Broadmarket analysis is presented here courtesy of Cashflow Heaven.
WHICH WAY THIS
MARKET IS HEADED
As you can see the
major indices are locked in confirmed downtrends—regardless of what the
economics might say one way or the other we are in a bear market for
stocks. The S&P-500 is trying to use 1450 as support with backup at
1425-1430 but don’t count on it holding. There is risk on the S&P to
1385 if conditions don't improve very quickly.
The Nasdaq
Composite is holding over 2600 and the 200-day average but it is looking
progressively weaker.
The broader NYSE
Composite is also projecting negative sentiment. The index contains a
wide range of stocks from small to large and the big caps have been
unable to pull the small caps higher. On Tuesday the outlook was
promising but the index faded back to 9600 and is in danger of a
breakdown.
There were 28 new
highs on the NYSE on Friday and 285 new lows or roughly 10% of the index
setting new lows and only 1% new highs---those are some pretty bearish
internals and point to more profits being made on the downside.
Unfortunately for
the bulls the Fed isn’t like to come to the rescue—and the economy isn’t
likely to either.
The Feds hands are tied by rising inflation
numbers. On Thursday the CPI report confirmed inflation is alive and
growing into the monster the Fed has always feared—a fact that will push
rate increases before we’ll see another decrease—a scenario that scares
the heck out of traders.
Led by energy prices, U.S. inflation increased 0.3%
for the second month in a row in October. Core prices -- which exclude
volatile food and energy costs -- increased 0.2% in October for the
fifth month in a row, the Labor Department said Thursday. The core rate
was boosted by a 0.5% gain in rent costs as folks bail out of homes they
can’t afford and move into rentals.
Energy prices increased 1.4% in October, marking
the biggest jump since May, while food prices rose 0.3%. The price of
food is really taking off-- a survey out on Friday reported the cost of
a traditional Thanksgiving dinner rose +11% this year for the biggest
jump in price in 17 years! Milk prices alone have rocketed +32% over
just the last 12 months.
With the price of virtually everything but housing
going through the roof the Fed isn’t making a secret out of the fact
they are done cutting rates as evidenced by comments by Fed Governor
Randal Kroszner and St Louis Fed President William Poole on Friday.
Kroszner said the rates are already low enough to
get the economy through this rough patch--Fedspeak for don't bet on a
rate cut. Poole told Dow Jones the Fed is unlikely to change its current
policy stance (4.5%) unless the economy slows more than expected.
Just as the Fed was trapped into a rate cut at the
last meeting because they had not changed their bias from easing and
there were no speeches to the contrary, the current round of Fed heads
taking to the microphones have gone out of their way to telegraph to the
markets there will be no further rate cuts in December.
Now the markets and the economy are caught in a
rough dilemma—the Fed can’t cut rates as long as inflation is zooming
higher—yet the economy is faltering.
One of the best indicators of market strength is
the health of the nation’s shippers—if consumers and corporations aren’t
buying things you’ll see it show up first in parcel delivery and
trucking.
Federal Express (FDX) announced it was cutting
earnings estimates for the quarter by 15-20 cents due to lower shipments
and higher fuel prices. The CEO warned truck shipments remained weak and
fuel prices were rising faster than their dynamic fuel surcharges could
adjust. Fuel costs for the quarter had risen $85 million or +8% over the
prior quarter. He said FedEx was reviewing their capital expenditure
plans for reductions to keep pace with the weaker traffic.
Confirming the warnings from FedEx, Yellow Roadway, now YRC Worldwide (YRCW)
warned the shipping market was continuing to deteriorate with weakness
in manufacturing, retail and housing sectors and had still not reached a
bottom. CEO Bill Zollars cautioned that conditions were worsening month
by month. YRCW tracks factors like shipment size and quantity to
determine when a bottom has been reached and Zollars said we are not
there yet. They quit giving guidance earlier this year when conditions
began to get worse.
Another big indicator of economic health is
retail—and we’re seeing weakness—a bearish sign going into the holiday
shopping season. Kohl's (KSS) reported a 13% drop in income Thursday and
cut its earnings forecast for the holidays and for the full year. They
said seasonal clothing was showing significant weakness. Kohl's had
previously warned on Q3 earnings but this announcement shows the trend
is continuing.
Retail performance in general has been trending
dangerously lower--just last week warnings included JC Penny (JCP),
Macy's (M) and Ann Taylor (ANN). JCP made headlines when they said they
were seeing a "dramatic weakening" in consumer spending. Higher gas
prices and very few home equity loans were putting a real drag on
consumers.
You know things are getting tough when Starbucks reports its first ever
drop in store traffic! Sales were up due to higher prices as they tried
to recover the higher costs of dairy components but traffic was down.
There are now some major market analysts predicting
a recession—not just the usual perma-bears. John Bogle, founder of the
Vanguard funds was on CNBC on Thursday reporting a 70% chance of a
recession. Then on Friday Merrill Lynch Chief Economist, David
Rosenberg, laid out his reasons why he thinks the economy is already in
a recession or very close to it.
Rosenberg pointed out that much of the S&P earnings
are derived from global sources from multinational companies like GE,
MMM, MCD, KO, CSCO, etc. Much of those earnings are profits from
currency conversion back to dollars. Every major company has warned in
their guidance that U.S. earnings were weak but their international
business was strong.
Rosenberg went on to point out that it is no longer
just a housing crunch--weakness has spread to retail, autos, banking and
nearly every other sector. It was not a pretty picture but he laid out
the facts—and they all point to the same conclusion.
So we’re not likely to see any more rate cuts in
the immediate future and the economy is trending lower—the question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two new trades lined up this week and
they are both bearish.
The first is on a company that would be going down
no matter what the overall economy was doing—the current bear market is
just a bonus. This company is essentially in the ‘buggy whip’ industry
struggling with a product that is becoming increasingly obsolete yet
management seems unable to stem the losses. The stock’s chart just
signaled a new leg lower this past Friday—a downside run we’ll be
jumping on with some brand new puts first thing Monday morning!
Our next play is on a company straddling two of the
most bearish sectors in existence right now—real estate and retail.
Investors are starting to flee the stock in increasing numbers and just
like our first play we got the big entry signal Friday for what looks to
be some awesome downside profits.
Bear markets don’t have to hurt your wealth—in fact
our two new plays this week could boost your options account big time—so
let’s get to it…
For more information on everything you receive with your Pearly Gates subscription click on
Cashflow Heaven.