Stock Market - Pre Open Report for March 4th 2008

Futures are pointing to another lower opening. Events driving this mornings futures is the revision to the gross margins from Intel (INTC) in which they have called for a lower margins due to increasingly lower prices on memory devices, mostly due to a lower demand in these products.

Redbook Retail sales data for February was down 1.7% v January

Thornburg Mortgage (TMA) is in some serious trouble as they have been running into trouble with margin calls, additionally the company’s CEO said that they were not sure if they would be able to satisfy their lenders requirements by selling portfolio securities.

Clearwire (CLWR) missed earnings significantly this morning (-1.98 v 1.01e) and lowered forward guidance significantly

BMO Capital markets (BMO) misses estimates and does not see being able to meet fiscal year earnings targets.

Citigroup (C) is in trouble again. Claims of more layoffs from the company and of additional significant losses coming down the road.

Fremont General Corp (FMT) has announced receipt of notice of covenant default with respect to guaranties issued. This is essentially the ‘nail in the coffin’ for this company.

Intel and Citigroup are the ’surprise’ issues for today, couple this with the other weak earnings and data coming in this morning and we are looking for another lower opening.

Citigroup Injected, Countrywide Rejected

The Dow and S&P closed in positive territory, but the Nasdaq couldn’t hold on to any gains.  In spite of the 133 point gain on the Dow, the market just wasn’t  "strong" today.  There was plenty of selling on the rallies.

Citigroup (C) plans to inject $3.3B in capital to support six of seven SIV’s it took back on it’s balance sheet last year.  They are trying to maintain their credit ratings.  The SIV’s assets total around $49B.

Fitch not only downgraded Ambac (ABK), but now they’ve downgraded 46 classes of RMBS (residential mortgage-backed securities).

A judge has denied Countrywide’s (CFC) appeal of the bankruptcy court’s order allowing an investigation into how the company calculated proof of claims on consumer bankruptcies.  This has been an ongoing affair.  Legg Mason is a major shareholder in CFC and is reportedly unhappy about the Bank of America/Countrywide merger.  It remains to be seen if he will fight this.

This isn’t earth-shattering, market-moving news, but watch for more of this type of action in other companies:  Bryn Mawr Bank (BMTC) announces their plan to freeze their pension plan as of March 31,2008.  They will close the plan to future employees and discontinue future benefit accruals for current employees.  No employee will lose previously earned benefits.  However, the company announced that in addition to the existing dollar for dollar company match on the first 3% of base salary, the Bank will make an additional, fully vested discretionary contribution of 3% of employees’ base salary into their 401(k) accounts without regard to the employee deferral contributions.

Market Close

The markets closed in the red after a crazy short week.  Next week the big drug makers report earnings and potential market moving economic data will help make next week interesting again.  The XLF (Financial ETF) was unable to break 28.00, closing at 27.20.  Noticed that even Microsoft (MSFT) couldn’t hold that spike up on earnings and closed down 0.93% on the day.

New York City Comptroller is suing 26 financial firms that underwrote Countrywide (CFC) stock and bonds.  Also suing more CFC officers and global accounting firms.  Citigroup (C), JP Morgan (JPM),  Goldman Sachs (GS), KPMG accounting and Grant Thornton are among those named in the class action suit.

Treasury Secretary Paulson says the stimulus package may help create 500,000 jobs this year and that checks may be mailed 2 months after legislation is enacted.  Tax rebate checks are going to help create 500,000 jobs?  Someone want to explain that to me?

Caterpillar’s CEO says he expects to see record results again in 2008 and sees top line sales to be above $50B in 2010.  He expects his company’s softer markets to bottom in 2008 and that any U.S. recession will be short-lived.  Wait a minute!  Isn’t this the same guy that was wailing away last quarter that the U.S. was looking at economic conditions not seen since the Great Depression?  Guess he finally got the memo to knock off all that negative talk.

There will be more commentary and charts later and over the weekend. 

Big Day on the Dow?

The Dow was up over 300 points, the Nasdaq Comp. up almost 90.    Goldman Sachs says they are “short” the housing problem and they don’t seem to have any exposure to the CDO’s or SIV’s.  The other broker/bankers also reported that the whole SIV/CDO problem is contained.  Wal-Mart had decent earnings and forecast in-line revenues.  The Nasdaq 100 QQQQ’s jumped up, too.  Is this the “all clear signal”?  It all sounds good, right?  Two questions I would have is, why is GS “short” anything  and why did Citigroup, Lehman’s, et al., want an SIV bailout fund if all the problems are contained?  New lows outpaced new highs today and there is still a lot of selling into any strength.  Yes, some stocks recovered some of last week’s losses.  We said to expect a technical oversold bounce and that is what we got.  Nervous shorts were definitely covering.  The anxiety and fear in this market runs on the buy or the sell side, whether selling, buying, selling short, and covering shorts.  That’s why we are getting such big point swings on a day-to-day basis.  The bias is still to the downside at this point.

It is very difficult to keep emotions out of a day like today.  Seems like everything is going up and it will never stop.  There isn’t any real evidence of an “all is well”, we just had a technical rally and the Q’s experienced a short squeeze.  Option’s expiration is this Friday and I expect a wild week.

More later!

Monsters Under the Bed

If you read last night’s spooky Halloween commentary, you recall I said that the market was worried about monsters hiding under the bed and was afraid of more bad news coming. And today it got more of it, and the monster today was named CitiGroup (C). More bad news coming from the financial sectors is pulling our markets further and further down the rabbit hole. Ever since this credit crisis began we were warning of danger and economic problems were yet to come. I said that we had not heard the end of this, even as the many talking heads on TV said the credit crisis “was well contained and would not spread”. That is why we don’t listen to talking heads, we look at economic data, charts, market sentiment, etc. That is where you can tell if problems are brewing or not. I need to claim a little victory here only because so many have written to me and claimed that we are way too bearish on the markets and we need to ‘lighten up’. That is not our style, we never go with emotions and greed, we go with the logic, hard facts, and charts to tell us where money is going, and not going. The news out of CitiGroup today was a substantial blow to the company and to the entire financial sector as a whole. The reports coming out today with regard to their possible losses are staggering. For some time now Lisa has been talking about the commercial paper liquidity problems and that companies will have a difficult time trying to sell those notes. And that is what has happened, and it has happened in a huge fashion. And it is still not over. This has the potential to keep rippling throughout the financial companies for a very long time because the housing market and the economy are NOT improving.

I was pointing out a month ago that the markets MUST have confirmation from the DOW transportation index, as well as a strong financial sector, in order to be considered healthy and return to a bullish stance. Some even questioned my interpretation of the DOW theory, but I stood my ground and stand by that assessment for it continues to be shown correct. We are not in a bullish market, we are in a market which has moved from bullish to uncertain and scared. These are the kinds of markets which can go on for weeks, months, or even longer. But unless there is something very significant to transition it back to a healthy bull market then this is the middle point before a bear market sets in. As John Murphy, author of Technical Analysis of the Financial Markets, said tonight in his commentary that we are witnessing a market that is preparing itself for a weaker economy. And in a weaker economy you have to be very careful of the momentum stocks and take profits along the way, because just as was witnessed with Crocs (CROX), once a momentum stock has lost its drive, it is over with, and many never recover. They are hot for a while and then they blow up and that is it, they trade sideways for months or years after that. I read tonight that even Jim Cramer (Lisa and I do not listen to him or put any value in his TV show) has told his viewers that Crocs is done and he advised any of his viewers holding it to sell now. Well, if Jim Cramer has given up on a stock then I guess it really is dead now, the fat lady has sung.

Today’s selling hit the financial’s in the worst way. The losses today in the financial sector (XLF) were the worst in 4 years, even worse than the big down days when the credit crisis was unfolding. This needs to be taken notice of, as many financial institutions today have lost key technical support on the charts. Names like JP Morgan, Bank of America, and many regional bank stocks have all dropped below key levels and are extremely bearish. A healthy bull market MUST have supporting financial sector strength, otherwise the walls will collapse.

We have to concentrate on Utility, consumer staples, and metals (both common and precious) stocks, for they may be the only sectors that have any potential as a whole. Sure there will be the few momentum stocks or technology flyers here and there, but they will get softer and and harder to find if this continues. Too much emphasis is being placed on “global growth” as the sure bet. We agree that “global growth” offers companies a better playing field from which to operate a business and to sell products, but where we don’t agree is that global growth will continue if the US economic picture continues to weaken. As it has been said many times, our world is a global economy now, if one of the largest participants in that global economy continues to weaken it will spread. There is no way other countries can isolate themselves from our economic slowdown. So while global growth does give companies a bigger ball park to play in, eventually the weeds on one side of the field will spread and pocket the whole field. Think back to the movie “Caddyshack”, the gopher had a way of finding a way to go anywhere and spread destruction. You get one gopher on your golf course, then you have troubles everywhere.

We need to remain in a capital preservation mode, longer term holdings that you have need to be watched for trend line breaks and sold immediately if they fail. Preserve your money! I don’t know how to say it any stronger. In an uncertain market it is safer to play the charts and when a trend breaks you get out. Better to hold on to your money in cash than to “hope” the stock comes back one day. Why leave money in a stock that become road kill when you could have taken it out and preserved it from any more damage? It makes no sense to stay stuck in a stock once it shows signs of giving up the ghost. That is where the charts offer so much. Always remember that charts are the window for the traders and investors in that stock.  When it shows a significant shift in crowd behavior then you need to act on that. Don’t just wish for it to get better, that does not work and shows you do not have control over your financial situation. Wishing and hoping are for dreams, not stock investing and trading.

Tomorrow we may see a technical bounce, not for any substantial reason, but only as technical traders take advantage of scalp trades. We will get the monthly unemployment data tomorrow and it will be the key to the moves the market makes tomorrow. It is a toss up which way the market will react in the short term, but if the unemployment data plots another dot on the slow down of the economy then we have one more piece of data that is pushing the market toward bear country. If the data is good, then we will have a “relief rally”, but what follows a relief rally is usually high amounts of selling into the strength again by large holders. When the markets were heading down in August, before the extent of the credit crisis was fully acknowledged or understood by many, I saw very large amounts of insider buys taking place as documented on the SEC Form 4 filings. All during the time when stock market talking heads were saying that this was just a simple market correction back in August there were hundreds of SEC 4 filings each day of board members, CEO’s, and other’s making buys on their company stock. Guess what, that has turned, now it is selling that is being seen. And over the last few weeks there have been only a handful of SEC 4 buy filings transacted. Now even they are afraid of what is happening and are no longer bullish and buying on the dips anymore. Now they are sellers.

Below you will find some charts that I chose to show, two are financial companies, and the last one is for Chiquita Brands (the banana grower) (CQB). This company will make its way to our swing trade potential list. It has some good fundamentals along with a chart formation that is setting up nicely. But it needs to break above resistance before we would buy it. It will be included in the next swing trade guide.

We must see what tomorrow brings, but some things are certain, another CEO is now likely to be on the unemployment line (CEO of CitiGroup), new layoffs are coming in the financial companies, more layoffs from the auto makers will come, and there ARE monsters under the bed !

 

CitiGroup expects “substantial decline” in Q3 income

More troubles for the financial sector.

“Citigroup expects “substantial decline” in Q3 net income, sees a YoY decline of 60%

Co announced that dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment are expected to have an adverse impact on Q3 financial results. Citi currently estimates that it will report a decline in net income in the range of 60% from the prior-year quarter, subject to finalizing third quarter results. “Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs,” said Charles Prince, Chairman and CEO of Citi. “Our fixed income trading business has a long history of earnings power and success, as shown in this year’s record first half results. In September, this business performed at more normalized levels and we see this quarter’s overall poor trading performance as an aberration. While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter.” Co cites write-downs of approximately $1.4 bln pre-tax, net of underwriting fees, on funded and unfunded highly leveraged finance commitments… Losses of approximately $1.3 bln pre-tax, net of hedges, on the value of sub-prime mortgage-backed securities warehoused for future collateralized debt obligation (”CDO”) securitizations, CDO positions, and leveraged loans warehoused for future collateralized loan obligation (”CLO”) securitizations… Losses of approximately $600 mln pre-tax in fixed income credit trading due to significant market volatility and the disruption of historical pricing relationships.”

source: Briefing.com