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

Technorati tags:

No comments: