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Market Wrap

Financials Weak; McDonalds Sales Food For Thought

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The major averages started the week mixed-to-lower as continued weakness among the financials, soaring energy prices and strong same-store sales from fast food giant McDonald's Corp. (NYSE:MCD) $59.31 +4.14% gave investors some food for thought.

Of today's top 10 most active securities, the Financial Select SPDRs (AMEX:XLF) $23.01 -1.37%, Lehman Brothers (NYSE:LEH) $29.48 -8.70%, Washington Mutual (NYSE:WM) $6.25 -16.99%, Citigroup (NYSE:C) $19.60 -2.29%, Wachovia Bank (NYSE:WB) $18.89 -6.15%, JP Morgan (NYSE:JPM) $37.51 -6.43% and Bank of American (NYSE:BAC) $37.51 -6.43% held respective #3, #4, #5, #6, #8, #9 and #10 spots, as earnings, or lack of earnings from Lehman Brothers brought another tidal wave of selling into the financials.

Lehman Brother (LEH) $29.48 -8.70% said this morning that it lost $2.8 billion in the second quarter and plans to sell $6 billion in stock to beef up its capital base. The company's CFO Erin Callan said the company has completed its deleveraging program of selling assets and raising equity, and is using its new capital to expand its business. The company said it plans to raise $4 billion by offering 143 million shares of common stock at $28 apiece.

While Lehman was delivering the much anticipated bad news of the negative impact from mortgage-related losses, shares of Washington Mutual (NYSE:WM) $6.25 -16.99% plunged to an all-time low after UBS said it had completed an extensive credit analysis of the bank's balance sheet. In a note to clients, UBS said it thinks Washington Mutual will take total losses through 2011 of $27 billion, with $21.7 billion of the total coming from mortgage losses. While UBS sees the bank's capital requirements sufficient so it will not have to raise more capital, the firm cautioned that further economic weakening could put its analysis at risk.

Economic news regarding the housing market at 10:00 AM EDT had the National Association of Realtors saying pending sales of previously owned homes jumped 6.3% in April to 88.2 from an unrevised reading of 83.0 in March. The 6.3% increase was well above economists' forecast for a 1.0% decline. Still, April's 88.2 reading was 13.1% lower than a year ago.

The NAR's chief economists Lawrence Yun said, "Bargain hunters have entered the market en masse, especially in areas that have seen double-digit price declines."

FTN Financial's chief economist said "We are seeing an acceleration in foreclosures. As foreclosures have taken off, they put pressure on prices. Banks have become more aggressive with sales on homes they have foreclosed." Mr. Low added that he thinks sales will stabilize in the next few months and that will set the stage for an inventory turn sometime next year. "For now, prices will continue to fall. There is still an inventory overhang that will take 18 month to work through. The end game of the housing bust is near."

A quick glance of today's action for some of the very thinly traded CME Group's regional housing futures show little action.

I do see the May'09 Composite (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, NY Metro, San Diego, San Francisco, Washington DC) having edged up from my 05/30/08 benchmarking of 153.20 to 155.40. We've got a wide spread between the bid/ask here at 153.00/165.00. I should note that a more recent check for this contract's composite was taken on 6/03/08 where last trade was 154.20.

I'd have to say, based on observation, that I don't see much here at this point and more likely some type of composite squaring by an individual player as none of the region housing futures contracts have budged from their 05/30/08 benchmarks.

CME Regional Housing Futures (Aug'08 to May'09) Benchmarks

Having once tracked the various CME Regional Housing futures on a week-to-week basis, the lack of trading activity in this relatively new derivative has had me backing off to every two weeks (end of month and 15th). I've benchmarked the last couple of weeks only as we recently had a futures roll from the May'08 contracts and I wanted to see if there was another excessive negative roll to some of the forward-dated contracts.

It has been my observation that Las Vegas, Los Angeles, Miami and San Diego have been the WEAKEST of the various regional housing futures.

The May'09 contract discussed tonight, simply shows "no change" in the various regions, but a couple of "up-ticks" for the Composite.

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Since we're on the subject of housing, Moody's Investor Service did cut its rating on the nation's largest home builder DR Horton's (NYSE:DHI) $11.73 +0.77% debt one notch further into "junk" territory amid concern about quarterly losses that could continue into next year.

Last month, DR Horton reported a Q2 net loss of $1.31 billion, which included $834.1 million in pretax charges from inventory impairments and land options the builder walked away from.

In Dec'07, Moody's cut the company's debt rating to "junk" status saying that "even though Horton will continue to outperform many of its peers that have already been downgraded, our expectations about its fiscal 2008 and 2009 performance do not conform to that of an investment grade company."

Closing U.S. Market Watch

Having paced declines for the better part of the last several weeks, the Dow Industrials (INDU) 12,280 +0.57% offered some sign of bullishness to an otherwise bearish news flow today.

Breadth among the Dow 30 components finished positive at 18:12.

Alcoa (NYSE:AA) $42.17 +7.52% was a percentage gainer after positive mention in this weekend's Barron's, while shares of McDonald's (NYSE:MCD) $59.31 +4.14% jumped after the world's largest hamburger chain said global sales at locations open at least a year rose 7.7% in May, including a 4.3% rise in the U.S. on new menu items and upbeat breakfast trends.

Financial components JP Morgan (JPM) $37.51 -6.43%, recently added Bank of America (BAC) $29.61 -2.91%, Home Depot (NYSE:HD) $26.54 -2.35% and Citigroup (NYSE:C) $19.60 -2.29% kept gains in check.

Dow 30 Components (Price Weighted Index)

Percentage gainers for 20DyNet% (05/20/08 close) and outperforming stocks are hard to find in the narrow Dow 30. Discount retailer Wal-Mart (NYSE:WMT) $59.57 +2.05% today holds the greatest amount of favor during that time period, while General Motors (NYSE:GM) $16.48 +1.60% today has sputtered notably with a 17.01% decline.

"Red arrows" continue to align themselves with the banks and with high fuel prices pressuring the commercial airline industry, Boeing (NYSE:BA) $73.95 +1.07% today, loses favor among buyers.

It is notable that Chevron (NYSE:CVX) $101.20 +1.70% today, and Exxon/Mobil (NYSE:XOM) $89.07 +2.62% are down over the past 20-dayNet%, despite the surge in oil prices.

July Crude Oil (cl08n) did take a rest today, settling down $4.19, or -3.02% at $134.35. Saudi Arabia said today that it wanted to convene an energy summit of producers and consumers to focus on "how to objectively deal" with high prices. The Saudi government said, "The increase in prices isn't justified in terms of market fundamentals."

Last Wednesday evening, crude oil as well as the euro were both resting on what I observed as "important" near-term support levels. However, early Thursday morning, the ECB's President Jean-Claude Trichet said the ECB "is in a state of heightened alert" regarding inflation, after the ECB left its key interest rate unchanged at 4.00% for the 12th consecutive month.

Those comments sent the euro surging back higher against the dollar and helped further fuel buying in crude oil, which is denominated in U.S. dollars.

Euro CurrencyShares (NYSE:FXE) - Daily Intervals

Crude oil's surge last week wasn't due entirely to geopolitical concerns regarding tensions between Israel and Iran, but hawkish comments out of Trichet. The euro as depicted above with the FXE gave back some gains today. The euro is the most heavily weighted currency in the U.S. Dollar Index (DXY).

Yen CurrencyShares (NYSE:FXY) - Daily Intervals

While the euro holds strong versus the U.S. dollar, some "currency positives" for the U.S. dollar and perhaps Japan's economy is the Yen's recent weakness. One of the major risks to the U.S. economy is that its major trading partner's (Japan) economy would crumble should the yen get "too strong" versus the dollar, thus their exports to the U.S. crumble.

U.S. equity bulls like what they're seeing in the yen, but it is the euro and oil prices that remain the headwind. The SLOW METHODICAL decline in the Yen is what remains bullish. From here, I don't think market participants want to see further SHARP decline in the Yen. A SHARP decline in the euro may bring some weakness to oil too, but as you can see from the weighting of the Dow components, a DIA bull, and even an SPY/OEX bull need to be careful what they wish for as long as the FINANCIALS remain weak.

Dow Diamonds / S&P Dep. Receipts Montage - Daily Intervals

I like the Dow Diamonds (DIA) $136.62 +0.24% as a BUY for 1/2 positions at tomorrow's open (barring a mushroom cloud in the Middle East). The DIA "should not" close below $120.75 having closed ABOVE $128.92 in May. If the DIA does look to close below $120.75 at a 03:50 PM EDT tick, I'd suggest moving back to the sidelines.

IWM and QQQQ Montage - Daily Intervals

Early Friday I had profiled a BEARISH trade for the IWM with OPTIONS in the ProShares Ultra Short Russell 2000 (TWM) $70.28%, but thought better of it today and closed out the trade for a decent profit.

Tonight's advance/decline reading for the very broad Russell 2000 looks very "oversold" at 26 advancers and 82 decliners as the IWM now approaches support at $72.00.

NASDAQ-100 heavyweight Apple Computer (AAPL) $181.61 -2.17% unveiled its 3rd generation iPhone today at its developer's conference. The company said the new iPhone will offer faster downloads (2.8-times faster than original iPhone) and will be priced at $199.00. New features will include a Global Positioning System (GPS) and will be available in 22 countries starting July 11th. As rollout builds, Apple looks for the new iPhone to be selling in 70 countries over the next several months.
 

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