Wall Street Wrap

Market Edges Higher as Bonds, Finance and Commodities Strong

By Robert Perrego, at 5:06 pm on February 26th, 2010

The stock market tried to be bullish today but only managed a 4 point gain for the Dow Jones Industrial Average.  I say it was trying as the stocks posting gains were the names you would buy in a bull market.  Leading the DJIA was JP Morgan & Chase Co. (NYSE: JPM) which gained $1.38 (+3.25%, $41.97).  Looking at the components of the DJIA that were down today and it seemed as if they were selling the defensive names; Kraft Foods Inc. (NYSE: KFT) -1.35%, McDonalds Corp. (NYSE: MCD) -0.69%, Procter & Gamble Co. (NYSE: PG) -0.42%, Coca~Cola Co. (NYSE: KO) -0.35%, Johnson & Johnson (NYSE: JNJ) -0.21% and Wal-Mart Inc. (NYSE: WMT) -0.09%.

The Dow Jones Industrial Average edged up 4.23 points to 10,325.26.  The S&P 500 tacked on a small 1.51 point gain (+0.13%, 1,104.49) and the Nasdaq 100 was up 5.77 points (+0.31%, 1,818.68).  On the month the DJIA added 257 points (+2.55%), the S&P 500 climbed 30.71 points (+2.86%) and the Nasdaq 100 showed that the place to be in February was in technology, gaining 77.75 points (+4.47%).

Across all markets, bonds and commodities did the best with interest rates dropping in 14 of 17 major economies worldwide.  EVEN the Greek 10-year was lower by 30 basis points as bond prices rose on news the German Government might buy Greek debt through a state owned bank.  This strengthened the euro against the dollar causing commodities to rise.

Yesterday, I mentioned the CurrencyShares Euro Trust (NYSE: FXE) was something to keep your eye on thinking that the news in Greece has got to get better sometime.  The timing was spot-on (better to be lucky than good sometimes, but being right gets paid) as the FXE closed higher today than all but one day in the last two weeks of trading.  If the bad news has washed itself out, any further positive developments about the Greek Tragedy of 2010 will be bullish for the euro, commodities and stocks.

On the flip side of this, the PowerShares DB US Dollar Index (NYSE: UUP) closed lower than all days but one in the past two trading weeks.  Looks like the dollar is a bit high here, and with the possibility of Washington D.C. passing the $1 trillion health care bill next week via ‘reconciliation’, the path of least resistance for the greenback is down.  If the carry trade cowboys get involved here, shorting the dollar and buying stocks, March may indeed come in like a lion.

New York spot gold rose $10.00 an ounce to $1,116.60 (+0.90%, 4:22 p.m.).  A break out here would be at about the $1,130 level with support at $1,060.  The SPDR Gold Shares (NYSE: GLD) chart is starting to look very interesting with resistance at $111.  The only thing I do not like about the chart is the stochastics are too high, but a close (2 closes even better) through $111 and I am a buyer.  The GLD closed up $1.12 (+1.03%, $109.43).

Nymex crude is pushing $80 again up $1.51 today to $79.68 a barrel (+1.93%, 4:26 p.m.).  Analysts think that crude will trade more off of supply and demand fundamentals and less as a reaction to the dollar in the future.  This sounds like it means that oil will trade on the premise of a better functioning economy and not on gloom and doom and fiscal nightmares.

Existing Home Sales were reported this morning at down 7.2% (January) to a seven month low (5.05M vs. 5.5M expected).  Last month sales dropped off a cliff (-16.7%) and analysts did not have to think too hard as to why.  NO JOBS.  An economy can turn up or down on simple expectations.  You have a job and things are good, but then a friend gets the axe and your brother calls to tell you his company just shut down.  You may still have a good job, but you are not dying to go buy a new house at this point.

The federal tax credit for new home buyers seems to not have helped as much lately and I have a theory – all the new home buyers that were going to buy a home already did.  I do not think they are going to squeeze a lot more out of that program.  Also, in December you go Christmas shopping not house shopping and it is cold in January.  Hopefully, sales pick up in the coming months but with all this snow in February I would not bet on a strong number.

I saved this for last to go out on a good note: The USA Men’s Hockey Team beat Finland 6 -1 in the semifinals today and will play the winner of tonight’s Canada-Slovakia game for the Gold.  Team USA vs. Canada will be a great game to watch.  Win or lose that one, Team USA is cranking out the medals faster than Freeport-McMoran (NYSE: FCX) and this has been a great Winter Olympics for our athletes and for us.

Have a great weekend.

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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

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

Market Drops on Good Earnings. Buy on Rumor, Sell On News?

By Robert Perrego, at 4:48 pm on January 15th, 2010

Intel Corp. (NSDQ: INTC) traded to a 52 week high yesterday and then reported a 33% earnings beat (40c vs. 30c) after the close, beat their revenue number by $400 million and promptly sold off 3.16% today (-$0.68, $20.80).  Welcome to the world of stock trading.  After announcing earnings, Intel traded up in the after-market by 50 cents yesterday and everything looked like a go for semiconductor and technology stocks today.  This is the third Friday of the month and that means it is an options expiration day, which can add volatility to the market and exacerbate moves.

After buying some Intel in the after-market yesterday you would be all ready for what could happen today – an Intel rally.  Well, what did happen is that the semiconductor space got sold off across the board with Micron Technology Inc. (NYSE: MU) dropping 5.59% (-$0.60, $10.13), Analog Devices Inc. (NYSE: ADI) down 3.37% (-$1.01, $28.96), Maxim Integrated Products Inc. (NSDQ: MXIM) losing 3.21% (-$0.62, $18.65), ST Microelectronics (NYSE: STM) falling 2.74% (-$0.25, $8.87) and Texas Instruments (NYSE: TXN) hanging in there but still off 0.84% (-$0.21, $24.50).  Buying into an earnings announcement but not waiting around for the numbers seems to be working as the news is getting sold.

The Dow Jones Industrial Average had 27 of 30 stocks finishing lower and lost 100.90 points (-0.94%, 10,609.65) for the day.  The DJIA sold off hard right out of the open, trading down until finally finding a bottom at 1 p.m. at 10,561.  The afternoon session brought the index back by 48 points as bargain hunting and short covering started.  The S&P 500 dropped 12.43 points (-1.08%, 1,136.03) and the Nasdaq 100 lost 22.00 points (-1.16%, 1,864.52).

The good news for JP Morgan Chase & Co. (NYSE: JPM) was that they beat earnings solidly (72c vs. 61c) and had their revenues come in up 32% year-over-year.  The bad news was that they reported large losses on mortgage and credit card loans and that they increased their loan loss reserves.  Bad news also came out today from Bank of America Corp. (NYSE: BAC) as they stated that their credit card charge-offs rose and Capital One Financial Corp. (NYSE: COF) had their credit card charge-offs top 10%.  Did everyone make their November payment, buy Christmas gifts on plastic as a last hurrah and lock up the checkbook?  All the market saw was three strikes and the bank stocks are out!  Bank of America lost $3.32% (-$0.56, $16.26), JP Morgan dropped 2.26% (-$1.01, $43.68) and Capital One fell 1.29% (-$0.54, $41.13).  Dick Bove, a well known bank analyst, was on CNBC after the close and stated that the banks would have $40 to $45 billion of write offs by the end of 2010.  So now you tell us?

E-Trade Financial Corp. (NSDQ: ETFC) ripped from $1.71 to $1.82 within the last 20 minutes of trading today as more rumors of someone buying them hit the market.  These rumors hit every few weeks but this time the rumor says these talks are so far along that E-Trade is not longer accepting new accounts.  Well E-Trade could be no longer accepting new accounts for another reason too – bankruptcy.

Baidu.com Inc. (NSDQ: BIDU) is up $81.19 since Google Inc. (NSDQ: GOOG) announced that they were hacked and pulling out of the Chinese market.  The interesting second story on this is that Google hacked the hackers back and found some evidence the Chinese Government may be involved.  Nonetheless, the clear winner from this digital espionage is Baidu, as the 21% jump has put the stock back above the uptrend line it held since July of 2009.  Whether or not it stays above the trendline is not known, but I doubt the Chinese Government is backing down and now, after making such a big stink, Google would lose face (and the respect of a lot of people who think they are the good guys for taking a stand) if they go back into China.  Baidu is a buy.

The PowerShares DB US Dollar ETF (NYSE: UUP) gapped higher and commodities sold off.  In recent columns I have written about this ETF dropping below its 50 day exponential moving average ($22.745) and looking weak.  Today the UUP closed above its 50 day EMA, gaining 13 cents (+0.57%, $22.27).  If the carry trade cowboys started getting short the dollar the last few days they are in losing positions now, but they may be shorting more and averaging their price higher.  This is because the UUP has a nicely defined downtrend line off the peak of December 22nd.  Until the UUP closes above this downtrend line the short trade is still looking good.  As usual the dollar and the DJIA went in opposite directions today.

Oil dropped on warmer weather and a strong dollar.  Nymex crude dropped $1.44 a barrel to $77.95 (-1.81%, 4:14 p.m.).  New York spot gold also got hit on the strong dollar losing $11.50 an ounce (-1.01%, 1,130.00, 4:19 p.m.)

Have a great weekend.

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