Broadmarket analysis is presented here courtesy of Cashflow Heaven.
WHICH WAY THIS MARKET IS HEADED
The SP-500 appears pretty
precarious as you can see
above. The chart ‘double
topped’ this week which
means there is a pretty
decent chance for a return
to the downtrend line. The
big market mover this week
is the FOMC meeting and with
the price of oil down the
Fed won’t be nearly as
likely to take a hard line
on interest rates. If the
Fed is market friendly we
could see another rally in
the SP-500, but for now the
chart is looking very
bearish.
The Nasdaq faired only
slightly better and gained
less than a point for the
week. The lack of financials
in the index was a positive
but several tech disasters
whacked any real rally
attempt. This week we’ve got
Cisco reporting on Tuesday
and they are a big tech
barometer. If Nortel is any
indication we might have a
downside surprise on CSCO.
Nortel reported earnings on
Friday losing more than
expected and guiding lower
for the rest of 2008. Nortel
warned they faced a tough
economic environment ahead
and lower spending by major
customers. Cisco may buck
the tide but the business
environment is anything but
friendly right now. It will
be interesting to see if a
negative report by Cisco (if
that is the case) can offset
a more rate-friendly Fed.
The Nasdaq managed to peek
over 2325 more than once but
was knocked back to 2300
both Thursday and Friday.
The Nasdaq currently has a
week uptrend but Cisco could
end that trend if they
disappoint on guidance.
The big economic report for
Friday was the Non-Farm
Payrolls for July. The
economy lost 51,000
jobs---right inline with the
prior three months. Analysts
had expected job losses of
70,000 to 80,000 so from
that standpoint the report
was bullish—the bad news was
the unemployment rate.
The unemployment rate
increased from 5.5 to
5.7%---the highest level in
four years. Manufacturing
continued to lead the list
of job losses with 35,000
jobs eliminated. In addition
to the actual job cuts the
average workweek fell to
33.6 hours meaning employers
are cutting back on employee
hours as a way to trim
payrolls without necessarily
cutting employees. The July
report marked the seventh
consecutive month of job
losses. Rising unemployment
claims to a five-year high
suggest that next month’s
report could be even more
negative.
Gross Domestic Product came
out on Thursday and was
boosted by stimulus checks
from Uncle Sam and a big
drop in imports driving
growth in the U.S. economy
in the second quarter to a
1.9% annual rate.
Unfortunately those gains
may not be sustainable as
most economists chalk them
up to the largest increase
in disposable personal
income in six years, thanks
to about $80 billion in
tax-rebate checks from
Washington.
The biggest problem is still
falling home prices and a
crumbling financial
sector—and by the looks of
things neither has hit
bottom.
Home prices in 20 major U.S.
cities have fallen a record
15.8% in the past year, as
prices dropped in all areas
tracked by the Case-Shiller
home price index, Standard &
Poor's reported Tuesday.
Prices are at the same
levels as they were in the
summer of 2004, which means
four years of appreciation
have been wiped out. Prices
are down 18.4% from peak
levels seen two years ago so
if consumers don’t seem
especially optimistic there
is a simple explanation.
Falling real estate values
and the loans associated
with them are still
devastating the banking
industry—a fact underscored
by the seemingly non-stop
need for more government
cash. The nation’s banks
borrowed a record amount of
funds from the Fed over the
past week…
more than any other week
during the whole “credit
crisis.” U.S. banks
borrowed an average $17.45
billion from the Fed’s
discount window every day
over the past two weeks.
That’s easily the most
action the discount window’s
ever seen, and the second
consecutive week of record
transactions—a strong sign
banks are in trouble
regardless of what they, or
the government say to the
contrary.
Not only did the Fed dole
out record funds from the
discount window this past
week, but Bernanke and crew
also conducted another wave
of loans as
banks were able to secure
another $75 billion in
emergency loans. On Thursday
in less than 30 minutes, the
Fed took on another $28
billion in illiquid
asset-backed securities in
exchange for U.S.
Treasuries. Between the TAFs
and TSLFs, the Fed has now
dedicated over $1.5 trillion
(of your money) to keeping
mismanaged financials
afloat—but in many cases
even this unprecedented
government bailout isn’t
enough.
The FDIC announced on Friday
it had issued warnings to
four U.S. banks that lacked
sufficient reserves to cover
potential loan losses. The
warnings told the banks to
raise more capital, expand
their loan loss reserves and
diversify their loan
portfolios or risk being
shutdown. Eight U.S. banks
have been shutdown so far
including First Priority
Bank, which was closed on
Friday. Sun Trust Banks
agreed to take over First
Priority and reopen the bank
on Monday as Sun Trust.
However with other bank
takeovers that won’t always
be the case--IndyMac Bank
was closed two weeks ago and
taken over by the FDIC and
not another bank. On Friday
IndyMac Bancorp, the holding
company, filed for Chapter 7
bankruptcy and will be
liquidated to pay its
creditors. IndyMac Bank was
severed from the holding
company when the FDIC took
over, leaving the holding
company without any material
assets to repay its
liabilities of as much as
$500 million. The FDIC is
estimating it will cost the
FDIC fund up to $8 billion
to cover the losses in just
this one bank.
The bottom line is in spite
of the recent bounce in the
Financial SPDR (XLF) the
worst is NOT behind us and
it would be prudent to check
the solvency of your own
bank. A friend of mine told
me this weekend he was just
in an Idaho branch of Key
Bank last week with his
niece who was trying to take
out her savings to go to
college. He said there were
‘men in black suits’ in the
bank lobby going down the
line asking everyone if they
were depositing or
withdrawing. If the answer
was withdrawing you were
invited out of line and into
a private conference room
where a series of questions
were asked—if the men didn’t
like your answers you didn’t
get your money and her
request was initially
denied. After about 20
minutes of pleading she
finally got her money but
apparently many others
didn’t. This little incident
never made it into the local
papers and one has to wonder
how much of this kind of
thing is going on around the
county. The authorities
obviously don’t want a panic
on their hands but it may be
smart to diversify your bank
accounts into only the
safest institutions.
The markets have been helped
recently by falling oil
prices but oil firmed this
past week around $125 after
several attempts to move in
both directions. It appears
there is plenty of support
at $122 but still lots of
sellers at $127—but that may
change soon. Crude closed at
Friday $125.10 but not
before trading at a range
from $122 to $128.60 mostly
on a flurry news about Iran.
The deadline for a decision
to the U.N. committee is
this weekend and Iran
stepped out in front of the
deadline with tough words.
Iran's President Ahmoud
Ahmadinejad said, "the
nuclear issue is just an
excuse for the country's
foes" and, "Iran will stand
against its enemies with its
power." The White House was
quick with a negative
reaction along with
spokesmen from other U.N.
nations. All were quick to
emphasize this weekend was
the deadline for a "clear
answer" from Iran. Iran
replied that there was no
deadline but they had
"already replied."
Expect this problem to
escalate and Israel isn’t
going to stand by forever
while Iran stalls for time
while building toward a
nuclear weapon. These ‘line
in the sand’ exchanges are
liable to push oil higher
and if an actual air strike
takes place oil will sky
rocket over night.
So we’ve still got a flurry
of earnings out this week
although the majority are
behind us with negative
guidance looking ahead.
We’ve also got a potentially
market friendly FOMC meeting
this Tuesday, rising
unemployment and a
continuing crisis in the
financials with new banks
failing every week—it’s
quite a volatile mix and the
question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two trades lined
up this week—the first is
bearish and the second
bullish.
Our bearish trade is on a
specialized transportation
company that doesn’t get a
lot of press but they’ll be
reporting earnings this
week. The stock has risen
steadily toward an old
resistance point but earning
are likely to disappoint
because of record high fuel
prices. Earlier this year
earnings fell and things
have gotten even tougher
since then—this company has
a very high likelihood of
disappointing and we’ll be
there with some well-placed
puts to take advantage of
it—this play has the
potential to be a quick and
powerful money-maker!
Our next play is on a
resource stock that has
really moved in the past few
weeks and may be ready for a
rebound—and we’ve got a very
interesting way to play it
that has the potential to
really increase your returns
while simultaneously
decreasing your risk—you’ll
love it when you see and
we’ll be taking our position
first thing Monday!
We’ve got two high-potential
plays lined up on a market
ready to move—so let’s get
to it…
For more information on the Pearly Gates trading newsletter subscription click on
www.cashflowheaven.com.