12.6%: Legg Mason Opportunity (LMOPX)
  • -7.1%: Marsico 21st Century (MXXIX)
  • -6.9%: Driehaus Emerg. Mkts (DREGX)
  • -6.3%: Spectra Fund (SPEC)

What most of the leading funds have in common is an outsized weighting or exposure to the energy/ag/materials sectors. Sectorwise, energy and materials are up the most so far this year, while the financials and healthcare are the two biggest laggards.

Monday Morning Musings

After a very strong week last week, the market is starting off the new one on a weak note. Selling is pretty heavy in early trading, with all of the 10 major sectors in negative territory. The ARMS Index is above 1.32.

Wachovia (WB) ousted its CEO over the weekend, but its stock is still down as are the rest of the financials so far.

Oil was also down a lot this morning, nearing the $125 level, but it has since bounced back above $127. The energy stocks are mixed.

Drug and biotech stocks are going to get the lions share of attention this week as the big ASCO conference is underway, so look for plenty of big swings coming out of that one. Those indexes are lower so far this morning, fwiw.

Asian markets were higher across the board overnight. The Yen is also higher this morning vs. the dollar, while the Euro is lower. Go figure. The 10-year yield is lower at 4.00% despite a slightly stronger than expected May ISM report (49.6).

The selling is very sharp this morning, and the fear indicators are spiking. The VIX is up a whopping +13% already, topping 20.15. That is a big spike, to be sure. The CBOE put/call ratio opened at an elevated 1.07, while the ISEE call/put was equally low at 69.

The silver lining here is that usually when we see a rush to buy puts like this, as everyone rushes to protect against any downside, it often proves to be short-lived. I suspect that could be the case again, and I am still looking to use weakness to put more cash to work in names I like.