Stock Market Summary - May 7th 2008

Larry Kudlow of CNBC said tonight that today’s market sell off was the result of Barrack Obama winning the primary in North Carolina last night. Huh? I had to actually play back the tape to make sure I heard him right. Yep, he blames the market sell off on the idea that Mr. Obama might end up in the White House. Now, I need to say that the following discussion is in no way a political statement, I am just conveying the facts, and Lisa and I will never mix our own political beliefs in the market. I am only pointing out the nonsense information that main stream media try’s to make people believe.

Mr. Kudlow’s statement tonight goes far beyond ridiculous, it is down right stupid. For as long as there has been a stock market, the claim has always been that a Democrat in the White House will be bad for stocks. But, that is more of a scare tactic then reality. I’m not going into how one political party differs from another with regard to taxes or anything like that. I’m just talking about the equities market, and history shows us that there are just as many good years in the stock market under Democrat rule as their were when Republicans were in office. And when it comes down to the hard numbers, Democrats have actually been better for the stock market when viewed over many years. View the image shown here for a comparison of market performance since 1901 to which party held the White House. Kind of debunks the whole claim he made. Mr. Kudlow is just trying to build a case for what he will say if the market does not go to 16,000 this year, like he said it would in a recent show.

The real reason for the sell off today was as follows:

1. Over bought market.

2. Major resistance levels across many indices were reached.

3. Housing market continues to decline.

4. The corporate earnings trend for this quarter continues to decline.

5. And last, late in the day, the Governments statistics of consumer credit was a potential sign desperation by the average consumer.

 

We have been showing you index charts with prices advancing on low volume. Always a danger sign that a rally is likely to fail. And as the prices were advancing on that low volume, the market was at an over bought level. And this could be seen in numerous stocks as well.

Major resistance levels were all being reached simultaneously, as we showed you in last nights charts. That kind of resistance is formidable and should be respected. The market was showing her hand and today she folded.

The housing market data this morning was a blow to those who kept saying the housing market had stabilized, or even improving. Lisa and I have been sticking to the trends, and the trends have said ‘no improvement’. So today’s data was just a catalyst for starting the sell off.

Corporate earnings, regardless of what you have been hearing in the media, are deteriorating. What we see is that the earnings for this quarter have an undertone to them which is ’squeeze’ every penny to report as high of an EPS as possible. Margins are not looking good and we see it likely that that earnings will worsen as the year goes on.

And last, consumer credit today was indeed a big shocker. The data for the month of March showed that credit card debt increased a shocking 8.2%. Some would say this means that consumers are spending money so all should be well. We disagree with this thesis. The rapid rise in credit card debt is a big warning sign of a consumer crash coming. The problem is that the ATM machine that homes had been turned into by cashing out the rapidly rising house prices has ended. The home ATM machine has run dry. And credit cards being used for cash is increasing at an alarming level now. This revels some very deep problems within the US economy, which is that the average American can not get by without the cash being extracted from the homes.

This means that the US economy is so bad, that the average middle class American citizens can not live by conventional means of job income. In good economic times, an average family could get by comfortably with a single income. As time went on that same average family needed a second income. And as we know a two income household is the norm now. And now that is not enough, the rapid rise in home prices which started in the late late 90’s became a third income.

Now that the third income has evaporated they are turning to what ever they can use to get their hands on some cash, their credit cards. This is all leading to a melt down of the consumer. We already know that personal bankruptcies have been rising rapidly over the past 6 months. And this trend will continue, even go parabolic perhaps. Banks and financial institutions will continue to lose money as more and more loans go into default. Banks are cutting back on lending even further now, so that much needed cash is even harder to get, and jobs in the United States are declining. A domino effect that could pick up momentum and push the country into a very deep recession.

And what about all of the efforts by the Government to ‘fix’ the problems? All actions to date by the Government have been to keep corporate America well taken care of in the short term, nothing else. Everything has been temporary fixes, a crutch if you will. Nothing has been done to address the problems for the long haul. So as the economy heads down the rabbit hole, the Government just keeps throwing down thin ropes which are going to keep breaking and slip the economy down further and further.

Some rather significant technical levels were breached today on today’s decline. We want to see some additional confirmation, but today’s decline did signal the beginning of a new down trend could be in the making.

A question was asked today, ‘what is distribution’? Distribution is what happens when you observe a stock trading on high volume but no price advance. Think of it as a relay race. The runners go around in a circle and just keep handing off the baton to the next runner. And this just keeps going around and around. In the stock market when you see a stock where shares are being exchanged over and over to new runners, but the price does not move up that is a distribution event. It is usually viewed as a turning point. 

Another question was why the financial sector sold down today. The answer is that the financial stocks have been over hyped as "all is well" and too many analysts claiming the ‘bottom was in’. This led to an over abundance of retail buyers piling into the financial stocks. Remember, the stocks to get hit the hardest first are always the ones that are trading at over priced levels. And many still view the financial sector as a bad investment and over priced.

Market Close and Consumer Credit Number

MARCH CONSUMER CREDIT:  $15.3B V $6.5 prior revised
- Growth in consumer credit largest since Nov 2007
- Annualized rate of credit growth 7.2% v 3.1% annualized in Feb

We’ll do some more analysis on those numbers this evening.

The indices closed to the downside today:  Dow 12814 (-206)   Nasdaq 2438 (-44)   S&P 1392 (-26)  Volume was low on the NYSE and decliners were certainly outpacing advancers:

NYSE volume 949M shares, about 27% below its six-month average; decliners lead advancers by 4.3:1.
- NASDAQ volume 1.88B shares, about 5% above its six-month average; decliners lead advancers by 2.4:1.

CTX (Centex Homebuilders) has been downgraded to BB from BB+, junk status.

TREASURY’S $15B 10-YEAR NOTE AUCTION BID-TO-COVER RATIO: 2.21 V 2.34 PRIOR AND AVERAGE OF LAST FIVE AUCTIONS
- indirect bidders take 28.4% of competitive bids
- notes draw 3.937%

Check in later for nightly commentary!

Market Update 1:30 pm

At mid day the overall market volume remains rather light. However, in my “reading of the tape” I see volume spikes on the sell side so this suggests that the trend to the down side is building. At least that is where it stands at this time.

George Soros, one of Wall Streets “whales” (a person with a lot of money who has made fortunes from the markets) said today…

…GEORGE SOROS: “ACUTE PHASE” OF CRISIS LARGELY BEHIND US, THOUGH IMPACT ON US ECONOMY HAS ‘ONLY BEGUN’ TO BE FELT; THIS IS ‘A BEAR MARKET RALLY’ …

 Well George, that is what we have been saying here for a very long time now. Glad to see you agree with us now. But, I will add that there is still a risk of the credit crisis reaching a systemic level, essentially seizing the economy to a grinding halt, and a bond market crisis would follow. Although that has not happened yet, it remains on the table as a potential issue.

Crude Oil is sitting at $122 and change. Gas cracks have moved towards higher gas prices at the pumps, again. Housing in the United States continues to decline (both sales and prices) and this is having an impact on the market today as those who felt the housing market was starting to turn got a slap in the face with a reality sandwich.

Welcome to our new readers! Readership here at RebelTraders continues to grow, and growth from traders from around the world continues to expand. Glad your with us! 46 Countries and growing..

 

 

 

Update 10:00am ET

Pending Home Sales for March:  -1.0% V -1.0%E (prior revised from -1.9% to -2.8%)

US PENDING HOMES TABLE

Mar      Feb    (Prev)    Mar07
Pending index     83.0     83.8     84.6      103.9
Mar      Feb    (Prev)    Mar08/07
Pct change        -1.0     -2.8     -1.9      -20.1

Pending home sales indices by region, adjusted:

Mar      Feb   (Prev)    Mar07
Northeast     80.8     71.8     71.8      95.5
Midwest       74.1     82.7     82.7      95.4
South         84.9     85.0     85.0     115.8
West          91.2     92.5     95.8     100.7

Reuters survey of U.S. economists forecast:
U.S. March pending home sales index -1.0 pct

NAR forecasts:
(Percent changes on year-on-year)

Existing home sales forecast
May     Apr
2008 units (mlns) 5.39    5.39
pct change       -4.7    -4.7
2009 units (mlns) 5.72    5.74
pct change        6.1     6.6

New home sales forecast
May      Apr
2008 unit     536,000  576,000
pct change     -30.9    -25.7
2009 units    590,000  602,000
pct change      10.1      4.6

Housing starts forecast
May     Apr
2008 units (mlns) 0.96    1.00
pct change      -29.5   -26.3
2009 units (mlns) 0.97    0.99
pct change        1.3    -0.5

Median existing home sales prices
May         Apr
2008 price   $213,700    $215,800
pct change      -2.4        -1.4
2009 price   $222,600    $223,800
pct change       4.1         3.7

Median new home sales prices
May         Apr
2008 price   $238,000    $238,400
pct change      -3.7        -3.6
2009 price   $250,900    $247,800
pct change       5.4         4.0

MOODY’S: EXPECTS US SPECULATIVE GRADE DEFAULT RATE TO RISE TO 4% AT YEAR END FROM  1% IN 2007

FED SETS OVERNIGHT REPOS, ACCEPTS $17.25B

Premarket May 7,2008

The futures jumped on the following news:

Q1 PRELIMINARY NONFARM PRODUCTIVITY: 2.2% V 1.5%E; UNIT LABOR COSTS: 2.2% V 2.6%E
- Prior Non-farm Productivity revised from 1.9% to 1.8%
- Prior Unit Labor Costs revised from  2.6% to 2.8%

Here’s more of an explanation on these numbers.  Funny how people get excited over a slowing labor market.

Productivity measures how much an employee produces for each hour of work. Generally, as the economy slows, companies pull back production, hiring and other spending to try to boost efficiency and lower costs.

The U.S. economy expanded at a 0.6 percent annual pace the first three months of this year. Over the past two quarters, the pace of growth has been the weakest since the final six months of 2001, when the economy was in a recession.

Hours worked dropped at a 1.8 percent pace, the most since the first quarter of 2003, today’s report showed.

U.S. employers cut payrolls in each of the last four months, bringing the total number of jobs lost this year to 260,000.

Compared with the same period last year, productivity rose 3.2 percent, the biggest gain in almost four years.

Unit labor costs, which reflect the gain in efficiency, were up 0.2 percent compared with a year earlier, the least since the second quarter of 2004.

Compensation for each hour worked increased at an annual rate of 4.4 percent in the first quarter, compared with 4.6 percent the final three months of 2007, today’s report showed.

Less Buying Power

Adjusted for inflation, hourly pay decreased 0.7 percent in the year ended in March, the weakest performance in almost 13 years. That is one reason economists are forecasting consumer spending, which accounts for more than two-thirds of the economy, will slow in coming months.

A Labor Department report last week signaled the slowing job market is subduing wages. Average hourly earnings rose 0.1 percent in April, the least in six months, the government said.

Smaller increases in wages, which account for about two- thirds of the cost of producing a good or a service, would reduce inflationary pressures. Some Federal Reserve policy makers have said they are concerned increases in food and fuel costs will boost other prices. ……………..

Electronic Data Systems Corp., the world’s second-biggest computer-services provider, last month reported first-quarter profit that beat estimates as contract signings soared 66 percent. Productivity improvements, such as reducing facilities that store client data, helped lift earnings by 2 cents a share.

Cutting Staff

Chief Executive Officer Ronald Rittenmeyer is firing workers and moving jobs to lower-cost labor markets such as India to reduce spending and attract more clients with lower prices. While a slowing U.S. economy has forced some clients to reduce spending on small projects, especially in the manufacturing and consumer- products industries, other customers are spending more, Rittenmeyer said.

March Pending Home Sales numbers are due out at 10am ET.