Market Wrap, Tuesday, 04/07/2009 Don't Worry, Be Happy by Jim Brown Click here to email Jim

HAVING TROUBLE PRINTING?

Stocks were all dressed up ahead of earnings but investors stopped off at the local watering hole for a drink before picking up their dates. Pre-earnings jitters settled in like a nervous teen heading to his prom.

Market Stats Table

The economic calendar today was very light with no material reports. The weekly chain store sales rose +0.6% and the second weekly gain but still well below year ago levels. Sales remain poor but they are improving. The Sales Index rose to 489.5 and the highest level since early September. The ISCS noted that the shift in sales due to the calendar date for Easter this year was also depressing the numbers. In the graphic below you can see the gains since late January but they have a long way to go before normalizing.

Weekly Retail Sales Chart

The Job Openings and Labor Turnover Survey (JOLTS) showed non-farm job openings were basically flat in February. The year over year decline was -29.2% compared to -31.0% in January. In February 4.36 million people were hired compared to 5.04 million in the same period in 2008. Unfortunately 4.83 million people left their jobs either voluntarily or because of layoffs. The number of job openings rose slightly to 3.0 million from 2.9 million. Layoffs rose +31% from year ago levels. Over 13.2 million people are currently unemployed while the total number of idle or unemployed workers rose to 37 million. That includes everyone who would take a job in their chosen field if one were offered and those who are employable but not currently looking for work. Of those currently working a recent survey showed that 70% feared for their jobs.

In a separate survey released on Tuesday 71% of business owners and managers expected to reduce employment before year-end. That is a terrible forecast of what is to come and supports the views of economists that unemployment could move over 10% by 2010. In that same survey 67% of owners and managers said they expected sales to decline in 2009 and 66% said they were cutting expenditures on capital spending.

Consumer credit fell by -$7.5 billion in February or a -3.5% drop. The majority of this came in revolving credit balances that fell -$7.8 billion or -9.3% on an annualized basis. This is due mostly to limits being lowered on credit card accounts and the cancellation of home equity lines of credit. This was the fastest contraction in consumer credit in over 30 years. Expectations for larger tax refunds this spring have analysts hopeful existing credit lines can be paid down and then put back to work as consumers spend their new credit. Another factor in the drop in credit balances is the fear of losing your job. This has prompted many workers to pay down credit balances just in case a layoff does occur.

The only economic reports on Wednesday are Mortgage Applications, Wholesale Trade, Oil Inventories and the FOMC minutes. Of those events the FOMC minutes is the most critical for the market. Analysts want to believe they know what the Fed was thinking at the March meeting but there is always the potential for a surprise if the Fed discloses something previously unknown. For instance if the Fed expressed worry about an impending depression or fears that inflation was exploding then the markets would not react calmly. Analysts believe that both extremes are currently under control and not a danger.

The big news today was earnings angst and the toxic asset auction. Falling expectations for Q1 earnings. Q1 earnings are expected to decline by -36% compared to expectations of a +30% gain just six months ago. S&P-500 earnings are expected to decline by -13.9%. The discretionary spending sector is expected to post declines of -107%, materials -81% and energy/coal -57%. It is hard to get excited about the outlook for earnings other than just hope they are not as bad as expected. Nobody expects a positive surprise.

After the close Alcoa (AA), the first Dow component to report, showed a lost of $497 million for Q1. Falling prices and declining demand pushed Alcoa to its second consecutive quarterly loss. Analysts expect Alcoa to recover because they have slowed production to reduce global stockpiles. Alcoa said last month they were reducing their global workforce by -13%. Revenue fell -44% to $4.15 billion from $7.38 billon in the same period in 2008. Prices for aluminum have fallen from $1.50 per pound last summer to around 62-cents per pound on the London Metals Exchange. After items Alcoa's loss would have been 59-cents and analysts were expecting a loss of 56-cents. Alcoa fell about 40-cents in after hours.

Mosaic (MOS) reported earnings that fell -89% and revenue that fell -36%. Earnings came in at 13-cents compared to analyst estimates for 24-cents. MOS earned $1.17 in the comparison quarter in 2008. The CEO said despite the current drop in demand he was confident that demand would return because large crops were still required to feed the world's population. He said this was a self-correcting cycle because adding nutrients to the soil can only be deferred for so long before crop yields fall drastically. Mosaic and Potash are suffering from the credit freeze. Overseas customers can't get credit for large shipments of fertilizer and that is depressing sales. The CEO said profits from the rest of the year should increase. Once the financial crisis passes I am very confident Mosaic and Potash will blossom again. MOS fell -2.50 to $40.50 in after hours trading.

Mosaic Chart

Bed, Bath and Beyond (BBBY) saw profits fall more than 18% but they still beat analyst estimates. BBBY said it earned $141.4 million or 55-cents per share. Analysts were expecting only 44-cents per share. BBBY is benefiting from the demise of Linens and Things last fall. BBBY said the decline in the housing market had weakened demand for home furnishings. BBBY shares jumped +$4 in after hours.

Pier 1 (PIR) reported a wider than expected quarterly loss as markdowns cut into profits. However shares rose after the company gave encouraging guidance and said it had reduced inventory levels. Despite the drop in inventory PIR said it expected to remain unprofitable for the next two years. PIR lost 33-cents per share compared to analyst estimates for an 18-cent loss. Gross margins fell to 43% from 48%. Sales were down -13%. PIR shares closed up +17%.

Earnings on tap for Wednesday include FDO, STZ, EXM, GLBC, RPM, SGR and GBX. Nothing to get excited about but a continued preview of what is to come when the earnings tsunami arrives next week.

Emerson Electric (EMR) spoiled the sentiment at the open with a guidance cut to $2.40-$2.60 a share, down from the February forecast of $2.70-$2.95. Emerson also said the economic weakness was likely to last into late 2010 or early 2011. Revenue for 2009 was expected to decline -15%.

The toxic asset auction under the TALF program was a bust and that depressed the markets. The trillion dollar TALF program designed to remove troubled assets from bank balance sheets only received $1.7 billion in loan requests in today's auction. That was down -64% from the auction held in late March. During the two-hour window the Treasury exchanged cash for $896 million in credit card debt and $811 million collateralized by auto loans. The three main companies offering up the debt were Cabela's with $486 million in credit card loans offered, Carmax offering $630 million in auto loans and World Financial offering $709 million in credit card loans and loans on Nissan cars. Ahead of the auction there was another billion of collateralized debt rumored to be offered but it did not make the cut. The $1.7 in completed transactions was dramatically less than the $8.2 billion in eligible deals offered in the first auction. Only $4.7 billion of those actually made it into the auction. Investors and participating companies are becoming more wary over the auctions because of complicated paperwork, requirements for only AAA credits, provisions for employment of foreign nationals and because of potential retroactive interference by lawmakers. The debt was traded at 200-280 basis points over the swap rate.

The lack of any major players stepping up to the loan window concerns the major banks, Fed, Treasury and analysts. In theory it should mean that nobody needs to borrow from the government but in reality it actually means everyone is scared to borrow from the government. If this continues to be seen in the various government bailout programs then the ability of those programs to function is seriously questioned. Today's TALF auction should have seen $20 to $50 billion in loans offered. This suggests the Public-private Bad Bank program due to start later this month may have even fewer takers. If you offer bailouts and nobody accepts because they don't trust the government to not modify the terms later than your entire program fails.

The IMF is reportedly planning on raising its estimate of toxic assets to $4 trillion when it provides its next assessment of the global economy on April 21st. That would be an increase from the prior $3.1 trillion estimate. Nouriel Roubini has been saying $3.6T to $3.8T for months. This suggests U.S. banks would need to double their current write-offs of $1.2 trillion. The change in mark-to-market to mark-to-make-believe could eliminate some of those write-offs.

I also heard today that the results of the stress test on banks would not be released until the end of April and not until the bank earnings cycle had passed. I also heard that the individual results for each bank might never be released. Turbo Tim Geithner needs to get a grip on reality. He promised investors and consumers for the last 3-4 weeks that the stress test would solve the problems by discovering which banks are healthy and which banks are at risk and forcing them to recapitalize. Now they are not going to release the results? You could not write a script this bad. Somebody needs to get Turbo Tim a playbook with a permanent market so he can remember what he said and can't change it once he writes the plan in the book.

Sun Microsystems (JAVA) continued its two-day decline to close at $6.25 after the IBM deal died. IBM withdrew the $7 billion offer a day after Sun's board said it was unhappy with the reduced amount. IBM was first rumored to be offering between $10-$11 billion for Sun but that offer faded after IBM discovered some problems in the way Sun licenses Java. Founder Scott McNealy may be turning into the 2009 equivalent of Jerry Yang. Yang demanded more money from Microsoft and ended up seeing the initial $31 deal evaporate and Yahoo stock decline to trade under $9. JAVA traded as high as $27 back in 2007 but has been in a persistent decline with rising competition in the server market. Sun has been shopping itself for the last year as prices continued to decline. Shares traded under $4 as recently as mid March. I am sure McNealy has $20 ingrained on his brain and IBM was thinking more like $8. If he is not careful he will be dealing with the reality of $4 once again.

Sun Chart

The Dow lost 186 points and declined to support at 7800. On Sunday I recommended buying a dip to support at 7800 followed by stronger support at 7500. Today's close at 7789 was a textbook dip to that initial support level. We had four weeks of major gains without more than a day of profit taking. It is only natural that holders would take some profits ahead of the earnings cycle. I am still in buy the dip mode. It is unclear from today's action if the 7800 level is going to hold and it would be very healthy if we did get a further drop to 7500. It would give those really cautious buyers an excuse to finally take a position.

Dow Chart

Tuesday was NOT a sellers market. It was simply a buyer boycott and some moderate profit taking. The volume was severely anemic with only 8.6 billion shares traded and the lowest volume since February 13th. In the table below note the decreasing volume on the down days. Today was not a change in trend and only a buyer boycott while the market consolidates its gains and traders wait for next weeks earnings wave.

Market Internals Table

The S&P-500 only declined to 815 and could easily return to major support at 780. I would not be concerned about the recent rally unless that 780 support level broke. We saw resistance at 840 provide a solid top for two days and that kind of resistance causes traders to question the future of the rally and take profits as they await the next move. So far this is not a material decline despite the -25 point loss this week.

S&P-500 Chart

The Nasdaq remains the strongest index and the decline to 1560 was totally inline with expectations. The problem for the Nasdaq will come when the big techs begin to report earnings next week. With PC sales declining and chip sales in the tank we could see some unexpectedly severe earnings misses. However, it would be hard to imagine that investors have not already priced in the worst given the last six months of pessimism. The Nasdaq has several levels of support between today's close and 1490 but 1490 is the only one that matters. As long as that level holds the rally is intact.

Nasdaq Chart

Let me restate my view. I would be a dip buyer to Dow 7500, Nasdaq 1490, S&P 780. Below those levels I would be bearish. The earnings cycle does not really kick into high gear until next week so the rest of this week is just foreplay. Beware the FOMC minutes on Wednesday because they could increase volatility. However, if the SEC announces the reinstatement of the uptick rule I believe the VIX could drop sharply and the market find more stable footing. Personally I don't believe the uptick rule in a penny market has anything but emotional value but quite a few analysts are calling for its return. Puts on the VIX in advance of that announcement could be profitable.

Jim Brown