The holiday spirit finally spilled over into the market and a +205 Dow day to end the week is a great present for traders, most of whom will not be back until the New Year. Sales of nearly 4 million Blackberry phones by RIMM, Oracle's street beat by 4 cents and good news from Merrill about a $5 billion infusion of cash prompted a huge gap open and shorts were crushed once again as their options expired. Ho, ho, ho!
Dow Chart - Daily
S&P-500 Chart - Daily
Depending on which side of the recession/inflation debate you are on there were economics to fit your bias. The Personal Income numbers showed a headline rise of +0.4% and right inline with most expectations. However personal spending jumped +1.1% and well above expectations. It was the largest increase since July 2005 and not a sign of a pending recession. Analysts point out that much of the gains were due to higher energy prices. However, the inflation indicator in the report showed year over year inflation accelerated. Top line inflation jumped to 3.6% and the core rate rose to 2.2%. Both of these numbers are over the Fed's comfort zone and suggest we have seen the last rate cut. If spending is rising unexpectedly fast and inflation rates are following then the Fed will be changing their bias to tightening very quickly.
The final Consumer Sentiment for December was a sleeper with the headline number of 75.5 only +1 point from the initial reading of 74.5. No excitement there but still the lowest level since Oct-2005 and the second lowest since the early 1990s. The expectations component fell to 65.6 but the current conditions component is holding the high ground at 91.0. It appears the individual consumer is not feeling very recessionary. You would expect all the recession talk and the drop in the markets could have further depressed sentiment. Evidently the holiday spirit is in full bloom.
The monthly Mass Layoffs report showed the number of layoffs involving more than 50 workers in November was 1,300 compared to 1,320 in October. The number of workers involved in November was 136,924 compared to 131,780 in October. There was no surge in layoffs, as you would have expected if we were rushing headlong into a recession. The numbers are still slightly elevated and should remain so for several months but not to a level that would give cause for concern.
Next week is holiday shortened by two days and it is going to be a slim week for economics. The only reports of interest will be the two Fed regional surveys and the Chicago PMI report. The PMI falls on a Friday that will see even less trading than we just saw last week. With no material reports and the way the holidays fall this year suggests any economics will be ignored until the New Year.
Friday was quadruple witching and options on the S&P-500 expired at the opening print. The RIMM earnings and the Merrill cash infusion just capped a long list of a dozen reasons not to go into the holidays short. The S&P expiration produced record volume in the first hour on the NYSE and then settled into boredom until the remaining shorts capitulated heading into the close. The overall volume across all the exchanges totaled 7.62 billion shares and the strongest volume day in December. Big earnings and big news always seems to catch investors leaning the wrong way going into expiration and Friday was no exception.
RIMM Chart - Daily
Research in Motion (RIMM) had the last laugh over the RIMM bashers of late by selling 3.9 million Blackberry phones sold over the last quarter. This compared with about 650,000 Palm Treos sold. RIMM had been knocked for nearly a $25 loss on comments from one analyst that Palm smart phones were selling faster than the BlackBerry. Maybe that is true in Podunk Kansas but it is definitely not true in the rest of the civilized world. RIMM profits surged 100% and analysts were racing to beat each other in raising their price targets. What a difference a month makes. Thanks to Apple pushing the bar higher on prices with their iPhone at $400 and $600 the Blackberry was no longer just the toy for the status conscious well to do corporate executive. If Jane and Johnny Highschooler can justify paying $500 for an iPhone suddenly the soccer moms and work at home dads could justify a similar expense for a real tool for both business and pleasure. The retail consumer has picked up on the corporate trend. Where the Blackberry was primarily a phone for business people RIMM reported the percentage of the subscriber base for no-ncorporate and non-government users at quarter end had risen to 34%. RIMM spiked +11% to $120 on the positive earnings news. Several brokers raised their price targets to the $140 range.
In contrast to RIMM, Circuit City (CC) fell -29% to $4.91 and a 4-year low after reporting a far larger Q3 loss than analysts had expected. CC lost 64 cents per share and analysts were only expecting a loss of 31 cents. Revenue fell 3% with a product mix that moved toward low margin sales. Analysts commented that losing money during a holiday season was not a good sign for the future. CC also said it expected a small loss in the current quarter and analysts had been expecting a profit of 56 cents. There were numerous comments that they could be heading for a death spiral with customers showing a fondness for Best Buy and a falling interest in CC. Analysts said they could easily face liquidity issues and the likelihood of a takeout was slim given Best Buy's lead in the sector.
Micron (MU) reported earnings on Thursday night with a loss of 24 cents per share compared to analyst's expectations for a loss of 19 cents. Micron said the price of DRAM chips fell -20% and the price of NAND chips fell -30% over the quarter. There is a serious chip glut and as always the chip companies claim it will be better next year when demand returns. Micron fell -5% to $7.50 and blunted a rebound attempt in the Semiconductor Index.
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Now that the Chicago Mercantile Exchange (CME) has snapped up the CBOT and controls over 85% of U.S. traded futures and options on futures a dozen financial institutions plans to create a new futures exchange. The players behind the move include BAC, JPM, MER, C, CS, BARC, Deutsche Bank, Royal Bank of Scotland and eSpeed (ESPD). It will be a fully electronic exchange that will start out in early 2008 with treasury futures as its first product. The technology will be on the eSpeed electronic platform. The group will meet early in 2008 to name the enterprise and layout the game plan. The CEO of eSpeed, Paul Saltzman, will become the acting CEO of the exchange. I know CME has plenty of clout but how would you like to have all those banks betting against you. You know they will be placing their trades on the new exchange rather than the CME. Prior to the after hours announcement CME gained +9 to within $4 of a new high. In after hours CME lost -$22 on the news and that is probably just the start of a big decline. It might be time to start cashing out on those CME profits.
United Rentals (URI) did not get the ruling they wanted in the trial against Cerberus. Cerberus cancelled a $4 billion takeover deal for the company and URI sued them. The court ruled that Cerberus was not obligated to consummate the deal specifically since there was a $100 million breakup fee outlined in the contract. URI fell -17% to $18 almost instantly when the ruling was announced. URI was trading at $34.50 when Cerberus initially announced they were walking on the deal. In hindsight a $100 million breakup fee is not a good trade off for a $1.46 billion drop in market cap.
Just before Friday's close the nations three top banks, Citi, Bank America and JP Morgan announced the potential $80 billion Super SIV was dead. Lack of demand was kryptonite to the deal and the group finally put it out of its misery. Various private rescues made the plan unnecessary. The banks said it was available if anybody wanted to use it but there were no takers. Possible users of the fund had made it known that they no longer had need of it and were finally able to trade their SIVs on their own. This is clear evidence the excess liquidity being pumped into the system is finally taking hold and the credit crunch is easing.
Merrill Lynch, with potentially another $10 billion in write-downs coming in Q4, is said to be close to a $5 billion capital infusion from Singapore's Temasek Holdings. Merrill has already taken $7.9 billion in write-downs from bad bets on mortgage-backed securities but analysts claim more losses are coming. The Temasek board has already given approval to the investment pending pricing, timing and regulatory issues. Some analysts speculate the number could rise to $8 billion if the terms are sweet enough. The Temasek fund was set up in 1974 to manage Singapore's investments and controls a portfolio of more than $100 billion. UBS announced last week that the Government of Singapore Investment Corp is investing $9.75 billion for a 9% stake in UBS.
Crude Oil Chart - Daily
The Energy Bill is now history and the government claims it will save 4 million barrels of oil per day by 2030. Unfortunately peak oil will occur long before then so that savings comment will just be a future footnote in history. The bill calls for automakers to raise the average miles per gallon on new cars to 35 mpg by 2020. Careful, let's don't upset Ma and Pa Babyboomer who grew up on the gas guzzling muscle cars of the 60s and 70s and morphed into the even larger gas guzzling SUVs. By 2020 most boomers will be driving golf carts at their retirement homes and conserving gas when they do venture out simply to try and get by on their social security checks. The new standards will never have to be enforced by law. Peak oil will enforce them well in advance of 2020. Consumers will be dumping SUVs faster than yesterday's coffee grounds when peak oil strikes and it will be here before you know it.
Whoever wins the presidential race next year is in for a major surprise. Just like President Bush was hit with 9/11 at the beginning of his term the next president is going to be hit with Peak Oil. Good morning Mr. President, oil hit $150 overnight and two more countries halted exports in order to save the oil for their own people. Would you like your eggs poached or fried? I say that in jest today but somebody is going to give the new prez those exact words in the not too distant future. I would venture that half the bozos running today would drop out if they actually knew what the future holds. You may think I am a crackpot today but five years from now it will be a different story. I just wrote a 100-page article for the year-end renewal promotion on how near we are to Peak Oil and the damage it is going to cause to American consumer wealth. It will be ugly and although all the signs are present the general public chooses not to see. I spent three days in October listening to presentations from 50 credentialed experts on why and when peak oil will occur and there was not a single reporter in attendance. You would think bad news would sell papers but this is the story nobody wants to print. It is not politically correct to warn Americans their love affair with their automobile is about to end badly. Readers of this newsletter will be years ahead of their neighbors when the oil bubble bursts. I am extremely happy about the hour-long documentary we acquired for this year's renewal special. It is professionally produced by a major studio and spells out the problem in pictures and plain English that anyone with an 8th grade education can understand. I guarantee you will be passing this DVD around to your friends. View movie trailer here: http://tinyurl.com/yryu6s Find the renewal email you got this weekend and make sure you don't miss out on this offer.
Meanwhile, the markets ran for a +200 point rally on Friday as good news broke out all over. At least that is what the talking heads on CNBC would have you believe. It makes a good sound bite ahead of the holidays and everyone that owns stocks will have an additional warm and fuzzy feeling over the weekend. What happened on Friday has absolutely nothing to do with the market's future. I wish it did. In a nutshell there were some news events that triggered a gap open on the one day per quarter that it matters. The S&P options expire at the opening print of the S&P. It does not matter where they closed on Thursday but where they open on Friday. When the flurry of news stories pumped the overnight futures to extreme levels option expiration panic ensued. Anyone managing their positions with the S&P stuck under 1460 all week were suddenly faced with an open around 1475. That 15-point difference is a huge amount of money. It is even larger when market sentiment was bearish going into Thursday's close. Put volatility was off the charts while call volatility was negligible. There were a lot of traders loaded up with shorts and the news and option expiration games blew them out. It was easily 90% short covering and odds are good this bounce will not have legs.
One analyst called it the St. Nick of time rally. In reality any fund or institution that wanted to be in or out of the market had to be out by Friday. That was the last high volume day of the year and funds need volume to enter and exit positions. The remaining five trading days will be only a shadow of the volume from last week. It will be mostly retail traders trying to decide where to invest their holiday bonus. Don't forget it is also markup week and that provides a positive bias. The market should also have a positive bias simply because the volume sellers are done. Tax selling should be over until Jan-2nd. Anybody who did not want to take gains in this tax year will have a green light on Jan-2nd. That normally takes 2-3 days and can sometimes be offset by the influx of end of year retirement contributions. The key point here is Friday's short squeeze has almost nothing to do with the real market other than possibly improving retail investor sentiment.
The Dow gapped open to just over resistance at 13400 and then fell back to use that level as support for the next four hours. There was no upward movement until 2:PM and it appeared there was not going to be a closing sell off. Shorts already in pain but hoping for an afternoon drop finally began to cover when faced with the closing countdown. The Dow managed to move over 13450 before new sellers begin to hit the tape. For Monday resistance is 13500 and support 13400. Those will be the key levels to watch. It is normally a bullish week for the reasons I laid out above about funds being out of the market and retail traders spending their holiday bonus.
Dow Chart - 15 min
Dow Chart - 5 min
The Nasdaq had resistance at 2670 and that was exactly the level broken at the open and then used as support for the next several hours. It was a classic short squeeze. The closing short capitulation produced a close at 2690. The next resistance band is 2690-2700 and that will probably be tested on Monday.
The S&P-500 had the absolutely perfect setup for the Friday
Nasdaq Chart - 30 min
S&P-500 Chart - 60 min
Here is the key to trading next week. That key is SPX 1490. That level has been the key so many times over the last year the 1-4-9-0 keys on my keyboard are worn smooth. I would short a failure at 1490 but only if you are an aggressive trader. Remember, the next several days until year-end are normally bullish even if only slightly so. The coming week is "markup week." This is where funds keep making small buys on stocks they own to make sure they finish the year as leaders. This dresses up their year-end statements and helps provide a little more bullish sentiment to the year-end bias. We could have several tests of 1490 so I would not want to be the first bear to place a bet. If we do move over 1490 I WOULD go long. Over 1490 the sentiment could change and we could see some more short covering from those traders who shorted it when we failed here in the prior week. The Friday spike probably caught those shorts off guard as well but until we get back to 1490 and begin to move over it they are still safe. If we do move over 1490 I would buy the move. It could become infectious and we need to go with it should a Christmas miracle arrive.
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