Money manager Laszlo Birinyi said today that investors who wait to buy stocks until the recession is actually declared to be over will miss out on some huge gains. Bernanke said today, "The recession is very likely over." Is that the proverbial fat lady singing?
Market Stats Table
Investors must have taken Laszlo's words to heart because the major indexes have now broken over all short-term resistance and are clearly in breakout mode. Of course other reasons for the rally include end of quarter window dressing and Friday's triple witching option expiration.
Friday's rally got a lift from the economics with the NY Empire State Manufacturing Survey spiking to 18.9 in September. This was up from only 12.1 in August. This was a much stronger showing than analysts had expected at 14.0. New orders rose to 19.8 from 13.4 indicating an improving trend. This was the third consecutive month of improvement in new orders. At the same time inventories are contracting at an accelerating pace. As inventories contract there are rising expectations from the replenishment cycle. However, the report showed that employment is still declining although losses in August were half the rate of June.
Empire State Bar Chart
Producer Prices for August rose sharply by +1.7% because of increases in energy costs. Excluding food and energy the core inflation was only a mild +0.2%. Core prices for intermediate and crude goods have definitely improved. The deflation scare from large declines in prices early in 2009 has eased. Prices for inputs to the manufacturing process were higher than any point during the recession. Rising orders along with rising prices supports the idea that the recession is over. However, orders are still weak relative to growth periods and will probably remain weak for the rest of 2009.
Retail sales for August spiked unexpectedly by +2.7% compared to analyst estimates for +1.4% growth. The gains were led by autos but there was broad based strength across the board. Apparel, department stores and sporting goods stores had very strong sales gains. Building materials and home furnishings were the only two sectors to post a drop in sales.
The headline number was the strongest gain since January 2006 but obviously the cash for clunkers program generated the sales. Auto dealers posted a +10.6% sales gain for the month. Back to school purchases were also strong at more than +2% and confounding to analysts who had previously said they were weak. We should expect a sharp decline in September without an auto stimulus program to provide the boost.
Retail Sales Chart
Economic reports due out on Wednesday include Mortgage Applications, Current Account, Consumer Price Index, Treasury Capital Flows, Industrial Production, Housing Market Index and Oil & Gas Inventories.
The U.S. dollar is still under pressure and today's close on the dollar index at 76.54 is the lowest close since the 76.46 on Sept-23rd last year. The 52-week lows came at 75.89 on September 22nd as AIG was crashing. Lehman filed bankruptcy on Sept-15th and AIG lost 60% of its value. On the 16th AIG hit its low for the year and the government stepped up to prevent its failure. The dollar index plunged to the 75.89 low but rebounded sharply to 88.46 over the next two months as it became apparent the financial system was not going to collapse.
Today there is a tougher problem. The dollar is crashing on worries over the debt load assumed by the U.S. Fed and Treasury to prevent the collapse of the financial system. This is not something that can be resolved over a couple months. This is going to take a decade to work off the stimulus debt and any new spending by the current administration. The dollar is going to continue to decline and could easily return to the early 2008 lows at 70.69. This almost guarantees that dollar based commodities are going to continue to rise.
Crude oil rose to $71.19 intraday as the dollar fell and Ben Bernanke said the recession is technically over. The prospect for increased demand in a rebounding global economy and the falling dollar rescued it from Monday's drop to $68.02. We are also only a week away from the expiration of crude futures next Tuesday. Oil inventories on Wednesday morning are expected to show a drop of 3-million barrels for the week. There are also three storms forming in the Atlantic. None are currently expected to turn into hurricanes but having three separate storms heading our way is a reason to be cautious. We have been very fortunate over the last several years without a material storm since Katrina. Eventually our luck is going to run out.
Natural gas prices have really been explosive. After reaching an extremely oversold price of $2.41 on Sept 4th on fears of an UNG futures dump the price has rocketed higher. The $2.41 was a 7.5-year low. The CFTC is going to meet on Wednesday to discuss position limits on commodities and that probably triggered some short covering on both oil and gas futures today.
Crude Oil Chart
Natural Gas Futures Chart
In stock news Adobe (ADBE) announced earnings after the bell of 35-cents. This was down from the 50-cents earned in the year ago period. Adobe was happy to maintain its earnings in a tough economy and projected earnings of 23-29 cents in the current quarter. Adobe also announced it was purchasing web analytic company Omniture (OMTR) for $1.8 billion. That represents a $21.50 per share purchase of Omniture and 24% over the Tuesday close.
Blockbuster (BBI) said today it might close nearly 1,000 stores by the end of 2010. The once mighty giant of the rental business has been knocked down to size by NetFlix (FLIX) and Redbox. A SEC filing today said Blockbuster would close between 810-960 locations by the end of 2010 and that would be more than a fifth of its current stores. Blockbuster's prior guidance anticipated closing only 380-425 stores. BBI said 35% of its stores were "core" and 47% of all stores were profitable but the remaining stores were losing money. BBI is moving to convert its 4,356 domestic stores to the smaller city based footprint and shutdown the large anchor store concept. BBI is also moving to compete with Redbox and currently has 500 video dispensers in place with an expected 10,000 by the end of 2010. Redbox has over 15,000 today. Redbox was originally funded by McDonalds (47% owner) and Coinstar (47%). In February Coinstar purchased the portion it did not own for $175 million.
For those readers not familiar with Redbox this is a coke machine sized dispenser which has an inventory of the top 100 or so DVDs. Users swipe their credit card and select a DVD and it drops into the pickup slot. The cost per DVD is $1 per day. When you return it the machine reads the barcode on the DVD and cancels the billing. These machines are showing up in McDonalds, 7-11s, gas stations, etc. Seems like everywhere I look there is a new Redbox location. Blockbuster is going to really need to explode its rental machine presence if it is going to compete in the new normal. Blockbuster only claims 1.6 million online subscribers while Netflix claims 9.4 million so BBI has its work cut out for it there as well.
Redbox DVD Station
Online brokers Etrade, Schwab ad Ameritrade all said online trades rose significantly in August with double digit percentage gains. Schwab said daily trades were 334,300 in August, up +24% over August 2008 and +15% over July. Ameritrade said trades rose +71% year over year and 16% from July. Etrade posted a +37% rise in trades. Etrade said it had a record number of accounts at 2.7 million.
Fed Chairman Ben Bernanke lifted the markets when he said during some Q&A today "the recession is very likely over at this point." This came in early afternoon and the markets rallied sharply off the comments. Industrial stocks like CAT and AA were already moving higher and his comments pushed them even farther. GE has finally broken out over long term resistance at $15 with a 10% move over the last two days.
For all practical purposes the fear of a correction appears to have passed. That may make it even more likely since everyone appears to be throwing money at the market. Instead of the daily dose of bears on CNBC the bulls are appearing more often. Laszlo Birinyi said U.S. stocks have "A lot of room to run." Laszlo said he expects to see the S&P at 1700 over the next couple of years. He made that prediction back on May 20th and repeated it again this week on Bloomberg. He is still recommending buying financial stocks that are outperforming. I am surprised we have not seen Abbey Joseph Cohen out with a higher prediction this week. Even noted bear Barton Biggs called himself "unfashionably bullish" and said he believed the S&P would rise to 1200-1250 before a material correction appeared.
With all the bears turning bullish and talk of a correction disappearing it makes you wonder what the future has in store for us. I always worry when everyone moves to the same side of the boat. When that happens the boat has a tendency to capsize. If everyone is turning bullish that means we are running out of bears to keep the market moving higher as they cover their shorts. Once everyone is "all in" on the bullish side there is nobody left to buy.
Somebody is buying this market and volume has definitely increased. Volume today was 10.3 billion shares. Really significant was the spike in new 52-week highs to 447. That is the highest level we have seen this year. New 52-week lows totaled only 47. Some of this could be short covering ahead of triple witching. When portfolio managers close their puts they are using for portfolio insurance it provides a bullish lift to the market. This along with end of quarter window dressing could be pushing the market higher. I don't really care why it is happening as long as it continues.
The S&P rallied well over prior resistance to close at 1052 and is in blue-sky territory until it hits the 50% retracement level at 1116. That does not mean there is no upside resistance but the trend is solid. The SPX should run into uptrend resistance around 1075 but that does not mean a crash is imminent. We saw buyers rush into the market on Monday's gap down open and the pace of buying and volume is increasing. Support today is prior resistance at 1035.
The Dow finally broke over resistance at 9625 and moved over 9700 intraday. Uptrend resistance is about 9800 but the Dow is really in a free fly zone until about 10318. The path should be higher but I am sure there will be thunderstorms along the way. Initial support is 9575.
Dow Chart - Daily
Long term Dow chart
The Nasdaq has gone from weak sister to leader of the pack in two short weeks. The Nasdaq has broken over the 50% retracement level at 2063 and appears to be headed for a test of 2160 this week. Several sectors in the Nasdaq are fueling the rise but nearly all tech stocks are gaining ground. The Nasdaq went from the lagging index in a range bound pattern to exploding higher above major resistance. The Nasdaq actually has more room to run and short covering into triple witching could be the power.
Nasdaq Chart - Daily
Long Term Nasdaq Chart
The small caps in the Russell 2000 are proclaiming a new bull market. If the small caps were not participating I would be telling you that fund managers were not onboard with this rally. If only large cap stocks were rising then fund managers were looking for liquidity for a quick exit. The Russell broke over major resistance at 600 that dates back to 2004. The angle of ascent has gone vertical and while scary it does show that the rally has breadth.
I have been telling everyone to buy the dips for quite a while now and that message is still true. Eventually we will buy a dip that doesn't rebound but until proven wrong that is the trade that is working. I would also remind you to "sell too soon" because rallies like this don't last forever. Lock in profits by selling early or at the very least make sure you have trailing stop losses. You can always get back into the market but you can't always recover that lost profit.
Sell too soon!