It’s barely a new year and already our predictions
are coming true…
THE MARKETS IMPLODED THIS PAST WEEK KNOCKING
OVER FOUR DOLLARS OFF SUNTRUST BANK (STI) AND BLASTING OUR JAN 60 PUTS
STRAIGHT THROUGH THE ROOF!
Our trigger on this one was a stock price below
60.00 so we ‘officially’ broke-even, but anyone who hung on until Friday
make a very nice profit—and by the looks of things there are more gains
to come as the markets continue to sell.
You can bet there are a huge number of fund
managers and market traders re-thinking their bets this weekend and that
will likely mean much more volatility immediately ahead—to get a handle
on it let’s take a good hard look at…
WHICH WAY THIS MARKET IS HEADED
As you can see by
the charts above we’ve had a major implosion---the markets
self-detonated into the worst yearly opening since 1932 with a -565
point drop in the Dow and -170 point plunge on the Nasdaq!
The big hedge funds
and private equity firms were suddenly free to take profits now that we
are in a new tax year and that is exactly what they did. Believe it or
not three quarters of the Nasdaq gains in 2007 were on the back of GOOG,
AAPL and RIMM. You only get to count those profits if you sell and the
big fund managers rushed to do exactly that---Google (GOOG) lost -8%,
Apple (AAPL) -10%, Research in Motion (RIMM) -10% and Amazon (AMZN)
-10%.
Analysts blamed the
market meltdown on the Jobs numbers on Friday but that was likely just
the spark—the real motivation was likely profit taking in the New Year
with the jobs number as the catalyst. For that reason we could see a
rebound soon with the markets plunging deeply into oversold territory.
After a big morning flush out on Monday the funds could be looking for
bargains—and we all know how fast short-covering rallies can ignite the
markets to the upside.
That said some
fundamental problems with the economy are not going away that fact was
underscored in a big way by the jobs report. There were sharp drops in
construction (-49,000), manufacturing (-31,000) and retail (-25,000).
The job diffusion index fell to 48.4---the lowest level since 2003.
Meanwhile the unemployment rate spiked by 30 basis points to 5.0%---the
highest rate since Nov-2005--and a sharp warning that the odds of a
recession are rapidly increasing.
On the plus side
employment gains were recorded in November for an upward revision from
94,000 to 115,000. The total for Oct-Nov rose to +274,000 and offsets
the very thin 18,000 gain for December bringing the 3-month average to
97,300 new jobs. This was actually higher than the 3-month average for
Q3 at 76,600 jobs which is good news but we are still on a downward
slope regardless of how we slice it.
After this initial
sell-off however it won’t be long before the pundits start promoting the
possibility of a much larger rate cut at the next FOMC on the 29th
of this month. This is especially the case when you factor in the drop
in the ISM Index on Wednesday into contraction territory at 47.7 for
December. This was a drop of -3 points from the barely positive 50.8 in
November and racked up the sixth consecutive month of declines in the
index. The last time that happened was in the recession of 2001.
At this point the
Fed funds futures are projecting a 160% chance of a 25-point rate cut
when they meet again in a little more than 3-weeks. Already Goldman
Sachs and JP Morgan jumped into the fray on Friday with forecasts for a
50-point cut to 3.75%.
Goldman even
suggested we could see an intermeeting move before the regularly
scheduled Jan-29th meeting. They believe the Fed will want to fight the
recession rather than focus on inflation during Q1. Recessions are more
damaging than inflation and should be at the top of the Fed's priority
list. Once the economy begins to show growth again they can shift their
focus back to inflation.
But the truth is
the Fed isn’t even waiting for the next decision on rates to inject more
money into the markets—they announced late Friday they would offer
another $60 billion in TAF loans (Term Auction Facility) similar to
their first offering of this type. They will increase the amount offered
to $30 billion on each of the next two auctions. Those auctions will be
on Jan-14th and another on Jan-28th, the day before the FOMC meeting.
The Fed saw its last auction of $20 billion oversubscribed by 300% so
it’s not surprising that they are planning on continuing the auctions
every two weeks for as long as it takes to address the pressures in the
short-term funding markets.
Part of the current
problem in the markets is we are seeing billions in funds leaving U.S.
stocks and heading overseas through funds and ETFs. With the U.S. market
apparently heading into a recession many investors want to shift money
to an economy still growing. Russia funds were seeing strong inflows of
cash as were Taiwan, Brazil and even China. The combination of tax
selling and money movement was too much for the markets to bear
culminating in Friday’s sell-off.
Starting this week
we’ve got Dow component Alcoa kicking off the earnings cycle when they
report on Wednesday but the real earnings calendar does not fill up
until the week of Jan-21st. That gives everybody planning on reporting
after Jan-21st another full week to warn if earnings are going to be
less than expected. So far warnings have been very light except for
financials.
Earnings estimates for the S&P for Q4 have declined to an expected loss
of -9.5% and decisively ending our long string of earnings growth
quarters. The earnings damage is almost entirely due to losses in
financials. If you remove the financials from the S&P equation earnings
are still expected to top +12.5% growth—not bad. But earnings for the
financials alone are expected to drop -66%.
Fortunately
earnings for energy and techs are still rising. The economy can't be too
bad if tech stocks are still raising estimates but the fear is that even
those bulletproof sectors may be in trouble. At this point however
Financials and Materials are the only sectors with negative
expectations.
Next week the
Computer Electronics Show (CES) opens in Vegas with 140,000 attendees
and over 3,000 exhibiting companies across 1.8 million feet of floor
space. This is the largest electronics show in the world and all the new
toys will be exhibited. Home theaters, gaming, cameras, phones, home
networking, vehicle electronics and dozens of other categories will be
on display. This should give tech stocks a boost from the hype
surrounding all the new devices and their components. The Macworld
convention comes the following week from the 14th to 18th and Apple is
expected to make even more announcements that could spur buying in tech
stocks.
The Nasdaq lost
-170 points for the week and plunged to 2500 at Friday's close. This is
major support from August and the majority of the drop was in the major
names. It was clear tax selling ahead of CES and MacWorld. Those waiting
for an entry point in those big movers will likely be jumping into the
gap early in the week to establish positions.
A likely scenario for this week is that Monday turns into a washout as
retail traders and margin calls flush out the rest of the weak holders.
By late Monday or Tuesday buyers are likely to move in with the bulls
get a running start heading into mid-week. Even though the economy may
have some longer term problems we’ll still likely see a big bottom
buying frenzy and subsequent bounce in our immediate future--the
question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two super
strong plays lined up and as you may have guessed they are both bullish.
The first is in the
super-strong health care sector and traders love this stock—it zoomed
higher on Thursday inspite of a very weak market and pulled back just
enough on Friday to make this one really attractive. With a big
international health conference coming up this week this stock is ready
to keep blasting higher—a ride we’ll definitely want to be aboard!
Our next play is on
a tech stock with the ability to rocket higher to the tune of several
dollars per day—or more. We’ve got a once-a-quarter (if you’re lucky)
buying opportunity with Friday’s big sell-off and if we can get more
downside Monday morning this could be our most profitable set-up for the
past year. You absolutely DO NOT want to miss this one because it could
put a pile of cash in your pocket by this time next week!
We’ve got two super
hot plays and the most compelling market set-up in months—so let’s get
to it…
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