The better than expected economic results this morning helped the markets to post back to back gains and stretching the streak of gains to three days.
Market Stats Table The economic calendar today was slim with only Pending Home Sales and Auto Sales for May. The Pending Home Sales was a lagging indicator since the period covered was April. Home sales rose +6.7% and well over analyst expectations. The index rose to 90.3 from 84.6 with the consensus at 85.0. This was the third consecutive monthly gain in sales with the northeast posting the sharpest gains. The index is now 12.3% above it's January low and only slightly below the peak at 93.4 seen last August. Obviously the pending home sales are being driven by the rising volume of foreclosures and low interest rates. Auto sales data for May showed that Ford gained market share despite a 24.2% drop in sales. Government Motors (GM, actually GMGMQ.PK now) reported a 29% decline and officials said it was the best month of year so far for the bankrupt automaker. GM car sales fell -37.7% while trucks fell -20.8%. GM also said Q2 production would fall to only 390,000 vehicles, down -53% from Q2-2008. Chrysler posted the biggest drop in sales, down -47% to only 79,010 vehicles. This was actually a small improvement from April. Chrysler suffered from the appearance that the government might let them fail and then the multiple takeover discussions with Fiat clouded the outlook. Ford posted the biggest market share gain since 2006 and Ford said new car sales were brisk. Ford is the only U.S. automaker not in bankruptcy. Toyota posted a 40.7% drop in sales. Honda's sales fell -41.5% and Nissan sales fell -33.1%. The annual rate of sales for all brands came in at 9.9 million units compared to 9.3 million in April. This is down from 14.3 million in early 2008. GM clams it has a buyer for the Hummer brand but would not disclose the name. Reportedly it is the Chinese firm Sichuan Tenzgzhung Heavy Industrial Machinery of China. Under the terms of the deal the new owner will contract to GM to make the Hummers for an unspecified period of time. GM is also thought to have buyers for the Saturn and SAAB brands but the deals have not been finalized. In 1962 GM had 464,000 workers and was paying benefits to 40,000 retired workers. There was one retiree for every 11.6 employees. The average age at death was 67. GM currently has 62,000 hourly workers and 29,000 salaried workers in the USA. Today GM also has 493,000 retired workers drawing benefits and the average age at death is 77. That is 5.4 retirees for every single active GM worker. Over 75% of the retirees were hourly workers. The average retiree receives $37,800 in payments annually plus medical benefits. There is no possible way that a single employee can support 5.4 retirees in the manner they have become accustomed. This is why the UAW has already begun cutting benefits to current retirees as a result of the bailout deal. GM has transferred its liabilities to a trust and as part of the bailout the UAW gets a 17.5% ownership position in GM plus some other payments. When GM comes out of the bankruptcy they will no longer have this monster cash drain. Unfortunately retirees will be forced to live on drastically reduced income levels. The administration is sure trying hard to make people believe they don't want to be in the auto business. The administration is taking credit for the positive things to do with the bailout like saving jobs and forging a new path to make ecologically sensitive cars of the future that nobody will want. However they are trying very hard to avoid blame for plant closings, layoffs, dealership terminations, etc. While the administration is forcing these changes on GM you may have noticed that the GM officials announce all the negative points while the administration only covers the positive big picture points. They want all the credit but none of the blame. Sounds like politics as usual. I saw an email today from a person that has 8,000 shares of GM @ $3.25 and they were asking if they should sell now that GM has filed bankruptcy. Let me be perfectly clear. Despite the fact that GM/ GMGMQ.PK is still trading on the pink sheets at 61-cents today it will go to ZERO eventually. If you still own stock in GM every day you delay in selling it only results in a bigger loss. Don't make the mistake of thinking I have $25,000 in my GM position and I can't afford to sell it for 61-cents ($4880) today. I feel your pain but can you afford to sell it for ZERO a few weeks from now? I had a friend that had over IMG million in Microsoft $50 LEAPS (split adjusted) back in 2000 when Microsoft started their long decline. As those leaps lost value he hung on because he could not afford to take a $200,000 loss, then a $300,000 loss, then a $500,000 loss, etc. He eventually saw them expire worthless because he could not afford to take a loss. It ruined his health and his marriage. Do you think if he had it to do over again he would watch his fortune evaporate again? Obviously not. I am sure we have all done that with a position of our own at one point. Hopefully everyone learned that it is better to take a small loss and live to trade another day than take a big loss and have to work anther decade past retirement to make it up. If you own GM you should use any day the market is open as a chance to dump it. GM was booted from the Dow on Monday and replaced by Cisco Systems. That gives the index a very strong tech component with Intel, IBM, Microsoft and Hewlett Packard. This brings the tech component in the Dow to about 17% and could accelerate it to the upside when the next big tech move appears. Dow component Citigroup was also booted from the Dow and replaced by Travelers Insurance (TRV). They are the largest U.S. property and casualty by market cap. The committee said Citigroup was likely to have a considerable government ownership position for years to come and replacing them with Travelers would restore stability to the financials sector of the index. The changes will become effective prior to the open on June 8th. The Fed's TALF loan program scored a big win today. After the first two TALF auctions barely drew any applicants the April auction picked up significantly but the May auction completed today was the largest. In March the auction only managed to sell $4.7 billion in asset backed loans. The April auction slipped to IMG.7B and April rebounded to $10.6B. The May auction raised over $15 billion in loans to companies including Ford, Deere, Citigroup, CIT Group, American Express, BMW and Nissan. The loans covered various types of consumer debt including auto loans, credit card loans and heavy equipment loans. These loan sales provide cash to the companies so they can continue lending to consumers. Now that the process is starting to move smoothly we could see some more companies come to the TALF market over the coming months. Meanwhile the still inoperative Public Private Partnership program may not get off the ground. The program was created to buy toxic assets from banks and mortgage companies using a combination of government and private funding. Unfortunately the details have never been able to be resolved to everyone's satisfaction. The bidders want to pay too little and the sellers are asking too much. There is confusion on how to split the revenues on the back end and the market and values are improving while the debate rages on. The government may escape this debt trap without ever loaning any money if the market and the financial sector continue to improve. JP Morgan announced a $5 billion stock offering on Monday night that was designed to free them from the TARP TRAP. Have you ever noticed that TARP and TRAP have a nearly identical spelling? American Express said it would raise $500 million and Morgan Stanley said it would raise $2.2 billion. The goal of these secondary offerings is to meet the Fed requirements for paying back the TARP. Banks are taking advantage of the current market rally to sell additional stock and continue their capital raises. Nobody knows when the appetite for bank stocks could wane so they want to strike while the market is hot. Banks believe the 20-30 cents per share savings to earnings from repaying the TARP loans is worth the minor hit to the stock price from the offerings. JPM and AXP traded lower but MS ended positive for the day. Analysts thought JPM's stretch to $5 billion and their pricing at the top of the range was probably a little greedy in today's market. Homebuilders were hot after the pending home sales numbers were released. Toll Brothers (TOL) rose +3.9%, Pulte Homes (PHM) +3.5%, Hovnanian +8.6% and DR Horton (DHI) +4.1%. The pending home sales spike of +6.7% was the strongest monthly gain in eight years. With mortgage rates rising 75 basis points in the last two weeks the number of mortgage applications has slowed. We are rapidly approaching the end of the selling season for new homes. Buyers typically want to buy in the spring so they can move over the summer vacation and have the kids ready for the next school year in the fall. As we move farther into the summer the new home sales numbers will slow. Homebuilders are hoping to flush any remaining inventory as buyer traffic slows and not have to hold it over the slow winter months. If you want a bargain in a new home wait until late summer to buy when the builder incentives will be at their highest. Oil traded over $69 intraday ahead of tomorrow's oil inventory report. The $70-$75 OPEC price target for year-end could be hit next week if inventories show a big drop tomorrow. Oil prices have more than doubled since the lows and gasoline prices have risen over 80%. According to the Lundberg survey the average price in the U.S. today is $2.51 but it is much higher in many areas. In Michigan the average price is $2.70 and in Illinois it is $2.76 per gallon. Crude Oil Chart test line 1 The economic calendar today was slim with only Pending Home Sales and Auto Sales for May. The Pending Home Sales was a lagging indicator since the period covered was April. Home sales rose +6.7% and well over analyst expectations. The index rose to 90.3 from 84.6 with the consensus at 85.0. This was the third consecutive monthly gain in sales with the northeast posting the sharpest gains. The index is now 12.3% above it's January low and only slightly below the peak at 93.4 seen last August. Obviously the pending home sales are being driven by the rising volume of foreclosures and low interest rates. Auto sales data for May showed that Ford gained market share despite a 24.2% drop in sales. Government Motors (GM, actually GMGMQ.PK now) reported a 29% decline and officials said it was the best month of year so far for the bankrupt automaker. GM car sales fell -37.7% while trucks fell -20.8%. GM also said Q2 production would fall to only 390,000 vehicles, down -53% from Q2-2008. Chrysler posted the biggest drop in sales, down -47% to only 79,010 vehicles. This was actually a small improvement from April. Chrysler suffered from the appearance that the government might let them fail and then the multiple takeover discussions with Fiat clouded the outlook. Ford posted the biggest market share gain since 2006 and Ford said new car sales were brisk. Ford is the only U.S. automaker not in bankruptcy. Toyota posted a 40.7% drop in sales. Honda's sales fell -41.5% and Nissan sales fell -33.1%. The annual rate of sales for all brands came in at 9.9 million units compared to 9.3 million in April. This is down from 14.3 million in early 2008. GM clams it has a buyer for the Hummer brand but would not disclose the name. Reportedly it is the Chinese firm Sichuan Tenzgzhung Heavy Industrial Machinery of China. Under the terms of the deal the new owner will contract to GM to make the Hummers for an unspecified period of time. GM is also thought to have buyers for the Saturn and SAAB brands but the deals have not been finalized. In 1962 GM had 464,000 workers and was paying benefits to 40,000 retired workers. There was one retiree for every 11.6 employees. The average age at death was 67. GM currently has 62,000 hourly workers and 29,000 salaried workers in the USA. Today GM also has 493,000 retired workers drawing benefits and the average age at death is 77. That is 5.4 retirees for every single active GM worker. Over 75% of the retirees were hourly workers. The average retiree receives $37,800 in payments annually plus medical benefits. There is no possible way that a single employee can support 5.4 retirees in the manner they have become accustomed. This is why the UAW has already begun cutting benefits to current retirees as a result of the bailout deal. GM has transferred its liabilities to a trust and as part of the bailout the UAW gets a 17.5% ownership position in GM plus some other payments. When GM comes out of the bankruptcy they will no longer have this monster cash drain. Unfortunately retirees will be forced to live on drastically reduced income levels. The administration is sure trying hard to make people believe they don't want to be in the auto business. The administration is taking credit for the positive things to do with the bailout like saving jobs and forging a new path to make ecologically sensitive cars of the future that nobody will want. However they are trying very hard to avoid blame for plant closings, layoffs, dealership terminations, etc. While the administration is forcing these changes on GM you may have noticed that the GM officials announce all the negative points while the administration only covers the positive big picture points. They want all the credit but none of the blame. Sounds like politics as usual. I saw an email today from a person that has 8,000 shares of GM @ $3.25 and they were asking if they should sell now that GM has filed bankruptcy. Let me be perfectly clear. Despite the fact that GM/ GMGMQ.PK is still trading on the pink sheets at 61-cents today it will go to ZERO eventually. If you still own stock in GM every day you delay in selling it only results in a bigger loss. Don't make the mistake of thinking I have $25,000 in my GM position and I can't afford to sell it for 61-cents ($4880) today. I feel your pain but can you afford to sell it for ZERO a few weeks from now? I had a friend that had over $1 million in Microsoft $50 LEAPS (split adjusted) back in 2000 when Microsoft started their long decline. As those leaps lost value he hung on because he could not afford to take a $200,000 loss, then a $300,000 loss, then a $500,000 loss, etc. He eventually saw them expire worthless because he could not afford to take a loss. It ruined his health and his marriage. Do you think if he had it to do over again he would watch his fortune evaporate again? Obviously not. I am sure we have all done that with a position of our own at one point. Hopefully everyone learned that it is better to take a small loss and live to trade another day than take a big loss and have to work anther decade past retirement to make it up. If you own GM you should use any day the market is open as a chance to dump it. GM was booted from the Dow on Monday and replaced by Cisco Systems. That gives the index a very strong tech component with Intel, IBM, Microsoft and Hewlett Packard. This brings the tech component in the Dow to about 17% and could accelerate it to the upside when the next big tech move appears. Dow component Citigroup was also booted from the Dow and replaced by Travelers Insurance (TRV). They are the largest U.S. property and casualty by market cap. The committee said Citigroup was likely to have a considerable government ownership position for years to come and replacing them with Travelers would restore stability to the financials sector of the index. The changes will become effective prior to the open on June 8th. The Fed's TALF loan program scored a big win today. After the first two TALF auctions barely drew any applicants the April auction picked up significantly but the May auction completed today was the largest. In March the auction only managed to sell $4.7 billion in asset backed loans. The April auction slipped to $1.7B and April rebounded to $10.6B. The May auction raised over $15 billion in loans to companies including Ford, Deere, Citigroup, CIT Group, American Express, BMW and Nissan. The loans covered various types of consumer debt including auto loans, credit card loans and heavy equipment loans. These loan sales provide cash to the companies so they can continue lending to consumers. Now that the process is starting to move smoothly we could see some more companies come to the TALF market over the coming months. Meanwhile the still inoperative Public Private Partnership program may not get off the ground. The program was created to buy toxic assets from banks and mortgage companies using a combination of government and private funding. Unfortunately the details have never been able to be resolved to everyone's satisfaction. The bidders want to pay too little and the sellers are asking too much. There is confusion on how to split the revenues on the back end and the market and values are improving while the debate rages on. The government may escape this debt trap without ever loaning any money if the market and the financial sector continue to improve. JP Morgan announced a $5 billion stock offering on Monday night that was designed to free them from the TARP TRAP. Have you ever noticed that TARP and TRAP have a nearly identical spelling? American Express said it would raise $500 million and Morgan Stanley said it would raise $2.2 billion. The goal of these secondary offerings is to meet the Fed requirements for paying back the TARP. Banks are taking advantage of the current market rally to sell additional stock and continue their capital raises. Nobody knows when the appetite for bank stocks could wane so they want to strike while the market is hot. Banks believe the 20-30 cents per share savings to earnings from repaying the TARP loans is worth the minor hit to the stock price from the offerings. JPM and AXP traded lower but MS ended positive for the day. Analysts thought JPM's stretch to $5 billion and their pricing at the top of the range was probably a little greedy in today's market. Homebuilders were hot after the pending home sales numbers were released. Toll Brothers (TOL) rose +3.9%, Pulte Homes (PHM) +3.5%, Hovnanian +8.6% and DR Horton (DHI) +4.1%. The pending home sales spike of +6.7% was the strongest monthly gain in eight years. With mortgage rates rising 75 basis points in the last two weeks the number of mortgage applications has slowed. We are rapidly approaching the end of the selling season for new homes. Buyers typically want to buy in the spring so they can move over the summer vacation and have the kids ready for the next school year in the fall. As we move farther into the summer the new home sales numbers will slow. Homebuilders are hoping to flush any remaining inventory as buyer traffic slows and not have to hold it over the slow winter months. If you want a bargain in a new home wait until late summer to buy when the builder incentives will be at their highest. Oil traded over $69 intraday ahead of tomorrow's oil inventory report. The $70-$75 OPEC price target for year-end could be hit next week if inventories show a big drop tomorrow. Oil prices have more than doubled since the lows and gasoline prices have risen over 80%. According to the Lundberg survey the average price in the U.S. today is $2.51 but it is much higher in many areas. In Michigan the average price is $2.70 and in Illinois it is $2.76 per gallon.
Crude Oil Chart The main reason for the rise in oil is still the decline in the dollar. There are inflation reasons and hopes for a global recovery but the dollar is still the major factor. The dollar index sank again today to 78.40 and the lowest level since December. There are conversations taking place around the world about replacing the dollar as a global currency. China, Russia and Brazil are the recent heavyweights adding their concerns to those Middle Eastern and European countries that have been down on the dollar for quite a while. Chinese officials questioned Treasury Secretary Geithner when he was there last week. When he was questioned after a speech and he replied the U.S. favored a strong dollar the audience broke out in catcalls. When he was questioned in another meeting by Chinese officials about the decline in the dollar he told them not to worry that the U.S. would always support a strong dollar and one Chinese official said something to the effect of "We hear what you are saying but would feel more comfortable if you would show us the math behind your claims." Ouch!
Dollar Index Keeping the market in check today were the chip stocks. The Applied Materials CEO was on the wires saying there would be failures in the sector because of a lack of consolidation. He said consolidation of weaker firms through mergers or acquisitions was hard due to the technological differences between the firms. Most chip stocks were down today but still much higher than they closed on Friday. Monday's chip rally was huge and today was simply a profit-taking day in chips. Oracle CEO Larry Ellison said today that Oracle could produce a Netbook computer using Sun Microsystems technology. Oracle is buying Sun. You may remember Ellison's prior foray into Internet computers. Back during the tech bubble Ellison was pushing the idea of a cheap skeleton PC for using the Internet with all the applications like Word or Excel served over the Internet rather than hosted on the PC. The idea never took off and Oracle was forced to abandon the concept. The current Netbook concept is gaining momentum. After the bell Aetna (AET) warned that earnings would fall to between 3.55-3.70 per share from prior estimates of 3.85-3.95 per share. The warning was due to rising medical costs and lower projected Medicare revenue. AET fell -8% in after hours trading. Microsoft announced it was going to release the successor to Vista called Windows 7 as soon as October 22nd. This should give the PC sector a sales boost for the holidays since Windows 7 is not seen as problem plagued as was Vista. Microsoft normally give a certificate for a free upgrade to the new Windows with any PC purchased in the months leading up to the new release. However there was no mention of any certificate program for the back to school shopping season. The certificate program is to prevent a lag in sales when consumers put off buying a new computer until the new Windows versions are released. Most don't want to have to install a replacement operating system after just a couple months of ownership but history has shown the certificate program helps PC sales even though quite a few consumers never use the certificate to upgrade. The market challenges for the rest of the week include the Jobs report on Friday. Estimates are falling with a loss of -520,000 jobs for May. A better than expected number would be a huge market driver. I am not sure a worse than expected number would matter given the current market sentiment. Chairman Bernanke will give testimony on jobs and the economy on Wednesday to the House Budget Committee and be quizzed by lawmakers on the status of the Fed's economic bailout measures. This could be a market mover. If he says something about green shoots popping out all over I am sure we would see a major rally. However, the Fed Chairman is fully aware of how his comments could move the market so he will be on guard with his statements. Still there is always a chance the market will hear something to spark buying, or selling. For economic reports there are the Factory Orders and ISM Nonmanufacturing Index, Oil and Gas Inventories, Mortgage Applications and the Challenger Labor report. Factory Orders and the ADP report would be my bet for the most market beta. The ADP report at 8:15 tomorrow is expected to predict a loss of 525,000 jobs in May. This is a prediction of the Friday government Jobs report so this preview can be a market mover. The markets rallied today but the numbers were minimal. After Monday's big gains they seem hesitant to provide confirmation. However, despite the lack of movement the volume was decent at 10.4 billion shares. Not strong, just decent. For a consolidation day and a lot of pressure from the banks it was bullish just to finish in the green. The consensus seems to be that everyone is waiting on a pullback that may never come. Nobody wants to go long with conviction because the market is perceived to be overbought after the three-month rally. Unfortunately the pullback never comes and funds are faced with trying to leg into the market in small bites while saving their biggest cash for the expected pullback. In a piece by Jeffrey Saut of Raymond James about conversations with fund managers he said nearly all of them are under-benchmarked in equities. With the market rising they are being forced to reallocate and this is causing a form of fund panic. It is like a short squeeze only they are short equity ownership. They are being forced to buy the rallies even though this is not a pleasant situation. As a fund manager you are either with the pack or against the pack. Your compensation depends on you producing the same type of return as your competitors. It is buy or die in the face of a continued market rally. For them their sentiment is still cautious. They are afraid of the market because it has failed to sufficiently consolidate the recent gains. The minor dips along the way were just enough to start building interest then a major short squeeze would erase their hopes for a decent decline to buy. Faced with underperformance compared to their peers ever day is a new Excedrin headache. One writer said it is now a "business decision to buy rather than an investment decision." They know it is not a rational market but they are fully aware it can remain irrational for an extended period of time. Many funds and institutions have refused to believe or buy into the rally for a variety of reasons. Now the underperformance is killing them and that is why any future dips are likely to be shallow rather than corrective. The Dow rallied strongly on Monday on yet another short squeeze. The majority of the gains were in the first 90 minutes. The rest of the day was treading water as those shorts that remained slowly came to the realization that it was not going to tank again at the close. This morning's opening dip was quickly bought but Monday's resistance high held and a long day of trench warfare developed. The range was very tight and volume was almost dead even as longs took profits and shorts continued to cover. As a trading day is was boring as hell. As a consolidation day it was excellent. The markets closed higher for the third day and in clear breakout mode on several indexes. The Dow came to a dead stop at the 200-day resistance at 8751 but failed to give back any ground. Support has appeared at 8700 and traders are waiting patiently with their fingers on the trigger for signs of a directional move. None came today. Should the Dow move higher there will be a significant battle at 9000.
Dow Chart The S&P, unlike the Dow, has broken over the 200-day average and that is a strong technical indicator for fund managers. Most have a hard rule to be long over the 200 and short under the 200. This could be a sea change for fund manager involvement in the current market. The S&P has broken out to a new high for 2009 and closed over the January resistance highs. A move over the psychological 950 level will be viewed as confirmation of the breakout and should trigger additional buying.
SPX Chart The Nasdaq may have struggled on Tuesday with the chips giving back some of Monday's gains but the breakout picture is clear. The Nasdaq was the first to break over the 200-day average and has now broken out to a new 8-month high. Once the chips shake off the Tuesday blues the Nasdaq should lead us higher. Short-term support is now 1825 and resistance is 1900. The Russell-2000, not shown, is also in clear breakout mode over the January highs and the 200-day average. This suggests fund manager involvement and rising commitment.
Nasdaq Chart For the rest of the week I would remain cautious if it appears the shorts are able to mount enough of a defense to test initial support levels. The Friday/Monday gains are simply out of character and despite being clear breakouts on the charts we need to see confirmation in the form of high volume on any continued move. We could easily see a decent dip just on profit taking but I believe it will be bought. I think we are on the verge of a continuation leg higher if just a few more ducks fall in sequence. Bernanke's testimony on Wednesday and the ADP report at 8:15 clearly have market moving potential. I would continue to buy the dips until proven wrong. Jim Brown  |
