Providing Stock Market Analysis and Economic Commentary without the Hype
The technical analysis summary for February 18th is now available for viewing on the ‘market update videos’ page.
Friday Schedule:
(all times are US ET)
08:00 Fed’s Dudley to speak
08:30 Jan CPI (last m/m 0.1%, y/y 2.7%; ex food & energy last m/m 0.1%, y/y 1.8%), Jan CPI Core Index SA (last 220.774)
Earnings
Before the Open: AMWD, AGP, BRC, BAM, HMSY, HUN, IBI, JCP, LPNT, PAG, PCG, PNW, SHPGY, SRT
There have been a number of contradictory theses on the “money on the sidelines”, notably of the funds of retail investors. However, an interesting piece from “Trader’s Narrative” points out that the money is actually flowing to the sidelines instead of flowing from the sidelines into the markets.
This actually enlightens some curious behavior of the markets which could only be understood in an environment where mainly professionals are trading.
In the three first weeks of September 2009, the outflow of funds from equity mutual funds left some wondering if it was not a similar phenomenon to December 2008 (hence creating de facto what Chuck has been observing as “distribution”). “Trader’s narrative” does not seem to understand the move, but it could well be explained by the fact that investors having broken even are exiting the market as soon as they can when confronted with the dire economic circumstances and a slow recovery (in their experience, at least). So, if retail investors are leaving the market instead of joining in, this also means that the potential for going higher is weaker. The contrarian analysis being that if “dumb money” is leaving the market, it is the time to get in… If it were not for an insecurity on the strength of the recovery.
However, this points out another news, which is much less encouraging for bears. If retail is out of the market or in the process of exiting it, it means that the actors moving the market are mainly professionals… Hence, mostly a traders’ market, with great intraday moves but with finally, always a progression upwards. And if the majority of the market actors trades on fundamentals (which explains the “inflation play” at work this summer), this questions somewhat the predictive value of TA. The different structure of the market may also change something to the way technicals work (or don’t work in the present case). The fact is that this market calls for some mental flexibility and the capacity of being able to reverse direction quite rapidly if you’re a trader, or some option-related protection of you’re an investor of some sort.
The other point being that the rise in yields on corporate bonds, might also be explained by an influx of that “cash on the sidelines”; scalded by the experience of 2008, investors might want first to reach into more securitized investments such as bonds (but with a higher return) before returning to equity if the recovery is indeed as powerful as the market predicts it to be.
And for the permabears shorting everything on sight and harping on this reporter because he does not (constantly) predict impending doom, they might be inspired to read Marc Faber’s comments back in July as to the timing of the next crisis: “Asked when this would be, he said he could not forecast a precise timing: “it may be 5 years time, 10 years time, but that’s not the last crisis.” Gives an idea of the time span involved, no? Anyway, here’s to you an extract of the article on the “cash on the sidelines”.
The fabled trillion dollar cash hoard that US mutual fund investors are sitting on is well known by now. But what isn’t equally well known is just what they are doing with all that cash. We do know that after reaching a peak right at the March lows, the shell shocked US retail investor stopped stuffing cash into their accounts.
At its peak the cash hoard was about $4 trillion dollars. By the start of this month, it was down to $3.56 trillion and the most current data shows that retail investors have continued to slowly exit their safe haven, taking the number further down to $3.48 trillion. So where have all those billions of dollars gone?
From the fund flows data it seems that the vast majority of it has been funneled to the fixed income market, and more specifically, taxable bond funds. I showed a pie chart of the fund flows in last week’s sentiment overview to juxtapose the extremely skewed ratio of money flowing into bond funds vs. equity funds.
(…)
The data for the bond funds is for both taxable and municipal bond funds. As well, this month’s data point (shown in a darker shade) is partial because it including only the first 3 weeks. Nevertheless, this chart is a telling a remarkable story.
First, not surprisingly, as the bear market took hold, people started to react by taking their money off the table. The worst month was October 2008 (not March 2009) when $72 billion was withdrawn from equity funds – $47 billion of that from domestic funds. At this point of maximum panic, US investors sold everything, even bond funds. They only trusted one thing: cash.
But by the start of the year, while they still distrusted the stock market, they began to change their mind about bonds. Each month they put more and more money into bonds, even as the stock market launched on an astonishing rally.
Month after month, as the S&P 500 went on to higher highs, US investors continued to ignore equity mutual funds. Then most shockingly, during the first 3 weeks of this month, they actually withdrew funds from this asset class! At this rate, by the end of the month, we’ll see outflows equivalent to December 2008. All the more astonishing as the S&P 500 is hundreds of points higher.
This is simply astonishing. What exactly does a stock market have to do to get some respect around here?
Bullish
There are two ways we could look at this. If you’re bullish, you would say that the fact that the retail investor (or “dumb moneyâ€) has not jumped on the bull market bandwagon means that this is the real deal. After all, secular bull markets are known for pulling out of the station and leaving all but the most savvy investors and traders behind. And as contrarians, we want to zig where the crowd is zagging. So let them shiver, coiled in the fetus position, terrified of the last (and past) bear market. This is a new dawn. A new day.Bearish
On the other hand, if you are bearish, you would point out that retail participation is vital to create momentum in a trend. Unless the US retail mutual fund investors start to believe in a bull market, there won’t be a bull market. After all, if the considerable amount of money sitting in fixed income is not used to bid up equity prices, how will we create the virtuous cycle of higher prices (which pulls in more money and so on)? Every secular bull market feeds on this self-perpetuating mechanism.Could it be that this bear market left a traumatic mark on the psyche of the average US investor? If so, then this generation of investors will simply not be the same. We know from previous brutal bear markets that while the wounds heal, the scars are not forgotten. The generation that lived through the Great Depression continued to distrust banks, the stock market and all manner of ’speculation’ even after the US economy righted itself and went on to new heights of prosperity.
No, that’s not the title of a post by Chuck. It is the very serious WSJ that published an article whose first phrase runs thus. For introducing a bit more rationality in an appreciation of the market, the article is quite brilliant at examining the fundamentals and the way the market is currently being overvalued.
For now, the economy appears to be living mainly on stimulus… However, the question is how long the banks will avoid having to clean up their balance sheets? Until the realization dooms that the core roots of the crisis are still present in the economy, the markets will continue to keep up their good performance.
Is the stock market smoking hot or just smoking something?
The S&P 500 has risen almost 60% in a little more than six months. Since it fell by almost half in the half-year prior to March’s low point, you might think that is fair enough: The sharper the fall, the more drastic the bounce-back.
At a superficial level, that is hard to argue with. Short of swarms of locusts sweeping the world, it is hard to imagine corporate earnings plunging as fast as they did in the latter months of 2008.
Still, after the market’s last cyclical trough, in 2002, it took more than three years for stocks to rise 60%. Stocks are ultimately discounting mechanisms. Judging what expectations are at any given moment is, granted, something of an art form. But some indicators are warning that, at 1070 points, the market has overreached.
The first, and simplest, is the price/earnings multiple. These come in various forms, but many look expensive. Trailing 12-month operating earnings, which exclude one-off charges, give a multiple of 27 times. The multiple of reported earnings is 142.
Looking ahead, consensus estimates for operating earnings result in a 2009 multiple of 19.5 times and 15.1 times for 2010, when analysts expect S&P 500 companies to produce earnings of $70.
Meanwhile, David Rosenberg, economist at Gluskin Sheff, reckons the S&P 500 is actually discounting earnings per share of $83 in 2010, using inflation-adjusted Baa-rated bond yields as a proxy for the cost of equity.
The chart above showing annual inflation-adjusted earnings for the S&P 500 since 1960 shows the sharp change that took place after the 1980s. Average annual growth roughly doubled from 1.8% between 1960 and 1990 to 3.5% in the period thereafter, 5.7% if you exclude 2008′s recession year.
The latter period included unusually moderate inflation resulting, in part, from IT-related productivity gains and, for much of it, low, stable oil prices. It also included, after 2001, the second leg-up in America’s debt-to-gross-domestic-product ratio that began rising in the 1980s. Banking on earnings shooting back toward their prerecession growth trend, as a figure of $70 to $80 would imply, seems ambitious in the absence of those tailwinds.
The one big stimulant keeping the market partying comes courtesy of Uncle Sam. But with unemployment rising, industrial capacity utilization still languishing under 70% and the housing market almost wholly dependent on federal help, clear signs of a sustainable private-sector revival are few. Post “cash for clunkers,” for example, vehicle sales look set to have slumped below an annualized rate of nine million units in September, according to Edmunds.com, a consumer-autos site. Cheap money and fiscal handouts might feel like narcotics, but are ultimately medicine for a sick patient.
Best quote… ‘you can’t spend yourself into prosperity’
The U.S. stock market is stumbling.
After a powerful rally that pushed the Dow Jones Industrial Average ahead by more than 30% in three months through last week, stocks are clearly having trouble extending their gains.
Many analysts see a pullback ahead, and they are debating whether it will be just a temporary annoyance or something bigger and more painful.
Indicators of market health, including trading volume, buying demand and trading by companies and corporate insiders, are beginning to flash yellow or red. People also are beginning to question whether the economic fundamentals are strong enough to justify continued gains.[...]
“This 40% rally isn’t based on a 40% increase in fundamentals,” says Michael Farr, president of Washington, D.C., money-management firm Farr, Miller & Washington. “The economy is still declining. Credit isn’t coming back. Unemployment is rising and we are seeing a much less robust consumer. I think the market at some point is going to give back a large portion of these gains.”
Mr. Farr and others say it is impossible to know whether the market already has topped out, or will edge higher before giving up the ghost. But even many bullish investors see a downturn ahead.[...]
Consider trading volume. Average daily volume for all New York Stock Exchange stocks hit a record of 7.21 billion shares in March, as the rally began and heavy buying sent stocks sharply higher. That slipped to 6.42 billion in April, and so far this month, it is running at 5.14 billion, putting it well below the 2009 average of 6.15 billion a day.
“A new bull market is one when investors are prepared to commit larger and larger amounts of new money to equities,” says Paul Desmond, president of Lowry Research in North Palm Beach, Fla. “What we have seen here is a very consistent drop in total volume going back to early April.”[...]
Mr. Desmond says his data, going back to the 1930s, don’t show any new bull market with such a weak volume trend, which leads him to believe that this rally won’t become a lasting bull market.
Other data reinforce that concern. The number of stocks joining in the gains has begun to shrink, which doesn’t typically happen this soon in a real bull market. And Mr. Desmond’s measure of stock demand, based on the amount of trading volume and price change occurring on stock gains, indicates that demand has been fading, another negative signal.
“Investors are risking smaller and smaller amounts of capital and that is a bad sign,” Mr. Desmond says.[...]
Source: WSJ
Everyone wants to know “has the market bottomed” ?
Everyone from financial commentators (CNBC), professional Wall Street analysts, economists, and of course let us not forget the US Government are all in disagreement over what happens next.
The very same people who in 2007 said such things as…
…are the same people once again trying to convince the American people that the market has bottomed, the economy is stabilizing, and it is once again time to buy stocks for the long term.
If you are familiar with the movie then you will understand my title for today’s market close update. If not, rent the movie somewhere and be prepared for some good old fashioned humor.The events of the past 24 hours can best be summed up as "It’s a Mad Mad Mad Market".
First the US Senate decides to kill the auto bailout bill sending the futures down significantly in the overnight hours.Then this morning we have the Whitehouse issuing a statement that they will intervene and ‘save the day’ pulling the market from the grips of hell. The Whitehouse does not yet know how they will bailout the automakers but they assured the market this morning they will. I imagine that when Hank Paulson heard the Senate killed the bailout he was very unhappy.
I am sure that right now Ben Bernanke and Hank Paulson, along with President Bush staffers are discussing the implications of tapping the TARP to give funds to the automakers. The reason why there has been no ‘official’ announcement yet regarding how much, under what terms, or with what conditions is because they are scrambling to find out how to do it.
-In the year 2525
If Man is Still Alive-
by Zager & Evans 1969
Ever since I saw the FOMC announcement headline printed today as 25/25 I have not been able to get that old song out of my head 
Perhaps in some deep subconscious way my mind is telling me that is when the markets will return to normal.. Only kidding. But normalcy is still far from being on our door step, <door bell rings> “trick or treat” yells the child at the door. I say “oh please child, no tricks” and the child responds “I am Ben Bernanke and tricks is what I love to do”
Ok, so that never happened, but on this Halloween night when the witches, goblins, and ghosts are getting ready to go back into hibernation until next year let us use these last few hours to ponder this spooky market.
Today the FOMC did what most in the markets were anticipating, they issued a 25 basis point cut to the Fed Funds Rate and an additional 25 basis point cut at the discount window. And in their press release the FOMC said the following…
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
To me that says that they are done cutting rates for the near future. I don’t think we will see another rate cut, unless another shoe drops or the brown stuff hits the fan again. Another scary and spooky skeleton can still fall out of the closet and spook the markets again. But in the absence of any more depressing economic data it is safe to say that rate cuts are done for the near term. The initial reaction after FOMC announcement was a fast and furious sell off that lasted for about 10 minutes. Then a pause, then some buying, and some selling again, and then finally a close to the upside at the end of the day.
Unlike the rate cut on September 18th where the market rallied right out of the gate on the news, today the horses tripped over each other when the gates were opened and could not figure out which way to run at first. There was more confusion this afternoon on the future direction of the markets then there appeared to be before the rate cut. The idea that there may be no more rate cuts for a while (or at all) gave the junkie withdrawal fears (reference my post where I described the markets as being like a drug addicted junkie, but in this case addicted to rate cuts). In some ways it was as if the FOMC said to the market “this is your last allowance payment, now go get a job and earn your own money”, which gave the market some fear of being able to make it on its own now.
Has the FOMC set the market out into the world before it is ready? Is it able to sustain itself now without any more allowances from Daddy FOMC? We’re going to find out. After the rate cut, Lisa and I were watching various sectors to gauge the reaction. The most notable was the financial’s, which had little reaction. They tried to get out of the gate, but when it got out on the track the horse went back into the paddocks and closed the door. At the bottom of the commentary I will show you the XLF chart. This chart still shows a spooky and dismal pattern with more downside movement possible. I heard that Dennis Gartman, famed trader and a very successful one at that, was going to be on CNBC. I played back his appearance and he also said that he felt the financial’s had more downside travel to go. Of course his is one of many opinions on the markets, but he is right more times than not. So he does carry some credibility in his assessments, and we agree with his view (or we would like to say, he agrees with ours ). In the trading following the rate cut, the banks and lenders just could not make any headway, when you see that kind of price action following a rate cut you have to be concerned, for it is the financial institutions that benefit the most from a rate cut.
Ok, now that the horses have run a lap or two and are tucked away in the stables for the night we have to see how this sets in as the jockeys get ready for their race tomorrow. Will the track be dry, mushy, slushy, or even icy! We’ll see, for now please don’t get excited and think all is well and jump into everything that moves up without a strict plan in place.
Master Card (MA) released some great earnings, but did issue some caution for next year. Even so, the stock was bid up today and had a very high short interest going into today’s earnings (MA had 10.5 Million shares shorted), so the stock made a large upward advance. But, don’t get too caught up in that move, as the move was mostly short covering and not ‘new’ money going into the stock. I would even venture here to say that before Friday is done with, we could see a healthy pullback on MA as those wanting out go to the ticket window and collect their winnings.
Crocs (CROX) was one of those momentum stocks that everybody just had to have this year. After the market closed they issued earnings and they missed their expectations, the market was not kind to them. They took Crocs to the wood shed and left them there to bleed to death. The stock lost over 23% of its value after the report. This is why we tell you to take profits, especially on stocks going vertical. The faster they run up, the harder they will fall when something bad happens, and those falls usually don’t have a parachute, they hit with a thud. In swing trading (and even longer term investing), never be concerned with holding on to something for every penny you can get out of it. That is what makes most traders lose in the long run. They get too caught up in the emotional moves as they see the stock keep advancing and never take money out on the way up. Traders who say they will cash out at the top will usually be the ones who are crawling on the floor looking for scraps to go home with, for a top can not be predicted with accuracy. Every trader you encounter in your life time who has made a living at it will tell you the same thing, to sell into strength, not weakness. When you sell into strength you are making money, when you sell into weakness you are saving your capital. There is a difference, one makes you rich, the other just keeps you struggling from trade to trade.
Some interesting news on the wire tonight, the NY Post is reporting that the Securities & Exchange Commission is looking into Goldman Sach’s. They want to know why it is that Goldman did not sustain the same types of losses that other firms did resulting from the credit crisis. What inside information may they have had access to? Well, that is what the SEC wants to know. This could get ugly. Or it could be swept under the rug, since the SEC has a bark, but not much bite.
So as the spooky ghosts and goblins go away for another year, remember that the skeletons only went as far as the closet, and they can fall out at any time if someone opens the door. There are still many economic problems facing the markets, they were not erased today by the 25/25 cut. We all tell our kids that there is no such thing as monsters under the bed, but they still want you to leave the light on so they can go to sleep. Tonight, the US stock markets are asking for the lights to be left on!
XLF Chart:
And for you folks out there who have no clue who Zager & Evans are, and never heard the song “2525″… Here it is for you. (we are showing our age here!)
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