Mutual funds dressed up stocks one more time as the managers headed for their big New Years Eve celebrations. Many stocks hit multi-week highs as managers threw money at the winners in hopes of making their year-end statements as attractive as possible. Unfortunately we all know those party dresses and tuxedos end up in a pile on the floor once New Years Eve passes and the hangover begins.
Market Stats Table
Economic news was about the only thing on tap on Tuesday and it was not pretty. The Consumer Confidence number for December fell to an all time historic low at 38.0 after rebounding slightly in November to 44.7. December's reading was the lowest since the records were started in 1967. Analysts had expected a bounce to 45. Falling jobs were credited with the drop after unemployment hit a 15-year high in November at 6.7%. 42% of people surveyed for the confidence report said jobs were hard to get and those who felt business conditions were bad increased to 46%.
The latest Case Shiller 20-city housing index fell by 18% from October 2007 and the largest drop since inception. The 10-city index fell by 19.1% and its biggest decline in its 21-year history. The numbers are expected to decline even more over the next couple months because housing demand has fallen significantly since the equity markets went into free fall in November. Phoenix AZ had the largest decline of -34% year over year.
MasterCard's Spending Pulse report showed consumers spent between 5.5% and 8% less during the holiday season compared to 2007. Retail sales for December will be reported on Jan 8th and analysts are competing with each other to have the lowest estimates on the street. Analysts are now predicting we could see another 25% of retailers to file bankruptcy or close in 2009.
The Chicago Purchasing Manager's report or PMI rose fractionally to 34.1% from 33.8% in December and contrary to analyst estimates for a continued drop. Anything under 50 represents a contraction in economic conditions. There were some positive signs with the employment component rising to 39.6 from 33.4. New orders rose from 27.2 to 29.4 and prices paid fell to 30.5 from 50.7.
Oil prices gave up some ground despite the continued fighting in Israel. The problem is not with production from Israel since there is no production in that country. The fear is that countries surrounding Israel could come to the aid of Hamas and prompt an attack by Israel on oil production in those countries. There are also worries that shipments from the region could slow due to the close proximity of the fighting. Israel and Hamas have been fighting for decades and nobody seriously expects the conflict to grow beyond the current borders. The small bounce in oil prices this week is just a knee jerk reaction and has nothing to do with supply and demand. Mastercard's spending pulse for last week showed that gasoline demand in the U.S. fell by 3.8% from the same week in 2007. Petrologistics also surprised analysts when they said OPEC crude production could fall -400,000 bpd in December. This is more than previously expected and suggests there could be some teeth in the recent OPEC announcement to cut another 2.2 mbpd in January. Time will tell.
Reporters were blaming Tuesday's rally on the $5 billion in financing GMAC received from the Treasury Dept and an additional $1 billion to GM. This is total crap but they have to blame market moves on something. Both loans were expected and GM rose a whopping 21 cents. GMAC immediately rolled out some new financing plans including an increase in zero percent financing and lower credit standards in an attempt to clear out some inventory. The stage is being set for rapidly rising car prices. With automakers shutting down for a month and removing nearly 800,000 cars from the production lines the supply of vehicles is going to shrink quickly. GM has found from recent price cuts and high incentives that they can't make money with that program and they will have to raise prices on lower volumes to get back in the black. If you are looking for a new/used car the low priced window may be closing soon.
With the Fed/Treasury bailout of GMAC it should be noted that the Fed currently has $2.3 trillion of assets on their balance sheet and only $40 billion in capital. That is better than 50:1 leverage and it is expected to grow to 75:1 in 2009. Bear Stearns had less leverage than the Fed but they couldn't print their own money. I guess you can take on all the debt you want if you own the printing press for money. There is a rising feeling in the economic community that this monster Fed debt load could end badly.
Apple Computer is still reeling from the rumors over Steve Jobs health. Apple had rallied to just over $88 intraday when the Gizmodo Tech Blog printed a story saying Jobs health was declining fast. This was given as the reason why Jobs canceled his traditional keynote speech at MacWorld Expo in January. The stock rebounded from its $4 drop after CNBC disputed the rumor. An unnamed Apple executive said something to the effect of "If there was something wrong with Steve they would let us know." That is not exactly true and investors have a long memory when it comes to bad news. Apple and Jobs concealed his original cancer diagnosis for over 9 months before disclosing it to shareholders. Fool me once shame on you, fool me twice shame on me. Investors don't want to be on the receiving end of a surprise announcement. Since Steve Jobs and the board are NOT saying anything about his condition and the stock has fallen -$20 since the new rumor began I am betting on the rumor rather than on Apple's truthfulness. If there is truly nothing wrong with him then the board should be fired for letting the rumor kill the stock price.
With the trading year nearly over the carnage by country is dramatic. Russia is leading the loss column with a -73% drop in its market. Mexico is actually a relative winner with only a -24% decline. US markets are near the bottom of the list with only a 40% decline.
Even with the year-end window dressing there were only two Dow components that will finish the year in the green. Those two companies are Wal-Mart and McDonalds. Both cater to the blue-collar crowd. Of course that crowd has grown significantly in 2008. Worst hit were the financials and commodities plus GM.
Small cap stocks are normally the sector that outperforms when a recession ends. There are quite a few more small cap stocks today than there were just a few months ago. There were only 300 small cap stocks with a market cap under $200 million back in June. That has grown to nearly 700 today. Small caps are normally seen as having market caps between $300 million and $2.5 billion. There were 54 small cap stocks with more than $2 billion in market cap in June. Today there are only 15. The number of small caps with a market cap over $1 billion were cut in half from 377 to 197 over the last six months. This gives fund managers plenty of options when the buying actually begins. To put this in perspective XOM, MSFT, GOOG and WMT have a combined market cap greater than the entire Russell-2000 index. S&P announced it had changed its requirement for a $5 billion market cap to be considered for the S&P-500. The new threshold is now $3 billion. It has been a tough year.
Today the Dow closed up +184 and the Nasdaq +40. The Russell 2000 rose +3.56% to 482 but is still under resistance at 490-500, which has held for the last month. It is still the strongest index but struggling to hold its gains until year-end. Tuesday's move across all indexes was purely year-end window dressing on low volume. This is setting up a strong potential for an early January decline. I wish it were not so and I will be the biggest cheerleader if I am wrong. I believe there will be some dumping of stocks the first week in January once we are out of the 2008 tax year.
The Dow rally took it to 8669 and almost exactly in the middle of its current range. There is no trend other than sideways and we have seen three tests of support at 8400 over the last three weeks. That should be the key Dow level to watch for next week for signs of a real breakdown. A breakout over 9000 would be huge and could attract vast amounts of cash from the sidelines. If fund managers felt there was a real rally in progress I believe most would chase it.
The Nasdaq continues to honor support at 1500 and closed exactly in the middle of its 1500-1600 range over the last three weeks. Like the Dow there is no trend other than sideways while it consolidates gains from the November bottom and we wait for the 2008 tax year to pass.
Without boring you I will briefly claim again that the Russell is still the most bullish index BUT I am still of the belief that the window dressing rug could be pulled out abruptly next week. Small caps may lead the indexes out of a recession but they also fall the fastest when market disasters strike. A break of support at 460 would be a clear sign of fund selling.
Russell 2000 Chart
If the markets actually tank next week it could signal a bad trend. There is a 91% correlation rate between the first five trading days of the year and the market direction for the rest of the year. Personally I think any decline will be short lived and the bottom is behind us. However, there are a lot of analysts who believe the rebound into December is just another bear market rally. They believe economic conditions are going to get worse before they get better and Q4 earnings, which will begin to hit in another ten days are going to be horrible. They expect dozens if not hundreds of retailer bankruptcy filings and store closings. They expect home prices to continue lower. I believe home prices will begin to rise in Feb/Mar as we enter the normal spring buying season. Mortgage rates hit 5.14% this week and applications are rising. Economics may get worse but anybody with a newspaper, email and TV already know that. The breakfast of champions lately has not been Wheaties but bad economic news. Will that be sunny side up or over easy on that Confidence report Mr. Jones? It is time for investors to shake off the winter financial gloom and start expecting spring sunshine and flowers. It may not begin for several more weeks but I do believe it is coming. The ice age in the credit markets is beginning to thaw and new loan programs are springing up everywhere. Lets hope the markets follow suit and January closes higher than it starts.
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