Depending on your age your probably remember the frequent use of that headline sentence by either Groucho Marx, William Bendix in Life of Riley or more recently Daffy Duck. Regardless of who you remember the phrase definitely applies to today's market.
Market Stats Table
Last Tuesday the Dow closed at new 52-week highs and appeared ready to move over resistance. What a difference a week makes. Without any specific news there was a constant stream of negativity that seemed to poison investor sentiment. Worries about a double dip appear to be growing and some major companies warned that Q4 was not going to produce stellar results. Add this to the Bernanke wet blanket comment from Monday and investors decided to take some profits.
I normally ignore the weekly Chain Store Sales report every Tuesday but today bears mentioning. Normally there are changes of +/- 0.1% or so. Today's report showed sales last week fell -1.3% and much stronger than normal. The week after Thanksgiving normally sees a slump in sales but this was very strong. The Chain Store Index fell to its lowest level since March. The ICSC survey showed that only 45% of holiday shopping had been completed compared to 51% at this point in 2008. Personally I can't comprehend being done shopping by Dec-8th but then I am a male while my 30-yr old daughter already has all of hers wrapped and under the tree.
There is one additional shopping day before Christmas for those late shoppers. However, Hanukkah is 10 days earlier in 2009 than 2008. The ICSC cut its estimate for sales growth in December from 3% to 2%.
You remember how gloomy the markets, housing and economy were last Nov/Dec and retail sales were in the tank. Retail sales for 2009 are up only 2.6% over the same period in 2008. Consumers have definitely not rebounded. Analysts claim job losses, loss of home equity loans and lowered credit card limits continue to weigh on consumers and their holiday shopping trends. Wage income is down -3% over 2008. The ICSC claims their surveys suggest consumers are postponing purchases until the last minute in hope of some last minute panic sales by retailers not wanting to carry inventory over into 2010. The average family is expected to spend just over $600 on the holidays in 2009. That sounds like my food bill alone for the Christmas-New Year week.
Weekly Chain Store Sales Chart
The other economic report for today was the Job Openings and Labor Turnovers for October. It is a lagging report but I will mention it briefly. Job openings fell slightly to 2.5 million. Hiring also slowed to just under 4.0 million but remained above its lows in July. However, the good news came from the separations component. Separations, whether quit or fired, fell to 4.2 million and the lowest rate since this report began in 2001. Fewer workers were laid off and fewer quit! That is a bullish sign but it is very weak given the falling job openings.
Weighing on the markets more than those employment numbers was guidance warnings from some big names. You may remember I cautioned about the Q4 warning cycle last week. McDonalds (MCD) reported global same store sales for November were "soft" across all markets. Same store sales rose only +0.7% compared to analyst's estimates for a +1.7% increase. The primary market weakness came from the U.S. market where sales FELL -0.6%. Asia Pacific, Middle East and Africa sales fell -1% while European sales were up +2.5%. If Ronald can't sell $1 burgers and fries to an addicted to fast food U.S. consumer then money must really be tight.
3M issued a cautious outlook for Q4 and warned that profits would be less than expected. 3M said tight credit conditions and other headwinds would make the economic recovery "patchy and slow." Thank you 3M for that colorful description as the markets tank on your warning. The CEO George Buckley said, "We all know we are going through some transitions in the economy and forecasting is very, very difficult." Also, "Unless the U.S. unemployment rate improves dramatically, the coming year will be a challenging one for companies that cater to consumers. As a result the coming year could be marked by "real market share transfers as weaker companies, unable to tap credit markets as before, fall by the wayside." As you can imagine 3M's warning comments helped to poison market sentiment and send the markets lower. Fortunately for them their stock price barely moved.
Kroger (KR) posted profits that missed street estimates by a mile and slashed its full year forecast blaming high unemployment and intense competition. CEO David Dillon said Thanksgiving sales were soft and prices cuts by competition to retain market share were brutal. Kroger is the largest and best performing grocery chain in the U.S. and probably a sign of things to come in the sector. Analysts said Kroger was best positioned to deal with the economic problems but that did not mean they were immune. Kroger posted profits of 27 cents before charges and analysts were expecting 37 cents. Kroger cut its full year estimates to $1.60-$1.70 from $1.95.
Chart of Kroger
On the world front Greece took center stage as Fitch cut the country's debt ratings to BBB+ with a negative outlook. This followed a ratings downgrade by S&P last week. This is the first time in over 10-years that a ratings agency has given Greece less than an A rating. The Greek stock market saw heavy selling on fears the country was headed for disaster unless politicians tackled the dangerously high debt levels. The public debt for Greece is expected to rise to 12.7% of 2010 GDP. This would be seriously in violation of the Eurozone rules to keep debt under 3% of GDP. Greece has never been that low since joining the Euro in 2001. Under the pre recession rules Greece would have been unable to borrow money from ECB loans. However, the post recession rules allow borrowing above BBB- so Greece is right on the verge of disaster with any future downgrades. Goldman Sachs said that unless the ECB changes the rules again Greece will no longer be eligible for ECB loans by Jan-2011.
The downgrade on Greece brought back into focus the potential for country defaults that exploded onto the world stage with the Dubai crisis two weeks ago. Now more institutions are rethinking their global investments. Dubai had gone into back burner simmer mode last week as analysts waited to see what changes would be made by Dubai World to solve its money problems. That changed this week after the sheikdom's finance chief raised new questions about the pace of restructuring at the government owned Dubai World. The director general now says the restructuring could take more than six months. Lenders had always assumed that Dubai World had an implicit government backing but Dubai officials have now denied that relationship. The Dubai stock market, -6.1% today, has plunged sharply the last two days as more news breaks.
Moody's and S&P have now cut the debt to junk status on several of the Dubai World companies. $3.5 billion of Islamic Bonds come due on Monday for Nakheel, a subsidiary of Dubai World. Market analysts fear that some of the Dubai World debt could have been syndicated and sold off to other banks and those banks have not yet confessed to owning the troubled debt. This Dubai problem is not over and even if there are no U.S. banks involved it is a blow to the already unsteady global banking system. There are still rumors that the total debt could be over $80 billion. Dubail World's investment arm, Istithmar, lost the W Union Square New York hotel in a foreclosure auction today. Istithmar purchased the hotel in 2006 for $285 million. It was sold in the auction for $2 million to LEM Mezzanine, one of the firm's interim lenders. This is probably only the first of many asset losses for the Dubai World parent and every time this happens it is going to pressure the market.
On the positive side CIT Group (CITGQ.PK) said it would exit chapter 11 bankruptcy on Thursday. CIT cut its debt by $10.5 billion and restructure remaining maturities over the next three years. The bankruptcy plan was approved in advance by the bondholders. CIT must also restructure the board and find a new CEO now that the plan has been approved. Taxpayers lost a $2.3 billion TARP investment when CIT filed for bankruptcy.
CITGQ Stock Chart
The banking sector took it on the chin again as Meredith Whitney blasted the sector from CNBC's Squawk Box this morning. She compared the moves taking place in the sector as rearranging the deck chair on the Titanic. She said real banking activity is minimal and most of the banks are more concerned with raising additional capital than making loans. She continues to warn that there will be more capital raises and more dilution to existing shareholders. Fortunately her constant anti-bank tirade to try and produce business for hew new company is growing old and although the banking sector was lower it was one of the best performers of the day. The BKX is struggling to hold support and has been moving in a very narrow range for the last month.
Banking Index Chart
Bernanke did not help the banks on Monday or the general outlook. His comments that it was too early to declare a lasting recovery were not received well by those who wanted to see a strong rebound in 2010. "We still have some way to go before we can be assured that the recovery will be self sustaining." When asked about the extended period portion of the FOMC announcements he said, "Right now we are still looking at the extended period, given that conditions remain, low rate utilization ... and stable inflation expectations, that remains where we are now." The Fed chief repeated his belief that the recovery will continue at least into next year. But he cautioned that the U.S. economy is confronting some "formidable headwinds," including a weak job market, cautious consumers and still-tight credit. He said, Those forces seem likely to keep the pace of expansion moderate." Gee uncle Ben, thanks for the optimistic outlook!
The one-month T-Bill auction today went off at an interest rate you don't see every day. The auction rate was 0.00% and only the fourth time in history that debt was sold at that level. What we have here is a flight to quality of the highest order. Investors are so concerned about a safe place to park money they will park it with the U.S. Treasury for free.
Energy was down hard again today with crude closing at $72.70 as the dollar rallied to a six week high. You may remember back in early November when oil was testing resistance over $80 that I said more than once in these pages that I expected to see $70 before $85. It appears that will come to pass as rising inventories, repricing of U.S. crude purchases using the sour crude contract and the rising dollar are all taking a toll on the light crude contract. Demand continues to fall despite the extra gasoline being used to shop. For more than 15 million unemployed workers not driving back and forth to work conserves plenty of fuel. Inventories out tomorrow are expected to show another increase.
Crude Oil Chart
Dollar Index Chart
Despite the negative markets today the average investor is experiencing increased bullish sentiment. Charles Schwab released survey data today showing that traders are more optimistic about an economic recovery. The survey polled 300 individual investors who trade frequently. 50% were bullish on the market compared to 34% in the last survey in July 2009. 35% are neutral and only 14% are bearish compared to 47% neutral and 19% bearish in July. Nearly 63% said they planned to increase their trading activity over the next six months. 54% expect the economy to recover within 12 months and 18% expect signs of a recovery in the next six months. The majority of traders, 55%, were holding less than 30% cash in their long-term accounts. More than half said the U.S. market was the most attractive right now compared to other global markets. 40% of traders said technology will lead the recovery while 29% said it would be financials. This compares to 40% financials and 32% technology back in July. The real point here is now that the retail investor is bullish does that mean the rally is over. Whenever the retail trader shifts into fully bullish mode that normally spells the end for the easy profits.
I don't know about you but focusing on the Dow's close today would make you believe that the easy money may be over. The Dow dropped to close on support at 10280 and looks very heavy. After multiple attempts to move over 10500 it may be time to take a rest. I am hearing more anecdotal comments about fund managers slipping quietly into cash for year-end. Institutional trader comments have been running something similar to "why risk profits now when we are up 30% for the year, my bonus is secure and I know I will have a job in 2010." I have also heard several comments about the mother of all shorting opportunities on Jan-4th. Whether these comments are representative of the larger professional trading community or just a couple loud mouths we do not know. However, if they are talking their book or lack of a book then other traders may follow suit.
I don't believe that was the problem with the Dow today although lack of dip buying was definitely apparent. A full 29 of the Dow 30 stocks were negative with Verizon the only gainer. The big losers were MMM, XOM, CAT, MCD and CVX. Two of those stocks warned today and the other two were down on weak oil prices. The rest of the Dow was down fractionally. Not exactly a picture of health but it was also not a terminal disease.
Since before the jobs report the Dow has been weakening. I attributed it to managers selling blue chips because they were willing to go to more risk stocks if employment is improving. Since the Jobs report the actual jobs numbers have been called into question as a purely seasonal bounce because people took seasonal jobs to make ends meet. If this was a swap of blue chips for higher risk securities then the negative comments about jobs should have reversed that flow and it die not happen.
There appears to be growing worries about the quality of the rebound as evidenced by Bernanke's comments. We also have the fear of the Fed ahead of next Tuesday's FOMC meeting. We heard from Bernanke on Monday that the extended period would remain but it did not help equities. I believe the Dow weakness is more of a flight to cash today rather than a move to small caps although small caps are still holding their gains from last week.
The Dow needs to hold the 10250-10275 level or risk a complete breakdown as confidence in the rally evaporates. Initial support would be in the 10000-10100 range but I believe a drop to that level could have darker consequences.
The S&P-500 is a slightly better chart than the Dow but right now is appears the outside day we had on Friday was an accurate predictor of the future. Support at 1085 is critical with the 50-day at 1080 as backup. A break of 1080-1085 on the S&P could easily target 1040 and a significant decline from last week's new 52-week highs.
The Nasdaq is much better off than the Dow. After weeks of the Dow leading the charge it is now the Nasdaq and Russell that are the relative out performers. The Nasdaq is moving slowly higher and actually pushed over 2200 on Friday before losing traction. The Schwab survey showing investor sentiment has switched to tech stocks as the sector to lead the recovery is helping keep the Nasdaq near its highs.
However, if the general market turns negative there is nothing that moves faster than a new tech stock buyer. They tend to bail quickly and look for new entries. If the general market weakens it is entirely possible to see Nasdaq 2050 tested. I know that is heresy but the closer we get to year-end without any decent momentum to the upside the more likely we will see a trader revolt. The congestive support above 2140 needs to hold to keep tech investors in the game.
The Russell declined a measly 5 points today and remains the bight light in the markets. Resistance at 606 held again on Monday but the Russell did not stray too far from that level. I am getting really mixed messages from the markets tonight. If I were only watching the Russell I would be cautiously bullish. The Russell is typically a Santa Clause Rally favorite and that may be what we are seeing over the last few days. Support is 580 and resistance 606.
To summarize I am neutral tonight. The Dow declined to support and what should be a point to buy the dip. However, I am cautious because of the uneasiness in the broader market and the fear of next week's Fed meeting. I would like to buy today's dip but I would only do it cautiously and only on a positive market on Wednesday. If we open down I would go with the flow and not fight the tape.
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