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Stock Market Summary - May 8th 2008

I am going to start off with the earnings tonight from American International Group (AIG).  AIG reported a loss for Q1 (January to March) of $7.8 Billion Dollars! A loss that dwarfs the loss they had in the previous quarter, which by the way, was thought to be a "the kitchen sink" quarter then. Well, it was not the kitchen sink and today’s earnings show just how bad the situation with the economy and the financial system really is. AIG needs cash, badly! They are looking to add $12.5 Billion Dollars to the balance sheet to strengthen their operating cash flow. One method they will use to raise the cash is to sell $7.5 Billion dollars worth of common stock and equity units. We don’t know the ratio of how much stock vs equity units is going to be sold yet, that will probably come out in the conference call Friday morning. But anyway you look at this, that is some substantial money they need to raise.

But, you want to know what the most bizarre, and in my view, one of the most stupid decisions they also made today? They are going to raise the dividend by 10% to $0.22. Now, you just lost $7.8 billion dollars, you are going to put new shares into the market and dilute the existing share holders, your credit ratings were immediately lowered following the earnings release by Standard & Poors and Fitch, and you are going to raise the dividend! Are you nuts? Well, I guess if you are going to give your share holders a Chrysler building up the back side, you might as well as give them a morphine pill so they don’t feel it as bad. That is what raising the dividend is all for, to make people feel better about losing a lot of money on their investment. The 10% dividend increase will do nothing to offset the losses in the stock price as I see it. We have no forward guidance yet, and I expect we will learn more during the conference call, but from this vantage point tonight it would appear that AIG is in very serous trouble.

On the announcement from AIG, the S&P futures dropped fairly substantially and have set the tone for a lower open tomorrow. Remember that AIG is a DOW 30 component.

 

 

 

 

 

 

 

(S&P Futures - 5 Minute Chart)

 

Today’s trading was an attempt to break the now forming down trend in the markets, but it was unsuccessful. The bear market rally from March is appearing more and more to be over. We still need further down ward movement to confirm, but at this time anyway it looks to be building down ward momentum. Earnings tonight from many of the companies that reported were dismal. Many companies that flew by my screen wire service were not good at all. My back of the envelope calculation shows me that the average earnings for the quarter may have dropped by another percentage point on today’s earnings alone. We’ll know on Monday if this was true when the WSJ runs their next report.

The US dollar has been showing some weakness building over the past two days. The chart below shows the dollar on a 60 minute scale and the current resistance and support. The break below the triangle pattern last month has resulted in a technical retrace of the resistance level. Should the overhead resistance hold, and the price break below the trend line, then we have established a new down path in the making.

 

 

 

 

 

 

 

 

(US Dollar Index - 60 minute chart)

What’s happening tonight?

SOUTH KOREA: APRIL PPI YOY: 9.7% V 8.0% PRIOR; MOM: +2.6% (FASTEST MONTHLY RISE SINCE JAN 1998)

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AUSTRALIA: RBA QUARTERLY MONETARY POLICY STATEMENT: RAISES INFLATION FORECAST FOR 2008, CUTS GROWTH FORECAST; MONETARY POLICY SETTINGS CURRENTLY APPROPRIATE
- CPI Forecast At 4.5% By End-2008
- GDP Expected At 2.25% In Dec 2008, 2.75% Dec 2010
- Significant slowdown in demand needed to curb inflation.
- Too early to gauge full impact of rate hikes so far.
- Noticeable restraint in home and business lending demand.
- Rate of unemployment forecast to increase, wages to fall
- Currency: Strong AUD to slow exports near-term

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THE RECENT MARKET REBOUND? JUST A SUCKER’S RALLY - HENRY BLODGETT AT CHERRY HILL RESEARCH
- "Wall Street predictions are wrong about half the time, so take them all with a grain of salt. That said, the current views of Morgan Stanley strategist David Darst have more logic going for them than most. And Darst is about as bearish as brokerage strategists get." Adds: "Contrary to the predictions of those who view the market’s recent rally as a sign that it’s off to the races again, Darst says we are following a classic bear-market pattern."

- Darst explains that bear markets tend to unfold in three stages: "1) Big sell-off (which we saw in the crescendo leading to Bear Stearns collapse). 2) "Big sucker’s rally (the month of April, with GM up 22%, Citi up 18%, Japan up 11%, and so on)." 3) A long, inexorable, relentless, grinding lower that takes 6 months, 9 months, a year."

- "The biggest difference between bullish perception and actual reality? Profit expectations. Rosy-eyed analysts are still looking for 11% profit growth this year, says Darst, while Morgan Stanley thinks earnings growth will only be 3%. If this profits cycle follows the usual pattern, even Morgan Stanley’s prediction will probably prove optimistic."

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PREMATURE EUPHORIA - ALAN KOHLER AT BUSINESSSPECTATOR.COM
- Happy days are here again. Well, actually they’re not: if anything, things are still fundamentally getting worse, in three ways:

- 1) "Food and energy prices are both at record highs and showing no sign yet of returning to “normal”, whatever that is from here on in." Adds: "Not only will the high prices constrain household spending, but central banks now have one arm tied behind their backs (last night the ECB left rates on hold because of the risks to inflation)."

- 2) "The Western world housing crash is worsening, not getting better. In the US the speed of the decline in house prices is, if anything, accelerating as inventories grow as a result of rising defaults and foreclosures because of resets on adjustable rate sub-prime mortgages."

- 3) "Credit conditions in the US are continuing to tighten, not loosen. In the latest Federal Reserve senior loan officer survey published last month, 55 per cent of domestic banks – up from 30 per cent in January – reported tightening lending standards to large and middle-market firms over the past three months, and 70 per cent of banks reported that loan spreads were rising."

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ACCORDING TO S&P, THE PACE OF US DEFAULTS IN THE FIRST 5 MONTHS OF THE YR IS THE FASTEST SINCE 2003- FT
- YTD 28 entities have defaulted in North America and the defaulted debt totals $18.4B

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CITIGROUP MAY TODAY ANNOUNCE MORE THAN $200B IN NON-CORE ASSETS THAT COULD BE SOLD - FT
- Citigroup’s CEO is also expected to confirm his plan to cut the firm’s costs base by about 20%.
- As expected, the CEO is expected to reject calls for a breakup of Citigroup.
- The report cites unidentified people close to the matter
- Follow Up: A later FT report said that Citigroup may identify as much as $400B in non-core assets that could be sold.

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ECONOMISTS SAY THE COMMODITY SURGE ISN’T A BUBBLE
- WSJ survey of commodity analysts: "Fifty-one percent of the respondents said demand from China and India was the prime factor in soaring energy prices, and 40% said demand was the chief contributor to rising food costs. Constrained supply was cited second most-often; 20% blamed supply problems for higher food prices and 15% for increasing energy prices." 11 percent did say prices are soaring amid the creation of a speculative bubble.
- On the Fed outlook: Sixty percent of economists surveyed by the WSJ say the Fed is concerned enough about inflation. They expect interest rates to stay on hold at 2 percent for the rest of the year.
- The credit crisis is still a crisis, according to the survey: Just 36 percent thought it was mostly over, and 62 percent said we’re only at the halfway point of the crunch

And one more bit of news for today. On the radio today I heard an advertisement from the US Government for Food Stamps. Yes, the Government is running commercials on how to get food stamps. The commercial speaks to how there should be no shame in applying for food stamps. This is the first time I ever heard the Government run commercials for food stamps and it was somewhat chilling to listen to.

See you in the morning…