Michael Jackson's unexpected passing on Thursday afternoon provided reporters with something to do as the pre-holiday week wound down to completion. Stock news was sparse but Jackson stories were everywhere.
There were two economic reports on Friday and both were positive. The Consumer Sentiment report for June rose to 70.8 from 69.0 in May. The majority of the gains came from the present conditions component, which rose to 73.2 from 67.7. The headline number of 70.8 was the highest level since February of 2008. This is a material rebound and suggests the consumer is feeling much better about the economy than any time over the last year.
Consumer Sentiment Chart
One of the reasons the consumer sentiment number may have improved is the two-month spike in Personal Income. The report released on Friday showed personal income spiked +1.4% after a +0.5% the prior month. The savings rate rose to 6.9% due to stimulus payments to Social Security recipients. This is the highest savings rate in more than 16 years. As you can see from the chart below the change in income direction since March has been dramatic. Much of this has been a direct result of the stimulus payments but consumers don't care where the money comes from just as long as they can cash the check.
Personal Income Chart
Despite next week being a holiday shortened week there is a full schedule of economic reports. The two biggest ones are the ISM Manufacturing Index on Wednesday and the Non-Farm Payrolls on Thursday. The ISM Index rose to 42.8 for May and the highest level since September. Analysts are expecting the improvement to continue with a rise to 44. Anything under 50 is still a contraction but definitely an improvement from the 32.9 low in December.
The Non-Farm Payrolls on Thursday are officially expected to show a loss of -375,000 jobs in June. This would actually be slightly more than the -345,000 lost in May. HOWEVER, there are whisper numbers as high as -225,000 and this could be setting up for a negative surprise if the losses are larger than expected. It is possible analysts are putting too much expectations on the automakers going back to building cars and putting a large number of unemployed workers back to work.
Non-Farm payroll Chart
The rest of the week is chock full of economics but they pale in comparison to the ISM and Jobs. There are three home price/sales reports and a couple regional activity reports. One report of note will be the IEA Mid-Term Outlook on Monday. The last monthly update showed an increase in the demand outlook. This report is a comprehensive look at the current global supply and demand trends for oil. If this report shows an improvement in demand expectations we could see oil prices move over $70.
One economic area not improving is the commercial property space. Moody's Commercial property price index fell -8.6% for April and the single largest one-month decline. This is down over 30% from peak in 2007. Real estate analysts claim the commercial real estate sector is showing accelerated deterioration. Over 50% of sales are classified as distressed sales although private equity acquisitions under $2.5 million are very strong. The commercial real estate sector is often referred to as the next shoe to drop in the economy. The economic downturn has created a flood of vacancies and those vacancies have created cash flow problems for building owners and driving quite a few into bankruptcy and foreclosure. The only thing that will correct this problem is a rebounding economy and growing space requirements for rebounding companies.
Late Friday Societe Generale upgraded their estimates for the recovery and said future records will show that the recession ended in Q2. SocGen said Q2 will show a drop in GDP of -1.5% only because the depth of the decline to -5.9% in Q1 was so dramatic. In Q3 they are expecting a positive +1.5% GDP and a continued rise from there. SocGen said recent economic indicators are now pointing to a better than expected recovery. Barclays agreed with the SocGen comments and boosted estimates even higher. Barclays raised GDP estimates by +0.5% in Q3 to 2.5% and to 3.5% in Q4. Barclays said the U.S. cash for clunkers program was going to boost auto production by as much as 50%.
The FOMC met last week and the closing statement was everything an investor could have wished for. To paraphrase, the pace of economic contractions is slowing, spending is stabilizing, inventory adjustments are nearing parity and the Fed expects a gradual resumption of sustainable economic growth. Most importantly the Fed added a statement saying inflation was expected to remain low for some time while keeping the "conditions are likely to warrant exceptionally low levels of Fed rates for an extended period" language. The Fed reiterated its plan to buy $1.25 trillion in mortgage-backed securities and $200 billion in agency debt by year-end. In addition they said they were going to buy $300 billion of Treasuries by autumn. Holy cow Batman that is a huge amount of money. The reason for those purchases is to keep mortgage rates artificially low for the rest of the year in an effort to aid in refinancing and keep foreclosures to a minimum.
The former Fed Chairnam Alan Greenspan could not stand to see his replacement getting all the headlines. He promptly wrote an op-ed for the Financial Times contradicting the Fed statement. "Excess capacity is temporarily suppressing global prices but I see inflation as the greater future challenge. If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012. Earlier if markets anticipate a prolonged period of elevated money supply."
He also warned that government-spending commitments over the next decade were "staggering." "Current debt issuance projections will surely place America precariously close to a borrowing ceiling." Greenspan warned that continued public sales of government debt were unsustainable. The U.S. debt is expected to rise to 80% of GDP by 2019. This is an unheard of number for a developed country let alone the world's largest economy. The seeds of long-term economic destruction are being sown. Greenspan said, "The alternative of political allocation of resources has been tried before and it failed."
Greenspan needs to realize that second-guessing or contradicting the Fed in times of financial stress is not productive and erodes public confidence in the Fed's actions. This is especially bad after Bernanke was attacked by lawmakers and his credibility tarnished in the press. Greenspan's time has passed and almost all analysts believe that his cheap money policies from 2002-2005 were actually responsible for the real estate bubble that caused this crash. Greenspan is on record as suggesting consumers take out adjustable rate mortgages (ARMs) as home prices were exploding "in order to afford a more expensive house." He also is on record saying he did not see the housing bubble until the crash began. Greenspan needs to find a nice quite rocking chair somewhere and go to sleep. Hopefully somewhere without a phone or Internet access.
However, he is right about the excessive government spending. You may have noticed in Friday's news reports that the cost of the proposed government mandated health care reform plan is now up to $1.6 trillion.
Stock news was pretty scarce on Friday with more press time being devoted to economics or Michael Jackson than individual stocks. Micron (Nyse:MU) was one exception with an earnings loss of -36 cents per share in the last quarter. However, analysts were expecting a loss of -43 cents so that was an upside surprise. Micron still lost ground for the day and helped keep the semiconductor index in negative territory.
Apple (Nasdaq:AAPL) gained +2.58 after it was learned that iTunes was swamped with downloads for Michael Jackson songs. Seven of the top ten downloaded albums were MJ songs, the top five individual songs and 8 of the top ten music videos were MJ offerings. ITunes keeps about 33 cents of every song sale so this was a windfall for Apple.
Google said over 50 of their top 100 searches were for Michael Jackson links. Yahoo said the home page story of his death was the most clicked link ever. Amazon said the top 15 most requested songs on Amazon music were MJ. Amazon also said it completely sold out of all MJ CDS in the first 24 hours. Twitter said five of the top ten most requested searches related to MJ.
Akamai said visits to news sites including CNN and Reuters spiked to more than 4.2 million visitors per minute on Thursday evening. Had the news come a couple hours earlier when the east coast was at work that number could have doubled. When consumers are at home they go to the TV for news but while at work they go to the Internet. Keynote Systems, which monitors website traffic, said websites for TMZ, MSNBC, Yahoo and Google all crashed for several minutes under the initial load. Google got so many hits they thought the system was under attack. AT&T said there was a record 65,000 text messages per second on its network on Thursday afternoon.
Palm (Nasdaq:PALM) exploded with a 15% gain after reporting better than expected results after Thursday's close. The company still lost money for the quarter but the selling pace of the new Palm Pre smart phones prompted analysts to believe that Palm could be profitable by year-end. Palm lost -1.73 per share for the quarter. The Palm Pre uses the webOS operating system and Palm says the Pre is only the first in a whole new line of phones using that new OS. Consumer acceptance of the Palm Pre has been very strong.
Chart of Palm
Boeing (Nyse:BA) continued to dog the Dow with additional losses. The losses came after Qantas cancelled orders for 15 Boeing 787 Dreamliners and postponed delivery for four years of 15 more. Qantas had ordered a total of 65 Dreamliners. Qantas also postponed delivery of 12 Boeing 737-800s. With passenger traffic falling -9.3% in May according to the IATA the airlines are having trouble filling seats. So far the next largest buyer with 50 planes on order is All Nippon Airways and they are standing firm on their order. The continued delays are giving many firms the reasons they need to cancel or modify orders so the Qantas cancellation is probably the first of many. Qantas said it would save $3 billion with the cancellation. That is $3 billion right out of Boeings pocket. However, with seven years of backorders that just means somebody's delivery date just got moved higher up the ladder to fill those slots vacated by Qantas. Boeing's stock losses continue to be a drag on the Dow.
Chart of Boeing
The Russell reconstitution is now history and it was actually relatively painless except for the initial drop on June 15th. Volume at Friday's close was very strong as index funds bought stocks being added to the indexes and sold those being deleted. One example was Eastman Kodak (Nyse:EK), which traded 33.9 million shares compared to its normal 5 million per day. Kodak was being kicked out of the Russell 1000 and added to the Russell 2000 because its market cap had fallen so sharply. That was good for Kodak because there are a lot more buyers of stocks being added to the R2K. Kodak gained +14% on Friday and most of that was in the closing minutes.
Russell said on Friday that the market cap of the R3K fell from $16.5 trillion to $10.6 trillion over the last 12-months. This is the first time since 1997 that the R3K market cap has been less than $11 trillion. Tech stocks regained the lead as the largest sector in the index. That had been financials and they fell back to the number two spot largely because of the monster market cap losses of the last year.
The last two days of June should maintain an upward bias for the Russell indexes since any index funds who procrastinated the rebalance will now be buying stocks that are already in the indexes rather than those going into the indexes as was the case on Friday. All those buys will be index positive and any late sellers of those stocks kicked out of the Russell will have no impact on the index values. The R3K is using the 200-day average as support.
Russell 3000 Chart (R1K + R2K)
If it is Friday is must mean the death of another bank. In this case four more banks were closed by regulators after the close on Friday. The Community Bank and the Neighborhood Community Bank both in Georgia were closed by regulators. That makes Georgia the leader in the failed bank race with 14 so far in 2009. These failures have been caused by the drastic drop in real estate values in the Atlanta area. In Minnesota, Horizon Bank of Pine City was closed. Also, Metro Pacific Bank of Irvine California was closed. So far in 2009 regulators have closed 44 banks. This compares to 25 in all of 2008. The FDIC has 302 banks on the problem bank watch list. RBC Capital is projecting a total of 1000 banks will be closed from 2009-2012.
For banks repaying the TARP the Treasury Dept laid out the details on Friday of how the warrant repurchase will happen. Banks that received TARP funds had to give the government warrants so the Treasury and the taxpayers could share in their recovery. If the Treasury and the individual banks cannot agree on a value of the warrants by the end of next week the Treasury will put them up for auction. The Treasury put the onus on the bank to determine the value but then has the option to ignore the banks valuation and go to auction. The banks have 15 days from when they repaid the TARP to submit a detailed valuation to the Treasury. The Treasury has 10 days to respond to the banks offer. If the Treasury objects to the price and they can't strike a compromise with the bank they each select an independent appraiser. If the appraisers can't agree a third appraiser is hired and a composite valuation of the three appraisers is used to establish a fair value. If the bank decides the price is too high and does not purchase the warrants then the government will auction them by soliciting quotes from 5-10 market participants.
The House passed the energy and climate bill late Friday by votes of 219 to 212. Virtually no republicans, only eight, voted for it and forty-four democrats voted against it. The cap and trade provisions are going to raise the energy costs for every person in America by $175 a year according to the Congressional Budget Office. Other estimates claim that the increased cost to a family will be over $3000 a year when you factor in the increased cost of everything they buy or use where prices were hiked to cover the increased energy costs. Make no mistake, every product that requires energy to make will go up in price. When the President was a candidate he once said that utility bills could rise 200% to 300% to cover the cost of his energy plan. I am guessing this does not qualify as a tax increase on people making less than $250,000. The bill has strong opposition in the Senate and is not expected to be debated in the Senate until late this fall.
On the topic of energy we saw the price of crude recover from the beating it took on expiration on Monday. After trading as low as $66.67 on the August contract we saw prices return to nearly $71 before news of a peace initiative in Nigeria tempered the gains. There was another big decline in crude inventories by -3.9 million barrels and the sixth decline in the last seven weeks. Refining capacity also rose sharply to 87.1% from 85.9%. Obviously demand is increasing or we would not see the improvement in the internals.
There is also a tropical storm watch for an area just south and west of Cuba and forecasters claim there is a 50% chance of it turning into a cyclone once it enters the Gulf of Mexico. This is a weak system but they tend to escalate quickly once they hit the warm gulf waters. Since this one has materialized quickly and has not been brewing for a week there have been minimal preparations for it to hit the oil patch. You can bet that there will be some frantic movement in the patch this weekend since this is the first storm of the season and rigs will want to get their house in order regardless of what this storm does. This is the wake up call for the 2009 hurricane season.
Gulf Storm Watch
We are only a week away from the start of earnings with Alcoa on July 7th. So far there have been a very few earnings warnings. However, it would not be the first time that companies waited until a low volume holiday week to preannounce their earnings miss in hopes much of the trading public would be at the beach rather than at their computer. This will be something to watch for next week.
JP Morgan (Nyse:JPM) made the news on Friday with the prediction the S&P could fall to 830 between now and September. JPM said the virtually uninterrupted rise in the markets since March increased the chance of a market correction. After September Morgan thinks the S&P will see a strong rally to 950-1000 by year-end. Morgan said any correction should be seen as an opportunity to build positions in cyclicals rather than a window to increase defensive positions. Morgan upgraded U.S. industrials and materials to overweight. "Visibility and earnings recovery will not happen until later in this recovery" according to Morgan. They see 4-6 quarters of global above trend growth starting sometime in 2010.
The S&P closed on Friday right back at that magic 920 level that has alternately been resistance and support since early May. This is well above the 200-day average at 895 but is setting up for what may be a head and shoulders formation.
I personally would like to think that we are going to see some earnings improvement in Q2 due in part to the lack of any significant earnings warnings. If we saw earnings improving like we are seeing in the economic indicators then the bears would not have a chance. The S&P has significant resistance at 950 and we are heading into the summer doldrums. However, this is also quarter end and we could still see some window dressing before Wednesday. If we can't move over 950 on this effort I think we will definitely see a retest of 880 and possible 850 but like Morgan said, I believe it will be a long term buying opportunity.
The Dow has been handicapped for the last two weeks by the drop in Boeing and some weakness in the financials. The tech components could not overcome the dogs of the Dow trying to bury the index like a new bone. Support at 8300 was tested twice and held firm both times. Unlike the S&P, which is resting on the 200-day as support the Dow is stuck under the 200-day as resistance. The Dow has a better opportunity to form a head and shoulders than the S&P because of its thinner 30-stock structure. All it would take would be sellers in 2-3 issues on a retest of 8600 to push it off the cliff again.
The Nasdaq has been the leading index and despite Monday's tank job it closed the week with a gain and at the highs. Two week's of support at 1800 was broken on Monday and we saw a retest of 1750 on Tuesday. Positive news about smart phones, semiconductors and biotechs helped to erase the losses. The support at the 30-day average was solid and from the velocity of some of the gains it appears there was some fund manager support. I must caution you that the Russell rebalance could be the reason. Remember I mentioned that tech stocks had taken over from financials as the biggest component of the Russell. As such those new tech stock candidates for inclusion into the Russell could have helped power the Nasdaq the last couple days. Starting on Monday they can help power the Russell as well. Should weakness appear I would remain cautious under 1800 even though we saw 1750 hold last week. Let's decide now that 1800 is our bullish line in the sand and go flat on another break. A move higher over 1865 and prior resistance will quickly run into strong resistance at 1900. I would love to see that test but I am not counting on it succeeding.
In summary I think we could see a bullish bias on Monday and Tuesday but weakness possibly starting on Wednesday. Remember the ISM is on Wednesday and Non-Farm Payrolls on Thursday. Friday the market is closed. We will be into a new month with highly questionable earnings starting on the 7th. It would be the perfect setup for a few disappointments to poison the sentiment and send us back to support. It would also be the perfect setup for a few earnings surprises to shock the shorts and push us over SPX 950. With volume declining every day next week the volatility in a thin market could be huge if there are any big news events. Conversely if the economics are right inline then boredom could appear just as easily.
Michael Joseph Jackson Trivia
Born in Gary Indiana in 1958
Tied with Carlos Santana & Nora Jones with most Grammys in one year (8)
Thriller sold 51 million copies
Was once a Jehovah's Witness
Once owned the Beatles music catalog. Sold 50% to Sony to pay bills.
Inducted into R&R Hall of Fame 2001 as solo artist
January 2003 Superbowl performance had largest viewing audience ever
State of CA closed 2700 acre Neverland Ranch for unpaid bills and no insurance. MaCaulay Culkin co designed the amusement park there.
Co-wrote "We are the world" with Lionel Richie
Godfather of Nicole Richie
"I don't like pop music."
"I will always be Peter Pan in my heart."