Friday, January 30, 2009

Q4 GDP Comes In Less Than Feared, But Still Lowest Since 1982

The market is lower in early trading, despite a better than expected GDP report and some positive earnings reports as well.

Q4 GDP came in at -3.8%, which is the weakest reading since 1982. This highlights how weak the economy was in Q4, but we already knew that. The Street was expecting the figure to come in at -5.5%, given the sharp dropoff in economic activity at the height of the credit crunch.

What is more important is what GDP will look like in Q1 of this year, as well as 2009 as a whole. Many are looking for a stronger second half to the year, which would make sense in light of the fact that most stimulus programs work their way into the economy with a lag. Since these programs ramped up in 2H08, they should begin to take hold later this year.

In corporate news, Exxon (XOM) and Amazon (AMZN) both reported strong earnings, and their stocks are higher. AMZN trounced consensus estimates and even slightly raised revenue guidance. Amid low expectations, that was enough to spur a +18% spike in the stock today.

Asian markets were mixed overnight, following a huge droppoff in industrial production in Japan (-9.6%). The dollar is also mixed, while oil and gold are both higher this morning.

The 10-year yield is a bit higher to 2.81%, as deflation fears ease and investors start to worry a bit about the prospect of inflation down the road. The VIX is also higher, to 44, but given the declines in the broad market the last 2 days I am surprised its not higher (good sign).

Trading comment: Yesterday I took final profits in my short bond etf (TBT) positions, and rolled the proceeds into the gold etf (GLD). Gold looks strong technically (and fundamentally), and is breaking out. I am also looking for an entry point to add back to some of the index etfs that I took profits on a few days ago, but would like to see some signs of stabilization first.

My work points to this pullback finding support soon, and hopefully it will just be a 2-3 day pullback. But with ailing hedge funds still the dominant sellers in this market, there is always that wildcard that is difficult to quantify.

long GLD, SSO

Thursday, January 29, 2009

A Pullback Was In The Cards

Yesterday I commented that with the S&P 500 rising to its 50-day average on 4 straight up days, that it was a likely place to look for a pullback. Also, the put/call ratio had been relatively low for the last 4 days, giving further support to the pullback thesis.

This morning we are getting that pullback, although I expect it to be a moderate one and not like the plunge we experience in early January.

The House approved an $819 billion tax and spending plan, and there is talk that the Senate will vote next week on a similar plan that could be upwards of $900 billion.

Earnings season continues apace, and here are some items:
  • 3M and Colgate (CL) both topped expectations and their stocks are higher. This is helping the consumer staples group buck the weakness this morning.
  • In healthcare, Zimmer (ZMH) and AstraZeneca (AZN) both fell short of consensus expectations, and their stocks are lowre.
  • Altria (MO) reported an in-line quarter, and its stocks is slightly higher

In economic news, durable goods orders fell -2.6% in December, which was more than the -2.0% decline expected. Jobless claims for the week also remained elevated (588,000).

Asian markets were up sharply overnight, following the positive action in the U.S., and optimism about a bank solution. The dollar is mixed today vs. the Euro and Yen, and oil is trading lower, below $42.

The 10-year yield is higher again, to 2.68%. And the VIX is 5% higher today to 41.7, after closing below the key 40 level yesterday. Overall, the trend looks lower for volatility, which should correspond with a more benign backdrop for stocks.

Trading comment: So far, yesterday's decision to take profits on those index etfs was a good call. I am hopeful that the SPX holds the 850 level, if it gets there, and would eye that as an area to add back some long positions.

Beyond these short-term trades, I do think that the recent test of the SPX 800 level was successful, and that the index should work towards 900-950 in February.

long SSO

Wednesday, January 28, 2009

Fed Offers No Real Surprises From Its Meeting

The FOMC met today, and the highlights from their statement is below. They pretty much reiterated what we heard at the last meeting, and commented on how tight credit conditions remain. Here are the highlights:
  • The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0% to 0.25%.
  • The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
  • Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending.
  • Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.
  • The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
  • The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.
  • The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.
  • The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Does The Fed Have Anything Left To Surprise Us With?

The market is getting a strong lift this morning on the news that the FDIC is in talks to create an aggregator bank that would buy the illiquid assets from other banks, which would allow them to get these assets off their balance sheets and minimize further write-downs and losses.

This news has investors very excited (the bank index is +13% higher), but the details of any such plan have yet to be figured out. Whatever the eventual outcome, this process is likely to take considerable time. Nonetheless, it is another "mustard seed" being planted, as Larry Kudlow likes to say.

There were more earnings reports last night and this morning, and many were better than expected. Wells Fargo (WFC) was the standout. Even thought they reported a loss, earnings were still above consensus. The company also said it was maintaining its dividend and has no plans to ask for additional TARP funds. The stock is almost +25% higher today. wow.

Yahoo and ConocoPhillips also beat estimates, while Boeing and WellPoint reported in-line numbers. All of these stocks are higher this morning.

Asian markets that were closed for a holiday spiked higher upon reopening. European banks are also leading those markets higher. The dollar is mixed, and the 10-year yield is up slightly to 2.55%. The VIX is down another -4.4% and flirting with breaking below the 40 level. It actually traded below 40 in the first half hour of trading.

Last, the FOMC meets today and will have its announcement later. Normally this would be the biggest news of the day, but with fed funds rates already at zero, what does the Fed have left for us? My guess is they will likely talk about buying LT assets to help keep interest rates low. If they mention things like buying other assets (corporate bonds), that would be a plus.

Trading comment: The S&P 500 has rallied right up to its overhead 50-day average. This is also the 4th straight day that the market is higher. And we have a Fed meeting today. This setup looks to me like it could result in a pullback after the Fed announcement. This just seems like a logical place for a little pullback.

As such, I am taking some partial profits on my index etfs that I bought last week. Nothing big, just locking in some trading profits and then I will look to add back if the market dips. All part of an active trading strategy.

long SSO

Tuesday, January 27, 2009

More Examples of Stocks Reacting Positively To Weak Earnings Reports

The market is bouncing again this morning, despite some more weak economic reports as well as some weak corporate profit reports. Remember, in the short-term, it matters more how stocks respond to the news than the news itself. This happens because sometimes stocks have already priced in, or discounted, the news items.

In economic news, consumer confidence came in at 37.7, a new low. But with the headlines in the media of rising unemployment, who can blame them. Also, the November Case-Shiller home price index of 20 major metropolitan areas fell -18.2% yr/yr, another new low. I think housing should stabilize by the back half of the year, and that should be a positive catalyst for the equity markets.

In corporate news, American Express (AXP) and Texas Instruments (TXN) both reported weak earnings, but both stocks are higher today nonetheless. AXP said it expects write-offs to rise in the coming quarters, while TXN issued downside guidance as well.

Amgen (AMGN) also missed earnings by a penny, but its stock is lower. And Bristol Myers (BMY) beat consensus estimates and it stocks is moving nicely higher.

China remain closed last night, but Japan's market surged +4.9% higher. The Japanese govt. is committing $16.7 billion to companies threatened by the credit crunch.

The dollar is mixed this morning, while most commodities are lower. Oil is down below $44. The 10-year yield is lower to 2.61%. And the VIX is down another -5.3% to 43.25. Nice.

Trading comment: The financials are bouncing this morning, which should support the broad market. Yesterday, when the banks rolled over, it weighed on the market. So keep an eye on the XLF. I am still in my recent trades.

Monday, January 26, 2009

The market held in okay today. It opened strong this morning, which always makes me nervous, and sure enough it gave back all of the early gains with about 2 hrs left in the session. But late day push kept the major indexes in positive territory for the day. Volume was lighter than Friday, but breadth was nicely positive.

The chart below shows how the SPX continues to struggle with key resistance at the 850 level. This area was support going as far back as Oct. 10th, but has now been acting as resistance. The market is still oversold, so I expect that the SPX will break above this level soon.

The next chart is of gold. Gold has rallied sharply recently, and today closed near the 900 level. It is now above both its 50-day and 200-day averages. This has gotten a lot of gold bugs excited, which in this market likely means we will now see a pullback towards the recent breakout level.

The last chart shows the volatility index (VIX), which declined -3.3% today to 45.69. Notice how the spike higher last week above the 50-day average turned out to be a head-fake, and the index has now broken its recent uptrend line. Ideally, bulls would like to see the VIX continue to trend lower, and break below the 40 level on a continued up move in the stock market. Wishful thinking?

Trading comment: I took partial profits on my short bond etf (TBT), and held on to the rest of my positions. I like that the market was able to claw its way back into positive territory, despite some weak earnings reports as well as some big layoff announcements.
long TBT, SSO

Quick Note on Hedge Funds

Someone sent me this update on hedge fund woes. Here it is:
  • Hedge funds lost more money in 2008 than any year on record. It may get worse in 2009, forcing fund managers to overhaul investment strategies, reduce fees and make it easier for clients to withdraw cash.
  • The $1.2 trillion industry may shed as much as $450 billion in assets, or 37%, through market losses and client withdrawals in 2009, according to a Morgan Stanley analyst.
  • That’s on top of the $600 billion that disappeared last year and would leave hedge funds with $750 billion, the lowest since 2002.
  • Investment returns fell an average of 18% last year, according to data compiled by Hedge Fund Research, the most since the firm began tracking. While that beat the 38.5% loss by the S&P 500 Index, many investors were angered when fund managers limited or froze withdrawals.

Monday Morning Musings

The market got a nice lift in early trading after a couple of better-than-expected economic reports. The Leading Indicators for December increased +0.3%, much better than the -0.2% decline expected. Also, existing home sales for December rose +6.5% month/month, vs. the consensus of +2.0%.

These are both welcome developments. I view the leading indicators report as a proxy on investor and consumer confidence, and the lack of confidence is as much at the heart of this credit crunch as anything.

We also got a mixed batch of corporate news this morning, including a fresh round of layoffs, including Catepillar, Pfizer, Sprint, Home Depot, ING, and Phillips Electronics:
  • Pfizer (PFE) and Catepillar (CAT) both lowered their profit outlooks for the year, and their stocks are down. PFE is also acquiring Wyeth (WYE) for $68 billion in cash and stock.
  • McDonald's (MCD) reported solid earnings, and its stock is slightly higher
  • GE had its AAA rating affirmed by S&P, which is helping its stock bounce just a little after Friday's drubbing
  • In Europe, financials are trading higher after Barclays (BCS) moved up its earnings report to Feb. 9th to help calm investor concern

Oil is trading higher this morning, above $48, which is helping the energy sector. The dollar is weak vs. the Euro, which is also helping commodities. The 10-year yield is higher again to 2.66%, right at its 50-day average. And the VIX is -5% lower, breaking below its recent uptrend line, a good sign.

Trading Comment: The oil services ETF (IEZ) I added to on Friday is having a nice morning, as is the ag etf (MOO). Both of these have now broken above their 50-day averages, which should give them a little open field to run. The market is also still oversold, so if the overall market can also rise, that would be a big help.

On my short bond etf (TBT), I am taking partial profits this morning. That position has rallied roughly 5% from my buy point, which is a nice move for a bond position.

As for the market, the S&P is struggling with the 850 level again, which is an important resistance area. A close solidly above this level would be a bullish sign for a continue run higher. Bearish sentiment increased last week, a good contrarian sign, and with month-end this week we could possibly get some window dressing too.


Friday, January 23, 2009

Energy Stocks Look Like They Have Bottomed

Another weak open in the stock market, but the last few big selloffs have recouped much of their losses by the end of the day. I would not be surprised to see a repeat today.

Earnings reports continue to roll in, but more important than whether or not the company beats estimates is how the stocks react. To wit:
  • GE matched estimates and also said it is committed to its $1.24 dividend this year, which many investors had been concerned about. Nonetheless, the stock is down another -5% this morning.
  • Conversely, Schlumberger (SLB) missed estimates by a couple cents, but the stock is surging +6.6% higher, as it looks like energy stocks may have bottomed in the near-term. Oil is lower this morning, but the whole energy sector is trading higher.
  • Also, Harley-Davidson (HOG) missed estimates by a wide margin, and the stock is down. Ditto for Capital One (COF).
  • Google (GOOG) beat estimates by 15 cents last night, and showed very solid growth. The stock is rallying +5% today, and is nicely above its 50-day average now.
  • And talks that Pfizer (PFE) is looking to buy Wyeth (WYE) has the latter's stock jumping nearly 10%.

One of the reasons for yesterday's weakness, and this morning's as well, has been the chatter that China is manipulating its currency. Treasury Sec.-elect Geitner made comments about this yesterday, and this morning there was an article in the NY Times about it. Markets don't like this feather ruffling.

Asian markets were lower overnight. The dollar is bouncing today, weighing on commodities (except gold, which is higher). The 10-year yield is spiking to 2.66%, right at its 50-day average. And the VIX is a bit higher to 48.6.

Trading comment: Yesterday I added to some my energy/ag ETF positions. And I am still holding my index ETFs. I think the market has gotten oversold, and I like that the S&P has held the 800 level all week, despite some negative headlines. Given the magnitude of the pullback this month, I am anticipating a nice bounce, even if it is just a short-term bounce.


Thursday, January 22, 2009

Earnings Season Is A Real Mixed Bag So Far

The market is trading lower in early trading, as it seems to have no memory from day to day. We are in the thick of earning season also, which makes for busy evenings and busy mornings, with tons of press releases coming out each day as well as conference calls being held.

Last night, Apple (AAPL) reported an exceptionally strong quarter, handily topping estimates. Guidance was also less conservative than it usually is. That got the stock moving after hours, and it is still up +7% this morning.

But Microsoft's report this morning reversed any spillover strength stemming from AAPL. MSFT missed consensus estimates, announced it is laying off 5000 workers, and said it will no longer issue guidance for the full year.

In addition to MSFT, there were also weak earnings reports in the tech sector from EBAY, Nokia, and Sony. All of these stocks are trading lower, and weighing on the Nasdaq.

The financials are also lower today, after a big bounce yesterday, led down by insurers. Last night, reports of insider buying from the CEOs of Bank of America (BAC) and JPMorgan (JPM) had banks stocks rallying after hours. But this morning, Aflac (AFL) is down -30% on concerns over some specific exposure it has on its balance sheet. There were also losses reported by banks like Fifth Third (FITB) and SunTrust (STI).

In healthcare, the reports were solid from the likes of UnitedHealth (UNH) and Baxter (BAX), and both of those stocks are higher.

In overseas news, Asian markets were higher overnight. The Bank of Japan said it will begin buying commercial paper and will consider buying corporate bonds to prevent a credit shortage. China said GDP grew +6.8% in Q4, which is the slowest pace in 7 years. China calculates GDP differently than we do, and some say in U.S. terms, growth would be closer to zero.

The dollar is mixed, while oil and commodities are lower. The 10-year yield is up again, for the 4th straight day, to 2.59%. The VIX is up 9% today back to 50, after a big plunge lower yesterday.

Trading comment: The market really has no memory from day to day, but the SPX 800 level seems to be holding, and I continue to look for a relief rally from the current oversold condition. The move higher in bond yields is helping my short bond position (TBT), which I am still holding. Gold is also starting to hold above its 50-day, a sign of strength.


Wednesday, January 21, 2009

Stocks Bounce, including Financials, On Solid Earnings Reports

The market is getting a nice bounce in early trading on the heels of some better-than-expected earnings reports.

IBM topped estimates last night, and in rare move, the company also raised earnings guidance for 2009. This is a strong showing for the tech giant, and its stock is up by more than 8% today.

One of yesterday's big losers, Northern Trust (NTRS), also topped estimates by a wide margin. The stock has reversed all of yesterday's decline, and it up by +23%. This is helping to lift other financial services stocks as well.

United Tech (UTX) also topped expectations, but its stock is trading lower so far.

The dollar is lower today, while the Yen is much higher. I have talked about this before, and bulls want to see the Yen move lower as a rising Yen highlights global investors covering their carry-trade and taking less risk.

The lower dollar is helping oil and other commodities bounce today. The 10-year yield is higher, near 2.45%. And the VIX is down -8%, back below its 50-day average.

Trading comment: As I finish this post, the market is giving back its early gains. This is another example of why I am always leery of strong market opens. There is still a lot of time left in today's trading session, but given how far the market has pulled back in the last two weeks, I still believe we are setting up for a relief rally.

Tuesday, January 20, 2009

Bank Stocks Plunge As Investor Angst Surgres

The selloff in the banks and financials today was breathtaking. No other way to sugar coat it. Its odd that investors seemed to have lost all hope on the day that Obama was trying to instill optimism back into the mainstream.

Here is a quick wrap-up of the day:
  • Celebration in Washington failed to excite Wall Street. The Dow posted its worst inauguration day drop in its 112-year history.
  • Financial shares led the decline on concerns banks will continue to slash dividends, be forced to raise more capital, and face new regulations.
  • Bank of America declined 2.08 to 5.10. State Street Corporation plunged 21.46 to 14.89 after unrealized bond losses almost doubled at the firm and it propped up funds to protect investors. Regions Financial reported a record fourth quarter loss, and shares declined 1.47 to 4.60.
  • Crude oil prices bounced back from early losses, but failed to lift energy stocks. Exxon Mobil fell 1.81 to 76.29.
  • Johnson & Johnson reported better-than-expected earnings, but its forecast was cautious, and shares lost 69 cents to 56.75.
  • Barack Obama, in his inauguration address, promised “bold, swift action” but acknowledged the economy is “badly weakened.”
  • The Dow closed down 332 points at 7949.
  • NYSE volume totaled 1.72 billion shares.
  • The S&P 500 was down 44 points.
  • The Nasdaq fell 88. Declining issues swamped advancers by 8-1 on the NYSE and by almost 6-1 on the Nasdaq.
  • The 10-year Treasury note was down 13/32 to yield 2.36%.

Trading comment: Today's selling looks to be overdone in the near-term, so I didn't make any trades today. But I will likely exit my index ETFs on a bounce. Until the SPX can recapture its 50-day, for starters, I want to remain defensive.

long SSO

Wall St. Less Enthusiastic Than Main St. On Inauguration Day

The mall in Washington is packed as the nation awaits the inauguration of Obama. Main St. is optimistic that the new Administration will push through a large stimulus package, and get the economy back on track.

Unfortunately, there is less enthusiasm on Wall St. this morning. Ongoing concerns about the European financial system are hitting our bank sector as well, driving the bank index down a sharp -12% so far.

Royal Bank of Scotland (RBS) said it could see a record loss of more than $40 billion. The British govt. may convert its preferred shares in RBS to common stock, which would give the govt. a near 70% stake. That has common shareholders worried, and RBS stock plummeted -65%.

State Street (STT) topped earnings estimates, but disclosed it is looking at a $5.5 billion loss. The stock has fallen as much as -50%.

The WSJ is also reporting that the U.S. govt may be looking at creating a bank that will purchase troubled assets from other banks, or guarantee against further losses. All of the above are leading to increased concern for stockholders, and that is why the banks and financial services stocks are all getting hit.

Oil was trading lower, but has since reversed and is how a bit higher to $37. The dollar is up, mostly due to a big dip in the Euro. The 10-year yield is also higher to 2.47%. And the VIX is up +13% to 52.

Trading comment: The market has now moved back into oversold territory, and should be in a position to rally. It will be difficult for the rally to make much headway without the participation of the financials, so let's hope we hear some news that calms investors fears regarding the TARP plan, etc. We also have some big earnings reports this week in the tech sector (AAPL, IBM, GOOG, MSFT, etc). I am still holding some of my long ETFs that I added recently-- for now.


Saturday, January 17, 2009

Weekend Links of Interest

Friday, January 16, 2009

Market Wrap

Here is a succinct write-up on the day:
  • A choppy day of trading ended well on Wall Street as the market overcame continued weakness in bank stocks.
  • McDonalds led gains among the Dow Industrials. Shares were up 1.69 at 59.67 after the company’s chief executive said he “fully expects” McDonalds will keep paying dividends.
  • Intel gained 42 cents to 13.74 after predicting profits might improve after the first quarter.
  • Best Buy rose 2.20 to 29.34 as competitor Circuit City announced it will liquidate its business.
  • Early enthusiasm for financial stocks evaporated quickly. Bank of America fell 1.14 to 7.18 even though it received a $138 billion federal lifeline. The bank warned that it might post bigger losses in the quarters ahead. Citigroup announced plans to split in two, and shares dropped 33 cents to 3.50.
  • The Dow closed up 68 at 8281.
  • NYSE volume totaled over 1.6 billion shares. The S&P 500 closed up 6 points. The Nasdaq gained 17.
  • Advancing issues beat decliners by 2-1 on the NYSE and by 6-5 on the Nasdaq.
  • The 10-year Treasury note was down a full point to yield 2.32%.
  • For the week, the Dow lost 318 points, or 3.1%. The S&P 500 fell 40 points, or 4.5%. The Nasdaq was down 42 points, or 2.7%.

Some Additional Light On The Proposed Stimulus Bill

From Reuters, details of the House's version of the $825 bln economic stimulus package have been trickling out throughout the day:
  • HIGHWAYS, RAIL, TRANSPORTATION: $30 bln for highway construction; $31 bln to modernize federal and other public infrastructure with investments that lead to long-term energy cost savings; $19 bln for clean water, flood control, and environmental restoration investments; $10 bln for transit and rail to reduce traffic congestion and gas consumption
  • STATES, EDUCATION: $79 bln in state fiscal relief to prevent cuts to key services; $39 bln to local school districts, public colleges and universities distributed through existing state and federal formulas; $15.6 bln to increase Pell grants for college students
  • ENERGY: $11 bln for research and development, pilot projects, and federal matching funds to modernize electricity grid; $8 bln for loans for renewable energy power generation and transmission projects; $6.7 bln for renovations and repairs to federal buildings
  • HEALTH CARE: $87 bln to states, increasing through the end of FY 2010 the share of Medicaid costs the Federal government reimburses all states by 4.8%, with extra relief tied to rates of unemployment; $30.3 bln to extend health insurance coverage to unemployed beyond 18 months provided under current law; $3 bln to fight preventable chronic diseases, the leading cause of deaths in the United States, and infectious diseases
  • BROADBAND, TECHNOLOGY: $6 bln to expand broadband Internet access for businesses in rural underserved areas; $20 bln for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies
  • HOUSING: $4.2 bln to help communities buy, rehabilitate foreclosed, vacant properties to create affordable housing; $1.5 bln to help local communities build and rehabilitate low-income housing using green technologies; $5 bln for public housing repair and modernization, including critical safety repairs; $6.2 bln to help low-income families reduce their energy costs by weatherizing their homes
  • ENVIRONMENT: $800 mln to clean up hazardous and toxic waste sites that threaten health and the environment.
  • WATER RESOURCES: $4.5 bln for environmental restoration, flood protection, hydropower, and navigation infrastructure; $6 bln for loans to help communities upgrade wastewater treatment systems; $2 bln for loans for drinking water infrastructure.

Bank Losses Larger Than Expected, But Stocks Rally

The bank stocks are lower again this morning, after larger than expected losses at both BofA and Citi were announced this morning. BAC also will be getting additional govt aid to help it close its Merrill Acquisition. BAC said it will slash its dividend to a penny in an effort to preserve what would have been $2 billion in payouts.

Citi will be splitting its company into two parts, in an effort to shore up its balance sheet. Also, the US Senate has voted to release the second part of the TARP plan, another $350 billion, which should be available to ailing banks. Maybe this time they will try to focus the actual "troubled assets", instead of just giving large sums of money to the banks.

All of the above has eroded confidence in the banks. The stocks of the big banks are trading lower, likely on fears of further dividend cuts, which is one of the main attractions of the bank stocks at current levels.

In economic news, the CPI fell -0.7% for December, reinforcing the low level of inflation. On a yr/yr basis, the CPI was up a scant 0.1%.

The dollar is lower this morning vs. the Euro, and this is helping boost commodities. Oil is up above $35, nat gas is higher, and gold is getting a nice bounce. The 10-year yield is also up to 2.35%.

The VIX hit its 50-day average yesterday at 54, but has dropped 15% from those levels. Today, it is down -9% near 46. Bulls would like to see the VIX continue to drift lower.

Trading comment: Yesterday's call to take profits on some of our short ETFs was a good once. The market rallied back sharply by the end of the day, and is extending that rally today. Today is options expiration day also, which could add to volatility. It is also a Friday ahead of a holiday weekend, which usually makes traders weary of taking big positions.

But next week kicks off with the Obama inauguration, which I hope will spark some enthusiasm and confidence among investors. The market is now back into oversold territory, though not deeply, and due for more of a bounce. If the start to this month is an indication of how things are going to be in the near-term, we are going to have to shorten up our investment/trading time horizons, and look to book profits quickly when we have them.

Thursday, January 15, 2009

An Update On Losses in the Hedge Fund Industry today released early estimates indicating hedge fund assets fell an additional 10.6% in December to $1.84 trillion, down from a peak of $2.97 trillion in Q2 2008.

  • The asset drop was largely due to net investor redemptions and fund liquidations of a record $221 billion during the month.
  • For the full year 2008, net investor redemptions and fund liquidations accounted for an outflow of $512 billion and performance losses accounted for an additional $535 billion loss; a total industry asset reduction of 36% or $1.047 trillion for the year.
  • When one considers the magnitude of losses in global financial markets in 2008, it is not surprising that the hedge fund industry, which on an aggregate level likely began the year with a high level of leverage and long exposure, saw this amount of outflow and performance losses.

It is clear that the hedge fund industry will look much different than in recent years. The two big unanswered questions are: 1) how many more funds will go out of business if they post another year of losses? and 2) when will all/some of the cash fund managers have built up come back into the market?

Steve Jobs Announces He Will Take Leave of Absence

The market is trading lower for the 7th consecutive day amid the double whammy of news that Banc of America needs more government aid, and Steve Jobs will take a medical leave of absence from Apple.

Last night, Steve Jobs said he is taking a medical leave of absence until June, to deal with his condition which has become "more complex" recently. Last week AAPL said that Jobs had been suffering from a hormonal imbalance, which accounted for his weight loss.

AAPL stock has come down quite a bit, and is very cheap at current levels. I am not selling any shares down hear, but will likely lighten up on a bounce. I am confident that the COO can continue to execute on AAPL's current pipeline in the near-term, but he certainly can't replace Jobs vision, laser-like focus, and leadership.

Both BofA and Citi stocks are getting whacked this morning, down more than -20%, as concerns again mount about their liquidity positions, potential losses, and need for more capital. In the case of BofA, the reports are that they need the funds to help with the Merrill acquisition.

Bucking the broad weakness in bank stocks is JPMorgan (JPM), which reported a slightly better than expected quarter, and its stock is slightly higher. The overall bank index is down -10%, and dragging most ever other bank stock lower.

In other corporate news, Motorola (MOT) is announcing further job cuts, with another 4000 expected this year. And the WSJ is reporting that Microsoft (MSFT) is looking at job cuts as well. These trends indicate the unemployment rate will likely continue to rise, but I reiterate that this is a lagging indicator.

The dollar is higher this morning after the ECB cuts its lending rate 50 basis points to 2.00%. The fact the the Euro is down on this action likely indicates investors still believe the ECB remains behind the curve, and should have cut rates more.

The strong dollar is weighing on oil, nat gas, and commodities. Oil is trading back down near $35, while gold is roughly flat. The 10-year yield is hovering near 2.19%. And the VIX is up sharply to 54. The VIX has spiked 35% higher since bottoming near 40 in early January. It is now bumping up against its 50-day average, which should offer some resistance.

Trading comment: This morning I am taking profits on half of an inverse ETF position (SRS) I put on the other day. The market has been down for 7 straight days, and I think a bounce is in order. It will be interesting to see if the market can reverse some of today's early losses, which would be a very good sign.

long AAPL, SRS

Wednesday, January 14, 2009

Beige Book Shows Weakening Economic Activity Across All Districts

The Fed released its 'Beige Book', which highlights economic activity among its 12 districts. Here is a summary:
  • Overall economic activity continued to weaken across almost all of the Federal Reserve Districts since the previous reporting period. Most Districts noted reduced or low activity across a wide range of industries, although a few Districts noted some exceptions in some sectors
  • District reports indicate that retail sales were generally weak, particularly during the holiday season. A majority of Districts noted deep discounting during the holiday sales season. Reports of retail sales during the holiday season were generally negative in most Districts. Retail sales during the holiday season were weak or mostly down in the Boston, New York, Philadelphia, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts. However, some contacts in the Boston and New York Districts noted that sales picked up after the holidays
  • Vehicle sales were also weak or down overall in the Districts reporting on them. Manufacturing activity decreased in most Districts. Most Districts reported a general weakening of labor market conditions. Most Districts reported that layoffs continued. Wage pressures remained largely contained, and some Districts reported pay freezes or reductions in compensation
  • Lower energy prices were noted in many of the Districts, and, except for the Richmond District, which mentioned higher prices for raw materials, most reporting Districts noted declining input prices. Activity in the energy sector declined in several Districts since the previous report, with a number of Districts linking the decrease to lower energy prices
  • Residential real estate activity continued to weaken in nearly all Districts. Boston, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, and Dallas reported that home sales were weak or had declined. Reporting Districts generally saw a decrease in homebuilding. Commercial real estate markets deteriorated in most Districts. Reports about commercial construction activity also were downbeat
  • Most Districts that reported on lending activity indicated that it continued to decline or remained weak, and many Districts reported that credit conditions remained tight or tightened further.

Sellers Flood The Market, Driving ARMS Index and VIX Higher

Selling pressure at the open is dwarfing buy orders by a huge margin. The retails sales report came in weaker than expected, and renewed concerns about banks are the main culprits for the weakness.

In early trading, the ARMS Index (which measures selling pressure) hit an extreme level of 4.40. Downside volume on the NYSE hit 98%, and the volatility index (VIX) spiked +18% to 51 as fear has resurfaces for the time being.

The last time we saw readings this high, the Dow was down some 600 points, so I guess the fact that it is down -250 now could be seen as a slight positive.

December retail sales dropped -2.7% month/month, which was more than the -1.2% economists were looking for. This reflects the sharp pullback by consumers in the current environment, as well as higher unemployment levels seen recently.

Banks are the weakest group this morning, after Deutsche Bank (DB) said it would post a 4th quarter loss of $6.3 billion. That has the stock down -10%. HSBC (HBC) is also getting hit on conerns about losses there, as well as Barclays (BCS).

On this side of the pond, Citi (C) announced the joint venture with Morgan Stanely (MS) about its brokerage unit, but that is doing little to ease investor concerns. Its stock is down -15% and struggling to hang on the the $5 level.

There were also profit warnings from Bunge (BG), UnderArmour (UA), and Tiffany (TIF).

The dollar is mixed so far, and oil is trading lower again to below $37. This is weighing on the energy stocks. The flight to safety is pushing investors back into Treasuries, driving the yield on the 10-year T-bond to 2.20%.

Trading comment: Pessimism is quickly coming back into this market, after a nice respit from mid-December into early January. The S&P 500 bounced +25% from its November lows to its January highs. I mentioned how sentiment had gotten too complacent and the market reached overbought levels. The market is still working off both of those conditions.

In the short-term, the market seems due for a bounce. But if it can't recapture its overhead 50-day average, it could be stuck in this lower end of the trading range for a bit. The December low was SPX 816. This is an important level to watch, imo.

long SSO

Tuesday, January 13, 2009

Stocks, Dollar Bounce In Early Trading

The market is higher in early trading, though the gains feel tenuous. Alcoa (AA) kicked off earnings season last night with a weak report, missing consensus estimates. Their results highlight the challenging conditions still present in the broader economy.

Biotechs are leading the way so far, with a big industry conference underway. Retailers are lagging, amid continued concerns about consumer spending.

Infosys (INFY) reported a strong quarter, and its stock is +7% higher this morning. Also, Reuters is reporting that Sony (SNE) may report its first operating loss in 14 years.

Financials have been very weak the past few days, with many stocks approaching their November lows. There is growing angst on Wall St. about how big the Q4 losses will be for the big banks, and this issue could be keeping the banks from increasing lending like the Administration wants them to.

Asian markets were down overnight, with Japan falling -4.8% after being closed for a holiday. The dollar is higher this morning, after the November trade defecit came in better than expected at $40.4 billion (vs. $51.0 billion consensus).

The strong dollar is weighing on commodities, but oil is bucking that trend and trading higher, near $38.50. The 10-year yield is also a bit higher to 2.33%. And the VIX is -3.5% lower so far to 44.24, after a big spike higher yesterday.

Trading comment: The S&P 500 closed below its 50-day average yesterday, which isn't a great sign. But the real support comes in around SPX 860, which has held so far. The market has pulled back -8% in just 4 days, so a bounce is in order.

I have not written much about the more esoteric indicators that I follow, such as the LIBOR rates, 2-yr swap spreads, CDSs, etc. But suffice it to say that they have all come down by huge amounts in the last couple months. This means that credit market angst is waning, and confidence returning. If this confidence can spread to the stock market, it should translate into higher multiples for stocks at some point. As always, timing is the key.

long SSO

Monday, January 12, 2009

Monday Morning Musings

The market is lower in early trading, pickup up where it left off Friday afternoon. Earnings season kicks off tonight when Alcoa (AA) reports results. Investors seem leery to buy this recent market dip amid worries that corporate outlooks could be weak when companies provide guidance in the coming weeks.

Consumer staples and medical stocks are higher in early trading, while materials and energy stocks are weak. Morgan Stanley is up +5% after a report that says MS and Citi (C) are close to a deal to combine their brokerage units, with Morgan paying as much as $2.5 - 3.5 billion for Citi's Smith Barney.

Asian markets were mostly lower overnight. The dollar is mixed vs. the Euro and Yen. Oil is trading lower again, back down near $38. The 10-year yield is lower to 2.35%. And the VIX is up a bit to 43.3.

Trading comment: I put some money to work on Friday, choosing to buy after the market had dipped 5% from its recent highs. I would like to see the SPX and Nazz find support at their respective 50-days. Given the fact that bear market rules still apply, I will adhere to my 10-15% stop-loss rule on all new positions.

long SSO

Friday, January 09, 2009

Unemployment Rate Rises to 15-year High, But Its Still A Lagging Indicator

The market is lower in early trading after the jobs report showed that unemployment reached a 15-year high. I would note that lately, weak market opens have strengthened into the market close. We'll have to see if this pattern shows up again today.

Nonfarm payrolls declined 524,000 in December. November figures were revised higher as well. The unemployment rate jumped to 7.2%, the highest level since January 1993. But before you get too bearish because of this datapoint, remember the unemployment is a lagging indicator for the stock market. That is, it often peaks after the market has already topped, and it oftens hits its lows well after the market has put in its own lows (which could be the case back in November).

Asian markets closed lower overnight, despite more rate cuts by central banks. The Bank of Korea cuts its benchmark rate by 50 basis points to 2.50%. I think that the ECB will be next to cut rates, as economic growth in Europe continues to slow.

In corporate news, it is not a good day for companies that start with the letter "C":
  • CVS cut its earnings forecast and its stock gapped lower by -10%
  • Chevron (CVX) also cuts its profit outlook, saying lower oil prices have hurt its profits.
  • Coach (COH) also warned of lower profits (no surprise there), and its stock gapped lower and is moving below its 50-day average
  • On the plus side, Apollo Group (APOL) reported better-than-expected earnings and that stocks has gapped up to a new high on strong volume

The dollar is higher today vs. the Euro, but lower vs. the Yen; oil is trading lower again, back down below the $40 level (I have been saying not to chase oil); the 10-year yield is also lower, near 2.40%; and the VIX is roughly flat, a good sign in a down market, at 42.48.

Trading comment: A few days ago I mentioned that I was taking profits in my trading long positions as I felt the market was getting too overbought, and sentiment had become too complacent. The S&P 500 is down roughly -5% from its highs on Tuesday. This is a sufficient pullback for me to look to start buying back those trading positions, and I will look to buy some ETFs today.

long SSO

Thursday, January 08, 2009

Market Wrap

Here is a quick market wrap-up courtesy of AG Edwards:
  • The tone of the stock market improved in the last hour. A rebound led by technology shares allowed the Nasdaq to finish positive and the Dow to dramatically pare its early loss.
  • Wal-Mart was responsible for the Dow’s decline. Shares lost 4.16 to 51.38 after the giant retailer lowered its profit outlook.
  • In contrast, Sears Holdings rose 9.30 to 49.98 on the strength of better-than-expected December sales.
  • Technology stocks drew attention as the annual consumer electronics show opened in Las Vegas. Microsoft gained 59 cents to 20.12. GameStop, the world’s biggest video game retailer, rose 2.97 to 25.58 on an optimistic profit forecast.
  • Weekly jobless claims were not as high as expected, but did little to alter bleak forecasts for Friday’s government unemployment report.
  • Homebuilding stocks gained as mortgage rates fell and Senators made progress on a bill to help distressed homeowners.
  • The Dow closed down 27 at 8742.
  • NYSE volume totaled just below 1.2 billion shares.
  • The S&P 500 was up 3 points.
  • The Nasdaq gained 17. Advancing issues beat decliners by 3-2 on both the NYSE and the Nasdaq.
  • The 10-year Treasury note was up 13/32 to yield 2.45%.

Market Shakes Off Early Selloff, Awaits Obama Speech

The market opened lower again this morning, on the heels of big selloffs in Asian markets. But after the first hour of trading, the markets began to come back and are actually in positive territory as of this post.

Retailers reported same-store sales this morning (roundup coming later), and most of the reports were pretty downbeat, as expected. Wal-Mart (WMT) reported same-store sales growth of +1.7%, and lowered EPS guidance to 91-94 cents (vs. $1.06 consensus). The stock has been down as much as -8%.

Gap, Abercrombie, and Macy's also lowered their outlooks for the quarter, with Macy's saying that it would close 11 underperforming stores.

In economic news, jobless claims came in below expectations at 467,000 (vs. 545,000 consensus). This is marginally positive, but we'll see how it correlates with tomorrow's important nonfarm payrolls report. The question right now is whether unemployment peaks at 8%, 9%, or 10%.

The dollar is lower again, helping gold get a bounce. But oil is also lower, after a huge -12% plunge yesterday. This is a sign of continued weak demand. Crude prices are currently trading near $42.

Asian markets were down sharply overnight, and Europe was lower this morning also, despite the Bank of England announcing an interest rate cut of 50 bps to 1.5%.

The 10-year yield is flat at 2.48%. The VIX is up slightly to 43.5, after a big spike higher yesterday.

In a few minutes, Obama will deliver a speech outlining his economic stimulus plan and how the govt. will be able to afford such a massive effort. Let's see how the market reacts to his comments.

long WMT

Wednesday, January 07, 2009

Market Pulls Back From Overbought Reading

Yesterday I mentioned that the market had moved deep into overbought territory, and that sentiment among options traders had become too complacent in the near-term. A look at the graph below shows how the oscillator has rallied back to its mid-December level, and now appears ripe for a pullback.

The catalyst for the pullback were some downbeat economic reports and an earnings warning, but those news items aren't all that surprising in this environment. The ADP employment report indicated 693,000 jobs were lost in December (vs. -493k consensus). This is a big figure, and although ADP's numbers are volatile, it has traders worried that Friday's payroll figure could also show a large decline.

Semis are the weakest group this morning, after another guidance downgrade from Intel (INTC). The firm now sees Q4 revenue near $8.2 billion (vs. $8.7B consensus). Financials are also weak after analysts at Oppenheimer said they expect banks to raise more capital in 2009.

On the plus side, Monsanto (MON) topped earnings estimates and raised guidance for 2009. That helped spike the stock +15% higher.

Asian markets were mixed overnight, with Japan higher and India sharply lower. Japan had its first 7-day winning streak in nearly three years. The government there will look to eliminate capital gains taxes for foreigners investing in Japanese companies.

The dollar is lower today, but so are oil, gold, etc. Oil is being hurt by a build in supply, which is pushing crude prices back down below $46. The 10-year yield is down slightly to 2.46%. And the VIX is up +6% back above the 40 level.

Trading comment: I used the strength in the market yesterday to take profits in my trading longs and trim some other positions. I will look to buy back into these positions on a pullback, including my index and sector ETFs. I have not really added that much to individual stocks here as I prefer to wait until Q4 earnings reports and guidance are announced.

long MOO

Tuesday, January 06, 2009

A Disheartening Loss

No, I'm not talking about the big up open we had this morning that is fading, nor am I talking about yesterday's market declines. I am referring to the Fiesta Bowl last night, where Ohio State came back from being down 17-6 going into the fourth quarter, only to lose in the closing seconds. Great game...tough loss.

Getting back to the markets, stocks opened sharply higher but quickly gave up most of their gains. The market is pretty overbought here, so it might be difficult to make much headway in the near-term. Also, sentiment has become pretty bullish, which also acts as a headwind.

In economic news:
  • The December ISM Services Index came in better-than-expected at 40.6 (up from 37.3)
  • November factory orders fell -4.6% (after falling -6.0% in October)
  • November home sales were down -4.0% (vs. -1.0% consensus)

In corporate news:

  • Mosaic (MOS) reported better-than-expected earnings, but said the supply chain is pretty full right now (the stock is down -3.3%)
  • Toyota (TM) said it will halt production at all of its Japanese plants for 11 days in Feb and March, after December sales dropped -37%

The dollar is higher again vs. the Yen and Euro; gold and precious metals are lower; oil is trading marginally higher; the 10-year yield is higher again, up to 2.54%; and the VIX is lower to 38.80.

Trading comment: I haven't put more cash to work, as the market is in overbought territory and sentiment is too bullish in the short-term. The 10-day CBOE put/call ratio and the ISEE call/put both hit levels last week that we have not seen since October 2007. Obviously, that was not a good time to be buying.

So I want to see if the market pulls back, or maybe it just trades sideways while it works off this overbought condition. Either way, I am holding off on new buys right here.

long MOO

Monday, January 05, 2009

Chart of the Day: Big Reversal in Bonds

After months of heavy buying in Treasury bonds, driving yields down to record lows, the last couple of days has seen a pickup in selling. (When bond prices fall, yields rise, and vice versa)

I noted a couple of weeks ago that I felt the stampede into Treasurys was overdone, and I was looking to short bonds. My vehicle for implementing this trade was to buy the ProShares Ultrashort Treasury ETF (TBT). This fund moves inversely with long-dated bond prices.

I was a little early in putting this trade on, but a look at the chart above tells me my thesis is starting to take hold. Notice the huge volume spike accompanying today's action, signaling strong conviction. Also, after reaching deeply oversold territory, the RSI indicator (top) is turning higher.

With all of the money that the Fed and other central banks are printing in an attempt to reflate the global economy, long Treasuries will likely reflect at least some pickup in inflation at some point.

But the Fed is also buying long-dated assets, and trying to do everything possible to keep rates low to help stimulate the economy. That, along with near-term fears about inflation, are what make this trade tenuous in the short-term.

As such, I will likely trade around this position, but for now I am willing to see how far today's strong bounce can carry it.

long TBT

Monday Morning Musings

The market is trading lower in the first hour of trading, but trying to recoup its losses as of this post. Financials are the weakest group, on the heels of a downgrade by Deutsche Bank. Energy and housing stocks are leading the way on the upside, followed by semis.

The dollar is sharply higher this morning, which is weighing on gold and silver. While commodities are lower overall, oil is bucking the trend and trading higher (over $47). This is helping the energy stocks, especially the beaten-down drillers.

The NY Fed announced it has begun buying fixed-rate mortgage-backed securities. This should help bring down mortgage rates further, and spur additional refi activity. Maybe this, along with the turn of the calendar year, will be the spark to foster a pickup in bank lending activity.

Separately, the WSJ is reporting Obama officials are trying to put together a $300 billion tax cut program to help stimulate the economy. I think tax cuts should be the prime focus, above big goverment projects where money will likely get wasted a bit, and not be as broadly spread out across the nation as tax cuts would be.

In corporate news:
  • Steve Jobs put out a personal letter to quell rumors about his health. He said his weight loss is due to a protein deficiency, and the treatment is pretty straightforward. Shares of AAPL are +5% this morning.
  • JPMorgan and Citigroup are trading lower after the stocks were downgraded
  • The FT is reporting that Pfizer (PFE) may be thinking about merging with a large rival, as it faces patent expirations
  • Sony (SNE) is denying reports it is preparing for drastic cost cuts and factory closings
  • Walgreens (WAG) reported December same-store sales rose +4.9% in the face of challenging headwinds

Asian markets were nicely higher overnight; the 10-year yield is building on Friday's gains, up to 2.44%; and the VIX is another -2% lower to 38.35, its 2nd day below the 40-level.

Trading comments: The Hi/Lo index is positive for the 3rd straight day, a major change since last year. The Santa Claus rally has now gained roughly +8.0% since 12/23, a big gain over a short period. That puts the market in an overbought condition, which makes a pullback likely. But if the pullback is somewhat mild, without a big pickup in volume, it could set the stage for further gains in the next few weeks.

Also, if you haven't voted in my 2009 Poll below, please take a moment to do so.

long AAPL, TBT

2009 Market Poll

I am still compiling results for my annual blog poll among all of the traders and portfolio managers I speak with. Right now, the consensus for 2009 is for the S&P 500 to achieve gains of roughly +12.7%. This is a little less bullish than the Big Money poll from Barron's, where the market strategists forecasts averaged +15.7%.
I also want to include my readers, so please tell us where you stand:
Where Do You Think The Stock Market Will Finish in 2009?
Gains in excess of 20%
Gain of 15 - 20%
Gain of 10 - 15%
Gain of 0 - 10%
More losses in 2009 free polls
long SSO

Sunday, January 04, 2009

Weekend Links of Interest

Here are some links of interest to articles from the week:

Friday, January 02, 2009

Stormin' Santa

According to the Stock Trader's Almanac, the "Santa Claus rally" is the period of the last 5 trading days of December and the first 2 of January.

Few thought we would get a really big Santa bounce this year, but guess what, so far the SPX has rallied +7.0% over the last 6 days. Not bad, huh?

I actually played this trend via the SSO, but I was a little early in my buying, which has dampened my gains so far. We still have one more day for this stat, but so far, so good.

The action today is very widespread and very bullish. The SPX has broken above its 12/17 highs, and all of the major indexes are now comfortably above their respective 50-day averages.

How quickly do you think performance anxiety becomes a factor for the multitudes of fund managers who are likely underinvested for this?

long SSO