Market Commentary - 4.27.2008
April 27, 2008
Bear market rally or time for the running of the bulls? The market has already priced in a first-half recession, with the expectation of improving economic/earnings data in the 2nd half of the year. We don’t believe that rosy story, and are of the belief that expectations are still way too high, but perception is reality. The market seemed to breathe a sigh of relief this past week as non-financial earnings were relatively strong in the context of lowered guidance, with exports offsetting weak domestic demand. The S&P 500 just peaked above the February 1st high of 1396.02, and if it can push above the 1400 level, it will be important from both a technical and psychological perspective.
Based on market action and recent speeches by the Fed, it looks like we are at an important turning point in the bond market, the dollar, and most commodities. After hitting all-time lows against the Euro, the dollar snapped back strong and short-term treasuries had their worst week in about 7 years, as precious metals failed to hold support levels. On the other hand, oil and agricultural commodities continued trading at or near record highs, with stories every day of major US retailers limiting the amount rice purchases as major exporters begin hoarding supplies for their own citizens.
Everyone will be watching what the Fed does on Wednesday, but more importantly what they say. The market is pricing in a 25 bps cut with the expectation of a pause after that, both because they believe the 300 bps cut to date has steadied the credit markets and because inflation data has started to show uncomfortably high prints. It’s hard to believe these guys (CEO’s, administration officials, talking heads) who have continued to try and say “the worst is over” every month since last August, especially as banks continue to report larger and larger write-downs; it’s also confusing as to why those stocks jump when they need to raise even more billions just to keep their minimum capital requirements intact.
However, that’s been the theme of this market – what you would to hold up expect in a weak economy – for example healthcare, utilities, and consumer staples, have of late underperformed financials, homebuilders and consumer discretionary. Even if, as we believe, things will not be nearly as good as expected on the economic/earnings front in the 2nd half, people are willing to buy equities because treasuries and money markets, or any “flight-to-safety” instruments, are trading at negative real yields, and investors are willing to bet the worst is behind us – they don’t want to miss the bottom.
Earnings
Although not as action-packed as last week, still a lot of important earnings dates this week:
Monday – FPL Group (FPL), Loews Corp (LTR), Manitowoc (MTW), MasterCard (MA), RadioShack (RSH), SOHU, Southern Copper (PCU), Tyson Foods (TSN), Verizon (VZ), Visa (V)
Tuesday – Archer Daniels Midland (ADM), Buffalo Wild Wings (BWLD), Corning (GLW), Deutsche Bank (DB), Office Depot (ODP), US Steel (X), Waste Management (WMI)
Wednesday – Akamai (AKAM), Allegheny Energy (AYE), Cabot Oil & Gas (COG), Colgate Palmolive (CL), Cummins (CMI), First Solar (FSLR), Garmin (GRMN), General Motors (GM), Kellogg (K), Kraft Foods (KFT), OfficeMax (OMX), Proctor & Gamble (PG), Prudential Financial (PRU), Sanofi-Aventis (SNY), Southern Co (SO), Starbucks (SBUX), Time Warner (TWX)
Thursday – Aon Corp (AOC), BankRate (RATE), Cardinal Health (CAH), Chesapeake Energy (CHK), Comcast (CMCSA), CVS Caremark (CVS), Dominion Resources (D), Exxon Mobil (XOM), Marathon Oil (MRO), Metlife (MET), Noble Energy (NBL), Sun Micro (JAVA), Tyco (TYC)
Friday – Agrium (AGU), Chevron (CVX), Duke Energy (DUK), EOG Resources (EOG), IntercontinentalExchange (ICE), Nortel (NT), PPL Corp (PPL), Sempra Energy (SRE), Washington Post (WPO), Weyerhaeuser (WY)
Economic Data
A lot on the economic front this week, in addition to the FOMC meeting:
Tuesday – Consumer Confidence, S&P/CaseShiller Home Price Index
Wednesday – ADP Employment, 1st Q GDP, Chicago PMI, Crude Inventories, FOMC statement
Thursday – Auto/Truck Sales, Initial Unemployment Claims, Personal Income & Spending, and Consumption, Construction Spending, & ISM Manufacturing Index
Friday – Average Workweek, Hourly Earnings, Nonfarm Payrolls, Monthly Unemployment, and Factory Orders
Strategy/Outlook
Depending on who you listen to, now is either the best time to buy equities in 20 years, or we are at a near term top and the next leg down is on the horizon. We are staying away from indexes at this point until we get some confirmation – some indexes such as the Dow and Nasdaq have broken out of their trading range, while the broader indexes such as the S&P and Russell are sitting right at resistance, while volume in this rally has been weak at best – there is still a lot of cash on the sidelines. Because of the continued choppy action, we are looking to position ourselves for longer term trades to try and take advantage of overall sector trends we are seeing.
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Market Commentary - 4.20.2008
April 20, 2008
After a strong rally on options-expiration Friday, the bulls look to have sent the bears into hibernation mode for the time being. However, as we have seen in the recent past, big movements during expiration week have become the norm, and we will need to see some follow through to confirm a sustained uptrend. All of the major indexes are right at their February 1st highs, and as we can see below with the S&P 500, buyers are once again trying to break us out of the trading range we have been stuck in for most of 2008:
Since the Bear Stearns blow-up, the market has shrugged off every piece of bad news thrown its way and looked for any reason to push higher. With earnings season in full swing, buyers have taken solace in the fact that things are not as bad as some have predicted – case in point – Citigroup reported a $15 Billion write-down, with deterioration in almost every area of their business and little evidence there is light at the end of the tunnel, yet the market cheered because “it could have been worse”. It seems clear the market has priced in a recession, consumer headwinds, and weak corporate earnings for the first half of the year. For now, the only thing holding the US economy together is the weak dollar and emerging market strength, which has driven export growth to offset US weakness. We have often mentioned the next leg down, but it looks like we will have to wait, unless there is another GE type bomb this week, or a big disappointment from the Fed next week.
This week’s price action will be driven almost solely by earnings news and technicals/sentiment, as there is almost no important economic data to speak of. Google was last week’s catalyst for a relief rally, who will it be this week?
Earnings
Another earnings-packed week will drive the tape - below are just a few examples with Bank of America leading it off:
Monday - Bank of America (BAC), Eli Lilly (LLY), Halliburton (HAL), Merck (MRK), Nabors Industries (NBR), Netflix (NFLX), Texas Instruments (TXN).
Tuesday – AK Steel (AKS), AT&T, (T), Coach (COH, DuPont (DD), Jacobs Engineering, (JEC), JetBlue, (JBLU), McDonald’s (MCD, National City (NCC), Robert Half (RHI), Yahoo (YHOO).
Wednesday – Alcon (ACL), Amazon (AMZN), Anheuser Bush (BUD), Apple (AAPL), Chipotle (CMG), EMC Corp (EMC), Freeport McMoran (FCX), Genzyme (GENZ), Moody’s (MCO), NewMarket Corp (NEU), Phillip Morris (PM), Qualcomm (QCOM), Boeing (BA).
Thursday – American Express (AXP), Amgen (AMGN), Baidu (BIDU), CF Industries (CF), Conoco Phillips (COP), Credit Suisse (CS), Deckers (DECK), MEMC Electronics (WFR), Microsoft (MSFT), Motorola (MOT), PepsiCo (PEP), Potash (POT), Dow Chemical (DOW).
Friday – Ceradyne (CRDN), Coventry (CVH), Goodyear (GT), Honda Motor (HMC), ITT Corp (ITT), Kyocera (KYO), Wendy’s (WEN).
Economic Data
This week will be very light on the economic front, with only existing & new home sales, durable orders, initial unemployment claims, and consumer sentiment. Also, we are watching crude oil inventories for any sign of weakening demand. The market will be much more focused on what the Fed will do next week than near term economic weakness…
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Market Commentary - 4.13.2008
April 13, 2008
Well, it looks like buyers have exhausted their strength as the major indexes were unable to push through the resistance levels we discussed last week. After holding firm against the backdrop of continued negative headlines and deteriorating economic data for several weeks, the markets finally crumbled on the heels of an earnings miss and downward revision from GE. The next few weeks will be the most action packed in quite awhile, as the majority of Dow 30/S&P 500 members will report earnings, a slew of economic reports are scheduled to come out, and finally the market awaits the Fed meeting and rate cut announcements on April 29th/30th. Last week we highlighted the fact that market volatility had trickled down near its lows for the year, and this week it started to tick back up but still sits well below the spikes seen in January and March. We expect the rest of the month to be extremely volatile, and if the remaining earnings reports and outlooks are anything like we saw this week from UPS, Alcoa, and GE…well the things won’t look so good for the bull argument.
This week should start off with a bang – we wouldn’t be surprised to see a “dead cat bounce” rally on Monday as the major indices are short-term oversold, but we are looking to sell into any strength as we believe the next leg down is now underway. This week will bring some much needed clarity regarding 1) the health of the financial institutions and credit markets, 2) the state of the economy and how well corporate earnings held up in the first quarter, and 3) how much inflation the US is already experiencing – and of course this will all play a big role in what action the Fed decides to take – currently the market is pricing in a 25 bps rate cut, with about a 46% chance of 50 bps.
Earnings
Nothing exciting on Monday, but Tuesday and the rest of the week more than make up for it as we’ll see a little bit of everything. The highlight will be the financial institutions including Washington Mutual (WM), JP Morgan Chase (JPM), Wachovia (WB), Merrill Lynch (MER), Citigroup (C), Sallie Mae (SLM), and Wells Fargo (WFC) just to name a few. For those who think the troubles in the credit markets are almost over, we think the next few weeks will prove otherwise. Some other big names we will be watching include Johnson & Johnson, Google, eBay, IBM, United Technologies, and Coca Cola. If all of that doesn’t get you excited, you shouldn’t be trading. Keep in mind, this is just a sampling of the earnings reports to come out this week – investors will be much more concerned with forward guidance than 1st quarter earnings results, and we will be much more focused on the market’s reaction than the actual results.
Economic Data
This week we have retail sales data on Monday, manufacturing data – NY Empire Index on Monday and Philly Fed on Thursday, inflation data – producer prices on Tuesday and consumer prices on Wednesday, some housing data on Wednesday, and we’ll also be watching for the Fed’s Beige Book on Wednesday, and unemployment claims and leading indicators on Thursday. The market has been trending up on hope that things will start to get better on the economic front after the 2nd quarter, but the reality is the data continues to show deterioration and none of the actions by the Fed/administration has flowed through to the real economy yet. Equity analysts have now lowered their earnings estimates every single week this year.
Strategy/Outlook
Since the indexes weren’t able to break resistance and we believe the next few weeks will show that recessionary pressure has spread far beyond Wall Street, we are looking to sell into any strength and believe the best opportunities in the near term to be on the short side.
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