Wall Street Wrap

Wall Street Wrap – The Dollar Trumps GDP, Markets Drop

By Robert Perrego, at 4:41 pm on October 30th, 2009

Yesterday the Dow jumped 199 points, fueled by the strong GDP number released before the open.  The 199 point rally drove the Dow right back up to the uptrend line that  it had been following since March 9th, and had broken on Monday.  Today what the GDP giveth, the rally in the dollar taketh away.  On the last trading day of October 2009, the Dow Jones Industrial Average dropped 249.85 points (-2.50%, 9,712.73).  The Dow 30 traded right down to its 50 day exponential moving average, where it was down 277 points, bounced, and traded back up into the close.

Uptrend Broken

Uptrend Break Monday, 2nd Close Below Tuesday, Pullback/Retest Thursday, Drop Friday

The S&P 500 lost 29.92 points (-2.80%, 1,036.19) and the Nasdaq 100 gave up 44.14 points (-2.57%, 1,667.13).  In October, the Dow closed up as much as 3.91% (10/19), the S&P 500’s highest close was up 3.86% (10/19) while the Nasdaq 100’s apex close was up 2.57% (10/22).

It took about thirteen trading to amass these gains and then only six to eight trading days to give it all up.  The Dow finished with a 1/2 point gain for the month, and forget the percentage translation, as if you wanted this in change at the market you would leave it in the ‘give a penny, take a penny’ tray.  The end of October does represent the end of the fiscal year for most mutual funds, but hedge funds usually run with the calendar year in order to make accounting consistent for their investors.  Next week there is a meeting of the Federal Reserve, but it is fully expected they will not move on interest rates.

Energy led the sector race lower losing 4.34% with finance dropping 3.93%.  All sectors were in the red with tech losing 2.89% and the industrials dropped 2.85%.

What may be spooking the markets is, if the Fed maintains the current low rates but releases hawkish statements, this could give the dollar rally legs and scare all the carry trade cowboys out of their dollar shorts.  As U.S. interest rates have been historically low for months now, a favored trade has been to short the dollar and take the funds from this short and buy ‘risky’ assets.  These ‘risky’ assets have included commodities, commodity stocks, tech stocks, financial stocks and stocks in the emerging markets.  If the dollar starts to rally and the shorts have to cover, the money that funded investment in stocks will be used in buying the dollar short, causing selling in the stock market to replace these funds.  This is what has caused the unusual inverse relationship between the dollar and The Dow lately.

On October 22nd, the dollar bottomed out with the PowerShares Dollar ETF (NYSE: UUP) closing at a 14 month low at $22.31.  This close coincided with the top in the Nasdaq, and since then the market has sold off as the dollar rallied.  The UUP is 1.75% off its low close while the Dow is 3.91% off its high close.  This gives a ratio of about a 2.23 to 1, dollar gain to Dow loss.  Looking at the UUP chart, the 50 day EMA sits at $22.82, or about 0.53% above the UUP close today.  Using this as a guide to the top in this dollar rally, before it possibly reverses and begins to trade lower, gives us a further loss in the Dow of 1.18%, or another 114 points (Dow 9598).  I see a Dow top support level at about 9580-9600 area, giving guidance as to where you may want to buy this latest pullback.

New York Spot Gold held up surprisingly well, dropping only $1.50 (-0.14%, $1,044.30, 4:25 p.m.) while the dollar (UUP) rallied 0.57% (+$0.13, $22.70).  Commodities always travel inversely of the dollar as they are valued in dollars and Nymex crude got hit harder than gold, dropping $2.87 a barrel (-3.59%, $77.03, 4:17 p.m.)

The Federal Open Market Committee meets next Tuesday and has their interest rate announcement on Wednesday at 2:15 p.m.  Trading should be very interesting with the first trading day of November on Monday and a whole lot of nervous Halloween scared money in the stock market, that is still short the dollar waiting to see if they are going to cover or short more.

One further note on the above chart:  I have seen this pattern many times before as a trend line is broken and is re-tested by a pullback shortly thereafter.  Also, please remember that a break in an uptrend line does not mean a down trend is coming.  It could mean a sideways movement or a reversal into a downtrend.  The market could move sideways for awhile and then resume its uptrend.  We shall see.

Happy Halloween Everyone!

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Wall Street Wrap

Wall Street Wrap – What a Difference One Number Makes – GDP

By Robert Perrego, at 5:05 pm on October 29th, 2009

Yesterday everyone was throwing the towel in, yours truly included.  Bill Gross from PIMCO was calling a top, Cramer on Mad Money was turning cautious, which given his naturally bullish direction says something.  The charts looked ugly with uptrend line breakdowns from Apple Inc. (NSDQ: AAPL) to Zix Corp. (NSDQ: ZIXI).  All seemed lost and the market rally we have been enjoying since March, was about to become the market we did not enjoy before last March.

Well GDP to the rescue! Last night when thinking about today’s GDP release I had two thoughts; 1) 3%, Really?, and 2) Ok, maybe we are coming off a lower base that could bounce back.  Also, Goldman Sachs Group Inc. (NYSE: GS) had just pulled their estimate down to 2.7% from 3%, and these guys usually get it right.  Well, maybe Randolph and Mortimer did not pay Beeks enough to get the numbers ahead of time, as the announcement at 8:30 this morning had Goldman with egg in their face for pulling their horns in just prior to a surprise upside beat – 3.5%!

The cash for clunkers program kicked into this number significantly as motor vehicle output added 1.66% to the 3.5%.  There was a lot of discussion about the fact that the ‘clunkers’ program pulled forward future purchases, so this 1.66% might be at the expense of Q4’s number.  Also, with 2% of this 3.5% attributed to stimulus spending, what do we have when those dollars run out?  Not to sound like a math whiz here, but that would be about 1.5%, and that is slow but better than nothing.

Once the GDP number came out the futures took off like a rocket.  Gold jumped as did oil, and just about the only thing that dropped was that pesky counter-trend dollar.  The Dow Jones Industrial Index closed up 199.89 (+2.04%, 9,962.58) while the S&P 500 beat all the major indexes gaining 23.48 points (+2.25%, 1,066.11).  The Nasdaq 100, the ‘tech trade’, added 29.21 points (+1.73%, 1,711.27).  Finance was the hot sector up 3.89%, with consumer cyclicals coming in second at  +2.84%.  Even with a 3% plus jump in the per barrel price of oil, the energy sector was only up 1.81%.

New York Spot Gold was up $19.40 an ounce (+1.89%, $1,047.10, 4:28 p.m.) as Newmont Mining Corp. (NYSE: NEM) reported their earnings were up 75% over last year’s same quarter number.  With gold above $1,000 for just about all of October, Newmont is most likely having a very good fourth quarter as well.

Nymex crude got back to its tricks jumping $2.41 a barrel (+3.11%, $79.97, 4:22 p.m.) as more growth means more energy demanded.  I would guess that it did not hurt that the dollar got hit as the PowerShares Bull Dollar ETF (NYSE: UUP) dropped 16 cents or 0.70% to $22.57.  The ‘risk trade’ is back on it seems, as the good GDP number seemed to hint it was safe to short the dollar and take those funds and buy the big banks, tech, developing markets stocks, gold, and just about anything other than bonds.  This ‘risk trade’ was being unwound over the last few days as the shorts being bought back in on the dollar caused it to rally off the bottom sharply.

If we get the ‘carry risk trade cowboys’ back en mass here, and they hammer away at this dollar, we could see higher highs for the indexes.  Note (not a pun) that by shorting the dollar and taking those funds to buy stocks, these risk ropers are creating money to trade with by increasing their leverage on funds invested as well as having a nominal price upward effect on stocks by decreasing the relative value of the dollar.  So, not only does the knocking down of the dollar create paper stock inflation, but the creation of the funds via margin and shorting creates more dollars technically and hence more inflation.  In the opposite, when this trade is unwound, the removing of this double edged liquidity causes more rapid drops.  An old saying on Wall Street goes; “Fear is stronger then greed”, and if they start to sell and unwind this dollar trade the move lower will be swift.  Stay on your toes.

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Wall Street Wrap

Wall Street Wrap – The Selloff Gains Steam as The Dollar Rallies

By Robert Perrego, at 5:23 pm on October 28th, 2009

The inverse correlation between the dollar and the market continues to hold as the Dow Jones Industrial Average sold off 1.21% (-119.48, 9,762.69) while the PowerShares Dollar ETF (NYSE: UUP) gained 0.40%.  Leading the Dow 30 into the tank was Caterpillar, Inc. (NYSE: CAT) which dropped $2.26 (-3.98%, $54.43) as the Durable Goods report this morning missed expectations coming in at up 1% while expectations were for up 1.5%.  New Home Sales also disappointed (402K vs. 440 exp.) and the Dow Jones Industrial Index uptrend line, that has been in effect since the market bottom in March, was broken to the downside.

The Nasdaq 100 was the weakest of the three indexes, dropping 2.34% (-40.40, 1,682.06) as technology was hit hard.  Apple Inc. (NSDQ: AAPL) lost $4.97 (-2.51%, $192.40) as the uptrend line in effect for that stock since July 7th was broken today.  The next two support levels for Apple are $191 and $186.  Intel Corp. (NSDQ: INTC) broke its uptrend line in effect since February 23rd and also broke down through its 50 day exponential moving average (EMA) at $19.51, dropping $0.71 (-3.59%, $19.03) with minor support in the $18.60 area and gap support at $18.  The S&P 500 dropped 1.95% (-20.78, 1,042.63).

Since the market bottom on March 9th, the Dow has enjoyed a nicely confirmed uptrend line that was set by three points; the bottom, July 10th and October 2nd.  The close below the uptrend line on Monday was the first cause for worry, and yesterdays close below this line was a second day break, which is one indicator or confirmation the trend line would fail.  To technical analysts, today’s sell-off comes as no surprise and to those watching the dollar rally, today’s stock performance was expected.

As I have mentioned in many previous ‘Wraps’, the dollar bottomed out last Thursday and has been rallying since.  The major market indexes all peaked last Thursday and the S&P 500 has dropped 4.6% since.  The UUP has its 50 day EMA just above it at $22.84 as resistance while the Dow has its 50 day EMA just below it at 9,667 as support.  The S&P 500 has 50 day EMA support at 1047 while the Nasdaq 100’s was broken today (1,688 vs 1,682 close).

Going Down?

Going Down?

Bill Gross, a Managing Director at PIMCO, the largest bond fund in the world, called the market top yesterday in his monthly market commentary.  The big question is whether or not this is just another correction or is it a reversal in market trend and heading lower?  While the S&P 500 and Nasdaq 100 broke their longer term uptrend lines awhile ago, now with the Dow Jones Industrial Index break, all three indexes are showing weakness.  The Dow, which was most likely oversold in March, ran up 54% bottom to top, and that is a nice move.

The economic and fundamental reasoning behind the decline of the dollar was a $1.4 trillion current budget deficit, all the money spent and/or committed to attempt to haul the country (approx $12 trillion) out of recession and future spending programs being debated now in D.C.  These factors still exist and the longer term trend for the dollar could be lower, so if the relationship continues to hold, the stock market should find a bottom soon and head higher again.  This could all be nothing but ’stock inflation’ and not be creating real value as the drop in the dollar kills purchasing power while stock prices increase.  Given the choice between higher and lower stock prices, most people would choose higher.

The dollar rally hit gold and oil prices with New York Spot Gold dropping $11.90 an ounce (-1,14%, $1,027.70, 4:54 p.m.) and Nymex crude lost $2.09 a barrel (-2.63%, $77.28, 4:50 p.m.)

Remaining Economic Reports expected this week:

  • Thursday: 8:30 a.m. GDP (3.0%) and Jobless Claims (525K)
  • Friday: 8:30 a.m. Personal Income and Outlays (0.0%, -0.5%) and Employment Cost Index (0.5%), at 9:45 a.m. Chicago PMI (48.5) and at 9:55 a.m. Consumer Sentiment (70.0).

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Wall Street Wrap

Wall Street Wrap – Amazon and the Dollar Trade Up, Market Drops

By Robert Perrego, at 4:56 pm on October 26th, 2009

Amazon.com Inc. (NSDQ: AMZN) continued its earnings driven momentum higher today adding another 5.2% to the 27% it gained Friday, after announcing earnings Thursday after the market close.  Jim Cramer of ‘Mad Money’ fame stated today that Amazon is the “low cost producer on the web” and is now beating Wal-Mart Stores, Inc. (NYSE: WMT) at that game.  Most people view Amazon as an Internet retailer, but what sets Amazon apart is their technological edge.  Amazon is one of the dominant forces behind the development of cloud computing, a cutting edge area of Internet development, and when you have Ph.D.s on staff trying to figure out how to sell books and iPods better, you have an advantage.

Amazon closed up $6.15 (+5.19%, $124.64) while the rest of the market had a rough slide lower.  The market traded as much as 100 points higher off the open this morning, but at 11:08 a.m., a large block of shares were traded in the PowerShares Dollar Bull ETF (NYSE: UUP) which reversed the dollar ETF from being down 5 cents ($22.38) and after this the dollar traded up as high as $22.60, a 1% intra-day move before closing at $22.58 (+0.66%, +$0.15).  At 11:08 a.m. the Dow Jones peaked at the high of the day (10,070) and reversed to the day’s low (9,849) dropping 221 points intra-day.  The Dow closed down 104.22 points (-1.04%, 9,867.96) while the S&P dropped 12.65 points (-1.17%, 1,066.95).  The Nasdaq showed relative strength on the backs of Amazon and Microsoft, losing only 6.88 points (-0.39%, 1,746.75).

Finance led the sector race lower dropping 1.50% with the multi-line insurers getting clobbered.  Genworth Financial (NYSE: GNW) dropped 7.93% (-$0.84, $9.56) and American International Group (NYSE: AIG) dropped 6.81% (-$2.65, $36.25).  The energy sector was the second biggest loser dropping 1.47% with National Oilwell Varco (NYSE: NOV)dropping 5.43% (-$2.55, $44.34).

Gold, oil, commodities, commodity based stocks and the stock market as a whole dropped on this dollar strength.  The UUP traded 6.85 million shares today, second only to the 6.98 million it traded on September 22, 2008.  The UUP closed right up against the down trend line that has been the defining trend line in the dollar since its second peak of a double top on March 9, 2009.  Remember the significance of that day?  That was the market bottom for the major indexes – Dow 6,547, S&P 500 676, Nasdaq 100 1,044.

New York Spot Gold lost $16.60 an ounce (-1.57%, $1,038.20, 4:06 p.m.) and Nymex crude dropped $1.82 a barrel (-2.26%, $78.55, 4 p.m.)

How far the dollar can run will be in part influenced by this week’s record sale of $123 billion in Treasury Notes.  Also, the Fed is expected to end its $300 billion debt buyback program by the end of the week.  This completion of the debt repurchase plan and the planned sale of a large amount of debt, caused the 10-year to drop and interest rates rose to their highest level in two months.  The higher the rate paid by treasuries, the more the dollar is worth, relative to the rates other currencies earn.

The market seems to be liking the weak dollar, as since the UUP peaked on March 9th it dropped 16.6% to its low close last Thursday while the Dow rose 54% during this same time period.  If the dollar continues upwards from here, weakness in stocks would be the result if the recent ‘Dollar up, Dow down’ relationship continues.

Economic reports due out this week:

  • Tuesday: 10 a.m. Consumer Confidence (54 expected)
  • Wednesday: Durable Goods Orders 8:30 a.m. (1.5%) and New Home Sales 10 a.m. (440K),
  • Thursday: 8:30 a.m. GDP (3.0%) and Jobless Claims (525K)
  • Friday: 8:30 a.m. Personal Income and Outlays (0.0%, -0.5%) and Employment Cost Index (0.5%), at 9:45 a.m. Chicago PMI (48.5) and at 9:55 a.m. Consumer Sentiment (70.0).

Earnings due Tuesday (b = before the market opens, a = after market close):

ACE 1.97 a, AKS 0.00 b, ACL 1.45 a, APOL 1.04 a, AVY 0.57 b, BIDU 1.78 b, BP 1.03 b, CP 0.76 b, CRS -0.23 b, CE 0.43 b, CX 0.14 a, CHE 0.88 a, CPO 0.63 b, CTS 0.07 a, DAI -0.40 b, DV 0.65, DWA 0.16 a, ETFC -0.09 a, ECL 0.60 b, FE 1.03, FTI 0.63 a, FPL 1.43 b, BEN 1.32 b, HRS 0.77 a, IACI 0.13 b, JCI 0.50, LLL 1.85 b, LCAV -0.30 b, MEE 0.17 a, MCK 1.01 a, NSC 0.79 a, NTRI 0.24 a, ORB 0.10 a, PCAR 0.02 b, PDLI 0.26, PLT 0.31 a, RYN 0.41 b, SAH 0.24 b, TXT -0.03 b, X -2.87, VLO -0.33 b, V 0.72 b, WAT 0.77, WYNN 0.15 b

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News

Market Wrap – Housing and The Fed spark a Rally

By Robert Perrego, at 4:40 pm on August 12th, 2009

The Mortgage Bankers’ Association said that their purchase index rose 1.1 percent last week and Toll Brothers Inc. (NYSE: TOL) announced that their quarterly net signed contracts rose for the first time in four years.  These two positive pieces of information sent most every home builder up over 4% with Toll jumping over 14%.

Home sales are directly impacted by the cost of the mortgage used to buy the home, unless of course you have the cash money on hand to buy a home outright, with which very few people do.  So all we need now to keep this positive news flow on housing going is expectations that interest rates will stay low.  Where would we get such news?  Enter stage left – The Fed…

At 2:15 p.m. the Fed announced no change in its interest rate policy and with this one line;

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

BUY! BUY! BUY!

The Dow Jones Industrial Index, which was up over 100 points at the time of the announcement, got one ear on that statement and after a quick shake out move back to +107 rallied to as high +185 before finally reversing to close up only 120.16 points.  The dollar initially shot up right after the announcement but then sold off to right about where it had been trading before the announcement and the corresponding move in gold was exactly opposite that of the dollar.  Both the dollar and gold finished up where they started before the announcement.

The Fed did not change rates, the dollar and gold ended where they started, the Dow returned to where it started and rates dropped marginally.  Yawn.  Basically all that happened was that the traders gunned their race cars around the track for awhile and then went home for dinner.

At 1 p.m. the $23 billion 10-year Treasury Note auction went decently well with a bid-to-cover ratio of 2.49 vs. a 2.48 recent average and a high yield of 3.734%.  The cover ratio indicates that there was not an unusually large amount of bonds demanded and the yield was lower than where currently issued 10 year paper was trading.  This means that the government had to pay more (higher rate) to get bidders to buy their debt.  The last bid-to-cover ratio for the 10-year note was 3.28 that went at 3.365% in July.  The drop in the b-t-c and the rise in interest paid says, as far as the ten year maturity is concerned, that buyers were less interested in U.S. Government debt.  Well, those that bought into that $23 billion at 3.734% were rewarded for stepping up to the plate as after the announcement the current 10-year note traded 3.72% turning a nice little profit for the 1 p.m. buyers.

Emdeon inc. (NYSE: EM) priced their IPO at $15.50 and opened trading at $17.75.  Cramer told his audience that he liked the stock in the $13.50 to $15.50 area but not to chase the stock above $17 or so.  Well Jimmy was spot on with this one thus far.  The stock opened at $17.75 and immediately traded up to $18.24 then proceeded to roll over and close on the day low at $16.52 making every buyer on the day a loser.  Today it paid to listen to Mad Money’s mouth.

All day long with housing a front-line issue, the talking heads have been croaking about whether or not the housing market has bottomed.  I will  cast my vote right here – not a chance!  Cramer was right about Emdeon but he was dead wrong and called a housing bottom in June and prices are still dropping and have a ways to go.  The MBA index ticked up today as prices dropped and more buyers pulled the trigger.  The Toll brothers statements showed that they are selling more lower priced homes.  As any security drops in price, demand increases, but prices will go lower from here.  Why do I say this?  Easy – unemployment is still headed higher.  Last weeks statistical drop from 9.5% to 9.4% was misleading as more people’s employment insurance ran out (and they were taken out of that number) than new people got fired (put into the number).  Economists consensus is unemployment goes above 10% before it peaks and maybe we bottom out in housing a few months before we peak in jobs lost, but not much before.  Simply put – people need jobs to pay mortgages.  These talking heads and prognosticators on TV need a reality check before their optimism gets the best of your investing dollar.

iStock Analyst put out a nice piece today about Cramer and his housing call along with stating that the market PE’s right now are predicated on 5% GDP growth coming in the next few quarters.  If that is the case and 5% is priced in, stocks are in for a rude awakening.

The Dow closed up 120.16 points (+1.30%, 9361.61) and the S&P 500 added 11.46 points (+1.15%, 1005.81) with the Nasdaq 100 up 24.90 points (+1.56%, 1619.59).

The strongest sectors today were finance +1.91% and industrials +1.89%.  The weakest industries were consumer non-cyclicals still returning a positive 0.66%.

NYMEX Crude added $1.07 a barrel and was trading at $70.19 at 4:34 p.m.

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