Despite apparently stellar economic news the markets have been moving lower as we expected. I cautioned several times over the last few weeks that the week after Thanksgiving could be weak and so far the markets appear to be following the plan. It is not because any fundamental changed but simply profit taking and consolidation in place from the six weeks of gains. So far it is rather tame profit taking given the magnitude of the gains.
Dow Chart - Daily
Nasdaq Chart - Weekly
SPX Chart- Weekly
On the surface it was a spectacular day for economic reports and possibly a preview of what is to follow. The first report out this morning was Durable Goods with a blowout jump of +3.4%. Consensus estimates were in the +1.2% range after the prior month loss of -2.0%. Transport orders provided most of the bounce with new orders ex-transportation rising only +0.3%. Obviously just looking at the headline number would have you believe that the economy was exploding but taking out those large and erratic airline orders puts it back into perspective. Airline orders can amount to billions of dollars a month and are very sporadic although Boeing has been on a roll recently. Looking at a graph of durable goods for the last year looks like a witches smile with alternating spikes and dips nearly every month. Should we be happy this was a spike month? Actually it was a neutral month and it should be Fed neutral. Yes, we should be happy for a Fed neutral report and one that shows continued growth in the economy now that the initial hurricane impacts have faded. This suggests the fourth quarter got off to a good start and numbers should continue strong into year-end.
The biggest report of the day was a spike in New home Sales to 1,424,000 units on an annualized basis. This is a new record high and the largest increase in 12 years. Where is that housing decline? On Monday we saw a decline in existing home sales to 7.09 million units and down from 7.29 million in September. One day we are in a steep decline of -2.7% in existing housing and the next we are seeing a +13% jump in new homes. What gives? The new home numbers are derived from a builder survey where they report new "contracts" signed not new closings. The existing home sales were based on actual closings. While signing a contract can be counted as a sale for today's numbers it does not mean you will close the deal. Many builders accept token amounts of money to contract a new house but in many cases your liability is only that deposit. You can walk and leave the builder hanging. The builder just sells the house to somebody else and likely for more money given the housing market for the last several years. Here is the rub. The New Homes Sales survey released today has a margin of error of +/- 17.7%. That is a whopping margin of error that spans 35 percentage points. This does not mean we should not discard the data but we should interpret it with caution. Sales in the West jumped +47%, Northeast +43%, South +1.9% and Midwest fell -9%. The margin of error on the sales in the West is +/- 56% to illustrate the volatility of the numbers. Inventory to sales did continue to rise despite a drop of inventory on hand from 4.7 months to 4.3 months. Actual homes for sale came in just below 500,000 and a +20% gain year over year. That should raise some eyebrows. If you are selling your home you can rejoice in the numbers since John Doe buyer will only see the headline but almost analysts agree it will be revised sharply downward in December. Homebuilders were unable to take advantage of the good news with most of them down for the second day in a row. Investors took advantage of the morning news spike to exit positions while analysts were criticizing the numbers.
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Fannie Mae said today that they expected home sales to drop -7% in 2006. They said Fall of 2005 would be a peak in housing due to a slowing consumer in 2006. The consumer may argue with that based on the jump in Consumer Confidence for November. Confidence jumped to 98.9 from 85.2 in October. Present conditions jumped to 114.0 from 107.8 and expectations jumped to 88.8 from 70.1. That suggests consumers are looking for better times ahead rather than in December. The jump in confidence was said to be on lower gasoline prices and a better outlook on jobs. Buying plans rose for everything but autos. Anybody even remotely interested has been seduced into buying a new car over the last two years and that means there is far less interest in buying the current round of offerings. Retailers said consumers voted with their wallets last weekend and the numbers were huge. Visa reported that customers charged $9.6 billion on Visa cards over the Black Friday weekend. This was a +16% jump over 2004. Cyber Monday attracted $505 million in online Visa charges for a +26% jump over 2004. It is the holiday season and consumer sentiment should continue to climb through December but could decline in January as those Visa bills begin to come due.
Wednesday continues the flood of economic reports with GDP, NAPM-NY, Chicago PMI, Kansas Fed Survey, Beige Book and Oil Inventories. The GDP will be a major report with estimates calling for a jump to +4.1% for Q3 compared to +3.8% in Q2. I am worried that the big decline in auto sales in September could derail that estimate. The Chicago PMI is expected to decline -2 points to 60.7 but whisper numbers are starting to call for a gain instead. Wednesday should be a news intensive morning but market volatility is not expected. Thursday continues the deluge with 10 economic releases the biggest of which is the ISM with estimates of a drop to 57.8 from 59.1. Friday is headlined with the Jobs report and official estimates for a gain of +210,000 jobs. Merrill Lynch is expecting a gain of +230,000.
In stock news it was a day where the headliners were the losers. Calpine (CPN) announced that Peter Cartwright, founder, CEO, President and Chairman, along with CFO Robert Kelly would be stepping down after failing to return CPN to profitability. CPN has been under pressure after spending $17 billion to build new power plants over the last 15 years. They sold their oil and gas properties last year at what they thought was the top in the market with expectations of being able to buy gas cheaper this year. It was not the top and gas doubled and fears of a bankruptcy are growing. The stock fell -56% today on a volume of 186 million shares. In 2001 when the stock was $58 that would have been an enormous amount of money. Instead the drop to only 54 cents at the close was only a drop in the bucket as investors threw up their hands in disgust. After the close today S&P announced it was removing CPN from the S&P-500 and adding Genworth Financial (GNW). Genworth was the recent spin-off from GE. The change will take affect after the close of trading on Thursday. Yes, Google was snubbed again. CPN had a market cap as of the close today of $307 million and ranked 500th in the index. Genworth had a market cap of $16 billion. This could cause some selling in the S&P as index managers adjust their weightings to compensate. GNW jumped $1.50 in after hours on the news.
Chart of Calpine - Monthly
Chart of Google - Weekly
Google suffered its largest lost ever of -$19.94 or -4.7% to $403.80 after two firms issued downgrades on the stock. This came only one day after UBS announced a $500 price target. Merrill Lynch said Google was starting to attract negative publicity due to its aggressive encroachment into other companies business. Funny, I thought that is what capitalism is all about, gaining market share at the expense of others. Dell prospered on that model for a decade without attracting negative publicity. Stanford Institute of Equity Research said the risk/reward no longer justified a buy rating at these levels. Google is now said to be fairly valued at 45 times 2006 earnings. This compares to Yahoo 42x, Ebay 45x and Amazon at 40x. However, it does not take into account that Google is growing at 2-4 times the rate of everyone else. If they ever split their stock, say 10-1, it would hit $500 post split ($50) in a matter of seconds.
Gold prices rose to $502.30 overnight as the buying in precious metals continues. It retreated to $494.30 intraday but recovered to touch $500 again at the close. There is a real battle of minds going on among analysts as to why gold is soaring. Some say it is a predictor of future inflation and a rush to safety. Others claim it is higher demand due to global growth. I reported last week that several countries were adding to gold reserves and reducing investment in other currencies ahead of a coming global slowdown. I also believe that OPEC nations, especially Saudi Arabia, are pouring oil dollars into gold ahead of a devaluation of the dollar on the next round of oil price highs. The U.S. has the most to lose of any other country once Peak Oil has passed and other governments know it. The U.S. economy will experience severe inflation and an eventual recession when the oil ceases to flow freely. I believe the spike in gold is due to other countries planning for this eventuality. Helping fuel this short squeeze is a drop in output from South Africa. The Gold ETF (GLD) closed at a new historic high at $49.80.
Chart of Gold - Daily
Chart of Oil - Daily
Natural Gas Chart - Daily
Oil prices fell again after the Saudi Oil Minister Ali Naimi said on Saturday that OPEC is unlikely to cut production at its meeting in Kuwait next month. The current OPEC ceiling has been 28 mbpd for the 10 members excluding Iraq but they have been pumping at full capacity at levels over 30 mbpd to compensate for the hurricane shortages. Naimi said that prices are a "little high" and OPEC would attempt to moderate those prices. It is thought that OPEC is now targeting $55 as their base rate. Venezuela's Chavez has been calling for production cuts to keep oil prices nearer to $60. Oil inventory levels announced tomorrow are not expected to show a significant build. Refineries are being repaired and daily refining volumes are increasing. That should lead to an eventual draw down in crude levels. Natural gas storage levels announced on Thursday should show another week of draws as the cold weather continues. The blizzard in the Midwest over the weekend is moving toward the Northeast and causing strong demands on natural gas. If this weather continues we could begin to see some substantial draws in both natural gas and heating oil.
The busiest hurricane season on record will expire tomorrow but not before tropical storm Epsilon became the 28th storm of the season. Epsilon is not a threat at 850 miles east of Bermuda but it still counts. According to forecasters 2006 should be a strong hurricane season as well. Glad I don't live on the Gulf coast and forced to play hurricane roulette every year. Forecasters are still calling for a colder than normal winter due to the same weather patterns that produced the record hurricane season. Winter may have gotten a slow start with 70-degree weather in the Northeast today but it appears to be picking up speed.
The nice weather in New York may be from a sunny disposition from all the workers at Goldman Sachs. It is estimated that Goldman will dole out $11 billion in bonuses for 2005. Yes, Goldman is a public company (GS) but it still acts like a private one. I am thinking about giving up my day job and going to work for Goldman based on these numbers below. Estimated bonuses for secretaries begin at $15,000, junior analyst's $70K and associates $95K. Sound good? It only gets better. 250 managers will get more than $2 million EACH, executive managers $3M and senior managers $3M. Those are the paupers compared to the higher rungs on the ladder. There are numerous managers, traders, equity specialists, etc, getting from $20M to $40M for their efforts. Many get more than the officers but don't worry about them. The vice chairman gets $17M, CFO $19M, president $29M and CEO $29M. Stockholders, they get a dividend yield of a measly 0.76%. The stock did appreciate +30% so far in 2005 but fell -$5 when news of the bonuses hit the wires. This is one company where it may be more profitable to work for instead of own.
The Dow posted a new high for November at 10959 as the economic headline numbers rippled through the markets. Unfortunately once aircraft were removed from the Durable Goods Orders and analysts shredded the New Home Sales faster than a Gulf hurricane through a subdivision it was unable to hold its gains. The Dow fell back to close at 10889 and the second consecutive close under 10900. As I mentioned earlier it is not the fault of the Dow, although half of the components are still down for the year. The Dow is up +7% since the October-27th lows and it simply needs a rest.
The Nasdaq has given up more ground than the Dow with a close today at 2233 and well off the 2269 high from Friday. The minor -6 point loss for the day was a yawner and nothing to get excited about. Dip buyers are alive and well but are still waiting for a real dip to buy. I would expect them to appear in greater numbers around 2220 but the lack of any material selling today may convince them to pony up to the bar at tomorrow's open if the GDP is decent. The Nasdaq high on Friday at 2269 was +4 points over the resistance high from June 2001 at 2264. This could be a bump on the next test but I do expect it to eventually break. Nasdaq 2300 would be my target for December. The SOX also pulled back from two days of fighting resistance at 485 but the consolidation was only minimal and is finding support at 475.
The SPX struggled all day but managed to maintain a fractional gain at the close. 1257 appeared to be the battle line and defenders managed a last minute goal line stand. Like the Nasdaq we could see buyers appear at 1250 but after today's battle a good GDP number could attract some before that level is reached.
The key here is timing. We expected a pause this week and it arrived right on schedule. No harm, no foul and no damage. The profit taking has been negligible given the gains and the only question is whether buyers will get a deeper dip before the next move higher begins. I am expecting higher highs before year-end but I am not as optimistic as some who are expecting numbers in the 12,000 area on the Dow. I would expect 11,000 to be broken but guesstimates over 11K are few and far between with 11350 a likely target. I think our true target is 1300-1315 on the SPX. Any gains over those levels would be appreciated but unexpected. We all know buyers and sellers tend to reach extremes so anything is possible when end of year buyers return. Just keep your stops tight as we approach the holidays because traders are going to want to lock in those bonuses. The next three weeks could be choppy with an upward bias but after Christmas all bets are off. I feel I have guided you well over the last year with accurate market calls that produced profits. I warned well in advance of October that 10250 would be the low in October and 10230 was the actual number. I told you to begin buying at 1185 in October once I thought the bottom was in. We have rallied +75 points since. If you feel this type of market analysis is helpful in making money then I suggest you take advantage of the year end special this year when it appears in your inbox soon. 2006 could be rocky and I can't wait for it to begin. I hope you feel that way as well.