Market Wrap, Tuesday, 04/28/2009 Just Passing Time by Jim Brown Click here to email Jim

HAVING TROUBLE PRINTING?

The markets remain locked in a narrow range while trader sentiment is slowly inoculated against the swine flu and we await the potential results of the financial stress test.

Market Stats Table

The opening blast on Monday was a new pandemic sweeping the globe and it started close to home in Mexico not half a world away in China. Starting this close to home and with the explosion of media reporting on Sunday evening the markets took a plunge at Monday's open but that dip was quickly erased. As the day wore on the continued alarming news about the swine flu weighed on trader sentiment. News that the Treasury Dept had told Citigroup and Bank America to raise more capital also weighed on sentiment. The markets closed with a minor decline and no harm done. On Tuesday the markets opened lower again but quickly recovered. After trading nearly to 8100 the Dow closed down only -8 points. No harm, no foul and the wait continues.

The economics for the day were strongly positive. Signs of improvements came from several areas. The Consumer Confidence for April spiked to 39.2 from the prior reading of 26.0. This was also well above the consensus estimate for 29.5. The majority of the gain was in the expectations component that spiked from 30.2 to 49.5. The current conditions component barely moved with a gain to 23.7 from 21.9. Clearly consumers still believe the economy is in trouble but expect it to recover soon. Those who expected jobs to increase nearly doubled from only 7.3% to 13.9%. Those planning to buy a car jumped nearly 25%.

This was a much improved confidence report and suggests consumers may start spending again if they think conditions are improving. Those consumers who expect the stock market to rise over the next year rose 12 points to 33% and the highest level since Oct 2007. Despite this rebound in confidence the 39.2 headline level remains below 40 and a level not seen since 1969. Analysts point to the current boom in refinancing as liquefying home equities and providing a sense of security for consumers they have not had in over a year.

Consumer Confidence Chart

Following the jump in Consumer Confidence we got the Richmond Fed Manufacturing Survey, which spiked from -20 to -9. This was a significant improvement from the low of -55 seen in December. Shipments rose +12 points to -3 and the highest level since April 2008. New orders rose +18 points to -2. This was a monster rebound and pushed the major components to only single digit declines and much better than the last several months. The Richmond Fed district is only one of the 12 Fed districts but is seen as a proxy for the national manufacturing survey, the ISM, which is due out on Friday. This is bullish for the economic outlook of the nation and should the ISM show the same rebound we could be off to the races.

Richmond Fed Survey Table

Richmond Fed Chart

Federal Reserve Districts

The Case-Shiller 20-City house price index for February decreased -18.6% from a year ago and that was actually an improvement over the -19.4% year over year decline reported in January. This was the first improvement in the index since January 2007. Overall prices are still declining but at a much slower rate and we are seeing some improvements in prices in many areas. This along with the record low interest rates and the ability to refinance is a strong glimmer of hope in the housing sector.

Tomorrow we get the Q1 GDP revision and estimates are improving almost daily. The last report showed Q1 GDP declined by -6.34% on an annual basis and the current consensus is for a move higher to only a -5.0% decline. The whisper numbers are even better and Moody's is predicting a reading of -4.3%. If we get a reading better than -5% it will be another sign the economy bottomed in Q4 and the recovery is already underway.

The other big event on Wednesday is the FOMC announcement at 2:15. Analysts are wondering what the Fed is going to pull out of its hat to combat the rising interest rates. The ten-year note closed today with a yield just over 3% and that has been the concrete hard resistance level since early February. The Fed does not want rate to rise and have embarked on a quantitive-easing program with a target rate on the Fed funds at close to zero. In March the Fed announced at the meeting on the 17th they were buying $300 billion in Treasuries to push rates lower and the rate on the ten-year plunged from 3.02% to 2.46% after the announcement. It is doubtful a duplicate announcement on Wednesday will have the same impact so analysts are wondering what new card the Fed will play to lower rates.

In stock news the earnings flow continues but there have been no major surprises. Over 40% of the S&P has reported and nearly 70% have beaten severely reduced estimates. Overall earnings were down over -30% in Q4 and projected to be down over -30% in Q1. That number has improved substantially with the new forecast in the -26% range. Notable earnings due out on Wednesday include AET, AFL, AKAM, HES, LSI, MTG, SBUX, V, WYN and WYE.

The news making holders of financial stocks uncomfortable is the rumor that Bank America and Citigroup have been asked by regulators to raise more capital as a result of the recent stress tests. The banks are reportedly arguing their case to the Treasury against having to raise more capital and dilute existing shareholders even further.

The rumor broke on Monday in the WSJ but no official results from the stress test are due until next Monday. Initially the White House said they were only going to release the "applicable" results with no explanation of what that term means. Now the administration is waffling on that May 4th date saying it could be released over several days beginning on the 4th. The confusion over when and what is going to be released along with the rumor that BAC/C are already being told to raise capital is weighing on investor sentiment.

Most financials are up +60-80% since the March lows so profit taking ahead of the event is to be expected. I warned everyone last week that we were likely to see some choppy trading while we wait for the test results. It is like a fraternity where three people have died recently from sudden onset AIDS. The 19 remaining members are all told in a highly publicized form to take an AIDS test or be kicked out of the fraternity. As the 19 wait for their results it would probably be a little difficult to line up dates. Nobody is going to want to be exposed to bodily contact in any form and it is doubtful others would want to be seen with anyone on the list in public and risk being ostracized. Those 19 would be untouchable until the test results gave them a clean bill of health. These 19 banks are nearly that bad off. Until the test results confirm some semblance of good health nobody wants to admit they own them and they are definitely not buying in quantity.

The swine flu has passed as a market-moving event unless a real pandemic breaks out. There have been 150+ deaths in Mexico and citizens have been banned from eating out or going to school in an effort to halt the spread. In the U.S. more than 64 cases have been reported in six states. However, there is a 2-7 day incubation period so seven days from now there could be a lot more cases.

However, now that we know it exists I believe it will be handled. Even if thousands more become ill the news is already priced into the market. With today's instant communication the spread of a disease, once it appears, is easier to stop. There may be a few stocks like Carnival Cruises and Royal Caribbean, which take a hit or travel sites line Priceline but overall the market will shake it off by next weekend. Priceline already recovered half its losses from Monday. Royal and Carnival have cancelled all port visits to Mexico until the epidemic is over. That would be a nightmare. Get an infected person on a cruise ship for a week. That would incubate thousands and turn them loose on the population just as they became contagious.

Retailers are already seeing improvements in sales and in brokerage upgrades. Merrill Lynch upgraded Home Depot on rising consumer confidence and the idea that the housing sector is improving. HD and LOW were both up for the day. J.C. Penny (JCP) said its home business was improving. Tractor Supply (TSCO) reported sales that increased +13%. Same store sales were up +4.2%. TSCO squeezed out a penny profit when analysts were expecting a four-cent loss. They also announced they were expanding to 1,800 stores. No recession there! It is probably because they don't actually sell tractors. That business is in the tank, ask John Deere, but the rest of the country dwelling population seems to be doing just fine.

In the energy sector BP, Europe's second largest oil company, posted profits of $2.56 billion. That was down from $7.09 billion in the comparison quarter but still better than analysts expected. They did it mostly by cutting costs. Lower oil prices forced BP to slash its capex budget, which includes deepwater drilling. I have said repeatedly this negative feedback loop is going to have monster consequences when demand returns after a couple years of project cancellations. Prices will exceed prior highs simply because so many projects in the pipeline have been cancelled. It takes years to coordinate the start of a new project and years before it can produce oil in any realistic amount. It only takes few months for oil demand to return to normal and that puts us way behind the curve once the rebound begins. Oil services stocks including drillers declined on the BP earnings report.

Valero also posted a better than expected profit on stringent cost cutting programs but also said they were slashing capex spending for the coming year. Valero also said it bought six ethanol plants from bankrupt Verasun and will close on a seventh soon. They paid $477 million for the seven plants. Valero said it expects the ethanol business to return in 2010 due to government mandates.

Microsoft is reportedly working with Verizon to produce a device that will compete with the iPhone. According to the WSJ the phone would be a touch screen mobile phone that would run Windows Mobile as an operating system. The project is codenamed "pink" and could include the Microsoft Windows Marketplace for Mobile. This is Microsoft's answer to the Apple App Store for the iPhone. Apple is also reportedly in talks to market the iPhone on Verizon and is discussing new products to be offered on the Verizon network. Sounds like Verizon is the place to be with these two major firms competing to give you massive amounts of business.

IBM raised its dividend by +10% to 55-cents and authorized another $3 billion stock buyback. IBM rose +$2 on the news. They had to authorize a new buyback so they could buy back enough shares to beat the street earnings estimates the next time they are in trouble. It is a standard ploy by IBM and they have been doing it for years. Fewer shares in circulation means higher earnings per share. IBM frequently surprises analysts with their earnings report by reporting a sharply lower number of outstanding shares. For the next quarter analysts have to revise their estimates based on the new share counts and then IBM beats the street again the next quarter because they bought back another 50 million shares during the quarter. Eventually analysts will catch on.

The Dow declined both days this week but only by a minimal amount. The Dow is having trouble with strong resistance at 8100 but still has a nice pattern of rising lows. The chart shows a rising wedge in the 8000-8100 range and regardless of direction there will be a sharp breakout soon. The daily range can't continue to narrow without an explosive event to end the squeeze. Strong support remains 7800 and it has been tested multiple times. While I believe the direction will resolve to the upside once the stress test results are complete, we are still in an indecisive phase. A move over 8100 hits strong resistance again at 9000. I would love to see that 9000 level tested in order to confound the sell in May crowd.

Chart of the Dow

The S&P chart looks like the Dow with the uptrend intact but resistance at 870 still holding firm. This is a typical third week in earnings market. The overall trend in earnings has been determined and the excitement is fading. We are simply waiting now for the stress test results. If there was no stress test and no 50% decline into the March lows I would be telling everyone to move to cash based on the chart, calendar and weak earnings. It would be a perfect setup for the sell in May crowd. However, this consolidation in place is setting the stage for a continued rebound if the stress test results are positive.

S&P-500 Chart

The Nasdaq uptrend is still intact but it is suffering from post earnings depression. All the big names have already reported and there is little to generate interest in techs. The Nasdaq is not really held back by the bank problems but it is in a holding pattern just like the other indexes until the stress test is over. Support is 1650 and resistance 1700. The Nasdaq is trading in breakout territory but has not strayed very far from that breakout over 1650. I would be cautious here until a new catalyst appeared. That could simply be a move over 1700 just as easily as some news event.

Nasdaq Chart

The Russell chart is showing the clearest picture of the market with a solid wedge and narrowing pattern. Resistance is clear as well as the uptrend support. The Russell was the only major index that ended in the green and that is a testament to fund managers still nibbling at small caps and not that afraid of a potential decline.

Russell 2000 Chart

I am still in buy the dip mode and it looks a lot like we could have another dip in our immediate future. I would key on the Russell and buy a breakout over 480 or a dip to 450. Watch out for volatility around the FOMC announcement on Wednesday. This could be a market mover. The ISM is Friday and the initial results of the stress test on Monday. Lots of potholes to avoid but the bad news bulls enjoy the obstacle course. Short interest is still very high so any breakout could be explosive. The volume for both days this week has fallen -25% from last week's levels. The volume today was only 9.3 billion shares compared to volume over 12 billion on four days last week. The bears have no conviction here and the declines of the last two days have been a buyer boycott rather than a conscious pattern of selling. Don't let the negative outlooks by a few spoil your day. Follow the charts and buy the dips to support.

Jim Brown