Stock Market Summary - May 1st 2008

Belief:

Confidence in the truth or existence of something not immediately susceptible to rigorous proof.

Belief is what one obtains when facts and observations are made and a theory is developed. Last July, we began to observe problems developing in the financial system at a rapid pace, then facts started to become known which reinforced those observations. Since that time, the facts and the observations of patterns in the economy continue to show problems still worsening. So why is it that the equities markets are going up? It comes down to the most basic and simple of human traits: greed and fear. In the stock market right now we have the classic greed of wanting more, and fear of missing out on having more. When markets go up, fear turns to the feeling of missing out on something. When markets are going down, fear turns to the anxiety of losing money. You see, greed and fear take on different meanings based on what the market is doing at any given moment. If it were not for these simplest of human emotions, there would be no market in the first place for people to wage each other for price negotiation of stocks.

When the market has suffered large declines, as we have witnessed this year, and then starts reversing, there is a feeling of euphoria. The Webster’s definition of euphoria is "a feeling of happiness, confidence, or well-being sometimes exaggerated in pathological states as mania". The euphoria in bear markets is the feeling that a burden has been lifted, there is joy, and there is a feeling that the sun will come out tomorrow. Euphoria is what creates bear market rallies and is why advances in bear markets can be so extreme. Recall that in bear markets there are more 2% or higher one day advances than there are in a normal bull market.  And euphoria spreads quickly throughout the market as it feeds the appetite of greed and fear.

It is our belief, based on many facts and observations, that the economy is going to deteriorate much further in our view. It is because of this that we maintain our belief that a bear market is upon us. The advances in the market over the past few weeks is simply a bear market rally. And what happens in these rallies is that the euphoria wears off once the facts begin to set in again, and fear turns back to the fear of losing money and the markets begin the next downward path.

The euphoria of the markets also greatly influence the media and analysts. Before the market began to deteriorate last year Jim Cramer of CNBC was putting price targets on stocks like Google and Apple of $850 and $350 respectively. He, like so many, were caught up in the euphoria and based their future projections on greed, not on fact. Reality hit Jim Cramer in the behind and the market began to cave in.  Suddenly, he backed away from all of those claims, and in March he turned somewhat bearish in his view of the market. Was he analyzing any real data? No, he was only following the market sentiment as greed and fear propagated throughout. Now that the market has advanced since March 17th, suddenly everyone has become very bullish again, and even making some outrageous predictions of the DOW reaching 16,000 this year (Larry Kudlow, CNBC). Those who lose in the end are those who follow their emotions and ignore facts.

The bear market that began in 2000 is a perfect example of the process of events I just described. Lisa and I remember very clearly the media and analysts reactions during that bear market. What is happening now has happened before. Same story, different year. There were a lot of people who lost their life savings and more in that bear market, because they got caught up in the euphoria and started to go long and build up substantial positions everytime another ‘bottom’ was called. The euphoria of the bear market rallies prevented them from knowing when to sell and take their money out before the next down leg came. Many just left their money in the market, for they kept thinking "it has to turn around soon," only to find out that, no, the market does not have to turn around soon, and they lost.

The chart below is the S&P 500 from the bear market of 2000 - 2003. Each blue arrow was another ‘bottom’ which was followed by euphoria and the concept that the market was now bullish again. But, as you can see that euphoria was busted multiple times. Even a primary bear trend line can be breached for a short period of time before economic reality sets in again. I see our current situation as a replay of 2000. But some would say "you can’t fight the Fed", they said that all the way through 2000 to 2003 as well. In that bear market the Federal Reserve cut the Fed Funds Rate 12 times! And every time the market hit an intermediate low, people were saying "you can’t fight the Fed". Well, yes you can. And those who did fight the Fed were those who came out the biggest winners in the end because they stuck to their beliefs, and not their emotions.

 

 

 

 

 

 

 

 

 

 

(S&P 500 - Bear market 2000 - 2003)

Today’s advance was again on volume that was not good. The volume trend is declining while prices have been advancing and that spells big trouble ahead. There are many indicators that just scream out that a substantial decline is on the way. Technology, which so many in the media have been jumping on as the next bull market, is about to hit a major resistance level. The chart below is of the semiconductor ‘SOX’ index. Notice that it has fallen substantially out of a long term pattern and has been retracing back to the point of where it failed. That point will be a turning point back down once again.

 

 

 

 

 

 

 

 

 

(Semiconductor Index - Weekly chart)

 

And the Dow Transportation Index, it too is right at a resistance point.

 

 

 

 

 

 

 

 

 

(Dow Transports - Weekly Chart)

 

Tomorrow is the monthly unemployment report. Our own analysis of the employment situation tells us that the unemployment trend is still firmly in a deteriorating pattern. How will tomorrow’s data come in? Well, if the Government uses the correct birth/death calculations in their analysis, then it will be bad. Does the Government want to make the economy look as best they can in this election year? You bet they do. Will they stoop so low as to make the data appear better then it actually is? I’ll let history speak for itself on that one.

But from where I sit, the market is at, or near a major turning point. Each day that passes in this bear market rally makes me more and more concerned for those who are going to be trapped by it.

Now for some additional facts:

State and local budgets are running into trouble. Deficits in local communities are rising and so are budget cuts. In my area, I know of many budget cuts being proposed or having actually been enacted. And layoffs have been occurring within the State and local Government. Where is the next wave of unemployment going to come from? The Government sector.

The chart below shows the revenues lost from reduced tax income just in past three months!

 

 

 

 

 

 

 

(Tax revenue changes for January - March 2008)

 

And one more bit of information. Atlanta, one of the fastest growing cities in this decade is also becoming one of the fastest growing cities with the highest amount of foreclosures.  On average, 1 in 150 homes in the greater Atlanta area are now in foreclosure. To us that does not look like a healthy economy.

 

 

 

 

 

 

(Atlanta - Foreclosures as of May 1st 2008)

Market Close

Ok, hang in there with me.  I’m watching some stuff after hours and I’m maxed out on my multi-tasking abilities.  There seems to be a steel beam in that ceiling of resistance in the market, but they sure are giving all they’ve got.  Check back soon!

Stock Market Update

The indices are bumping up to resistance again.  You have to make up your own mind on your risk tolerance, as to whether you want to take a short here.  AAPL is testing the resistance Chuck talked about it his previous posts.  Why is the market doing this?  Many people believe the bottom is in and things are going to be fine from here.  Apparently, Kudlow (CNBC) said he thinks the Dow is going to 16,000.  Dick Bove is still hawking the financials, analysts are upping price targets,  and hope reigns supreme.  Volume overall is low, but a little higher on the Nasdaq.  Symantec (SYMC) came in with decent earnings and guided higher, and some analysts are pushing RIMM, so everyone wants in tech now.  It won’t last, IMO.

New lows outpace new highs, volume low.  This says the rally is being carried by a few stocks.  Enter long at your own risk.

What?

I had to post this, because it made me laugh.  I know they are serious, but I just found it freaking ironic.

News Release
NR 2008-51

FOR IMMEDIATE RELEASE
May 1, 2008

Contact: Dean DeBuck
(202) 874-5770

Preserving Affordable Multifamily Rental Housing:
How Banks Help Sustain the Nation’s Supply of Affordable Rental Housing

WASHINGTON — The Office of the Comptroller of the Currency (OCC) today released the Spring 2008 edition of Community Developments focusing on the preservation of affordable rental housing.

“Banks working with specialized partners in viable local markets can stem the loss of affordable multifamily units and help maintain housing that is essential to the well-being of our nation’s communities,” said Comptroller of the Currency John C. Dugan.  “If positioned correctly, banks can help meet the nation’s growing need for affordable shelter while making safe, sound, and cost effective investments in their communities.”

This issue of Community Developments features an overview of the challenges facing the nation’s affordable multifamily rental housing inventory by Michael Bodaken, president of the National Housing Trust.  An article by Debra Schwartz of the John D. and Catherine T. MacArthur Foundation describes how a variety of public, private and nonprofit initiatives have addressed these challenges.  This issue also highlights the specific activities and investments of selected national banks, nonprofit organizations and state and local government agencies in supporting the preservation of affordable multifamily rental housing.

National banks often invest in the preservation of affordable multifamily rental housing under the “Part 24” public welfare investment authority which encourages bank equity investments in activities that primarily promote the public welfare in a safe and sound manner. They may also receive positive CRA consideration for these investments.

 

###

Nat. Gas Inventory

More of a build than expected:

EIA NATURAL GAS INVENTORIES: +86  BCF VS. EXPECTED RANGE OF +70 TO +75 BCF

Financials and homebuilders getting a boost after Moody’s says downgrades will slow.  Yea, that’s good news….makes everything all better now, doesn’t it.  Commercial paper outstanding also fell a bit:

US COMMERCIAL PAPER OUTSTANDING FALLS $21.2B W/W TO $1.763T- FED

Many see this as a positive, and maybe I’m wrong (would concede to that), but with all the borrowing from the Fed’s, I don’t see why more CP would be issued.  No need with the Fed pawnshops available. And, couldn’t it be that holders of the CP simply aren’t rolling it over, causing a decrease.  Ok, someone correct my understanding on this one, I’m open to it.

Construction Spending and April ISM Manufacturing

March Construction Spending:  -1.1% v prior -0.3% (prior revised to +0.4%)

April ISM Manufacturing Composite: 48.6 v prior 48.6
- Prices paid:  84.5 v 83.5 prior

Spending is down, prices are up.  We are not surprised.

Breaking News - 9:20 am

Home Depot (HD) is closing 15 stores. Removes 50 stores from future plans.

SEES Q1 PRETAX CHARGE OF $547M, Excluding the impact of this charge, the Company reiterated that its diluted earnings per share from continuing operations are expected to decline by 19-24% for fiscal 2008

There should not be any doubt that the housing crisis and the consumer recession is spreading to the broader economy.

Stock Market - Pre Open Report - May 1st 2008

The important news for this morning is the jobless data.

INITIAL JOBLESS CLAIMS: 380K V 365KE; CONTINUING CLAIMS: 3.02M V 2.950ME
- Prior Initial Jobless Claims revised from 342K to 345 K
- Prior Continuing Claims revised from 2.934M to 2.945M
- Highest Continuing Claims since April 2004

Jobless claims continues to increase unabated. The all important continuing claims has reached above 3 Million people.

 

MAR PERSONAL INCOME: 0.3 V 0.4%E; PERSONAL SPENDING: 0.4% V 0.2%E

Although the personal spending is a couple ticks higher than what economists were anticipating, it in no way means there is an improvement. When personal spending is charted over the long term it is then we see the declines in spending are worsening.

The bulk of March’s gains in spending were price related. Real spending was increased a tepid 0.1% in March and is up only 2% on a year-ago basis. In March, real durable goods spending declined 0.5%, real non durable goods and service spending both advance 0.2%.

Also, personal savings rate continues to drop. That is a ‘no brainer’ as people have less money to save as more and more of it is going to food and energy. But even without the food and energy cost increases, savings have been declining for years with other cost of living increases.

When the credit cards run out of available credit, then those who have been getting by… will be broke.

Exxon mobile (XOM) released earnings and they missed. Oh, they still made a crap load of money. But the pile of that crap was just a bit smaller than what was expected.

XOM:

REPORTS Q1 $2.03 V $2.14E, R $116.8B V $124.43BE
- Production on oil equivalent basis -5.6% y/y
- Q1 output 4.18M boe equivalent/day v 4.43M y/y
- Net production of crude oil and natural gas liquids 2.47M bpd v 2.74M bpd y/y
- Q1 CAPEX, exploration spending $5.5B, +30% y/y
- Expects no change in production until talks with unions are concluded

Reminder: 10:00 am we get ISM Data and Construction Spending Data