Flighty Financials Threaten Stock Market Correction

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This week's copy of Barron's highlighted some substantial concerns that we believe may help serve as catalyst to a stock market correction (or crash) this week. Several articles within this week's copy of Barron's, arguably the most important financial markets publication (and therefore widely read) that your newspaper stand has to offer, raised serious concerns that important investors are likely considering this morning.

Stock Market Correction

Asian markets moved sharply lower today, and European shares quickly followed their lead. Speculation filled, retail supported Mainland Chinese shares led the way lower, as the CSI 300 moved down 7.11%. The most attributed reason has been a sudden reconsideration of valuation, which coincides with market skeptics most commonly cited global concern. The word goes, we've come too far too fast and are due for reconsideration.

A Look at Global Markets:

• China's CSI 300: -7.11%
• Hong Kong's Hang Seng: -1.86%
• Japan's NIKKEI 225: -0.4%
• Broader Asia's MSCI Asia APEX 50: -1.6%
• South Korea's KOSPI: -1.0%
• India's BSE SENSEX 30: -1.6%
• DJ Euro STOXX 50: -0.75%
• CAC 40: -0.7%
• DAX: -0.67%
  

Flighty Financial Stocks Pulled the Market Too High

We would normally brush off this Asian market start as something most likely to be quelled by US trading, if not for good reason for concern right here at home. Barron's pointed out a few notable reasons for issue, not least of which is the legendary seasonal weakness of September/October. Barron's discusses the beginning of pre-announcement season for the coming year's forecasts. This is when companies begin taming analyst forecasts, or for the layman, making them more manageable. Stocks adjust along with earnings expectations, thus the importance of P/E ratio. However, at this point in the economic cycle, one would expect analysts' forecasts to already be somewhat tame.

We are more concerned by the fact that traders have been moving the market in large proportion on speculative interests. Barron's Michael Santoli noted the Wall Street Journal's Friday scribblings on the importance of five low-priced stocks on overall market movement. Apparently, Citigroup (NYSE: C), Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), Bank of America (NYSE: BAC) and AIG (NYSE: AIG) accounted for 31% to 43% of daily trading volume last week. Traders, both retail and professional, tend to cause impact like that, and it's not representative of long-term market direction. But, has the broader market been led astray anyway?

Well, stocks are up more than 50% since the March low. Some of that rich profit is deserved, and due to the extreme panic that had driven stocks below sensible consideration. Still, some of these low-priced shares moving the market only exist now because of massive government intervention, ownership, and as a result, shareholder dilution. Last week, a trend savvy but finance education absent friend of mine pointed out his prescient investment advice on FNM and C. When that happens, I raise an eyebrow. It's akin to a stock tip from your auto mechanic in high times.

I remember when a cousin of mine pumped the destined-for-bankruptcy General Motors (NYSE: GM) to me at a family event not too long ago. When I told him that shareholders would be left holding worthless shares, he could not comprehend it. His face filled with confusion and even anger toward me, as he had to go for a walk to contemplate the possible risk to his investment if I was right. He thought GM's bailout meant he should buy the stock, not realizing that a new company would emerge with new shares and shareholders (those mostly being public and union owners as per the reorganization). I hope that cousin of mine trusted in my advice and sold while he could, but these are examples of people acting on incomplete knowledge. This is why my MBA and Wall Street experience are worth a dime.

When shares are considered to represent the absolute reflection of asset value, and not understood as market-priced instruments, people can fall into these traps. This is why companies that are clearly destined for bankruptcy still trade above zero after the announcement. So, I think Santoli is right when he implies the broader market may be following these speculative financial cripples, taking a great majority of stocks above their 200-day average. This is a warning flag.

Barron's Alan Abelson noted that "examples of the spirited revival of investors' mindless pursuit of risk abound." He speaks of the great interest in and resulting share price rise in Fannie Mae, Freddie Mac and others. Stocks are not toys to be played with, but financial instruments that are market-priced by both savvy market manipulators and foolish retail masses. This is why doing your homework matters. Abelson points out AIG's rocket rise post its reverse stock split (another gimmick that fools the foolish). Its shares are up more than 300% despite owing the government 25 times its market value. In other words, it's effectively bankrupt without Uncle Sam's gracious generosity. So is it then saved by Uncle Sam's intervention? When I hear Ben Bernanke's remorse (disgust is more like it) toward AIG, I'm not so sure, and it's not a risk I would bear.

On page 19, Andrew Bary writes about Citigroup's (NYSE: C) charade. He says, "Citi isn't a bargain anymore," and he ain't kidding... The government's massive interest use to be represented in C's share price, but recent speculation says something else to me. Bary notes that firms without government interest (nor TARP funds to hamper their actions) trade for equal to less than Citi, and he rightly suggests that C holders might better consider trading their shares for those of JP Morgan (NYSE: JPM) or Morgan Stanley (NYSE: MS).

However, with the broader market benefiting from this foolish speculation, a broader market retrenchment seems likely to coincide with severe correction in these five foolishly buoyed financials. The five clunkers should drop significantly more than the broader market in any reconsideration. What I don't get is why investors would not shop exclusively for real value when there's a market full of it now. I also do not understand why insects swarm to their definite death at the bug zapper though.


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Health Care Reform Debate

Please share your health care reform opinion below. Comments will be updated three times daily.

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Health Care Reform Debate

The nation is divided on the subject of health care reform, as are our political parties. My own opinion has changed over the years. I bought into the Health Care Lobby's bologna in the past. I drank the Kool-Aid, so to speak, that government run health care would be a disaster for most Americans. However, the more I study the subject and get to know very poor people who are not covered, and regular folk you might not consider poor, who some Republicans says choose to "go naked" without coverage, I see the responsibility we have to give our countrymen the basic need of health care.

I myself went against my lifelong Republican Party loyalty to vote for President Obama because of his "hope" message and health care promise. Since then, I've discovered there were many more good reasons to vote for the current President. I'm now proud to call myself an Independent.

We say we are a God fearing nation. Well then, why does the conservative party that claims to be closer to God (mainly because of the abortion issue) seek to stymie free health care and basic services for those who cannot afford it. We feed the poor and heal the sick! The number of people who are not on welfare, but still poor enough to not afford health care, is significant. I've been given an opportunity to see this with my own eyes.

Also, I understand how a major illness can destroy the lives of an entire family whose health insurer may indiscriminately (or at least questionably) decide the sick person does not qualify for specific coverage involving specific illness due to some manufactured (or decided upon) disqualifying reason. Despite having insurance, an entire family can see its quality of life nearly instantly destroyed by such a decision, which I have also seen first hand. We need to take God's work out of the hands of insurance companies.

What do you think? Comment below.

Before you comment, please take a look at this insider's view. This man ran PR for a large insurance company. I like to call his previous position, Chief Liar. He understands the game that is being played by the insurance companies from his experience on the inside. Wendell Potter served as the Head of Corporate Communications at Cigna (NYSE: CI), and his words serve as a wake up call.

Let's call a spade a spade! Not giving Americans the free health care they need is not a proud characteristic of capitalism. It is, rather, inhumane!




TOPIC OF DEBATE ARCHIVE

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Market Report: Personal Spending & Sentiment Key

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The City streets empty out over the last couple weeks of the summer, and the effect of holiday sunning season is exacerbated on the last couple Fridays. New York can almost feel like an old Greek village in the midday hours when the Greeks nap away the hottest part of the day. Even in Greece, like New York, you will still find the wandering tourist complaining about all the shops being shuttered. Thus, we expect a good many of you are reading this from your summer rental balcony. I'm still waiting for my invite...

Market Report

Personal Income and Spending

According to an early interviewee at Bloomberg Radio, "back to school" shopping has picked up. Still, that's a normal seasonal pattern that would not reflect economic recovery, so we were not so enthused.

A bit premature in the summer for back to school impact, Personal Spending only increased 0.2% in July, and much of that came as a result of "Cash for Clunkers." That was evident in the 1.8% rise in spending on Durable Goods, and the government notes on auto impact. Set to run out at the end of August, the CARS program was never more than a stop-gap measure to help an ailing auto sector back to its feet. Retail spending still took a big hit in the most recently reported data.

Personal Income was flat in July, after a 1.1% drop in June on the completion of a fiscal stimulus program. Excluding the impact of that program, income rose 0.2% in June and 0.1% in July.

The Core PCE Price Index, a key measure of inflation that excludes the impact of volatile food and energy prices, increased 0.1% in July. Including food and energy, prices were approximately level, after posting a 0.5% increase in June.

Reuters/University of Michigan Consumer Sentiment

At 10:00 a.m., look for the University of Michigan's take on consumer sentiment. This index, alongside the Conference Board's measure, dropped precipitously in early August. Since then, the Conference Board's tally showed a bounce. Economists are looking for a slight improvement in today's metric as well, to 64.0, from 63.2 in the early part of the month. Much of the improvement has come with early anticipation of economic recovery, stock market rise of approximately 50% since March, and a less than dire global outlook. At this point, however, consumers are asking the question, "how long is it going to take before I get my old life back." Some speculate the days of free money will never return and consumers will bear the scar of this recession for some time.

Corporate EPS

Another Canadian bank reports results today, and the short list includes Bank of Nova Scotia (NYSE: BNS), Frontline Limited (NYSE: FRO), InfoSonics (Nasdaq: IFON), Tiffany & Co. (NYSE: TIF) and others.


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Oh Canada's Cunning Canadian Banks

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Today's Business: GDP, Jobless Claims & Canadian Banks on Tap

In today's business, you will find the first revision of Q2 GDP, the weekly jobless claims data and an interesting spin on Canadian camaraderie.

Oh Canada! Those Cunning Canadian Banks

I'm not sure if it was a sense of nationalistic camaraderie or a phobia that brought it to be, but it seems most of the major Canadian banks are reporting earnings today. The National Bank of Canada, Toronto Dominion (a.k.a. TD Bank NYSE: TD) and Royal Bank of Canada (NYSE: RY) are each reporting earnings. I suspect some great white PR team found a good way to win Canadian clientele, by lumping them all together in one big earnings sweep. I'm sure you would have missed most of the reports if not for their congregation, so it worked, but the only reason The Greek is mentioning them is to test the loyalty of our Canadian friends - let's see who is really reading... You know, Canadians are sooooo nice, but maybe it's all a big farce. Perhaps the overwhelming kindness oozing from the North is only so we do not invade the resource rich/cavalry defended emptiness... With so-called friends in Vancouver, Montreal and Toronto (or from those places), we'll choose our WSG favorite Canadian town based on their unsolicited feedback! Let's see who is for real!

Weekly Jobless Claims

Weekly jobless claims came in still hot and heavy at 570K in the week ended August 22. The latest shedding was only 10K short of last week's reading, and reflects a still troubled labor market. The sharp dip in this data flow a few weeks back lent much support to stocks. But as it turns out unemployment is still scary, so some second guessing seems certain here. This also continues concern for a double dip recession as hobbled consumer spending may not have enough support to sustain recovery.

The insured unemployment rate dropped a tenth of a percentage point, to 4.6%, but that had a lot to do with the long-term jobless having received their last check. Those are the same folks you need to watch out for now, as you walk home from the subway or as you sleep the night away in the suburbs... Your old drinking buddies could soon become your stalkers, since they know best the details of your net worth...

More than a few of you are receiving second and third chances, thanks to extensions of unemployment insurance. Extended benefits were available in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, and Wisconsin during the week ending Aug. 8.

Q2 GDP Revision

Today's GDP revision was a non-starter, as Q2 GDP remained at -1.0%. Still, the mark eased economists' concern, as Bloomberg pegged the consensus opinion at -1.5%. Corporate Earnings data is reported alongside GDP, and showed a 17.7% year-to-year decline. However, the market will like the news that quarterly profits increased 33.8% (annualized basis) over its sequential predecessor.

EIA Natural Gas Report

The weekly natural gas inventory data is due at 10:30 this morning. Last week's report showed natural gas stocks spilling over (assuming a liquefied state of course). For the week ended August 20, gas inventory in storage increased by 52 Bcf. Inventory stood well above both prior year and 5-year average comparable marks. Natural gas futures for the most current contract showed its price at $2.86 per MMBtu.

Federal Reserve News & Gurus

Richmond Federal Reserve President Jeffrey Lacker and St. Louis Fed President James Bullard address separate groups today. The Fed will also report on the state of its balance sheet at 4:30 this afternoon (We post this only to egg on Columnist Ferguson).

Corporate EPS Schedule - Oh Canada!

The day's earnings schedule includes a slew of Canadian banks. Look for EPS reports from A-Power Energy Generation (Nasdaq: APWR), American Eagle Outfitters (NYSE: AEO), Aruba Networks (Nasdaq: ARUN), Bebe Stores (Nasdaq: BEBE), China Sunergy (Nasdaq: CSUN), China Telecom (NYSE: CHA), Conn’s (Nasdaq: CONN), Cost Plus (Nasdaq: CPWM), dELiA*s, Inc. (Nasdaq: DLIA), Dollar Financial (Nasdaq: DLLR), Energy Conversion Devices (Nasdaq: ENER), Fred’s (Nasdaq: FRED), Genesco (NYSE: GCO), Gerber Scientific (NYSE: GRB), J. Crew (NYSE: JCG), LaBarge (NYSE: LB), Magma Design Automation (Nasdaq: LAVA), Marvell Technology (Nasdaq: MRVL), MICROS System (Nasdaq: MCRS), Net 1 Ueps Technologies (Nasdaq: UEPS), Netezza (NYSE: NZ), Novell (Nasdaq: NOVL), Omnivision (Nasdaq: OVTI), OSI Systems (Nasdaq: OSIS), Royal Bank of Canada (NYSE: RY), Shoe Carnival (Nasdaq: SCVL), Solera Holdings (NYSE: SLH), Suez SA (NYSE: SZE), Tandy Brands (Nasdaq: TBAC), Telvent (Nasdaq: TLVT), The9 Limited (Nasdaq: NCTY), Toll Brothers (NYSE: TOL), Toronto Dominion Bank (NYSE: TD), Vimpel Communications (NYSE: VIP), XETA Technologies (Nasdaq: XETA) and others.


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Daily Business News - Durable Goods & Home Sales Key

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Our daily business news report highlights stronger than expected Durable Goods Orders in July, better than expected New Home Sales, and also Mortgage Activity that defies a rising weekly mortgage rate.

We expect you'll enjoy today's copy, perhaps sweetened by a sprinkle of tetanus infection in my left heel. Last evening I stepped on a nail (a tac really, but nail sounds harder), and without health insurance, I asked Twitter followers what they thought I should do now... Such is the life of Mango, ex-health insurance... God help health care town-hallers when the tetanus infected start showing up with lockjaw, but growling and slobbering just the same. Watch out, here I come!

Daily Business News

Durable Goods Orders

Durable Goods Orders jumped 4.9% in July, driven by transportation. The gain compared against June's 1.3% decline (revised from -2.5%). July's big number even beat economists views for a 2.5% gain for the first month of the third quarter (read into Q3 GDP).

July's gain marked the third increase in the last four months, offering more sign that the economy has found traction. Excluding transportation, orders still rose by 0.8%, and ex-defense, new orders increased by 4.3%.

Mortgage Activity

With mortgage rates holding relatively low, mortgage activity gained again this past week ending on August 21. The average contract interest rate on 30-year fixed rate mortgages edged higher to 5.24%, from 5.15%. 15-year fixed rate mortgages moved to 4.58%, from 4.52% in the prior week. The rate increase was not enough to stymie mortgage activity though, as the Market Composite Index improved 7.5% on a seasonally adjusted basis. Purchase Applications edged 1% higher, while the Refinance Index gained 12.7%.

Barring some stimulant we're missing here, the most likely reason behind the contradictory data is timing. We do not watch rates on a daily basis here, but we expect there were enough days of attractive incentive to spur the sharp rise, and on an absolute scale, mortgage rates are low enough to spur interest. Economic recovery also drives anomalous improvement like this, and the four-week moving average for overall activity is up 3.5%.

New Home Sales

New Home Sales in July, at 433K, marked a 9.6% increase over June's revised annual rate of 395K. Bloomberg's consensus of economists was only looking for a pace of 390K, so more good news for real estate enthusiasts. As a matter of fact, The Greek's own Michael Douville is starting to look prescient to all you player haters out there who condemned him for forecasting real estate recovery this year. Look for our revenge video on YouTube sometime soon... Imagine the day Ben Bernanke uses the term, "player hater," and it's acceptable. One can only dream... but for now, you have "The Greek."

New home inventory experienced a dramatic cut in July, to 7.5 months, down a full month from June. To really grasp how much better things are getting, consider that new home inventory has not been this low since April of 2007.

Petroleum Status Report

Keeping with summer driving season norm, gasoline stores experienced a draw of 1.7 million barrels in the week ending on August 21st. Crude oil stocks saw a draw of 0.2 million. What's funny is that while economic data comes in fine and dandy, oil is giving back ground today. It's that confounding dollar playing tricks on you again, since a strengthening economy provides support for it as well... at least until the inflation bug bites. This confusion is why we keep all those annoying economists around...

Corporate EPS Schedule

Wednesday's schedule includes Aluminum Corporation of China (NYSE: ACH), Angeion (Nasdaq: ANGN), Brown Shoe Company (NYSE: BWS), Canadian Imperial Bank of Commerce (NYSE: CM), Charming Shoppes (Nasdaq: CHRS), CNOOC, Inc. (NYSE: CEO), Coldwater Creek (Nasdaq: CWTR), Concurrent Computer (Nasdaq: CCUR), Dollar Tree (Nasdaq: DLTR), DSW, Inc. (NYSE: DSW), eLong, Inc. (Nasdaq: LONG), Guess (NYSE: GES), HEICO (NYSE: HEI), Isle of Capri Casinos (Nasdaq: ISLE), Jo-Ann Stores (NYSE: JAS), Kirkland’s (Nasdaq: KIRK), New York & Co. (NYSE: NWY), Powershares Dynamic Software (NYSE: PSJ), Sigma Designs (Nasdaq: SIGM), SWS Group (NYSE: SWS), TIVO (Nasdaq: TIVO), Trintech (Nasdaq: TTPA), Williams-Sonoma (NYSE: WSM) and more.


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Fed Chairman Bernanke Gets Encore

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Today's Business

The day's business includes the announcement of another show for the often controversial Chairman Ben Bernanke. We will also receive home price data, consumer confidence, weekly same-store sales, and a slew of corporate earnings reports.

Fed Chairman Bernanke - Part II

President Obama renominated Federal Reserve Chairman Bernanke to another term today, but his confirmation will depend on the decision of an angry mob (otherwise known as Congress). We are guessing many of you will pose argument to the President's decision, but truth be told, Mr. Bernanke has done about as well a job as anyone might have, in my humble opinion. Where the Chairman has presided over the greatest recession in history, another individual might now be finding his way through the second great depression. Chairman Bernanke decided early that he would not be recorded by history that way when he stepped in, in unprecedented manner, to rescue several major financial institutions (though not always their shareholders).

Several of you will point to the institution he and Treasury Chief Paulson left out, and the repercussions of that miss (that being Lehman Brothers). Also, many will argue that the Chairman may have helped to misguide the Treasury Secretary and President at times, and that the group of them resembled a hen house during a culling, rather than level headed leadership.

However, the view here is that the Chairman not only handled his responsibilities well through a time of turmoil, but stepped up to lead a clueless Congress, and a President who needed his guidance, through a period of chaos. I believe he showed unexpected leadership skills at a time of need, and proved to be stronger than his humble stature indicated. Most importantly, the market has confidence in him, as indicated by his affect upon it after speaking in Jackson Hole. Today's market start higher is yet another indicator.

ICSC Weekly Same-Store Sales

Weekly and monthly retail sales data has been troubling of late, and raises concern that unemployment and credit constraint could lead low consumer confidence and spending to drive a double dip recession, if not the slow recovery seen by our Fed Chairman.

Today's sales data, covering the week ended August 22, showed improvement over the prior week's results. Sales rose 0.6% over the aforementioned period, but still fell 0.2% when compared against the prior year's result. Last week's report showed a 0.6% drop in that regard, so even in decline we had improvement.

S&P Case Shiller Home Price Index

The Home Price Index fell 14.9% in the second quarter, which marked improvement over Q1's 19.1% annual rate of decline. Month-to-month comparison shows the housing market stabilizing and prices improving. This publisher's quarterly report also shows the first quarterly improvement in three years.

Consumer Confidence

At 10:00 a.m., the Conference Board reports on Consumer Confidence. Bloomberg's consensus of economists sees improvement here, to 48.0 for August, from 46.6 in July. Recall that consumer confidence took a step back in July, after gaining earlier this year.

FFHA House Price Index

The Federal Housing Finance Agency (FFHA) will post its Home Price Index at 10:00 a.m. Economists are looking for a 0.4% improvement for June, versus the 0.9% gain in May.

Investor Confidence

State Street's Investor Confidence Index is due at 10:00. This measure of actual risk held in investment portfolios may slow its gain for August, if it does not retrench, due to the valuation and economic concerns that have surfaced through the month. Investor confidence improved to 119.4 in July, from 115.8 in June.

Corporate EPS Schedule

The earnings schedule includes Bank of Montreal (NYSE: BMO), Big Lots (NYSE: BIG), Blue Coat Systems (Nasdaq: BCSI), Borders Group (NYSE: BGP), Casual Male Retail Group (Nasdaq: CMRG), Chico’s FAS (NYSE: CHS), Corinthian Colleges (Nasdaq: COCO), CRH plc (NYSE: CRH), Daktronics (Nasdaq: DAKT), Dycom Industries (NYSE: DY), Hain Celestial Group (Nasdaq: HAIN), International Rectifier (NYSE: IRF), Lihir Gold Ltd (Nasdaq: LIHR), Linktone (Nasdaq: LTON), Medtronic (NYSE: MDT), On Track Innovations (Nasdaq: OTIV), QAD Inc. (Nasdaq: QADI), Retalix (NYSE: RTLX), Sanderson Farms (Nasdaq: SAFM), Staples (Nasdaq: SPLS), TTI Telecom (Nasdaq: TTIL), Tuesday Morning Corp. (Nasdaq: TUES), Urologix (Nasdaq: ULGX), Versant (Nasdaq: VSNT) and others.


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Fibonacci Retracement - Elliot Wave Theory Offers Omen

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Fibonacci Retracement Completed - Elliot Wave Theory Offers Omen

"Technically speaking," we have finished our "multi-week correction," albeit after a smaller-than-expected pullback from the August 7th peak, one that lasted barely ten trading days. The correction, which would be better characterized as a sideways consolidation, completed little more than a modest 23.6% Fibonacci retracement of the rally that began on July 13th.

After taking out the 1020 resistance level on Friday August 21st, the next logical upside target for the S&P 500 index is in the vicinity of 1047. It continues to be my opinion that Greek readers should carefully evaluate their portfolio and consider judicious profit-taking opportunities as the market benefits from programmatically-traded capital flows and arguably over-inflated P/E ratios.

Of greater importance than this near-term move is the eventual top to the bear market rally, which may in fact terminate at the 1047 target. In an upcoming series of articles, we will examine a number of different technical analysis techniques in order to gain insight into the strength and duration of the current rally.

Once such approach, Elliot Wave theory, suggests we are very near the completion of an historic wave "B" up in the context of an A-B-C wave sequence. At the culmination of this wave B movement (i.e. the bear market rally that began in March), wave C down will likely retrace back down to the 666 low and perhaps even carve out new lows in the process. At least that would erase such an ominous valuation.

Greek readers unfamiliar with Elliot Wave may refer to Elliot Wave International for free tutorial information. Though EW can hardly be construed as a comprehensive explanatory "theory" in the realm of physical sciences, it does offer reasonable insight into mass market behavior and certainly helps explain the movement of capital markets better than many other models offered by economic behavioral scientists.

My own interest in Elliot Wave stems from the basic observation that stock market indices, when viewed as time series, do exhibit wave behavior. This same behavior can be deconstructed by applying much more sophisticated analytical techniques and is the subject of my own work. Of course, none such method is completely deterministic.

In any case, if a given market model is to be useful as a predictive tool, we would want to be able to estimate in advance the index price at the pinnacle of the bear market rally and provide a reasonable guess as to the time frame in which the apex will occur. For such a prediction, we might examine a few different tools commonly associated with technical analysis:

• Elliot Wave
• Fibonacci Retracement
• Turn Date Analysis
• Technical Charting & Pattern Recognition
• Time Series Analysis
  

We will unfold this comparison as this next stage of the bear market rally develops.


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Buffet Warns on Public Debt Risk

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Buffet Warns on Public Debt Risk

Did Warren Buffet forget how much power his words can have and that he holds stocks himself? He warned today in a New York Times commentary that we are in uncharted waters, and that the "gusher of federal money" directed toward stimulating the economy now poses threat to both it and the dollar... He left out the part about the danger of influential financial market gurus speaking out publicly about risk to an often unsophisticated investment community that moves on news like this! (Whew! Take a breath) To his defense, Mr. Buffet tried to water down his comments, but major media is only going to broadcast the storm warning... While I agree with him and others on this subject, and have voiced my own concerns along with other writers here, I prefer not hearing it from America's Grandpa (since people listen to him on a completely different scale than yours truly). God bless him though, as we love and admire him here just the same.

The Day's Economic Data

With a dearth of market-moving data to report, we have only the two regular weekly publications to note this morning.

Mortgage Activity Report

Mortgage activity has been tightly tied to movements in fixed long rates as housing has languished. However, in recent months we have noticed Purchase Activity providing steady but slow gain. In this regard, the Mortgage Bankers Association echoed our words today in its weekly publication.

Contracted 30-year fixed-rate mortgages fell to 5.15%, from 5.38% in the prior week. Following recent trend, the Market Composite Index gained 5.6% on Refinance Index improvement of 6.9%. The Purchase Index gained some steam on its recent slow improvement, increasing 3.9% in the week ending on August 14th.

Showing consistency to recent trend, this report can only be supportive. Unfortunately, it has not proven consequential of late, and the rising wall of worry related to inflation and currency concern has become imposing.

EIA Petroleum Status Report

The regular oil inventory data is due later this morning. Last week's data showed crude oil inventory gained by 2.5 million barrels in the week ending on August 7. Gasoline inventories decreased by 1.0 million barrels, which is consistent with the summer driving season, especially one in which fewer people can afford extravagant excursions. Oil inventory levels remain above the upper boundary of the average range for this time of the year. Based on demand concerns, downward pressure continues in the near-term on oil as a result. HOWEVER, pressure on the US dollar, upon which the global commodity is priced, lifts oil in dollar terms. So, it becomes more expensive for Americans as a result, on both an absolute and relative scale.

Corporate EPS Schedule

Look for data from AFC Enterprises (Nasdaq: AFCE), Aker ASA (Nasdaq: AKER), BJ's Wholesale Club (NYSE: BJ), Citi Trends (Nasdaq: CTRN), Deere & Co. (NYSE: DE), Eaton Vance (NYSE: EV), Flexsteel Industries (Nasdaq: FLXS), Flowers Foods (NYSE: FLO), Gymboree (Nasdaq: GYMB), Harman International (NYSE: HAR), Hot Topic (Nasdaq: HOTT), JDSU (Nasdaq: JDSU), Limited Brands (NYSE: LTD), Mechel OAO (NYSE: MTL), Perry Ellis (Nasdaq: PERY), PetSmart (Nasdaq: PETM), Phillips Van-Heusen (NYSE: PVH), Semtech (Nasdaq: SMTC), Synopsis (Nasdaq: SNPS), Tween Brands (NYSE: TWB), Yingli Green Energy (NYSE: YGE) and more.

PS: UBS Just Outed You

And oh by the way, if you had a secret account with UBS (NYSE: UBS), where you had hoped to escape paying taxes in the US and elsewhere, well you have just been outed. Hope you have the money to pay your due share of taxes now...


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Editors Note 09-18-09

Editors Note:

Please find an economic review here later today, rather than the preview normally found here.

Greek

This Week: Consumer Alarm Bell Has Sounded

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(Tickers: A, EMKR, CEL, LOW, ICE, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

With last week's wake up call, the investment community realized that the American consumer has effectively walked away from the table. Without her spending, economic recovery cannot occur, not with any fervor anyways.

Last week's economic data showed retail sales swung downward in dramatic fashion in July. Where economists were forecasting a sales rise of 0.8%, July instead offered decline of 0.1%. The month's dismal performance also compared poorly with June's revised sales gain of 0.8%. (See Retail Sales Report details). While there's no doubting the numbers showing "Cash for Clunkers" is stimulating vehicle purchases, in a demand desert, that may be at the cost of the rest of retail.

Without question, the greatest driver of consumer spending softness is the highest jobless rate since The Great Depression. Excluding the government's assumption that many unemployed folks have decided to retire to a life of chosen camping by the riverside, as illustrated by the lower labor force count in July's Employment Situation Report, the army of the unemployed is still recruiting. Unemployment, especially the long-term sort that is plaguing our nation now, is also consistent with spending restraint. Needless to say, when Friday's Reuters/University of Michigan Consumer Sentiment figures showed a sharp drop in consumer confidence, few should have been surprised. However, on a light end of week/middle of summer trading day, the Dow, S&P 500 and NASDAQ Composite all sank approximately 1.0%.

I would bank on this latest portion of the wall of worry the market consistently climbs to prove a significant challenge. In this problem, you find your fundamental catalyst for the technical perspective expressed last week by our Econometrics & Programmatic Trade Analyst, Steven Ferguson. In other words, looks like time to take some short-term money off the table and for March's market seers to bank a bit of those big capital gains.

This Week

Monday

The New York Federal Reserve reported Monday morning that manufacturing in the region expanded for the first time in over a year. In fact, the month's reading was the highest since November of 2007, nearly two full years ago. August's Empire State Manufacturing Report produced a General Business Conditions Index of 12.1, versus the modest economic contraction seen in July. Economists were looking for improvement, but to a lesser degree of 5.0, based on Bloomberg's Survey (Barron's reports 2.2). The Inventories Index rose, but not into positive territory, while Shipments and New Orders gained further ground therein. The indexes are derived from a survey, and so it helps to know that with regard to the General Business Conditions number, 30% of respondents said conditions had improved, while 18% reported deterioration.

The Department of the Treasury reported on the flow of funds into and out of US securities. The Treasury International Capital Report for June showed net foreign purchases for long-term US securities of $90.7 billion. The inspiring inflow compared against May's net outflow of $19.1 billion. Net foreign purchases of US securities amounted to $123.6 billion, compared to American purchases of foreign securities of $32.9 billion. Foreign holdings of Treasury Bills decreased by $11.3 billion.

The National Association of Homebuilders published its Housing Market Index on Monday afternoon. The HMI improved 1 point, to 18 for August. All geographical segments of the nation saw gain in HMI, except the South.

Builder enthusiasm should lag the broader real estate sector, given the still heavy load of new and existing home inventory. Considering the excesses that occurred in housing and home building, the hangover should be likewise powerful in convincing builders to lay off the good stuff for a while. That's not to mention stricter lending standards, tighter regulation of mortgage brokerage and banking and increased joblessness. However, we should also be careful not to ignore the impact of significant government stimulus for the sector, including the first-time home buyer tax credit. It's been more than a year since the index has been this high (June 2008), and builders see hope for the months ahead inspired by the tax credit.

The Federal Reserve approved an extension of its Termed Asset-Backed Securities Loan Facility (TALF). The Fed also stated that no further types of collateral were expected to be added to the program.

The corporate earnings schedule includes Agilent Technologies (NYSE: A), Cellcom Israel (NYSE: CEL), Comstock Homebuilding (Nasdaq: CHCI), Emcore (Nasdaq: EMKR), First Marblehead (NYSE: FMD), GeoPharma (Nasdaq: GORX), Global Sources (Nasdaq: GSOL), Goldleaf Financial (Nasdaq: GFSI), Hastings Entertainment (Nasdaq: HAST), Industrial Services of America (Nasdaq: IDSA), LiveDeal (Nasdaq: LIVE), Lowe's (NYSE: LOW), Merrimac Industries (AMEX: MRM), New Oriental Energy & Chemical (Nasdaq: NOEC), Omega Navigation (Nasdaq: ONAV), Ore Pharmaceuticals (Nasdaq: ORXE), Peoples Educational Holdings (Nasdaq: PEDH), Pet DRx (Nasdaq: VETS), Pyramid Oil (NYSE: PDO), Repros Therapeutics (Nasdaq: RPRX), Simcere Pharmaceutical (NYSE: SCR), TechTarget (Nasdaq: TTGT), Telkonet (NYSE: TKO), Trina Solar (NYSE: TSL), Valspar (NYSE: VAL), Yadkin Valley Bank (Nasdaq: YAVY) and others.

The "Week Ahead" copy you have become use to will resume, but for this week, please find daily previews or summaries here...


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

CPI Growth Moderates in July

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(Tickers: JCP, C, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Today's Morning Report highlights the inflation (or deflation) data release for July. Energy played a big role in the Headline Consumer Price Index as usual, but Core CPI moderated to just +0.1% growth month-to-month.

CPI Growth Moderates in July

Economists were looking for a 0.2% increase in the seasonally adjusted Core CPI Index (excludes food and energy prices), according to Bloomberg's survey. The lesser growth result of +0.1% was a pleasant surprise, and offers investors reason to push stocks higher in light summer trading volume Friday.

Headline CPI held steady, as the energy component moderated from the previous month's strong gain. The Energy Index fell 0.4% in July, after posting a 7.4% gain the month before. You can see why the Headline CPI swings so wildly, with energy prices so volatile over recent times. The Food Component of the Headline figure also moderated in July, by 0.3%, but all items ex-food and energy increased.

There was one interesting aspect to the Headline Index we want to point out here. Natural Gas prices closed some of the gap between the energy resource and its petroleum cousin. The Nat Gas component of the measure gained, contrasting against the fall in oil and distillates.

Another trend worth noting is the sharp drop in Lodging Away from Home, which saw a 2.1% price decline in July. This may be yet another warning flag for nonresidential segments of real estate and for the Lodging and Hospitality sector.

On a year-to-year basis, which smooths out monthly volatility a bit, the data shows a 1.9% Headline CPI decline versus a 1.6% Core CPI increase (down from 1.7% in June). Thus, we can say that inflation is not a threat this month, but that says little for this time next year...


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Retail Sales Dropped in July

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(Tickers: SRS, URE, IYR, DRW, WMT, M, JCP, TGT, COST, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Retail sales data disappointed this morning, perhaps taking some of the steam out of the nascent auto industry recovery. It is clear from this morning's data that while autos may be doing better, consumers are not feeling so well. That probably has a lot to do with increasing job loss and a little to do with "Cash for Clunkers."

Retail Sales Report

Retail Sales unexpectedly fell in July, declining 0.1% against the economists' consensus estimate for a 0.8% gain. July's mild decline also compared unfavorably with June's revised rise of 0.8%. So what happened then?

While a lift was reported from auto sales (+2.4%), with retail sales ex-auto down 0.6%, the driver was not powerful enough to overcome a 2.1% drop at gasoline stations, and decrease across a slew of previously suspected improving segments. Building Material & Garden Equipment Supplies sales fell 2.1%, and Furniture & Home Furnishing Stores saw a 0.9% decline, both data points contrasting against green shoots in housing data.

Electronics & Appliance Stores posted a 1.4% decline, while Sporting Goods, Hobby's, Book and Music Stores saw a 1.9% drop. General Merchandise fell 1.8% and Department Stores sank 1.6%. Aha! The picture is clearer now isn't it...

Market whispers that "Cash for Clunkers" was borrowing sparse consumer spending dollars from other retail segments may have proven accurate in this morning's data. Unemployed folks, a rising count when you ignore the lower labor force denominator, clearly are not spending like they would like. Perhaps we have funneled cash flow from the employed toward autos at the cost of other segments. So, net net, we may be aiding the already reorganized auto sector at the cost of a starving retail market elsewhere.

My greatest concern, therefore, is once again focused at commercial real estate. Cash and credit cushions at retailer coffers are running thin, and more stores are likely to close down as light spending persists. Real estate operators are going to have to give a little more or see rising vacancies, which seem likely anyway.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Market Report: Fed Announcement Due

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(Tickers: BHP, JASO, M, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Wednesday's Market Report brings the close of the two-day Federal Open Market Committee (FOMC) meeting. We also received the latest mortgage activity news and will receive International Trade and Treasury Budget data through the day.

Market Report

Fed Announcement

The Federal Open Market Committee (FOMC) meeting closes today with its Policy Statement release at 2:15 PM. It is widely expected that the Fed will hold rates steady, so the focus of attention will be on the words of the economic leadership. Much attention will be directed toward any discussion of economic improvement and "exit strategy." Market players are interested in knowing if the Fed will cease purchases of Treasuries, as the September $300 billion quota/deadline is reached. The BOJ said earlier this week that it would play it by ear, perhaps seeking leadership from our Fed.

The market puts significant weight in the opinion of the government's economic seers, especially during uncertain times. So, look for market swing based on the economic discussion and forecast of the Fed. According to our resident technical strategist (and others), there's fertile ground for correction should Messenger Bernanke trip over his tongue.

Mortgage Activity

For the week ending on August 7, the MBA's Market Composite Index of mortgage activity showed a 3.5% decline on lower refinance activity that in turn fell on higher rates. The average contracted 30-year fixed rate mortgage saw rate increase to 5.38%, from 5.17% the week earlier. The Refinance Index dipped 7.2% as a result, but purchase activity continued to offer reason for housing enthusiasm. The Purchase Index rose 1.1%, marking the third such rise in four weeks... pleasant news. It should be clear by now that the all-clear has been sounded in housing. Tell Uncle Tom (I have an Uncle named Tom) it's okay to buy now.

International Trade Report

The International Trade Report for June showed the trade deficit expanded to $27 billion, from $26 billion a month before (revised). The trade gap, however, widened less than economists expected ($28.5 billion). Good news too, in that the gap in manufacturing narrowed. Exports moved 2.0% higher, while imports rose 2.3%. Petroleum played a role in exacerbating trade gap widening, so the ex-oil numbers were meaningful and slightly hidden to the layman.

EIA Petroleum Status Report

Oil inventory data is due for release at the usual 10:30 report. Last week's data showed inventory increased by 1.7 million barrels in the period ended July 31. Gasoline stocks fell by 0.2 million barrels. We are in the midst of summer driving season, and fewer folks can afford long vacations involving flights... So, more of you are driving for a day to the beach or mountain or park... simple logic, yet a normal seasonal pattern, possibly exacerbated by economic weakness.

Treasury Budget

July's Treasury deficit is expected to expand sharply by $180 billion, versus the $94.3 billion draw from coffers in June. The nine month total deficit for the fiscal year stands at $1.1 trillion. Recall, government estimates were for a $1.3 trillion deficit this year, if my memory serves me.

Corporate Earnings News

The day's schedule highlights reports from Advance Auto Parts (NYSE: AAP), Aegean Marine Petroleum (NYSE: ANW), BHP Billiton (NYSE: BHP), CACI Int'l (Nasdaq: CACI), China Automotive (Nasdaq: CAAS), Ethan Allen (NYSE: ETH), Hillenbrand (NYSE: HI), JA Solar (Nasdaq: JASO), Kinross Gold (NYSE: KGC), Liz Claiborne (NYSE: LIZ), Macy's (NYSE: M), Sara Lee (NYSE: SLE), Toll Brothers (NYSE: TOL) and several others including many Chinese companies.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Market News: Productivity & Labor Costs Improved

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(Tickers: DIA, SPY, QQQQ, NYX, DNDN, AGM, BOBE, ICE, FOSL, GILT, AMAT, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Market News

In today's Market News, Productivity and Labor Costs were reported improved, offering the market a tasty appetizer for the day's meal. Weekly Store Sales recovered from recent poor trend, and the FOMC kicks off its two-day meeting this day. The BOJ had something to say about its economy earlier this morning. Finally, Wholesale Trade data is due later this morning, along with a few key EPS reports noted below.

Productivity & Costs Report

Second quarter productivity improved 6.4%, above the economist consensus view for 5.5% and well ahead of Q1's reported 0.3% rise. The quarter's improvement was the best since Q3 2003! Remember though, when you are rising off a poor base, big gains become more likely. We also point out that the drivers of this improvement were less than exciting. Output actually decreased by 1.7%, but the denominator, or hours worked, fell at a greater pace of 7.6%.

This suspect driver of improvement is similar to the factor that greatly aided the improved unemployment rate in July. In that case, it was a smaller labor force in the denominator that allowed for an illusory improvement in unemployment. We are still shedding jobs on net...

In the case of productivity, we're getting more out of a smaller labor force and less hours worked. The good news here is that this does lift corporate profits and cash flow, important drivers of your shares.

Productivity Improved Across Business Lines:

• 5.3 percent in manufacturing
  
• 3.9 percent in durable goods manufacturing
  
• 2.0 percent in nondurable goods manufacturing

Unit Labor Costs also improved (or fell) by 5.8% in the second quarter, again on the same less than best driver.

ICSC Weekly Same-Store Sales

Weekly Same-Store Sales had been dipping back into negative territory over recent weeks. Some blamed the weakness on "Cash for Clunkers" diverting funds toward other-than-retail end-market spending. We looked toward rising unemployment and credit card defaults as the culprit. Whatever the case, this week's data measuring the week ended August 8, 2009, showed a better result. Sales improved by 0.4% on a year-to-year basis, and stuck flat on the weekly count.

Bank of Japan Decision

The Bank of Japan kept its unsecured overnight call loan rate unchanged, but where would you expect the Japanese to go from 0.1% anyway... BOJ representatives said things have stopped worsening. Happy happy! Joy joy! However, business investment is down on lower corporate profits. The BOJ says prices continue to decrease, but it expects that trend to moderate by FY end in March. Regarding exit strategy, the bank notes that events will dictate whether it keeps to September deadlines for the end of special liquidity boosting measures.

Wholesale Trade Report

June's Wholesale Trade Report is due for release at 10:00 AM. According to Barron's, the consensus is looking for a 0.8% decline in inventories, versus May's similar drop. In May, sales on the wholesale level rose 0.2%, while inventories dropped 0.8%, taking the inventory-to-sales ratio to a lower 1.29 mark. This is a good thing...

Corporate EPS Schedule

The day's earnings schedule includes reports from Applied Materials (Nasdaq: AMAT), Banco de Chile (NYSE: BCH), Bob Evans Farms (Nasdaq: BOBE), Clearwire (Nasdaq: CLWR), Cree (Nasdaq: CREE), Dendreon (Nasdaq: DNDN), Federal Agricultural Mortgage (NYSE: AGM), Fossil (Nasdaq: FOSL), Gilat Satellite (Nasdaq: GILT), Learning Tree (Nasdaq: LTRE), Warnaco (NYSE: WRC) and others.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.