Stock Market Summary for February 28th 2008

Denial: de·ni·al

• refusal to believe a doctrine, theory, or the like
• disbelief in the existence or reality of a thing

Today President Bush held a news conference. One of the questions asked was about the state of the economy and his response was "I don’t think we’re headed to a recession, but no question we’re in a slowdown". Now either this man has some extraordinary tricks up his sleeve for rescuing the economy and is not telling us or he is just in denial of the facts. He may very well understand the facts, but instead of telling the truth, he chooses to treat the American people as though they are uninformed.  So he will keep saying "The fundamentals of the economy are strong". The fundamentals of the economy are nowhere near strong.

Ben Bernanke, in his second day of testimony today, said that there is a possibility of some bank failures. Last Monday we learned that the FDIC was hiring back people who were involved with the last large bank failure episode. The Savings & Loan implosion in the 1980’s brought down many financial institutions. The FDIC is trying to bring some of these people out of retirement now. I have this thought… If you are only expecting a handful of bank failures, would not the staff you have be sufficient? Why bring back people who handled the last large banking system failure? Sounds to me like there is an expectation for a lot more than just a handful of bank failures in the future. Just the fact that Ben Bernanke acknowledged the possibility of bank failures tells me it’s very likely to be reality and be worse than he says.

This reinforces, to me, why Ben Bernanke is so hell-bent on cutting interest rates even in light of inflation, which is getting out of control. He is seeing the possible breakdown of the credit and banking system. He can’t say that publicly, of course, for if he did it may create a panic. But for him to say that "there may be some bank failures‘ tells me that there is more going on then we are being told (that should be no surprise, when has the Government ever told people the full story?)

So denial (or not wanting to tell the whole story) is keeping the average retail investor thinking that everything will be OK. But, what happens if the trends of data and other economic data we analyze stay true to their predictions and we see a deep recession? I’ll tell you what happens, it is the average Mom & Pop investors that get screwed, that’s what. Right now the politicians are doing their best to keep everybody from thinking that the economy is falling apart. Even the large banking institutions are afraid of the average Mom & Pop  pulling their money out of the banks or 401K’s. The banks would suffer even greater losses if that happened. Look, we are not trying to sound some alarm bell here or anything, but we don’t like what we are seeing and we always tell it like it is.

Back on December 2nd, 2007, I published a commentary titled "Close your eyes and cover your ears". It was about a letter that an investment bank sent to their clients. In the letter they tried to tell people to ignore what you hear on TV and simply don’t worry about anything. What is happening today is just a continuation of that same thing, just keep people in the dark, tell them to go shopping and buy more things, and everything will be OK. But it is not OK.  Since the time I published that commentary, more banks have suffered even greater losses; foreclosures on homes are growing; unemployment is growing; the economy is deteriorating; and the financial markets of many other countries are in trouble. Now I understand the principal of a ’self-fulfilling prophecy", where if you tell everybody long enough things are bad, they will believe it and will cut back on spending, thus adding to the already deteriorating economy.  But it is a different matter altogether if you deliberately try to keep people from knowing the true scope of a situation, only to keep people from withdrawing their own money if they choose to. We already know that banks and other financial institutions are hurting badly for cash. Why else would they be going to the discount window and to the "TAF" to borrow large sums of money in order to have enough liquidity to keep operating. The banks want you to keep your money with them, regardless of whether the financial system continues to deteriorate. Decisions as to what to do with one’s own money should be made by the individual based on factual information. This is why we are bothered when we read or see people telling the public statements such as "everything is fine", or "this is a normal correction". For what if it is not a normal correction, how will anyone know if they never get the facts

.After the market close we got Dell (DELL) earnings which were not quite up to expectations and they were trading slightly lower in after hours trading. American International Group (AIG) reported their earnings and they were dismal. Tomorrow morning AIG will hold their conference call, if they do not say anything reassuring expect to see AIG sell off sharply. Tonight Fitch Ratings Service said that AIG may be downgraded.

A question tonight from one of our readers regarding Deckers Outdoor Corp. (DECK). Deckers reported earnings tonight:

[DECK] Deckers Outdoor Corp Reports Q4 $2.69 v $2.41e, R$ v $184Me

- guides Q1 EPS "the same or modestly higher than 2007" (implies $0.75+ v 0.92e); guides Q1 sales growth 25% y/y (implies Q1 R$90.8M v $89.6Me)
- guides 2008 EPS up 20% (implies $6.07 v $5.82e); Guides 2008 sales growth 25% (implies 2008 R$561Mv $531Me)
- expects earnings to grow at a slower pace in the first half

The reason DECK sold off so sharply in after hours trading is due to their weak guidance. The company said that their EPS for the next quarter would be about the same as in 2007, this is not good. Additionally, they warned that sales growth would be at a slower pace. The share structure on DECK is so thin that it does not take much to create extremely high volatility. The after market volume suggests to me that there were many share holders who wanted to cash out but needed the volume in order to close their positions. In other words this was a classic ’sell the news’. Large share holders need a significant news event in order to bring in buyers to take their shares from them. The top line (headline) number was a beat of their earnings, this brought in new buyers while at the same time those who were already holders saw the lower guidance and wanted to get out. In this case the selling was more dominate and the price dropped sharply. This is why we are always very cautious with stocks that have such a small float. I would not do anything with DECK at this time. However, Based on the weekly chart a price drop below $95 would be a good place to try a short position. for a failure of that price level would be a signal of a larger failure and a drop is likely. But one still has to be careful of low float stocks.

Another question regarding Cummins (CMI). I agree that CMI looks ready to fall but I would wait for just a little bit of added confidence and wait for it to break below $51.50 which is the lows from today.

At the present time the S&P 500 futures are down 0.65%. Tomorrow should be another interesting day with more economic data coming in at 8:30 am and the Chicago PMI at 9:45am.

We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort ETF, symbol DXD.

 

 

Some Stock Market Thoughts - February 24th 2008

Surreal:  Having the disorienting, hallucinatory quality of a dream; unreal; fantastic

Surreal, that pretty much sums up the actions that have been taking place of late. The events that transpired at 3:30pm last Friday almost make me think of Rod Serling and the old television show "The Twilight Zone". In my commentary on Friday night I discussed the highly suspicious nature of the timing of the news release regarding the bond insurer Ambac (ABK) which took place at 3:30pm on Friday. It seems that this view is being shared by many more people as over the weekend there have been more discussions on the web concerning this event. And it appears that the level of suspicion of this event is rising.

President Bush: (September 20, 2007) "I say that the fundamentals of our nation’s economy are strong"

Throughout the credit crisis, rising inflation, housing market crisis, rising foreclosures, record losses by financial institutions, rising unemployment trends, retail spending deteriorating, and a United States deficit near record levels the President says "the fundamentals are strong". Unless I need glasses I would say that the fundamentals of the economy are collapsing and no where near strong. Where is the strength that the President sees? I think he is the one that needs glasses.

Maybe he did get some glasses because now he says:

President Bush: (January 18, 2008) "The long-term fundamentals of our economy are strong" (emphasis added)

So throughout 2007, when we have been warning our readers about the worsening economic conditions, the President said the economy was strong. But as the problems became even worse the President could no longer hide behind that same line anymore, so his speech writers added two words to his line.. ‘long-term’. So now he changed his tune somewhat to say that the fundamentals of the economy are strong, not now, but down the road. The President seems to be about 6 to 8 months behind the curve of what the data shows us and what the President tells the public.

The question now is how far in the future (long-term) do we have to wait to see these strong fundamentals? The $160 Billion dollar economic stimulus package is only going to raise the United States deficit to even higher levels. ‘Strong fundamentals’ I feel is a very long time away from now.

The coming week brings us many economic data items to chew on. On Monday morning I will post the list of events for the coming week.

Some questions about various stocks are answered next…

Deckers Outdoor (DECK) is a stock with a very low share float (number of shares available on the open market). A low float always creates a stock that can reach nose bleed levels without much in the way of any substantial financial justification. I see DECK as having more downward price moves to come. Spotting an exact entry price to short this stock is not an easy one, but in the chart below I have identified the strongest resistance and support levels. One could short DECK as it reaches resistance (stop out on the break above resistance) or short on the failure below support (stop out on the break back above support). Below the chart I have included a screen shot of the stock’s current structure.

 

 

 

 

 

 

 

 

 

(DECK) Daily Chart

 

 

 

 

 

 

(DECK) Stock Structure - observe the very low float

 

Another chart analysis requested is for Cummins Inc. (CMI). This stock also appears to be setting up for a good short play (HJ - good eye on your T/A). See the chart below for our technical analysis of CMI.

 

 

 

 

 

 

 

 

 

(CMI) Daily Chart

 

One more chart for analysis is the United States Natural Gas Fund ETF (UNG). This ETF tracks the performance of natural gas. This commodity has been in demand lately and has been reflected in the price. But we would be wanting to protect any profits on this trade as opposed to adding to a long position. The T/A shows us some signs of strong resistance just ahead. We we would not necessarily short this sector here, but we would take profits out of any long positions in natural gas if the price appears to be hanging up at resistance.

 

 

 

 

 

 

 

 

 

(UNG) Daily Chart

 

And my final chart for the night is a recap of the S&P 500…

 

 

 

 

 

 

 

 

 

S&P 500 Daily Chart