Stock Market Summary for February 4th 2008

U.S. STOCKS OUTLOOK - JANUARY EFFECT, DEVISED BY YALE HIRSCH IN 1972: AS THE S&P 500 INDEX GOES IN JANUARY, SO GOES THE REST OF THE YEAR; THIS PHENOMENON HAS A 91.1% ACCURACY, REGISTERING ONLY FIVE ERRORS, SINCE 1950

If the statistics shown above hold true then our markets for 2008 will be a bad one.

Another piece of very intriguing information that we came across today is that the total short interest in all stocks on the NYSE has reached 3.7%. That is 3.7% of all the combined shares of all stocks on the NYSE. The last time the short interest was this high on the entire NYSE was in 1931. Now some would say that this is a contrarian indication and it may be. But, for there to be that much short interest there must be a reason. Is there that much fear of a severe recession? Is it that large money is betting on a substantial decline in the market? Could it be that they see more into the problems unwinding in the financial system then others see, or at least admit? The data says that the last time the short interest was this high was in 1931. In 1931 the DOW reached a high of 196.90 in February of that year. In June of 1932 the DOW dropped to 42.30. That is a decline of 78.5%! So at this time we have short interest that is on par to the short interest in 1931 before that big decline. Sometimes a high short interest is NOT a contrarian indicator, it is an indication of just how bad people expect things to get. Are we repeating 1931 and 1932? I sure hope not!

Today we saw selling in the financial’s as resistance came into play as we discussed last night on the charts and on downgrades of some financial sectors on recession expectations. The financial sector tracking ETF (XLF) actually fell back below the trend line and closed back in the negative column. Recall that old school technical analysis says that for a trend to be broken (up or down) the price needs to trade at least three sessions on the other side of the line. Today may have been an example where the old school trend confirmation came into play, so far we have had only one day where the XLF closed above the trend line. Some talking heads on TV and the print media have been saying this is a great time to be buying financial stocks because they are so cheap. Well, you all know my favorite saying from Jesse Livermore… "It is not as important to buy as cheap as possible as it is to buy at the right time". When the time is right we will step into the financial’s.

S&P futures are currently down at this time by -0.2% and are still heading lower. Earnings reported today were not very exciting. Except for a few companies here and there beating estimates the majority were either inline or were a miss, and more importantly many guided lower for the year or the next quarter.

 

Moody’s and their Ratings-Black Box Warnings?

The Wall Street Journal reports that Moody’s will consider changes in structured finance ratings.  They are "considering a range of changes in the way it rates thousands of mortgage-related bonds and other vehicles hit hard in the credit crunch, including new warning-like labels that underscore the limitations of the rating."

Warning labels for ratings?!  What’s next?

Banks and Energy

Just for your consideration:

US Fed’s Quarterly Survey of Loan Officers: 55% of domestic banks tightened lending standards
- 85% of those originating nontraditional home loans tightened lending standards.
- 60% of domestic banks saw demand for prime home loans, tightened lending standards for home equity lines of credit.
- 1/3 of domestic banks tightened lending standards for business.
- Notes most banks see deterioration in loan quality in 2008.

Energy Secretary Bodman says US will buy reserve oil if it ‘reasonably priced.’  I wonder what constitutes ‘reasonable?’

Factory Orders/Durable Goods

December Factory Orders: 2.3% is up from the prior revised 1.7%

Durable Goods Orders were revised from 5.2% to 5.0%.

Markets are trading quietly and in a range.  Oil Service Holders are gaining a little ground this morning, as well as some Solars.  Pretty mixed on individual stocks.  Not a lot of conviction here.  Some consolidation is really needed.

Congrats to the Giants, but I was kind of pulling for the Patriots and a perfect season.  Oh, well.

Pre Stock Market Report - February 4th 2008

So far it appears that the markets are going to open flat to slight lower based on futures. The biggest event we see this morning is the announced budget from the US Government. Amazing how the tone of the Government has changed so quickly from "fundamentals are strong" to now being told "longer term outlook is sobering".

BUSH FY08 BUDGET PROJECTS $410B DEFICIT V $258B PRIOR - WIRE HEADLINE
- FY $3.11T budget proposal would nearly freeze spending
- "longer term outlook is sobering. healthcare costs create unsustainable pressures"
- budget does not adjust GDP forecast; remains at 2.7% for 2008, and 3.0% for 2009

 

Furniture Brands International - FBN

A stock we are watching for a swing trade on the -short- side is FBN, Furniture Brands International.

Last months short interest was an astonishing 40%. In the middle of January it appears that FBN was squeezed and the price gained 55% in the course of 2 weeks. This type of price move has historically shown to be unsustainable.

Currently FBN is near strong resistance levels. From these current price levels we would expect to see some new shorting of the stock along with selling of those who were playing the short squeeze. On January 30 FBN reported Q4 earnings and they were terrible, reporting negative $0.86 vs the expected negative $0.02. The company also cut their quarterly dividend by 75%.

FBN appears to be a company in trouble, and the price move over the past couple of weeks appears to be unsustainable and is why we are viewing this as a potential short trade. Price target would be 8.75, which is a 17% gain from the current price.

On the chart observe the two trend lines, these are stop loss points should you decide to take a position in this trade.

 

 

 

 

 

 

 

 

 

 

Societe Generale Bank & Enron

Societe Generale Bank.. remember them? It was just weeks ago that they announced substantial losses and they claimed that the losses were the result of a "rogue trader" who had over extended the banks money by huge amounts, and lost. When the story broke I remember commenting here on our site that I feel there was more to the story than we are being told. I even mentioned that it was possible that Societe Generale was on the brink of becoming insolvent and had used the "rogue trader" story as a way to avoid having to divulge that the bank suffered huge losses which were a result of activities they were fully in control of. Now, the story that Societe Generale Bank told the world may be indeed true and accurate. But in the world of big business you need to always have a slight bit of a suspicious nature in order to survive. On January 27th I wrote:

Some speculate that the bank was on the brink of becoming insolvent and this was a way of explaining their losses without it looking like a bank failure. Sounds far fetched but so did some of the accusations being raised about Enron. And they were later found to be true.

I know I heard this term "rouge trader" before. And I remembered where it came from. It came from Enron. In the book "The Smartest Guys in the Room" by Bethany McLean and Peter Elkind, which details the rise and fall of Enron, there was a story of another "rogue trader".

In 1987 Enron began to trade heavily in Oil Futures. Enron Oil, the division which was doing the trading was betting heavily on oil declining in price… but oil kept rising, but instead of closing out their trades and taking a small loss Enron continued to pour money into the trade thinking they were going to be right. But on October 9th, 1987 an Enron executive from Houston met with an Enron Oil Executive at a restaurant in New York. The Enron Oil executive, Louis Borget, told the Houston executive that their trades on oil were so far in the hole that it actually put Enron’s total net worth at less than zero. The losses were so substantial that Enron, on paper, was broke. After a panic meeting back in Houston, and a slight turn in the oil prices, Enron was able to wiggle their way out of the trades over the next few weeks with losses not as severe as as it looked originally, but the losses were still large.

Now mind you, according to details outlined in the book, the Enron executives were fully aware of the trading activities of Enron Oil from the beginning, they just were not aware of how in the hole they had become. When all was said and done Enron announced their losses to the public and to the SEC and blamed it on "losses from unauthorized trading activities by two employees in its international crude oil trading subsidiary". In other words, Enron which was fully aware of the trading activities decided it was going to explain their losses as just a couple of unauthorized transactions instead of divulging that the company was at risk of being insolvent. And so  they blamed it on a couple of ‘rouge traders’. Enron later went on to file charges against the subsidiary and the traders for their actions.

Now lets come back to present day. Societe Generale Bank claims that their substantial losses were a result of a "rouge trader" who had made "unauthorized transactions", and have filed charges against the trader. Now you can understand why I say that I feel there is more to the story than the public is being told. Time will tell if the story Societe Generale Bank has told everyone is true or not. But it is interesting how this has happened before and that it was used as a cover up for the real story.

Societe Generale Bank