The market struggled to hold its gains from Monday and although it finished near the highs of the day most investors were probably more focused on the early ads for Black Friday than buying stocks.
Market Stats Table
The markets opened lower thanks to a stronger dollar and some negative economics. The biggest economic news at the open was a new revision on the Q3 GDP. The revision by the BEA was the second update on the Q3 numbers. They lowered the estimate to +2.78% from +3.53% for Q3. This was a bigger decline than expected. The main reasons for the lowered estimate were higher imports, lower consumer spending and lower business investment. However, corporate profits were revised higher to 10.6% making it the third quarter of profit increase. All that cost cutting is helping profits but not GDP. The +2.78% growth estimate is still significantly better than the -0.7% decline in Q2. As I have reported before the main reason for the spike in the Q3 GDP was the cash for clunkers program and a small rise in homebuilding.
The FOMC minutes were released today and they also contained a revision to expected GDP for 2010 and 2011. The Fed revised their estimate for 2010 GDP to 2.5-3.5% compared to 2.1-3.3% in prior estimates. For 2011 they revised their estimates to 3.4-4.5% from 3.8-4.6%. They upgraded the 2010 estimate based on the strength of the current recovery but lowered the 2011 estimate because of the long term implications of the unemployment. They revised the expected unemployment rate for all of 2010 to 9.3-9.7% from 9.5-9.8%.
Also in the FOMC minutes the Fed participants agreed the recession was over and inflation would remain low due to excess capacity in the system. For the first time in the last three years the Fed views the risks to growth as "balanced" instead of a downside bias. Use of the various Fed short term lending facilities declined but longer term loans like the auto and credit card backed securities programs were increasing. The Fed saw exports increasing and a rebound in global activity. However, bank lending for commercial and industrial loans continued to decline. The Fed noted that banks are still tightening lending standards. (I personally believe that the tighter standards are a way to reduce lending and add to capital in fear of another wave of weakness brought on by the collapse in the commercial real estate sector.) There were some concerns about inflation due to the weaker dollar and the rising cost of commodities but the overall view of all participants was that inflation risks were evenly balanced. They reiterated their claims that economic conditions were likely to warrant exceptionally low rates for an extended period.
There was much discussion in the minutes about how the Fed can reduce its balance sheet and remove liquidity as the economy strengthens. Some participants felt the Fed should sell some of its assets before they begin raising rates while others believed that such an action would put additional pressure on the economy and raise interest rates too soon. Moody's believes the Fed will not begin raising rates until the end of 2010 or even early 2011 given the continued rise in unemployment. Moody's also believes the Fed will have to buy more asset backed securities in early 2010 to keep mortgage rates low. Almost everyone agrees that once the Fed does begin to raise rates they will do so quickly in order to avoid the bubble Greenspan caused coming out of the 2001 recession. They also agree the Fed will need to communicate to the market in advance exactly how they plan to reduce liquidity in order for the market to prepare for the exit. While that sounds benign it actually means that the Fed must warn the banks that the cheap money is going away so the banks can unwind their cheap money trades before rates go up.
The Case Shiller Home Price Indexes improved again in Q3 to -9.4% on a year over year comparison. The improvement was minor but it was the fourth consecutive month and the longest period of improvement in three years. From August to September home prices rose in 11 of the 20 metro regions tracked in the 20-city index. This is a lagging report and was mostly ignored.
Case Shiller Home Price Index
Home Price Table
Consumer Confidence posted a small gain in November from 47.7 to 49.5 but as you can see in the chart it was minor. Confidence remains deeply depressed due to unemployment, higher gasoline prices, low home prices and access to credit. Another report out today showed that 23% of all homeowners now owe more than their homes are worth. The component that measures consumer attitudes about the ease of getting a job rose to 49.8 and a new cyclical high. Those who believe jobs are plentiful fell to a new 26-year low at 3.2. Those planning on buying new appliances fell to a new cyclical low at 23.2 and a level not seen since 1995. This does not bode well for consumer buying during the holiday season.
Consumer Confidence Chart
The Richmond Fed Manufacturing Survey fell for the second consecutive month. The headline number at 1 was well off the 7 from October and high of 14 in Aug/Sep. November's reading was the lowest since April. The internal components declined sharply. Shipments fell from 11 to 6, new orders from 7 to 3 and order backlogs from -11 to -12. The employment index fell from +2 to -11 and the first return to negative territory since July. Analysts claim that the recent deterioration in the regional surveys suggests that manufacturers will be forced to cut production again early next year. The Philly Fed survey last Thursday was the exception with a rise from 11.5 to 16.7.
Richmond Fed Survey Chart
Key reports out on Wednesday include the Durable Goods, Personal Income, Consumer Sentiment, New home Sales, Kansas Fed Survey. We will also get both the crude oil inventories and the natural gas storage report. There are no reports on Thr/Fri.
The House Appropriations Committee proposed legislation called "Share the Sacrifice" calling for a general tax increase on everyone making over $30,000 per year in order to pay for the Afghanistan war. A person making between $30,000-$150,000 would pay 1%. People making between $150K-$250K would pay 5.4%. People making over $250K would pay an 11% tax.
Oil prices fell to close at $76.12 and a six-week low ahead of Wednesday's inventory report. The dollar was neutral for oil today after an intraday rebound but declined to close at 75.06 on the dollar index. It appears the impact of the dollar on oil prices is slipping in light of continuing demand declines. Fundamentals are becoming more important. Over 90 million barrels of distillates (heating oil, diesel, jet fuel and gasoline) are in floating storage aboard tankers. Investors bought those products at lower prices earlier this year in expectations of rising demand this fall/winter. That rising demand has not yet appeared. Eventually those products will have to be sold since the monthly storage charges are already eating into potential profits.
Another problem for oil prices was the adoption of the Argus Sour Crude Index for oil pricing for oil sold in the U.S. from the Middle East. Saudi Arabia changed to the Argus index on October 28th and Kuwait was rumored today to be readying a switch announcement. Saudi has been using the West Texas Intermediate (WTI) price since 1994. WTI, the oil grade referenced in the Nymex Crude Light futures contract, is delivered to Cushing Oklahoma. We have seen over the last year that storage problems at Cushing have resulted in large price dislocations in the WTI contract. Saudi believes that the Argus Crude Index represents a more realistic price for crude since the delivery point for the Argus contract is the Gulf of Mexico. The gulf has many more distribution points including multiple refiners and multiple pipeline connections and is not restricted by limited storage. This rumored announcement by Kuwait and others is depressing the WTI price. CME also announced they would begin trading and clearing of the Argus futures on Nov-23rd. I suspect we will see some dislocation of the WTI price and the dollar hedge simply because there is another crude contract in the picture. It does not mean the WTI contract is history, only that we need to see where the price settles in relation to the Argus contract and the 90 million barrels of distillates floating in the gulf.
Crude Oil Futures Chart
There were $42 billion in 5-year notes auctioned today and the results were astounding. They sold at near record yields with a bid to cover ratio of 2.81%. That is the highest BTC since Sept-2007. Investors were literally paying a stiff premium to get the bonds as a safe haven investment. The average BTC is 2.27% over the last year. The indirect bidders accounted for 61% of the sales and that was also high with the average of 42% over the last year and 51% average since June. Indirect bidders are foreign and institutional investors. The extreme high demand for these bonds with only a 2% yield suggests there growing doubt about the strength of the equity markets in the coming months. There is another $32 billion in seven-year notes on Wednesday and demand is also expected to be high there despite the holiday week.
Nobody was bidding for Brocade (BRCD) stock on Tuesday. Shares of Brocade fell another 9% after the CEO denied the company was for sale. The company also warned on Monday that it was lowering guidance and an overall rebound was not expected until mid 2010. Brocade had been a rumored takeover target by Hewlett Packard. Brocade recently acquired Foundry Networks.
Chart of Brocade
Hewlett Packard was for sale on Tuesday and 17 million shares were sold by investors expecting better news than the company gave on Monday night. The earnings report on Monday showed that growth in its core PC business came from price cuts rather than increased business. Hardware revenue fell 13%. HP did beat earnings estimates but they preannounced that over a week ago. Also hurting HPQ stock was a less than exciting guidance statement from the company. Apparently they still see the economy as challenging and don't look for a significant rebound for several more quarters. They did however see a spike in sales from the Windows 7 release.
Chart of HPQ
GM got an unwelcome Thanksgiving present today. The Swedish company scheduled to buy the Saab brand from GM pulled out of the deal because they could not figure out how to make the brand profitable. That seems to be GM's problem as well. GM said they had sold only 7,441 Saab's in the last nine months. That is roughly .004% of their overall sales. The Saab brand was created in 1947. Odds are good it will die in 2009 since GM has exhausted all its sales prospects for the brand.
Microsoft shares are likely to dip on Wednesday after they announced after the close that their CFO was leaving. CFO Chris Liddell will be leaving at the end of December and will be replaced by Peter Klein who is currently the corporate VP and CFO of the business division. Whenever CFOs leave there is a dip in stock prices on the worry that they are leaving a good position because of problems in the company.
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The trading week is nearly over. Actually I think it was over about 10:30 Monday morning. Volume has been steadily dropping and did not even break 7 billion shares today. There is a flurry of economic reports on Wednesday morning and the auction for $32 billion in 7-year notes and then professional traders will close the books on the week and leave for the holidays.
The Dow rallied sharply on Monday as an opening short squeeze reversed the losses from the prior two days. Once that short squeeze ran out of gas the market went into automatic pilot in hopes of circling safely until traders returned next week. The GDP and Richmond Fed surprises this morning provided a sharp opening dip but the bad news bulls were still waiting. The dip was bought and the markets went back on automatic pilot.
For Wednesday I would be surprised if we break 6 billion shares and Friday should be even less. The next two trading days are typically retail oriented and we have seen some decent Thanksgiving rallies. I would love to see the 8% gain for Thanksgiving week that we saw in 2008 but I have zero confidence that will occur. I would be very happy if we could just maintain the current levels with the Dow over 10,400 and the S&P over 1100. That would be a good launching point for any end of month or end of year rally.
For the Dow the uptrend resistance continues to keep a lid on the morning rallies and I doubt that is going to change. The next material resistance on the Dow is about 10700 and that would be a clear breakout of the current trend. I am more concerned with the possibility of another retracement to support at 10200-10300 as funds and institutions consolidate their gains for the year. However, as long as the bad news bulls keep buying those opening dips we have a chance for a higher close before the month is out.
The Dow is pushing against the uptrend resistance line but the S&P is struggling just to remain over its uptrend support and remain over 1100. The S&P is far less positive than the Dow and is actually a cause for worry. If the S&P can't find traction over 1100 then odds are good we will retest 1085 very soon. Every test of that level will produce increasing worry that we could slide into year-end rather than rally. I would love to finish the week over 1110 but I am not holding my breath.
The Nasdaq chart looks even worse than the S&P. We have an entire series of lower highs over the last six sessions and the uptrend appears to be slowing. The Hewlett Packard and Brocade earnings did not provide any support for techs although the semiconductor index was slightly positive on Tuesday. If the chips are about to shake off their big downgrade from last week then maybe the Nasdaq has a chance. Support is 2140 with resistance at 2200.
I have no bias for the rest of the week. The Russell was neutral with a close at 592 and right in the middle of its recent range. I could build an equally convincing case for both the bulls and the bears. If you are not already in the market I would suggest cautious dip buying or simply remaining flat until next week. Monday is month end and Tuesday could bring us an entirely different picture. Month ends are normally bullish as are the first three days of the new month. We don't know if this month will be different or follow the trend. Happy turkey day to all!