Shorts are getting a workout as news events continue to put the squeeze on the bears and provide false hopes for the bulls.
Market Stats Table
News on the debt crisis in Greece spiked markets after the open and shorts were forced to cover once again. The Wall Street Journal claimed in that Germany was going to provide loan guarantees to Greece in cooperation with the EU. The possibility of having the Greek debt crisis resolved sent he Euro sharply higher, the dollar sharply lower and markets into short squeeze mode.
Unfortunately later in the day Germany refuted the WSJ article and the markets started giving back their gains. Almost immediately another report surfaced saying there was a financial rescue plan in the works and the markets shifted back into rally mode. The confusion over which rumor was correct kept investors confused into the close. Michael Meister, financial affairs spokesman for Merkel's Democratic Union, said, "Greece will only get aid under strict conditions and if the Greek government undertakes far-reaching state reforms." Olli Rehn, European Economic Affairs Commissioner, said, "Greece will have to do the necessary measures in exchange for the EU's support. The EU charter forbids unilateral bailouts by the ECB but a combined effort with Germany and the ECB joining to give loan guarantees is possible.
The moral hazard here is that just giving them a loan guarantee does not change their deficit spending and the EU and Germany will want to extract some serious commitments before anything gets done. Once Greece receives an apparent bail out the sharks will turn their focus to Spain and Portugal, which are nearly as bad off as Greece. If a combination of parties bails out Greece then they will have to offer the same deal to Spain and Portugal. This is not a quick decision or an immediate deal. This could take months to hammer out and there are far more reasons it could fail than reasons it will come to pass. Having a 16-nation union with strict rules but no penalties means the rules are not followed. The strength of the European Union and the Euro was built on a strong outward platform but no support under that platform for enforcing the rules.
The EU has three choices for dealing with Greece. They can fine them for violating the financial practices rules but that helps nobody. They can kick Greece out of the EU but that would be the equivalent of kicking California out of the U.S.A for too much debt. It would be impossible to do and have severe repercussions if you could make it happen. If Greece was expelled then Spain and Portugal would be right behind them and the EU would fracture and dissolve. The EU will be stronger if they come up with a way to solve the problems. Investors will feel better about working with EU countries if they know the EU will backstop errant countries rather than letting them implode.
The problem with Greece has not gone away despite the gains in the market on Tuesday. This was just a news driven bounce and there will be plenty more news in the days ahead and not all of it will be positive. There is a planned EU summit planned for Thursday and there will be plenty of headlines coming out of that meeting.
The U.S. economic calendar was lackluster today with only three reports. The weekly chain store sales report showed sales rose +1.4% for the week ending Feb-6th. Sales were brisk at grocery stores due to the Super Bowl and the blizzard threat on the eastern part of the country.
The Job Openings and Labor Turnover Survey (JOLTS) showed that available jobs increased from 2.4 million to 2.5 million but the number of workers hired fell to 4.07 million from 4.13 million. Over 4.24 million workers left their jobs. This was a lagging report for December and is consistent with the non-farm payroll report. Layoffs are slowing but hiring has yet to increase.
Job Openings Chart
Wholesale Trade fell by -0.8% compared to the prior month gain of +1.6%. This was another lagging report for the December period and was ignored by traders. Sales rose +0.8% making it the ninth consecutive month of sales gains. Sales of durable goods surged by +3% with computer equipment +3.9%, professional equipment +3.9%, furniture +4.6%, metals +5.7% and machinery +7.5%. The inventory to sales ratio fell from 1.14 to 1.12 and the lowest level since June 2008. This suggests they will have to replenish inventories in the coming months and this will provide positive input to the GDP.
Economic reports for Wednesday include Mortgage Applications, International Trade and Treasury Budget. However, the biggest event will be the Bernanke testimony to the House Financial Services Committee as long as Washington is still open for business. The weekly Natural Gas inventory report and the Oil and Gas Inventories have been postponed until Friday due to weather conditions in Washington and the North East. Will house politicians give up an opportunity for a couple hours face time on TV just because of a little snow?
Before the open this morning Coca-Cola (KO) posted a profit of 66-cents and inline with estimates. KO gained +2% on the news that sales in Asia soared although sales in the USA fell slightly. McDonalds (MCD) said overseas sales rose +2.6% while USA sales were flat to down.
Caterpillar (CAT) was upgraded to overweight from underweight by Morgan Stanley and a raised price target of $70. Morgan Stanley said they were turning more bullish than consensus opinions on the pace of cyclical acceleration and the ability of CAT to deliver on its structural reforms. Morgan expects CAT to produce $8 to $10 in earnings. The +5% bounce by Dow component CAT plus gains from KO and MCD helped jumpstart the morning short squeeze. CAT's gains ran into a solid resistance ceiling at $54.
Electronic Arts (ERTS) was crushed for a 9% loss after reporting earnings on Monday night. Earnings were inline with estimates but the company warned that earnings for the current quarter could be in the range of 2 to 6 cents and analysts were expecting 13-cents. One analyst said EA was guiding for the worst-case scenario and should do well with Mass Effect 2 and Dane's Inferno proving strong revenue during the quarter. So who is right? Is it the company or the analyst? I would bet on the company forecast.
Electronic Arts Chart
Baidu (BIDU) gained $40 after the close after reporting earnings that rose by 48%. The company earned $1.88 per share compared to estimates of $1.68 per share. Baidu is profiting from the current conflict between Google and China and they should continue to post market share gains.
Chart of Baidu
Disney (DIS) reported earnings after the close that were flat but they still beat street estimates. Earnings were 47-cents excluding items and analysts were expecting 39-cents. After a few minutes of volatility the stock finished in afterhours almost exactly where it closed the regular session at $30.
The biggest news from Disney was the CEO calling the Apple iPad at "game changer" for distribution of content. Bob Iger said Disney was already putting the finishing touches on several new products that would be distributed over the iPad including a new ESPN ScoreCenter offering, ABC's Lost, an ABC news app and some interactive children's games.
S&P cut the credit ratings on Bank America and Citigroup to negative from stable because there is less likelihood the government will come to their rescue on any future problems. Without government support the S&P analyst did not believe either bank had enough strength to prosper over the next two years on their own. I personally disagree with the call on BAC. I believe BAC is a monopoly in the making and they will do really well once the housing market begins to stabilize. BAC has a million loans it acquired in the Countrywide deal and they are fighting nearly every one. Realtors will not even show a home for sale that is underwater and the owner is trying to do a Bank America short sale. There are numerous reports of transactions taking six months because of the lag time getting through the BAC paperwork. I wonder if BAC is not dragging their feet in hopes of a strong market in the spring that will inflate housing values and erase some of the loss from short sales? BAC was flat on the day.
Realtors are not showing any house with a short sale cloud over it because they can't be sure it will close before the July 1st tax credit deadline. Sales of houses that don't have a short sale cloud are picking up at least in Colorado. It appears Congress will have to extend the tax credit one more time if they want to clean up the huge inventory or homes where homeowners are underwater.
Toyota Motors (TM) rallied with a +1.75 gain after formerly announcing a recall on the Toyota Prius to fix the brakes. In recent weeks Toyota has recalled 5.75 million cars to fix a floor mat problem that caused accelerators to stick. Then they recalled 4.45 million cars for sticking accelerators that was a different problem than the floor mats. Only about 2-million cars were duplicated. The Prius recall is for 437,000 cars for a software upgrade to fix the brakes.
Iran was back in the news again this week with several high profile comments that are sure to move the market in the weeks ahead. First Iran said it was going to accelerate uranium enrichment to 20% starting today. This is in direct defiance with UN mandates and sanctions. They also announced expansion to 10 more enrichment sites. I guess that gives attackers that many more targets because they don't know which ones are actually being used and which are decoys. All the major world powers except for China immediately called for tougher sanctions in the face is this strong defiance.
Second, the supreme leader Ayatollah Ali Khamenei told a group of air force brass that Iran would strike a punch on Thursday that would stun world powers. Thursday is the 31st anniversary of the Islamic Revolution. Nobody knows what the "punch" will be but Iran is always long on talk and short on action.
The two news stories above were probably conceived to draw attention away from the anti-government protests expected on Thursday. The protest movement exploded after the June reelection of President Mahmoud Ahmadinejad. Opponents claim the election was rigged and the evidence is pretty convincing. That did not stop a government crackdown that jailed thousands, killed many and hanged two protestors as examples. The protests this Thursday were expected to be huge but the government has forbidden anyone from protesting and threatened immediate military response if protests occur. Iran will probably block cell phone and Internet traffic in order to prevent communication between protestors.
By focusing world attention on the uranium enrichment and some as yet unknown military event Iran was probably hoping to avoid attention on protest crackdowns. I doubt it will work but journalists have been banned from the country and without Internet it will be tough to get news and pictures out to the world press.
The markets rallied today on the CAT upgrade and the headline that Germany might go to the aid of Greece. The CAT, KO, MCD news pushed the Dow higher at the open and the markets were moving up until 10:15. The Dow rolled over at 10072 and fell back to 9976 for nearly a -100 point drop from the opening highs. The Greece headline broke at 11:30 and the Dow spiked again to a new high of 10139 and a +163 point rally off the 11:00 lows. The short squeeze did not hold once Germany refuted the news and the Dow dropped back to close at 10058. From the open at 9910 to the intraday high at 10139 is a +229 point gain but we closed -71 points off the highs. It was a bullish day but completely headline driven.
The Dow struggled with resistance at 10100 all afternoon and eventually failed at that level. A +150 point is still a good gain but it was just another short squeeze. Remember Monday was a -100 point drop to 9908. The Dow was headed back to that level with the early morning decline but the German rumor caused another strong squeeze. I am still negative on the markets overall until the Dow can move over resistance at 10300.
The S&P rallied less strongly than the Dow because the gains in Caterpillar pushed the Dow higher than the market. The S&P rebounded to near term resistance at 1075 and stalled. This is well below high profile resistance like 1085 and 1100. This appears to be just a normal news driven bounce and without any further revelations the path of least resistance is still down until the S&P moves over 1100.
The Nasdaq rallied to 2150 twice, once at the open and again after the German announcement and held that level the second time. Nasdaq 2150 is resistance but there was no real failure at that level today. Tech stocks in general rebounded slightly and those the most heavily shorted in recent weeks were the biggest gainers. MSFT, INTC, QCOM, AAPL and GOOG and all closed off their highs. 2195 and 2225 remain strong resistance.
In summary I am still slightly bearish until the markets can put together more than a couple days of gains at a time and without any monster short squeeze that weakens, as the day grows older. There is strong resistance overhead and as we saw with several stocks today the guidance is still cautious.
I think there could be some negative headline risk from the Thursday EU summit and from the Iran event. The risk from the Bernanke testimony on Wednesday, if it occurs, will likely be to the upside if he expresses caution about removing the stimulus.