WHICH WAY THIS MARKET IS HEADED
As you can see both
major indices have retraced to their uptrend support lines—this could
either be a great buying opportunity or the last of the current eight
week uptrend before a new leg lower.
It could go either
way but there is mounting concern as issues that were thought to be
behind us continue to worsen. And as earnings wind down there are fewer
catalysts to drive stocks higher. The reason given for Wednesday’s
sell-off was the high price of oil and the continuing spike higher since
mid-week isn’t likely to help the markets come Monday.
Oil prices traded
over $126 in the after-hours session Friday to another new all time
record. Higher oil prices directly affect the economy and we got a
glaring example of that after the bell on Friday as FedEx warned on
earnings for the current quarter. FDX cautioned that earnings are now
going to be $1.45-$1.50 compared to prior estimates of $1.60-$1.80.
Analysts had already cut estimates from $1.95 to $1.69 after FDX
initially warned for this quarter back in March.
FDX pin-pointed
rapidly rising fuel prices as the reason for the shortfall with their
CFO reporting that fuel costs had risen by more than $100 million since
the March warning. FedEx has dynamic fuel surcharges in place but
evidently they were not dynamic enough to cover rapidly rising costs. In
addition to sky-rocketing fuel costs FDX warned that the weak economy
has restrained demand for U.S. domestic express package and LTL freight
services. FDX declined to discuss earnings other than the published
warning saying they were in their quiet period before their scheduled
earnings release on June 18th. That should also be a red flag since a
normal quiet period does not extend over five weeks ahead of earnings so
you have to wonder what else the company isn’t talking about. FDX lost
-$2.84 in regular trading and another $3.00 in after-hours trading.
The FedEx warning
underscores the price of oil as a major escalating problem. It is not
just the airlines raising prices 14 times since the beginning of 2008
and out of control freight costs. Higher oil prices are simultaneously
creating massive food inflation and a consumer that is increasingly
unable to spend on anything other than core necessities.
Over 60% of
consumers claim they are facing hard decisions about how they are going
to afford fuel. The gains on Friday were attributed to the Hezbollah
takeover in Lebanon and new revelations on Hugo Chavez's involvement
with the Columbian rebels but that’s just the latest round of
drivers--the truth is there seems to be a new catalyst for higher oil
every week. Oil hit a low of 110 earlier this month and closed very
close to 126.00 on Friday—just nine days later. The chart says the price
is over-extended and we could certainly see a pull-back soon, but
world-wide fundamentals tell us oil will continue to climb over the long
run.
The other big
concern right now is that the worst of the credit crisis is NOT behind
us as was previously thought just a couple of weeks ago. American
International Group (AIG) warned on Friday that they lost $7.8 billion
in Q1 and needed to raise $12.5 billion in additional capital.
‘Earnings’ came to a negative 3.09 per share for the quarter. The losses
came primarily from their investment portfolio and credit-default swaps.
The swaps are promises to cover losses on $579 billion in bonds and
other kinds of debt. Losses from their investments in debt backed by
mortgages totaled more than $6.09 billion.
The
real question here is when will the escalating losses in the financial
sector end? Analysts thought AIG was done with their write-downs after
the Q4 earnings disappointed but every quarter is producing additional
losses from financial companies.
With 422 of the S&P 500's companies having
reported so far, earnings are expected to have fallen 17.4% from the
year ago, according to Thomson Financial. Most of the problems lie with
the ailing financial sector, where results remain crushed by write-downs
linked to bad loans.
For example
Citigroup (C) held an analyst meeting on Friday and revealed they were
going to sell up to $500 billion in non-core assets. The sales will
occur over time to avoid fire sale prices but it represents a
restructuring of huge proportions. The company will sell its mortgage
portfolio and assets in their securities and consumer banking segments.
Citigroup has cut 13,200 jobs since last summer and have written down
$38 billion in assets since this crisis began. Analysts say Citigroup is
being forced to take these measures to raise more capital because of
their current exposure to home equity loans, mortgages and auto loans.
As consumer credit continues to spiral downward Citi expects additional
write-downs and that requires additional capital.
In addition JP
Morgan announced Friday they were uncomfortable with the market and were
mostly in cash. They feel the crisis is not over and new revelations are
still to come—a timely insight considering the AIG and Citigroup news.
The analysts at JP Morgan feel the housing crisis will worsen throughout
the rest of the year, oil prices will continue to weigh on the economy
and a consumer meltdown will be the next shoe to drop. CEO, James Dimon
warned at a meeting in Frankfurt last week that he did not expect the
financial crisis to end soon and JP Morgan would remain very cautious.
We’ll get more
insight into how the consumer is doing this coming week when the
retailers report this Tuesday morning.
Excluding autos, sales are
expected to rise 0.2%, roughly unchanged in inflation-adjusted terms. A
good report out of the retailers would go a long way toward calming the
bulls but the charts tell us ANY downturn at this point will break the
current uptrend—the question is…
HOW DO WE MAKE MONEY ON
IT?
We’ve
got two plays lined up this week and they are both bearish. The first is
on a major index that is usually the first to fall and the last to
recover whenever economic uncertainty hits the markets. This index--like
the others we’ve seen--is currently sitting on major uptrend support and
we’re not going to take a position until that support is broken. We can
set automatic entry orders to get in the minute the break occurs and the
good news is if we get the signal there is plenty of downside on this
one to make us a small fortune on the right puts.
Our
next play is on a company in both the energy generation business and
real estate business—and both are hurting. The company just announced a
loss for the first quarter and investors didn’t like it one bit selling
the stock below key support. Now this one looks ready to continue
sliding lower and we’ll be along for the ride with some well placed puts
first thing this week.
We’ve
got two high potential bearish plays lined up on a market teetering the
abyss—so let’s get to it…
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