Wall Street Wrap

Market Bounces Back as Bernanke Promises Low Rates

By Robert Perrego, at 5:01 pm on February 24th, 2010

Last week the Federal Reserve raised the discount rate to 0.75% sparking fears that the federal funds rate might be next in line for a hike.  JP Morgan Chase & Co. (NYSE: JPM) gained 2.43% and Bank of America Corp. (NYSE: BAC) added 2.44% to lead the Dow Jones Industrial Average higher on the day.  The market spiked higher just after 10 a.m. – minutes after Fed Chairman Bernanke began two days of testimony in front of a congressional panel.  As Bernanke stressed that last week’s move did not mean the federal funds rate was going higher anytime soon, stocks responded strongly, pushing the DJIA higher by almost 90 points within 25 minutes.

The Dow Jones Industrial Average regained some of yesterday’s lost ground closing higher by 91.75 points (+0.89%, 10,374.16).  The S&P 500 added 10.64 points (+0.97%, 1,812.51) and the tech heavy Nasdaq 100 led the three indexes, up 18.69 points (+1.04%, 1,812.51)

The finance sector responded strongly as Bernanke spoke and on news that key senators are opposed to limits on commercial banks making bets with their own capital.  More trading news was made today as an SEC panel voted 3-2 to limit short selling on a down-tick on stocks that are down more than 10% on a day.  The new rule would make short positions only able to be entered on an uptick if a stock is down over 10% from its previous daily close in one day, and for all of the next trading day.  Quite frankly, this rule change is more for political cover for the SEC as they try to look like they are doing something.  The markets dropped drastically last year and all of a sudden, people looking for someone to blame pointed fingers at short sellers and the SEC.

The Effects of Short Selling

Fact is, short-selling adds liquidity to the market and just like with any trade, if the short-seller is wrong they can lose money.  An all to common public perception that short sellers cause stocks to go down too much is unfounded as there has to be a reason to bet that stock is going lower in the first place.  Short sellers will put a short position on if they think the stock is too expensive.  Some reasons for this might be that the company’s fundamentals are bad, the economy is headed lower or the stock has risen too far, too fast.

A way to think about short selling is; 1) Stocks are competing with each other for invest-able funds, and those that have better reason to be invested in get those funds and go higher, 2) Current investors in short-seller favored stocks may sell them to buy the more attractive stock, 3) The company that loses this invest-able funds ‘popularity contest’ are judged to be weaker and with no buying interest to counter-act regular selling, the stock goes lower, 4) On their own, short sellers would not be able to push a stock lower, as they have to ‘buy-in’ these shorts sooner or later, creating a ‘built-in’ demand for the stock.  Only the sellers of ‘long stock’ can sell the stock and walk away.  The short sellers have to be there to buy the stock back in and are nothing but future demand potential for that stock.

So if short selling cannot, by itself, make a stock go down, what is the SEC actually accomplishing here?  As long as their is sufficient liquidity in a stock, short selling is not the reason a stock is going down.  The SEC dropped the ball on policing ‘naked short selling.’  Naked short sales increase the supply of an issuer’s (company’s) effective outstanding stock, and is also illegal.  A lot of people should either be in jail right now, or should have paid large fines made money on naked short selling over the past few years.  If the SEC had done their job properly with the naked short sellers they would not be trying to save face right now by tinkering with legitimate short selling.  Period.

New York spot gold dropped $6.80 an ounce to $1,096.70 (-0.62%, 4:30 p.m.) and Nymex crude regained the $80 a barrel plateau, up $1.31 to $80.17 a barrel (+1.66%, 4:23 p.m.).  The PowerShares DB US Dollar Index (NYSE: UUP) dropped 0.20% (-$0.05, $23.76) and this throws a red flag.  Gold dropped and is acting weak while the dollar is dropping, which says to me gold has internal weakness.

Looking at the chart of the SPDR Gold Shares ETF (NYSE: GLD) we see that it failed to take out the resistance level at $111 and has rolled over and traded down to $107.36.  The stochastic oscillator looks to be topping out and rolling lower too.  The GLD did break the downtrend line from it’s all time high and this is a positive.  The next technical test for the GLD will be to see if it closes below $104 (twice in a row).  If this happens we have a lower low and strong trading stocks do not do that.  I suspect the ETF is going to trade sideways for awhile and consolidate.  The GLD will head down to $104 and flirt with breaking it – if it breaks for two consecutive sub $104 closes that is a sell signal.  If it holds and starts to head back up – buy more.

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Wall Street Wrap

Overall Market Flat – HMO’s and Finance Strong

By Robert Perrego, at 5:13 pm on February 22nd, 2010

On a day when the market indexes went nowhere, HMO’s logged nice gains as the public option is said to have been left out of the Obama Administration’s latest version of their proposed health care reform bill.  Humana Inc. (NYSE: HUM) climbed 5.55% (+$2.52, $47.87) while the nation’s largest HMO, UnitedHealth Group Inc. (NYSE: UNH) gained 3.56% (+$1.14, $33.08).  The top two components of the Dow Jones Industrial Average were banks as Bank of America Corp. (NYSE: BAC) was up 2.07% (+$0.33, $16.21) and JPMorgan Chase & Co. (NYSE: JPM) gained 2.04% (+$0.82, $40.85).

The market traded sideways most of the day until 3:30 p.m. when selling drove the Dow Jones Industrial Average down 18.97 points (-0.18%, 10,383.38) and the S&P 500 lost 1.16 points (-0.10%, 1,108.01).  The Nasdaq 100 was weakest dropping 5.69 points (-0.31%, 1,817.63).

Looking at the charts of the HMO’s and I see ‘buy, buy, buy’.  Humana had the biggest gain today but also the best chart when you balance risk and return.  Humana traded off to its 50 day exponential moving average over the last month, held it as support, and rose today on heavy volume.  The stochastic oscillator has bottomed out and is heading up and the short term down trendline was broken to the upside.  Looks like the stock could easily reach its previous high close of $51.94 soon, which would give you an 8.5% return.  The charts are similar for all the major HMO’s (AET, WLP, CI, UNH) but Humana’s chart offers the least amount of upside resistance, safety of support and percentage return combination.

Oil stocks were weak today which was unusual as the dollar was down slightly, Nymex crude broke $80 a barrel for the first time in a month and Schlumberger Ltd. (NYSE: SLB) officially announced their takeover of Smith International Inc. (NYSE: SII).  Last Friday rumors of this deal flew around Wall Street trading desks driving the stock of Smith up 13% (+$3.33, $41.03).  Today’s official announcement of the $11 billion deal added another 8.8% for a two day gain of 23%.  New York spot gold dropped $5.00 to $1,112.10 an ounce (-0.45%, 4:25 p.m.)

Two good reasons to stay away from the municipal bond market are the very low current interest rate environment (with bonds, when rates are low prices are high) and news out from the National Governors Association that for 2011 states are seeing total cumulative budget deficits of $53.6 billion, rising to $61.6 billion in 2012.  If you find a bond with a yield and credit you like and buy with the intention to hold until maturity, municipals might still be for you.  The problem here is that with these deficits and tax receipts weak as a result of the high unemployment rate, any bond you buy may get downgraded and drop in value.  States cannot print their own money and many are finding it politically difficult to cut spending, so without raising taxes the budget deficits will weaken the credit behind the bonds.  I do not think buying a municipal bond and hoping they raise my taxes to make my bond not drop in value is a strategy for me as one giveth and one taketh away, leaving me with nothing-eth.

Speaking of being left with nothing-eth, one of the new taxes proposed in the resurrection of health care reform is a Medicare tax on capital gains.  When I was studying economics in graduate school, commonly accepted good practice was to tax the area of the economy that the tax revenues were going to be used for.  This is thought to be a more efficient way of instituting tax policy as when you ignore this proper practice you eventually end up with a million taxes coming from this area and going to that area, or a massive spider web of tax and effect confusion.  When you levy a tax somewhere it distorts the way that taxed item functions, so the idea is if you have to tax, use the tax to shape what you are taxing in a more desirable manner.  You do not just run around like it’s an Easter egg hunt going “Hey look, there’s money over here – tax it!”

The current Administration has already announced their intention to raise the capital gains tax so this would be an additional tax on top of the new tax hike.  Why do I get the feeling there is a guy in Washington D.C. with a dartboard, a blindfold on and a handful of darts that say ‘new taxes’ on them?  Also, didn’t Obama promise that if you made less than $200,000 a year your taxes would not go up ‘one penny?’  If you own any stocks outside of an IRA or 401(k) plan and do not make that kind of money, your taxes are going up.

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Wall Street Wrap

Financials Weak and Dow 10,000 No More

By Robert Perrego, at 5:06 pm on February 8th, 2010

The Dow Jones Industrial Average slid steadily all afternoon closing down 103.84 points today (-1.03%, 9,908.39) and closed below 10,000 for the first time since November 4th of last year.  All but 2 of the 30 components were losers today with the three weakest stocks all being finance related companies.  Bank of America Corp. (NYSE: BAC) dropped 3.46% (-$0.52, $14.48), American Express Co. (NYSE: AXP) lost 2.80% (-$1.06, $36.79) and the Travelers Companies Inc. (NYSE: TRV) finished lower in the red by 2.44% (-$1.23, $49.05).  Home Depot Inc. (NYSE: HD) was the strongest of the Dow components gaining 2.18% and also up were home builders Lennar Corp. (NYSE: LEN) +4.62%, Beazer Homes USA Inc. (NYSE: BZH) +3.64% and Pulte Homes Inc. (NYSE: PHM) +2.29%.

The S&P 500 dropped 9.45 points (-0.89%, 1,056.74) and the Nasdaq 100 was down 11.24 points (-0.64%, 1,734.88) and was the leader by being the smallest loser.

I guess the sky stopped falling over in Europe as the euro stabilized against the dollar and Greece was mentioned by the talking heads on CNBC slightly less than the babbling about former Merrill Lynch & Co. chief John Thain getting a new job over at CIT Group Inc.  Various cures for what ails Greece have been proposed from applying for loans from the International Monetary Fund to getting more on their credit card from other EU members.  I vote the EU members bail the EU members out as we pay into the IMF and the chances of Greece paying that money back anytime soon with a strike or protest every other day does not look to good to me.  The Greeks are proud of the fact they invented democracy and the rest of the world is pretty happy they gave it to us, but constantly striking, protesting and having your voice heard pays less taxes than actually going to work.

The dollar slipped marginally, but stayed up at level it has not seen since August of last year.  With the dollar at this relatively high level and basically scared up a tree by the crisis in Greece (and other countries), commodities are looking like a bargain if you think the dollar will come back down when (if) Europe stabilizes.

New York spot gold lost $2.70 an ounce and last traded at $1,062.30 (-0.25%, 4:24 p.m.) as this percentage loss outperforms the 1%+ the DJIA lost.  CNBC has had gold up all day over $10 an ounce and I am guessing the futures contract they are watching is longer dated than the spot market.  If you are invested in or trading the gold ETF’s you will find that they correlate more closely with the spot market than whatever CNBC decides to display.

Oil gained $0.48 to $71.65 a barrel (+0.65%, 4:27 p.m.) as the steep slide down from last Wednesday’s peak is halted.  Oil reversed in this general neighborhood last December with the United States Oil Fund (NYSE: USO) bottoming at $35.48 on December 11th before running up to $41.17 on January 8th (+16%).  For all you channel and range traders out there, today’s close at $35.09 does hit short term bottoms from last December, September and August.

We have a relatively light economic calendar this week with no speeches or testifying for Timothy Geithner.  Fed Chairman Ben Bernanke testifies in front of the house Financial Services Committee on Wednesday about how he is going to let all the air out of the liquidity balloon without crushing job creation (like that is happening now anyway).  As long as I don’t hear ‘then we pray’, it sounds like a plan to me.  Ben is a pretty smart guy and the fact that our economically challenged politicians are going to quiz him on whatever he decides to do and then possibly even understand his answer is comical.

Tomorrow at 7:45 a.m. we have the ICSC-Goldman Store Sales, at 8:55 a.m. we get the Redbook and Wholesale Trade numbers come out at 10.

Selected earnings estimates for Tuesday, February 9th:

AGU 0.24, AFG 0.98 after the close, BIDU 1.68 atc, BJS 0.04, CAM 0.53, CHD 0.80 before market open, CVH 0.56 bmo, EOG 0.98 atc, IT 0.26 bmo, IFF 0.62 bmo, LGF -0.23 atc, MLM 0.33, TAP 1.10, NYX 0.48 bmo, PCH 0.04 bmo, PHM -0.19 bmo, RNR 2.50 atc, TIN 0.03 bmo, KO 0.67 bmo, VSH 0.12 bmo, VMC -0.01, DIS 0.39 atc, XL 0.70 atc

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Wall Street Wrap

Drop and Pop, Market Recovers some of its Loss

By Robert Perrego, at 4:56 pm on January 28th, 2010

Volatility returned to the Market as a broad morning sell off took the Dow Jones Industrial Average down as much as 181 points.  The selling climaxed with a 52 point drop at 11:30 a.m. to the day lows at 10,055, which pierced the support at 10,090 detailed in this column last Friday.  The rest of the trading day saw the DJIA climb back 130 points (-51) before rolling over in the final 20 minutes of trading to close down 115.70 points (-1.13%, 10,119.93).  Through all the selling, the financial companies maintained relative strength as JP Morgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC), Well Fargo & Co. (NYSE: WFC) and Goldman Sachs Group, Inc. (NYSE: GS) were under water for less than two hours and closed with small gains, while the broad market finished with a loss.  It is interesting to note that the big banks that Obama has targeted for his newest tax were the companies showing strength the day after his State of the Union speech.

The S&P 500 finished down 12.97 points (-1.16%, 1,084.53) and the tech heavy Nasdaq 100 really took it on the chin losing 47.80 points (-2.62%, 1,771.10) as Apple Inc. (NSDQ: AAPL) sank $8.59 (-4.13%, $199.29) and Qualcomm, Inc. (NSDQ: QCOM) lost $6.72 (-14.23%, $40.48)

CNBC carried the cloture vote for Bernanke’s Fed reappointment and earlier on it may have seemed that the needed votes for confirmation would not reach 60.  As the day wore on and the yes votes ticked higher, so did the market.  The final vote came to 77 Yes and 23 No, which reconfirms Ben as the Chairman of the Federal Reserve for another four years.

The market was under early pressure from yet another bad weekly Jobless Claims number and a poor showing by the Durable Goods release.  While the four week moving averages, which smooth out the weekly readings, are still headed in the right direction, we have seen the jobs number come in 30,000 higher than expected for more than a few weeks now.  The question is: Is this a result of bad forecasting by the economists or is the jobs picture getting uglier?  No matter how you answer, the ‘recovery’ is going very slowly at best.

At the end of yesterday’s Wall Street Wrap, I mentioned that today would see more than a few transportation companies reporting earnings.  Other than the techs, the Dow Jones Transportation Average (.TRAN) fared the worst today, dropping 2.33%.  The Dow Transports are of special importance as those following Dow Theory look for the Industrial Average and the Transportation Average to tell them where the market is headed.  The Theory says that when both averages are making new highs a Bull market is confirmed.  On the other hand, when both are making new lows, a Bear market is confirmed.  If you are only looking at 2010, both averages made new lows today as the DJIA closed at its lowest point since November 9, 2008 and the DJTA posted its lowest closed since November 27, 2009.

Apple’s drop today could be seen as a sign that yesterday’s iPad unveiling was less than impressive.  After the close today, tech giants Amazon.com Inc. (NSDQ: AMZN) and Microsoft Corp. (NSDQ: MSFT) reported earnings.  Amazon beat expectations ($0.85 vs. $0.72) on a per share basis and beat on revenues as well ($9.52 billion vs. $9.04).  Amazon stock was trading lower in the after-market at $121.70 (4:23 p.m.) after closing the regular trading session at $126.03 (+$3.28, +2.67%).  Microsoft reported strong earnings on the heels of a new product cycle as they introduced Windows 7 last last year.  Mr. Softy reported earnings of 74 cents a share vs. the expected 59 cents on revenues of $6.7 billion.  Microsoft closed at $29.16 in the regular trading session and was up to $29.32 in after-market trading (4:27 p.m.)

New York spot gold traded as low as $1,072.40 an ounce before rising $14 to close at $1,086, losing only $1.20 (-0.11%, 4:43 p.m.)  As the stock market sags gold seems to be hanging in there and this could be a flight to safety.  The PowerShares DB US Dollar ETF (NYSE: UUP) rose 0.17% today and closed within 4 cents of its 200 day exponential moving average.  The stochastic oscillator for the UUP has just crossed above 80 and has not rolled over to point lower yet, but once above 80 a reversal is much more likely.  With support for gold in the $1,060 to $1,070 level, an area it visited today, and the UUP approaching resistance and a high stochastic reading, a reversal looks in the cards for a higher gold price soon.  Nymex crude gained 25 cents to $73.92 a barrel (4:49 p.m.)

Tomorrow has the GDP report (4.5% expected) and the Employment Cost Index (0.4%) being released at 8:30 a.m.  The Chicago PMI (57.0) is out at 9:45 a.m. and Consumer Sentiment (73.0) is at 9:55 a.m.

Selected earnings releases for Friday:

ACI 0.17 before market open, AVY 0.68 bmo, CVX 1.70, FO 0.52, HON 0.90 bmo, MAT 0.68 bmo, NWL 0.27 bmo, PCAR 0.07 bmo, WL 0.04 bmo.

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News

China and Massachusetts Drive the Market Lower

By Robert Perrego, at 5:15 pm on January 20th, 2010

Mining stocks got hit today as the market took back what was gained Tuesday on the hopes of a Republican win in Massachusetts.  Hardest hit was Silver Standard Resources, Inc. (NSDQ: SSRI), which dropped 8.72% (-$2.02, $21.15).  Yesterday we tacked on 116 points on the hopes of a 41st vote for the Republicans in the U.S. Senate.  Well, the party was last night, the Republican candidate Scott Brown won and today the market posted its worst loss since November.  Hangover.  The party was being all happy about the possibility the Repub’s could block the Dem’s grand spending plans which would keep the debt, spending and taxes down.  The hangover is realizing that if Obama does not print the greenback into oblivion, if all of a sudden the trillion dollar health plan may not pass, then the expectations for a weak dollar will decrease.  Now ask yourself what the carry trade cowboys, who are short the dollar and long stocks and commodities, are going to do?

The Dow Jones Industrial Average dropped 122.28 points today (-1.14%, 10,603.15) with 24 of 30 components finishing lower. The S&P500 lost 12.19 points (-1.06%, 1,138.04) and the Nasdaq 100 led the charge lower as weak tech caused the index to close down 27.53 points (-1.45%, 1,867.95)

International Business Machines (NYSE: IBM) reported after the close yesterday and beat earnings, and also took first place in leading the DJIA lower today losing $3.89 (-2.89%, $130.25).  They sold the Intel Corp. (NSDQ: INTC) earnings after beating estimates and, starting in the after-market yesterday, they sold the IBM earnings beat as well.  Keep an eye on what happens to the eBay Inc. (NSDQ: EBAY) earnings announced after the close today and Google Inc. (NSDQ: GOOG), which reports after the close tomorrow.  If both these companies beat, and they sell the stock off after, this quarters reporting play is to sell tech earnings after the announcement.

The banks were strong today relative to the rest of the market as Bank of America Corp. (NYSE: BAC) reported a loss of 60 cents.  This loss included a one-time charge of $4 billion for a TARP payment spurring an Oppenheimer analyst to raise his rating on the stock.  BofA led the DJIA higher today gaining 17 cents (+1.04%, $16.49).  Bank of New York Mellon Corp. (NYSE: BK) posted a 49 cent per share profit after charges and 60 cents before, which beat the analysts’ estimate of 51 cents, powering the  stock higher by 4.84% (+$1.43, $30.96).  Wells Fargo & Co. (NYSE: WFC) posted an 8 cent per share profit with the analysts expecting a 1 cent loss.  Wells Fargo stock dropped 1.62% (-$0.46, $27.82).  Morgan Stanley (NYSE: MS) posted 29 cents per share profit with the analysts expecting 36 cents, causing the stock to drop 1.70% (-$0.53, $30.63)

Other than a Republican winning the Senate seat long occupied by Ted Kennedy, the big news today was a report that Chinese authorities asked some commercial banks to stop giving loans for the rest of the month of January.  China’s top banking official denied the report, but then again they had nothing to do with the Google hack last week right?  The Shanghai Composite dropped 2.9% on the report and a tightening of the loans in China will slow growth there and here as well.  The more buildings China builds the more Caterpillar, Inc. (NYSE: CAT) tractors they buy.

The combined news of the election in Massachusetts and the loan tightening in China caused the PowerShares DB US Dollar ETF (NYSE: UUP) to gap higher this morning on the open.  The UUP gained 1.22% on the day (+$0.28, $23.12) and broke its short term down trendline.  The stochastics for the UUP are reversed at a low level and heading higher so, with this breaking of a trendline and the stochastics all bullish, the chart points up for the dollar.

As a result of the report that China is slowing down their economic growth and that the dollar might be given a reprieve from death row, commodities got hit hard today.  Steel got hit for 3.11%, coal lost 2.86%, copper down 2.68% and gold down 2.39%.  New York spot gold lost $27.20 an ounce (-2.39%, $1,1140.40, 4:50 p.m.) and Nymex crude was down $1.59 a barrel (-2.00%, $77.73)

UPDATE: eBay earnings came in at 44 cents a share vs. the expected 40.  Revenue was reported to be $2.4 billion with expectations of $2.29.

Selected earnings for Thursday, January 21, 2010:

ACS 0.99 after the close, AXP 0.56 atc, APH 0.49, BNI 1.22 atc, COF 0.45 atc, CMA -0.49 before the open, ED 0.76, CAL -0.07 bmo, ELX 0.16 atc, FCS 0.17 bmo, FITB -0.31 bmo, GS 5.20 bmo, GOOG 6.45 atc, ISRG 1.71, ESI 2.36 bmo, KEY -0.39 bmo, LM 0.31 bmo, PNC 0.77, PPG 0.73 bmo, PCP 1.64 bmo, UNP 1.04 bmo, UNH 0.73 bmo, WDC 1.36 atc, XRX 0.22 bmo

Economic reports for Thursday:

Jobless Claims 8:30 a.m. 440K expected

Leading Indicators 10 a.m. 0.7%

Philadelphia 10 a.m. Fed Survey 18.0

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