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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News

Market Jumps in the Afternoon, Fed Raises Rates after the Close

By Robert Perrego, at 5:03 pm on February 18th, 2010

The Dow Jones Industrial Average jumped about 50 points within 15 minutes at 2:15 p.m. this afternoon, adding to slight gains earlier in the day to finish up a solid 83.66 points (+0.81%, 10.392.90).  Travelers Companies Inc. (NYSE: TRV) led the Dow higher gaining 1.91% (+$0.99, $52.).  Wal-Mart Stores Inc. (NYSE: WMT) reported $1.17 per share in earnings before the open this morning, with analysts expecting $1.12.  The world’s largest retailer missed on revenues though ($113.65 billion vs. 114.56) and the market sent the stock into the penalty box, dropping it 1.09% (-$0.59, $53.47).

The S&P 500 gained 7.24 points (+0.85%, 1,106.75) on the day with gains in most all industries except transportation and finance.  The Nasdaq 100 climbed 12.53 points (+0.51%, 1,823.39).

The market traded slightly higher early in the day but with no volatility or major movements.  At 2:15 p.m. there was a jump that one market player attributed to possible short covering.  A software engineer in Texas flew a small plane into a building containing an IRS office, and with the market these days, there were short positions put on in the event a terrorist connection was found.  It turns out that the pilot was more than a little frustrated with the IRS (what a surprise) and left a seven page online rant describing what was (or was not) going on in his head.  As soon as it was apparent that the plane crash was not a hidden terrorist cell or something more sinister, the market pop could have been a short squeeze as all those speculative short positions ran for the exits.  Who says the IRS and short side traders are bad?  On a down note, the IRS is expected to announce new taxes on software engineers to pay for a new building (just kidding).

Microsoft Corp. (NSDQ: MSFT) and Yahoo Inc. (NSDQ: YHOO) got clearance from regulators in both the United States and Europe to combine their search and advertising mojo in an attempt to mount a real challenge to the Goliath of the space, Google Inc. (NSDQ: GOOG), which controls some 66% of the market.  Microsoft gained $0.38 (+1.32%, $28.97) and Yahoo closed higher by $0.10 (+0.65%, $15.54).  Analysts think this combination could have legs as Microsoft’s ‘Bing’ search seems to deliver the goods and Yahoo can now free up some extra time to figure out why they passed on the $34/share buyout offer from Microsoft in 2008.

With today’s gain, the DJIA has closed significantly higher than its 50 day exponential moving average and has some clear sailing ahead of it to the upside.  There is minor resistance in the 10,430 area, but after that it looks like blue skies back towards the 52 week high at 10,725.  It looks like the U.S. stock market has broken free of the Greek tragedy, finally.

Looking at the gold chart shows it is right up against resistance formed by an island reversal, which involves horizontally lined up gaps.  A close above $1,130 in the spot price or $111 by the SPDR Gold Trust (NYSE: GLD) should signal a breakout and a run at its all time highs.  New York spot gold gained $14.20 an ounce today (+1.28%, $1,121.00, 4:16 p.m.)

Nymex crude jumped $1.85 to $79.18 a barrel (+2.39%, 4:19 p.m.).  It is looking like the February 9 call of trading the trend channel of the United States Oil Fund (NYSE: USO) between $35 and $41 is working out.

**********

BREAKING NEWS – The Federal Reserve just raised the discount rate by 0.25% to 0.75%.  This is not the more important federal funds rate.  To put this in perspective, the federal funds rate is what banks lend to each other at for overnight loans, while the discount rate is what rate the Fed lends to banks at.  While raising the discount rate does increase the cost of money, the fact that the federal funds rate is still at 0.25% still allows depository banks access to the cheaper loan.

The big news here is the surprise jack in rates.  The Fed used to always make these changes after a Fed meeting in order to be more predictable.  With the bottom dropping out of the credit markets in 2008, the Fed cut rates without meeting and now it seems they are going to raise them in the same manner.  This is one tool Bernanke can use to keep market players from getting too juiced up on the all the liquidity that has been injected into the system.  Also, this unexpected rise will put the carry trade cowboys on notice to stop shorting the dollar as now they will be less sure as to when a hike in the federal funds rate will come.  This uncertainty will scare them into lightening up on their dollar shorts.

The bad news is, if these cowboys buy their shorts in as now they are afraid of higher rates (which strengthen the dollar), they will be selling their ‘riskier’ assets – stocks and commodities.

Remember those comments earlier in this article about the clear sailing to the old highs – WHOLE NEW BALLGAME NOW FOLKS.

New York spot gold was at $1,121 before the announcement – now it is trading $1,110.90.  The Dow ‘Diamonds’, the ETF for the Dow Jones Industrial Average closed today at $104.17 and are now trading $103.45 in the after-market – translates to down about 72 points on the DJIA.

Do you think those guys that put the short positions on when they heard a plane hit a building with the IRS in it wish they were still short?

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Wall Street Wrap

The Greece No-Bailout-Bailout Waiting Game, Market Drops and Pops

By Robert Perrego, at 4:37 pm on February 10th, 2010

The Dow Jones Industrial Average dropped almost 100 points off the open this morning as no bailout for Greece had materialized overnight.  Then, as rumors circulated across trading desks that a plan was forming, the DJIA popped back up to go positive for a short time before selling off moderately into the close as the Greece watching no-bailout-bailout speculation game resumed.

The Dow Jones Industrial Average closed down 20.26 points (-0.20%, 10,0.38.38) with its ETF, “The Diamonds” (NYSE: DIA) losing $0.13 (-0.12%, $100.52).  For the S&P 500 (-2.39, -0.22%, 1,068.13) the ETF is called “The Spiders”, which dropped $0.21 (-0.19%, $107.01).  The Nasdaq 100 lost 4.08 points (-0.23%, 1,749.76) and the tech index’s ETF, “The Q’s” (NSDQ: QQQQ) lost $0.09 (-0.20%, $43.02)

There are rules in place that bar the ECB or other member governments from bailing out Greece by buying their bonds or extending credit, and now that a dire situation is up against these rules it looks like politicians are scrambling to find a loophole.   As strikes and protests loom, Greek Prime Minister George Papandreou stated that they have not asked for aid and market players are either of the belief help is on the way or the bottom is going to drop out.  You can place your bets on any stock exchange in the world by just buying or shorting stocks because if no substantial aid package comes through soon, there will be “blood on the walls” in the credit markets according to one strategist.  You can bet that bleeding in the credit markets turns stock traders screens red as equity markets will drop like they did at the end of last week without these politicians doing something besides holding a lot of lunch meetings.

Federal Reserve Chairman Ben Bernanke testified in front of the House Financial Services Committee today, contrary to reports it was canceled due to the weather, and stated that the central bank is considering raising the discount rate (not the federal funds rate) soon.  This rate usually follows the federal funds rate and is seen by Bernanke as one way to tighten without having to raise the more economically sensitive federal funds rate.  Many past statements by Bernanke have been that the federal funds rate will remain low for ‘an extended period of time.’

American International Group Inc. (NYSE: AIG) was up 16.33% (+$3.78, $26.92) on news they were selling their Alico subsidiary to MetLife Inc. (NYSE: MET) for $15 billion in stock and cash.  Last August AIG’s share price rocketed on speculation of the sale of a different subsidiary, a short squeeze and news founder Hank Greenberg was back in the fold.  While that rip in the stock took it up to over $55, the unit was never sold due to lack of interest.  This stock move, while not as large as the move to $55, seems to be real even though officers from both firms refused to comment on the situation.

Baidu, Inc. (NSDQ: BIDU) jumped $47.12 (+10.83%, $482.13) to a new all time on above average volume after reporting earnings after the bell yesterday.  BIDU also stands to gain market share as a result of statements by Google Inc. (NSDQ: GOOG) that they might be pulling out of China.  Google currently only has a 17% share of the search market in China, but 17% more is 17% more and the Chinese market is huge.

New York spot gold dropped over $10 an ounce this morning but recovered and was last seen trading at $1,071.90 (-$5.70, -0.53%, 4:30 p.m.).  Nymex crude gained 71 cents to $74.43 a barrel (+0.92%, 4:23 p.m.).  The dollar strengthened on the comments by Bernanke regarding raising the discount rate.  The PowerShares DB US Dollar ETF (NYSE: UUP) finished up 0.29% (+$0.07, $23.56)

Economic reports out of Washington D.C. are being delayed as a result of the federal government being shut down.  When President Obama mentioned a spending freeze for the national budget during his recent State of the Union speech, my reaction was I will believe it when I see it.  I am not sure this is what he meant, but one government official stated that having the Government shut down costs the taxpayers $100 million a day.  If you ask me, the less time these guys have to vote on raising my taxes the more money it saves me, so three cheers for Mother Nature!

Selected earnings estimates for Thursday, February 11:

ASF 0.15 before market open, A 0.32 after the close, ALU 0.08 bmo, AN 0.27 bmo, BEC 1.26, BWA 0.22, CEPH 1.58 atc, CS bmo, DVA 1.06, EXPE 0.28 bmo, BGC 0.24 atc, GPI 0.44 bmo, JASO 0.11, LH 1.15 bmo, CLI 0.76 bmo, MFC 0.57, MAR 0.25 bmo, MFE 0.64, MOH -0.16, PEP 0.91 bmo, PM 0.79, PGN 0.50 bmo, RNWK -0.06 atc, RTP, STRA 2.30 bmo, CAKE 0.24, VFC 1.47, VIA 0.87 bmo, WWE 0.18 bmo.

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News

Doubting Thomas Dissents, iPad iDisappoints?

By Robert Perrego, at 5:46 pm on January 27th, 2010

The Federal Open Market Committee announced that they would keep interest rates at their historically low ‘0-0.25%’ level and also stated that rates would remain low for an “extended period of time.”  Doubting Thomas Hoenig, the Kansas City Fed President, was the dissenting voice but not on the level of interest rates, just on the promise to keep interest rates low.  Hoenig ‘doubts’ the economy is still weak enough to keep the pledge to keep interest rates low for an extended period of time.  This one dissenting vote was enough to send the markets higher after the announcement as the Dow Jones Industrial Average rallied from 10,150 before the release to 10,236.16 (+0.41%, +48.87) at the close.

The S&P 500 experienced a similar turn of fortune on The Fed announcement rising to close at 1,097.50 (+5.57, 0.50%) and the Nasdaq 100 climbed to 1,818.90 (+0.83%, =15.04)

One possible reason why The Fed kept the promise to keep rates low for an “extended period,” is that the U.S. Senate will vote whether or not to confirm Bernanke to a second term as Fed Chairman tomorrow.  While politicians may worry about interest rates and inflation, right now they are more worried about votes and jobs, so losing this ‘extended’ language from the statement might make Ben’s reappointment a bit less certain.

Click ‘here’ to see the text of the FOMC announcement.

Treasury Secretary Timothy Geithner got grilled by members of Congress about his role in how the whole bailout of American International Group (NYSE: AIG) and Goldman Sachs Group, Inc. (NYSE: GS) was handled.  The heart of the issue that members of the House Committee on Oversight and Government pushed was whether or not Geithner made decisions with the best interests of the taxpayer in mind, or the best interests of Goldman Sachs.  Goldman Sachs was the biggest recipient of funds from AIG, and these funds were supplied by the U.S. taxpayer through the TARP fund.  Whether these politicians (and yes, I do not trust any politicians) were stumping and posturing for votes in this coming November’s elections, or whether they actually thought the bailout could have been handled differently, and at a lower cost to the taxpayer, no one knows.  I would say that Geithner and former Treasury Secretary Hank Paulson know a substantial amount more about banking, derivatives and the financial mess we were in than the lawyers and popularity contest winners we call politicians.  Who do you trust more, bankers or politicians?

Steve Jobs rolled out the new Apple Inc. (NSDQ: AAPL) iPad to some underwhelming reviews and this one review that claims it is ‘culture-changing.’ I have an iPhone and its great, but I do not see the reason to buy something that is half the way between my phone and a laptop (or netbook) for $500 to $1,000.  Whether or not the public buys this thing like they bought other Apple products, investors did not like it – until they heard the price!  Apple stock dropped as Jobs unveiled the iPad and you could practically hear the “that’s it?” from stock traders.  When Jobs announced that the lowest cost model would be $499 the stock ripped and closed the day up $1.94 at $207.88.  For Tracked.com’s take on Apple’s new gizmo see:  iPad or iFad?

A Tale of Two Dow Stocks today brings us Boeing Co. (NYSE: BA) and their biggest one day stock jump in over a year on stronger than expected earnings.  Boeing rose $4.22 or 7.31% after reporting $1.77 a share in profit ($1.36 expected) after losing 12 cents a share a year earlier.  The stock you didn’t want to be in today was Caterpillar Inc. (NYSE: CAT) as their earnings announcement came in above expectations ($0.36 vs. $0.28) but their year-over-year comparisons were poor ($0.36 vs. $1.08) and sales in the fourth quarter declined 39% to $7.9 billion.  Just over two weeks ago Caterpillar stock ripped to its highest level since September of 2009 as China announced a strong economy and traders bet Caterpillar was doing brisk business selling them tractors.  This price and volume spike from January 11th has a lot of people disappointed in today’s results from the CAT as the stock dropped $2.41 to $53.44.

Tomorrow we get the vote on whether or not Bernanke keeps his job and Durable Goods Orders (1.6% exp.) and Jobless Claims (440k) at 8:30 a.m.

First look at the companies expected to report tomorrow show that it is airlines day with ALK, JBLU and LCC reporting.  Also, keep an eye on the transportation index as airlines are part and KSU and ABFS are also reporting.

Selected earnings reports for Thursday:

MMM 1.21, ADPT -0.04, MO 0.40 before market open, AEP 0.46, AMCC 0.04 after the close, AZN 1.52 bmo, T 0.51 bmo, BLL 0.71 bmo, BAX 1.03, BDX 1.20 bmo, BMS 0.34 bmo, BCR 1.34 atc, CA 0.42, CP 0.83 bmo, CAH 0.46 bmo, CELG 0.62 bmo, CB 1.46 atc, CL 1.18, CY 0.11 bmo, DHR 1.03, D 0.60 bmo, EK 0.18 bmo, LLY 0.92, BMY N/A, F 0.26 bmo, BEN 1.47 bmo, GNW 0.10 atc, HP 0.50 bmo, JNS 0.19 bmo, JBLU 0.03 bmo, JNPR 0.26 atc, KSU 0.29 bmo, KLAC 0.27 atc, LLL 1.86 bmo, LEG 0.24 atc, LMT 1.99 bmo, MXIM 0.18 atc, MKC 0.91, MSFT 0.59 atc, MOT 0.08 bmo, NOK 0.28 bmo, OXY 1.24, OXPS 0.26 bmo, OSK 1.00 bmo, POT 0.78, PG 1.43, RMBS -0.26 atc, RTN 1.23 bmo, COL 0.73 bmo, SNDK 0.69 atc, SXE 0.47 atc, SY 0.69 bmo, SNV -0.59 atc, TXT 0.09 bmo, EL 1.19 bmo, TWC 0.88 bmo, TYC 0.59, UA 0.25 bmo, LCC -0.50, XEL 0.36 bmo.

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News

Consumer Confidence is Up, So is the National Debt

By Robert Perrego, at 5:07 pm on January 26th, 2010

Consumer Confidence came in at 55.9 vs. an expected 53.5, giving a boost to the market this morning that is trying to make up the heavy losses sustained last week.  Since dropping 5.2% in the last three days of last week, the DJIA has tried to rally both yesterday and today, only to sell off into the close and the resulting two day ‘bounce’ is a whopping 21 points.  Early on it looked like we may grab a triple digit day back in the Dow and Apple Inc. (NSDQ: AAPL) was strong on their earnings report and the anticipation of the unveiling of their tablet computer tomorrow.  The DJIA traded as high as 10,285 (+88) but closed at 10,193.54 (-3.32, -0.03%) and Apple traded as high as $213.71 (+$10.64) but closed up only $2.86 (+1.41%, $205.94)

The S&P 500 closed down 4.61 points (-0.40%, 1,092.17) and the Nasdaq 100 was the hero on the day gaining a herculean 1.47 points (+0.06%, 1,803.86).  The light action and relatively unmoved indexes are not uncommon on a Fed Tuesday.  Even though the Fed is certain not to raise interest rates, the market hates uncertainty and the action will be slow until 2:15 p.m. tomorrow when the language of the ‘non-move’ will be sliced and diced and over-analyzed.  Where the economy is right now, if Ben Bernanke even dreamt that he raised interest rates and Obama found out, there would be a new Chairman of the Fed and Ben would be teaching economics at Princeton for the spring semester lickety-split.

As of January 22nd, the public debt of the U.S. Government is $12.3 trillion dollars.  The budget deficit for fiscal year 2009 was a mere $1.4 trillion dollars, more than triple that of fiscal 2008.  Who says we cannot afford health care reform?  According to my handy iPhone national debt app, each and every one of us Americans has a $41,765.93 share of that debt.  What?  You say you were born in Canada now?

The dollar was strong today as the PowerShares DB US Dollar ETF (NYSE: UUP) gained 0.43% ($23.15) and closed at its highest level in a month.  Looking at the UUP chart shows that resistance is not much higher from bottoms made in August ($23.24) and a gap down in September ($25.25).  Above this resistance level the 200 day exponential moving average looms at $23.32.

Gold has a decent inverse correlation to the dollar, so close resistance for the dollar and close support for gold means a long gold trade is setting itself up.  I mentioned in a previous post that there looks to be support for gold in the $1,060 to $1,070 level.  Whether or not gold goes that low, or the dollar rises high enough to tick resistance is any one’s guess, but you don’t need to pick the bottom clean, just be aware of the overall direction of the ride and get on.  New York spot gold barely budged today and was last trading at $1,097.30 (4:33 p.m.)

There was not much action in oil as Nymex crude dropped 66 cents (-0.89%, 4:26 p.m.) and a barrel is now going for $74.60.

Yahoo! Inc. (NSDQ: YHOO) reported after the close today and hit their 11 cent a share estimate and fourth quarter revenues fell to $1.26 billion from $1.38 billion.  When you think of all the major Internet stocks and companies, Yahoo! is probably glad AOL got spun off so they don’t look like the only lame Internet operation hoping someone buys their shares.  Oh wait – someone wanted to buy all of their shares at $34 but the brilliant board, and yes you can call them all “Yahoos”, refused right about the same time the market caved in.  Yahoo! closed today at $15.99 and on the earnings news was trading $16.26 in the after-market (4:51 p.m.)  Only $17+ to go to get to that $34 price!

Tomorrow we have MBA Purchase Applications at 7 a.m., New Home Sales at 10 a.m. (370k expected) and the Fed announcement at 2:15 p.m.

First blush for tomorrow’s earnings is that there are a lot of major oil producers, refiners, drillers, etc… reporting tomorrow.  COP, HES, MUR and VLO to note a few.

By the way – between the time that you read how much your share of the national debt was and now – you owe another dollar.

Selected earnings for Wednesday:

ABT 1.17 before market open, ATI 0.23 bmo, BLK 2.12 bmo, CBT 0.27 after the close, CAT 0.28 bmo, CTXS 0.52 atc, COP 1.13 bmo, ETFC -0.04 atc, FLEX 0.15, GD 1.57, HRS 0.94 atc, HES 0.91, ITW 0.72 bmo, LRCS 0.40, LSI 0.11 atc, MWV 0.23 bmo, MUR 0.85 atc, NFLX 0.45 atc, NE 1.58 atc, NSC 0.84 atc, PX 1.09 bmo, ROK 0.35 bmo, RYL -0.26 atc, SAP 0.94 bmo, STJ 0.62 bmo, BA 1.36 bmo, UA UA -1.47, UTX 1.14 bmo, VLO -0.47 bmo, WLP 1.02 bmo

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