WHICH WAY THIS MARKET IS HEADED
The markets hoped the Fed would cut 50 and 50 but
almost nobody actually expected it to happen. It was too good to be true
and traders instantly hit the buy button. The Fed cut the Fed funds rate
by 50 basis points and also cut the discount rate by another 50 points.
That puts the Fed funds rate at 4.75% and the discount rate at 5.25%.
This was the perfect scenario as far traders were
concerned and the markets exploded higher with the Dow adding +335
points. Earlier in the day producer prices (PPI) for finished goods fell
by -1.4% in August and that was even more reason for the Fed not to be
worried about inflation. The core rate for finished goods rose only
+0.2% and right inline with expectations. Inflation rates as seen in the
PPI gave the Fed no reason to remain on the sidelines but the truth is
the PPI numbers were low mostly because of the -6.6% drop in energy
products in August---that drop is likely to be completely erased in
September.
As you might expect market internals have reversed
substantially over the last week. TrimTabs reported that more than $13.6
billion flowed into mutual funds over the last week ending on Wednesday.
That was five times more than the prior week and showed how investors
were playing the Fed announcement. Global funds saw inflows of $4.76
billion. Inflows on Wednesday at $8.49 billion were the largest single
day inflows since Jan-4th 2001. This compares to only $568 million the
prior week.
Morgan Stanley (MS), Lehman (LEH), Bear Stearns (BSC)
and Goldman Sachs (GS) reported their long anticipated earnings this
past week. Overall they were better than expected and after Lehman
reported on Tuesday the sector saw a strong bounce.
Bear Sterns (BSC) was the weakest of the batch as
expected with an 88% drop in profits. The big upside inspiration for the
week was Goldman Sachs with the company knocking down a whopping $2.85
billion for the quarter—an amazing performance considering it was after
a charge for $1.48 billion in losses on mortgages and broken LBO
agreements. They beat the street by $1.78 because of their diverse
business segments and their trading book.
Apparently Goldman bet against their own hedge
funds and shorted mortgage instruments to capitalize on the mortgage
problem---they managed a 75% win ratio for the quarter. Evidently they
didn't give that same trading benefit to their hedge funds with many of
them down 25% for the year. If you bought GS on the breakout over $180
you were rewarded with a high of $210 on Friday.
FedEx (FDX) needs more than a buyback to rescue its
shares after warnings this past week that earnings would be well under
street expectations. The company also cut its full year forecast. The
FedEx CEO has been on CNBC several times in recent weeks warning that
the slumping economy was worse than the economic numbers showed and the
Fed had to act quickly to rescue the economy from a recession.
The FedEx warning is a critical caution sign for
the economy. Comments about a nonexistent holiday shipping bounce
suggest this retail season will be worse than expected. Retail analysts
are already saying sales will be the poorest in five years and possibly
even ten. If the consumer does pullback then earnings for the rest of
the year are likely to be disappointing regardless of this past week’s
ratecut. So far this quarter there has been mixed earnings guidance but
we are just now entering into the critical warnings cycle for Q3.
Analysts will be shifting their estimates based on this warning cycle
and that hits high gear this coming week.
So we’ve seen a huge spike higher in the markets
based on a Fed willing to ‘do what it takes’, and an economy that could
be weaker than anyone suspects based on the Fed Ex warnings—the question
is…
HOW DO WE MAKE MONEY ON IT?
In this kind of a market the trick is to pick
individual stocks trending one way or the other as opposed to riding the
overall market tide—which is why this week we’ve got one bullish trade
and one bearish.
Our bullish trade is on a company with a near
monopoly on a super popular product sector and all you need to see is
their chart to realize investors love it. With their hot season coming
right up we’re likely to see the stocks big uptrend continue—and we’ll
be taking advantage of it with some well place calls.
Meanwhile our bearish trade broke critical support
Friday on big volume while the rest of the market was celebrating the
Fed’s rate cut—a bearish sign. With now support at least four percent
lower we’ve got a great opportunity for some fast downside profits.
We’ve got two excellent set-ups this week so let’s
get going…
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