Sunday, April 27, 2008

Bulk of Earnings Season Behind Us

- MSFT hangover cools techs, but SP500 clears resistance.
- Oil blitzes back up toward 120 after what looked like a crack in the oil pan
- Bonds continue their breakout . . . along with the dollar.
- Historic Fed action: stock, bond, dollar market bottomed on one day of action.
- Bulk of earnings season behind us, but economic calendar is jam-packed.
- Will techs and the Big 3 return to lead the week.

Market has to deal with issues but perseveres.

Microsoft sandbagged its current quarter in a 'what is good enough for Apple that is beating us about the head and shoulders is good enough for us' move. Unlike Apple that rebounded nicely and posted an almost 4% gain after its 'disappointing' earnings, MSFT didn't rebound, unless you call finishing $0.23 off its session low during a 6.19% loss a rebound. Thus, unlike Thursday where NASDAQ bounced and broke out over its February high in a key breakout, NASDAQ had to drag MSFT around all session and it lagged rather than led.

It didn't help that RIMM reportedly is having problems with its 3-G BlackBerry for AT&T and it may be delayed. RIMM lost 3% on the session but it was down quite a bit more than that before a nice rebound. In addition, oil surged back up even as the dollar climbed, tapping at $119 once more (118.93, +2.87). Interest rates jumped again as they continued their second breakout in the past two weeks.

There was enough in the mix to sink stocks early in the session and on through midmorning, taking some of the nice glow off of NASDAQ's Thursday breakout. Even with that, the indices held at near support at the 10 day EMA and put in what is becoming a typical midmorning bottom. The indices rebounded after lunch in a straight upside shot that took the indices back up to the opening prices, and in the case of the NYSE indices, to session highs. Enough so that SP500 broke over the key early February high.

It was not a powerful session; we know powerful sessions and are willing to suck up to them at any time, but this was not one. It was, however, a solid session. Volume backed off and breadth was mushy, but the market overcame disappointing news, held near support at the 10 day EMA, and rebounded with leaders bouncing back, and as noted, a new breakout by SP500. The volume was great on the breakout, but it the breakouts are piling up, and that is an excellent development for the market.

TECHNICALLY the action remained, despite the tech losses, in a positive build. The indices were under some pressure on the tech side, but then all slid lower as the session moved from the opening bell. Once more, however, it overcame some disappointing news as it has over the past few weeks (GE, TXN, etc.) and bounced back to squelch the losses. Always like it when the market can look at the bigger picture down the road and overcome near term setbacks.

INTERNALS: Breadth was modest and volume was light. Good to see volume back off on the selling on NASDAQ, but it is always nice to see it jump back up on a rebound move. The lack shows no real buying as stocks rebounded and SP500 broke over the February highs, but it was a non-expiration Friday after a good upside week, and in that situation getting out with a flat to slightly higher session is fine, low volume or not.

CHARTS: SP500 joined NASDAQ and DJ30 in their breakouts over the early February peak making it an official uptrend now for all three of the large cap indices. In other words, they have all made new highs since bottoming on the selloff, surpassing the prior peaks in the 3.5 month base. That is an important technical move for the individual indices and the market overall. As noted above there was no big volume on the SP500's move and that was somewhat disappointing, but you take what you can get when you can get it when recovering form a serious correction.

LEADERSHIP: Well we were not expecting it this week after they broke lower to correct given the dollar's sudden popularity, but the Big 3 (energy, ag, and metals) came right back on Friday DESPITE a stronger peso . . . er. . . dollar. Bonus. That was all the more a positive given tech lagged thanks to the MSFT and RIMM issues. Even then, however, RIMM rebounded to hold near support and thus remains in great shape. Moreover, plenty of leaders continue to form up good bases and are set to breakout while others are testing or starting to bounce back up after testing near support following a breakout move. Very nice. Others simply moved higher, showing no sign of wear and tear (e.g. the transports whether trucking, rails, or shipping). Money continues to move into new areas and also old areas when the opportunity presents itself. Healthy action.


Oil reinvigorated after a brief respite.

Oil tapped at $120/bbl just over a week ago, surging higher in what looked to be something of a near term climax run. It was, but it was very near term. After a quick dip to the 114 level it held and without much of a push it was back up to $119 Friday, jumping $2.87 on the session to $118.93. The dollar moved up during the week and so did oil, defying the 'weaker the dollar, the stronger the oil' relationship. Oil took on a bit more independence to end the week as it went it alone without the dollar falling.

Last week we discussed the tie between oil and food, or more accurately, how our government has made an artificial tie between the two with the anti-free enterprise anointing of ethanol as the solution to our energy problems. Besides the many arguments about how it cannot be the solution or even a small part of it, the fact that oil rose despite a stronger dollar to end the week is even more reason we need to disassociate food from oil by scrapping the ethanol mandate. Why? Because if a rising dollar is not going to break the pressure on food prices because oil is still rising in price regardless of the dollar, then we are going to be stuck with high food prices as long as the tie is there despite reversing one of the major drags on the economy, i.e. the weak dollar.

Food and fuel are two of the primary cost items for any household. It is bad enough that higher energy prices make feed grain and food prices rise simply by raising the price of operating the machinery to grow our food. When you link food costs directly to fuel, however, by making food an ingredient for fuel, you uncork the bottle and the unintended consequences spew out. Ask the ranchers slaughtering cattle right now before they are ready to sell because they cannot make enough money on them at the current prices given the cost of feed. Ask the poultry farmers doing the same. They have to slaughter because they won't make any money now but hope if the herd or flock is thinned prices will rise enough to make it worthwhile to buy the feed to fatten the herd. As one rancher friend put it, get ready for $8/lb ground meat.

Great. Not only is gasoline going to top $4/gallon this summer, but meat and chicken are going to go through the rough. The government tried to pick winners with its ethanol policy and as is always the case, when the market is manipulated by clamping down on one part, it squirts out in other places. This situation has to be rectified immediately to hopefully avert a real disaster ahead that will kill off any attempted economic recovery. The housing issues are bad enough and credit has done its damage. Now government policies are ready to finish off the consumer. We have to buy gas to get to work and we have to eat. Federal policies (or the lack thereof in the case of energy) are making both more expensive and if unchecked that is going to cause the deep recession that it looks like housing and credit could not bring about.

The days of the weak dollar may be over: bond yields rising, gold fall.

Without any help from the administration the dollar is staging its best move against the euro in months. Of course it is coming off the mat to do so given the long and deep slide, but at least it is making the effort. The dollar has not broken its downtrend, not by any stretch. It has not even broken its 50 day EMA having just reached that level Friday and failing to hold a move through it. That leaves it down in the cellar, but trying to find the stairs to climb out.

Bond yields are up sharply the past two weeks with the 2 year yield breaking out over 1.8% to over 2% as its first move. It stalled near 2.2%, and then toward the end of last week it broke out with another key move again, jumping to 2.44% on Friday. Even the 10 year broke higher up to 3.86% though its moves remain modest compared to the short end's surge.

Bonds are telling the same story of the stronger dollar, i.e. there is a recovery taking shape. Some say it is inflation. As discussed a week ago, rising interest rates are not inflation or caused by inflation. Inflation can be part of a rise, but bond yields move higher more for economic recovery reasons than inflation reasons.

Just look at gold. While oil is moving back up in a clear breakout and uptrend run, Gold has formed a head and shoulders top and is getting ready to really tank. It ran to 1000 last month and that was the top. It sold off sharply, rebounded, but made a lower high, rolling back over the pat week. It closed below $900 for the week in a rather amazing reversal from the highs just a month back. It is ready to crash much lower and that is not a sign of inflation. Thus the rising interest rates we see ARE NOT related to inflation, but instead an economic recovery to come.

Creative Fed action turned the tide and is a landmark in central bank history.

The dollar still has a long way to go, but the interest rates are showing it is going to continue higher unless the administration does something really stupid such as attempting to undermine it seeing its recent rise sustain itself.

The roots of the recovery go back, to the day, to the Fed's series of actions of opening the discount window to non-primary dealers, taking other forms of collateral as swaps, hugely jumping the amount of funds available to swap, and stepping in to quickly rectify the BSC run on the bank. This showed the markets this was not your Greenspan's Fed, i.e. one that would just cut rates again and again and again as the cure to any ailment. Indeed, it showed the Fed could fight the problem, successfully, without having to cut rates any further.

With that realization the bleeding stopped that day. It was not an immediate upside rocket shot, but the floor was built, and the dollar has spent the past 6 weeks setting up a bottom, breaking higher to end the week.

That makes the Bernanke Fed's action some of the most significant and important moves in Fed history. It affected liquidity without endless rate cuts. Sure it slashed rates, but that was part of the process of figuring out what worked. At first the swaps were ridiculed. We said at the time they did what was needed, i.e. get money where it was needed. On balding blow hard bloviated nightly that the government had to step in and buy all of the mortgages as the only way to stop the bleeding. No, that bailout blathering was wrong. There was simply not enough money and the window was too discriminatory in the first attempts so as to let those really hurting take advantage of it. Once that was fixed by opening the window, the fix was in. The Fed was seen as able to affect liquidity and solve serious problems without an indiscriminate flooding of liquidity across the world via rate cuts.

The results were immediate. The dollar stopped its slide. Bond yields firmed. The stock market bottomed on that day. Those who called Bernanke an amateur were half-right and half-wrong. Sure he did not get the politics, but the reason he was installed as Fed chairman, i.e. his brains and ability to think outside the box, became apparent when he did finally get the politics. Once he realized how the system works with the political overlays he crafted a policy that solved the problem. That makes this historic. It is one of the extremely rare occasions a government agency solved a problem without burning down the house in order to save it. Kudos to Chairman Bernanke.

We can lament the Fed did not do this quickly enough without gutting the dollar with those initial rate cuts, but it was in uncharted waters and it took a bit of time to figure out what the right fix was. When it decided and acted, however, the impact was immediate.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, April 13, 2008

Talk of Bigger Bailout in the Works

- GE shocks the market as its financial services division runs aground.
- Import prices surge as the US is in fact importing inflation.
- Sentiment falls to 1982 levels in the great north.
- Talk of a bigger bailout in the works.
- Volatility not budging with the Fed and the feds acting as the backstop.
- Low volume Friday holds out possibility market can heal itself, but more than ever it needs good guidance, a lot of good guidance, to pull things back together.

Market gets tired of swallowing bad news.

The market was looking for a catalyst and it got one, just not the right kind. The indices were set up well and Thursday showed indications an upside breakout was close. Then a big name issues a big surprise. You expect disappointments from AMD and AA, and they didn't disappoint by disappointing for yet another quarter earlier last week. But GE?

GE missed earnings by 7 cents and lowered its 2008 guidance. Just three weeks ago it said earnings would be in the 50 to 53 cent range with analysts expecting 51. 44 cents hurt. How was GE so wrong so late in the quarter? The financial services business hit the reef when BSC blew up. It is apparent that the entire financial sector came to a standstill at that point, and that left everyone wondering if one part of GE's business could drag earnings down so much when its other business units are in excellent shape, what is going to come out of the financial stocks whose sole means of income is form the financial sector.

Indeed, GE's revenues, while down from the financial unit, were up 8% overall. The overseas revenues rose 23%. Goodness gracious. Yet . . . GE warned for the year. Does it see things as that bad? Probably not. What it sees is that three weeks ago things looked super and then one business unit imploded with almost unprecedented speed. It simply does not know what lies ahead for that part of the company and thus it pulled in its guidance as a matter of prudence. Of course that doesn't mean everyone can let out a big 'whew' that all is clear. While it has been bad in the financial sector, GE is showing it could be a lot worse than everyone expects even with all of the write-downs at this point.

Maybe. While GE's results were hurt in the finance sector there are signs the credit crunch just in the past few weeks is better. The amount bid at the Fed auctions is on a rapid decline. Primary dealers bid only $39.5B last week of the $50B available. People who watch these say that is showing the dealers have liquidity again. Investment bank borrowing fell to $26.5B last week from $34.4B the prior week and $37B two weeks ago. Slowing at the discount window means improved liquidity. Seems opening the discount window was just in time. GS says there is a light at the end of the tunnel and that the credit crisis is in the beginning of the fourth quarter in sporting terms. MS CEO kept the sports analogy saying the crisis was in the final innings.

GE was bad and then there was piling on. Import prices surged with China jumping 148% year/year. Michigan sentiment for April flopped to a 26 year low. We wanted China to stop controlling its currency as much and it is doing so. As we said would happen over a year ago, when that happened the yuan would rise against the dollar and our imports from China would increase in price, basically importing inflation to the US. As discussed Thursday, we are doing this elsewhere as well with oil, metals, and other commodities priced in dollars. As the dollar falls foreign producers require more dollars to remain whole. We may export more but we pay more for just about everything. To top it off we are on this kick of burning food for fuel, driving world prices higher and helping cause food riots around the globe. That makes you really take a hard look at this ethanol issue and ask 'is this really the best solution to the problem given all the troubles in the world?' Sure doesn't look like it.

This was more than enough bad news to undercut the nice rally set up. Industrials were hammered but the weakness was market wide though not as intense as in the GE wannabes. Indeed many quality stocks held up well even as other big names (e.g. AAPL) took hits. It is definitely trouble when a big name that never misses, or at least has not missed in a decade, is blindsided because things turned so fast you have to wonder, and the market is, what is next? There was widespread downside but it was not an across the board wipeout. Volume was actually lower; there was no dumping overall and a lot of recent leaders held up well. There was some culling, and of course, GE was moving into leadership.

TECHNICALLY the action was weak as you would expect. The indices started low and moved lower, never able to put together a recovery as a midmorning attempt rolled over into a steady afternoon slide lower and lower. The market was overcoming bad news time and again, but there is a point where you are so full of bad food that you just cannot swallow another bite. If you are lucky it doesn't all come back up. It didn't Friday, but next week with all of the earnings reports is now even more important given the GE miss.

INTERNALS: Breadth jumped back to those levels seen during the selling and the up and down gyrations as the indices tried to put in that double bottom in January through March. Not surprising given the import of GE and the magnitude of its miss. -3.6:1 NYSE, -3.7:1 NASDAQ; it was not just GE and the industrials though many stocks were just weaker and were not selling off hard. Volume was the quite interesting technical aspect. It was lower on both NASDAQ (-11%) and NYSE (-1.6%), the latter even with GE trading 36M shares, 7 times its average volume. All of the heavy selling was in GE.

CHARTS: SP500, burdened by GE, had a bad day, blowing out the bottom of its lateral consolidation. It managed to hold some support at 1330. DJ30 also had to bear the yoke of GE, and it caved in its lateral consolidation a the 10 day EMA. It managed to hold its support at 12,250, not even getting there. NASDAQ did the same, making a new low on this pullback, but it did hold its long term trendline on the close and on very low volume. There is hope but it has to find the bottom here.

LEADERSHIP: There were definitely some implosions; you cannot have that kind of news and not see some stocks that were building nicely get plowed under. Overall, however, leadership held up well and our stocks mirrored that action. That is always good to see in a negative environment. Still, they cannot hold up if the market is not able to shake off GE and look to brighter futures elsewhere. Translated that means with all of these earnings coming out this week there need to be some big names with strong reports and upside guidance that is enough to wash GE right out of investors' hair. The market has no chance if other stocks don't show that GE was truly related to the March financial issues related to BSC financial decline.


Import prices confirm what the trade deficit told.

Prices for foreign products rose 2.8% in March, surging back from the 0.2% February gain, and back on path more with the trend that saw January rise 1.6%, December fall 0.2%, but November surge 3.2%. A lot of that has to do with oil imports, but even if you take out oil foreign goods rose 1.1%, the strongest in the last five months.

A lot of that was due to rising Chinese prices, up 4% for the month and 148% year over year. Oil imports were not cheap, however, rising 9.1% in March. Volatile number that was down in February, up 4.8% in January, down again in December, and up 12.4% in November. Follow the bouncing ball, but that ball is still bouncing uphill.

Some say the falling dollar is just a normal correction after years and years of a rising dollar that took it out of a normal relationship to other economies. Is that a bad thing? We had a strong dollar and we could buy goods from all over the world and do so cheaply. That is called raising your standard of living, and that is not a bad thing in just about everyone's book. You don't suffer inflation because of your strength. Now we have to spend more for oil and gasoline leaving less money to go elsewhere for things we typically enjoy in our standard of living. We have to spend more for everything. Our economy is in recession, helped along by hugely surging oil prices, surging metals prices, food prices and goods in general gratis a weaker and weaker dollar. Again, this is a good thing? Used to be we just complained about the cost of medical care and education. Now you wonder whether you want two-ply or single-ply. THAT is the definition of a lower standard of living.

Michigan Sentiment is . . . how do you say it? . . . crappy.

At 63.2 sentiment was bad. Well off the 69.0 expected, the 69.5 in March, etc. Steady downtrend and still heading lower. A combination of high gas prices, higher food prices, rising unemployment, politics, and general gloom in the media. Feeds off itself.

Sentiment is at recession levels in an absolute number sense, but the decline from 78 to 69 in just two months shows the rate of change indicative of a recession even without hitting historical recession ranges. That is a moot point now; it is there.

Present conditions were the stalwart at 78.4. The outlook is a pathetic 53.4, truly a recession level.

Comparisons to the past are of course widespread and somewhat appropriate. The big one thrown out was the worst showing in 26 years. Back in March 1982 the US was suffering through a horrible recession after the 1970's, the worst period in economic history since the Great Depression. In 1982 the economy was starting to emerge from that truly disastrous period after the Reagan Emergency Economic Recovery Tax Act of 1981 was passed and in place.

While the economy is likely in recession right now, it is hard to argue it is emerging from it. If it is, it is a shallow one. If it is we will see the stock market emerge ahead of it as it was trying to do before Friday and the GE miss. May still do it, but as noted above, it will take other widely followed stocks to put up some good guidance. If not then there is likely more downside for stocks and the economy.

Resolution Trust Fund Part 2?

It was only a matter of time. The Feds are talking about a bill to bailout those mortgagors who cannot pay their mortgage and the builders and lenders who became overextended and are now in trouble. Once more our government, in order to ensure domestic tranquility and the pursuit of financial irresponsibility, is preparing to bail out those that knew better but didn't act accordingly.

Today we heard it: the feds need to form an entity similar to the Resolution Trust Corporation back in the early 1990's to clean up the mortgage mess. In the early nineties the RTC was in charge of the Resolution Trust Fund that was basically a mechanism to throw money at the savings and loan collapse that occurred after the real estate market fell to pieces all across the south and other parts of the country. An entire branch of case law developed in the courts to assist in expediting the clean up by limiting claims of borrowers against lenders to keep the hundreds of billions in losses from growing into trillions. At the same time the 'trust fund' (a.k.a. a tax dollar fund) was used to pay off both sides in order to keep the nation's financial sector from collapsing altogether (it was not only S&L's that failed but bank after bank was taken over by other banks to avoid outright failures).

It worked but it cost a lot of taxpayer dollars that went to the wrongdoers. Basically it was a decision to grease the system and get through the mess even if it meant assisting those that were major players in the problem in order to avoid a larger economic collapse. The feds meant business. The Federal courts were given jurisdiction (no invasion into state's rights there) and the judges knew what the legislation was enacted for: to clean up the mess and limit the losses, and that meant harsh rulings. I was a newbie lawyer at the time and the case law that developed in favor of the lending institutions was so strong I had no trouble starting off my career with several summary judgment victories for defendant financial institutions. I liked to think I was smart and resourceful, but I knew better: the deck was stacked in the lender's favor as long as the bank hadn't done something like promise to place gold coins in the borrower's account every Monday. Even then you could probably get them off.

Anyway, after GE's sudden and unexpected miss, many Friday were saying the mess is going to be much larger than expected, even with the billions already written off. Who can sweep billions of dollars lost due to inappropriate actions under the rug? The federal government, a.k.a. the candy man. Of course it would mean more if the dollar had some weight behind it, but why quibble. With talk of a second stimulus package already you can bet that an offshoot of that will be some sort of federal creation to deal with the issue if earnings guidance does not improve drastically in the near term.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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