Thursday, December 28, 2006

Happy New Year

November existing home sales wowed the market on Thursday with an impressive 0.6% increase versus the expected 1.0% decline.  Sales of existing homes are down 10.7% from last year but the mood is positive in the marketplace that the housing slowdown is bottoming out.  More to the point is the median price of these homes is lower on a year over year basis.  The important median price has shown a year over year decline for the last four months.  

Other information in the report worth mentioning is the inventory level which did drop in terms of number of months of inventory.  This number dropped 0.1 months to 7.3 months and does reflect the higher rate of sales in the just reported month.  Still, we think 7+ months of inventory is fairly high especially with prices dropping.  The mood on Wall Street, as we mentioned earlier, was bullish housing so the bond market took another beating on Thursday.  

The stock market had a bad start but managed to reverse some of those losses late in the day.  The last few minutes of trading pushed the indexes into negative territory so the Dow failed to make another new high.  That’s not to say that the Dow won’t have one last push over the next week or so.

With the death of former president Ford, the stock market is considering taking the Tuesday trading session off so the country can properly mourn.  We can respect this move by the market.  That means that we will probably not be writing another post until Tuesday evening.  

We want to wish all of you a Happy New Year.  It is our wish that you and your family prosper in the New Year.

With that in mind, we are considering making a few changes to the Update in the coming year.  Please feel free to make comments on things you might like to hear about or changes you would like to see.  These types of comments are welcome at anytime, especially now as we try to improve the quality of this blog.

Dow Industrials:  12,501.52  -9.05
VIX: 10.99
QQQQ:  43.12
RYVNX:   17.16
RYAIX:  21.49
RYCWX:  35.12
TLT:  88.50
BEGBX:  13.74

Wednesday, December 27, 2006

New Headliner Dow High

With the Dow hitting a new all time high on Wednesday, we find it mostly a non-event for the world due to that index going off on its own. Yes, the Russell 2000, RUT, has been a willing participant but the indexes we follow in the NASDAQ are not.

Our position has been that the Dow would spike to a new high sometime early in 2007 and that eventuality may have occurred a little soon but there could be more to go. As you know, the NASDAQ indexes have not managed to break above their November highs so we feel that there is a slight drag on the market as a whole.

Wednesday’s news was about housing. New home sales were up in November to the tune of 3.4% with expectations of up 1.6%. The news was interpreted by the markets as a large sign that the housing “slump” is nearing its end. As we see it, the housing slump is no slump at all based on the way things are reported. Of course, the total new homes sold last month was 15% less than a year ago but, looking at the past decade, this “slump” only gets us back to where housing was five years ago.

At any rate, the bond market did not like the number at all and fell to close on the low for the day down about 0.75% in price (raising yields a bit). This is in stark contrast to the pop in the Dow of over 100 points. These two markets have been friends for a long time and to see them trade apart like this is not a good thing. But, it’s only one day so maybe the news isn’t all bad.

In regard to the new home sales, we found an interesting article in the online WSJ which we thought we would copy in its entirety:

November's new sales numbers are encouraging. …. Unfortunately, the estimates are also tainted, and difficult to interpret. The main problem is that cancellations are muddying the sales and inventory numbers. The Census Bureau counts a house as sold when the contract is signed. If a buyer has second thoughts and cancels the initial contract, however, Census does not readjust the numbers. As a result, sales are overstated and inventories understated for the month the house is initially sold. And when the house is eventually sold, sales are understated and inventories overstated. Lacking data on cancellations, it is impossible to tell if November's estimates should be higher or lower. -- Patrick Newport, Global Insight

This note starts to get at the difficulties of reading much into some of the statistics that we see on housing. In this case, the new home sales are supposed to act as a leading indicator because the sale of the home is recorded at the point of sale. This reporting is unlike the existing housing sales which only record the sale at the time of closing. So, there is more accuracy with existing home sales but the new home sales are the ones the market wants to look at due to their earlier measurement.

Just a few more words about the “new high” in the Dow: We know that the power in this index derives from the “safety” of the companies in this index and the need to window dress some large portfolios for year end. This rally is just part of a larger topping process that is going on right now. The NASDAQ indexes are lagging while the financials and some others are rallying. This dichotomy will not last too long. We are planning for a wild first week of January and want to deploy most of the rest of our funds at that time.

Dow Industrials: 12,510.57 +102.94
VIX: 10.64
QQQQ: 43.33
RYVNX: 17.06
RYAIX: 21.43
RYCWX: 35.05 (new low)
TLT: 88.70
BEGBX: 13.74

Tuesday, December 26, 2006

Post Holiday Trading is Light

Tuesday’s trading was light indeed with less than 800 million shares trading hands on the NYSE.  With the majority of the stocks trading higher on the day, the Dow itself managed to increase its price to a place close enough to go for another record.  We have been on the record here saying that we think the Dow will put in a new high sometime early in January.  We also think that high could represent the final high in this move with much lower prices to come in 2007.  

With such light volume, analysis of the action seems a little pointless.  The only thing we see is the Dow staying at prices that make the world believe that the market is strong.  Looking at the NASDAQ Comp and 100, the story is a little different with these indexes having some trouble reaching back toward those earlier highs.

There should be a few more traders around on Wednesday so maybe there will be more to report tomorrow but for tonight, we’re going to sign off.  

Dow Industrials:  12,407.63  +64.41
VIX: 11.26
QQQQ:  43.11
RYVNX:   17.25
RYAIX:  21.54
RYCWX:  35.63
TLT:  89.66
BEGBX:  14.02

Monday, December 25, 2006

Quiet Week Ahead

Let’s start with a hearty “Merry Christmas” to all of you.  This evening we have little to say about the markets because is seems like a very long time ago the last time they were open here in the US.  Looking back to last Friday, there did seem to be some early morning jitters with all of the major averages dropping out of the gate.  The news early Friday was that November durable goods orders were up 0.6% with expectations of 1.2% after a dismal drop in October of 8.2%.  Most asset managers will tell you that the durable goods orders are difficult to use as a market gauge due to their extremely volatile nature. October is a case in point.

As we mentioned here late last week, personal income and spending would be announced on Friday morning as well and these were pretty much inline with expectations but personal spending was up more than personal income which means the savings rate continues to be negative.  There is another number buried inside these reports called the PCE (personal consumption expenditures), something closely watched by the Fed for signs of inflation, ok the Fed is only interested if you take out the cost of food and energy.  (Possibly the Fed is not as all powerful as they would like us to think.  After all inflation is inflation isn’t it?  And, shouldn’t it be the Fed’s job to contain all of it not just the part away from food and energy. But we say this all the time and you are getting tired of the constant barrage.)  Anyway…while still above the Fed’s comfort zone, the PCE was up only 2.2% year over year compared to 2.4% last month.  

What is truly amazing, though, is that the markets decided not to like these inflation friendly numbers and sold off quickly in the early going.  This could be something if it wasn’t for the extremely low volume that accompanied the move.  The day before Christmas break seems to have low volume generally and last Friday was no exception.  The prices dropped on low volume and on previous low volatility.  The volatility index, VIX, has been trading at multi-year lows, indicating a very complacent group of investors generally.  With light volume on Friday, there was a bit of an uptick in the VIX.  This could indicate some minor nervousness ahead of the long weekend.  

So, stay tuned for some low volume trading this week and we will try to report on the days’ events as they go by this week.  Probably not much to report but there are a few economic data points being reported this week like retail sales for December 23rd and the existing home sales report.  

Dow Industrials:  12,343.22  -78.03
VIX: 11.36
QQQQ:  42.93
RYVNX:   17.34
RYAIX:  21.60
RYCWX:  35.99
TLT:  89.39
BEGBX:  14.06

Thursday, December 21, 2006

Philly Fed Report Holds Down Market

Before the market opened on Thursday, another set of third quarter GDP numbers were out showing the economy grew at a less than spectacular 2.0%.  We have tended to look at these numbers on a “gross” basis because it seems to point out the real activity in the economy.  When we say “gross” we mean Before inflation.  (To us, the inflation rate is difficult to measure so we like to take it out of play.)  

The 2.0% GDP growth rate is associated with a 2.2% inflation rate so the actual increase is more like 4.2%.  In the second quarter the growth rate was 2.6% but with a 2.7% inflation factor that figure is more like a 5.3% growth rate.  In first quarter the net GDP was 5.6% so you can see there is a slowing in the economy.  

Meanwhile, the savings rate has been negative for 19 months which means that people are spending more than their after tax earnings.  On Friday morning we will probably see another negative savings rate when personal income and spending are announced.  Personal income is expected to grow 0.4% but personal spending is expected to grow more at 0.5%.  

The other head scratcher in all of this is the massive amount of money the government is spending, a lot of which is “off-budget” for the war.  In this time of negative personal savings, the government is also in a Negative savings mode, too.  And, the GDP is only growing at 2%.  Can any of you explain this?

This is the basis for the possibility of a consumer led recession.  If the consumer figures out that the credit is running out, then they have to slow down their spending.  Over the past few years we have seen much extraction from the family ATM, the home they live in.  That ATM is starting to go a little dry with rates edging up just a little and with home prices stabilizing or declining.  With a GDP running at 2% annualized growth (that means the economy grew at about 0.5% in the third quarter), we don’t think it will take much consumer retrenching to lead to a serious decline in the GDP.

Back to the market action on Thursday, we saw a little fall off after the Philly Fed report indicated contraction in the business index for December.  Expectations were for a number of 6 after November’s 5.1 but when the number came in at negative 4.3, the stock market took a little notice.  Any number below 0 indicates contraction.  Stocks fell for a while right after that report and didn’t recover much going into the close.

Since this is the last post before Christmas, we wanted to wish all of you a Merry Christmas.  Hopefully, you can come back and visit us here next week.  If not, we understand and invite you to join us after the first of the year.  Our normal schedule of posting the evening before the market is open should remain through out the next ten days or so.  

Dow Industrials:  12,421.25  -42.62
VIX: 10.53
QQQQ:  43.38
RYVNX:   16.98
RYAIX:  21.37
RYCWX:  35.53.
TLT:  90.07
BEGBX:  14.11

Wednesday, December 20, 2006

Subtle Changes in the Market

Wednesday brought another selling opportunity at the beginning of the session.  The stock market was up fairly strong in the early going with the NASDAQ indexes trying to play a little catch up with the blue chip performance the day before.  The NASDAQ Comp was up about 0.5% in the first half hour which turned out to be the peak for the day and a steady sell stream the rest of the day.

The trading pattern is pretty much as it should be for the NASDAQ Comp over the last few days.  At some point the index will need to have stopped going up and then turn down.  The Comp failed to make a new relative closing high this week compared to the close on November 22nd, the day before Thanksgiving.  The intraday high on Monday this week did edge out the trading high in November but the market experienced those reversals as we discussed earlier this week.

Then on Tuesday the Comp opened down hard but managed to climb back to close with just a small loss.  On Wednesday, the index is now filling in the gap it left on Tuesday morning.  We don’t want to get too technical but just follow the possibilities.  The Dow makes a very visible new high, as we call it, a headliner high after that disastrous start on Tuesday.  Even the SP 500 didn’t manage a new high on Tuesday.  We realize that we are splitting hairs at this point but clearly the Dow is leading this advance—this is not bullish.

The most dangerous thing for market participants as we look at the low complacency number, VIX, is we are entering a low volume period of time between the holidays.  As the participants come back after the New Year we expect another try at a new high for the Dow on significant volume.  At that time we probably can declare the Dow at a peak; but, wouldn’t it be a little naked without the NASDAQ indexes at least making new relative highs?    

One item in the news caught our eye, that of FDX (Federal Express) warning of a profit drop due to fuel prices not matching up with surcharges.  At the same time, we noticed the fall off in the transports in general as they dropped over a percent on Wednesday.  You might consider that the oil price going up might affect the transports a little more than other industries but those stock prices have not been affected by the price of oil as it has been going up.  We believe there is a change in the wind for the market in general and these little signs are the reasons we think that time is very soon.  

We plan to publish a post on Thursday evening but we haven’t thought about next week.  At this point, we think there will be time to do postings next week but we don’t know if there will be anything to report due to lack of interest.

Dow Industrials:  12,463.87  -7.45
VIX: 10.26
QQQQ:  43.69
RYVNX:   16.75 ??? (ex-dividend probably)
RYAIX:  21.22 ??? (xdiv?)
RYCWX:  36.29 ??? (xdiv?)
TLT:  89.63
BEGBX:  14.12

Tuesday, December 19, 2006

Chalk One Up for the Bulls

After the early morning news, the stock market got off to a shaky start, with the Dow dropping about 40 points and the NASDAQ Comp falling a quick 25 points.  These levels turned out to be the lows of the day following our rules from yesterday’s post about buying early weakness.  Well, by the end of the day, the Dow was up about 30 points leaving the NASDAQ Comp to close in the red down 6 points, Tuesday being a clear victory for the bulls.  

One of the “causes” for the early morning drop happened to be the PPI which surprised the markets with a reading of up 2% for last month, on expectations of up 0.7%.  Not to worry, though, as the “core” rate was only up 1.3%, on expectations of up 0.3%.  The other “cause” was housing starts up more than expected.  Both of these created an environment for the investors to wonder again whether the Fed would raise rates.  Have they even looked at the yield curve—inverted like it has been for about a year.

As we surveyed the technical landscape, we noticed the Dow out ahead of the other indexes.  With oil up on Tuesday, the oil related stocks tended to go up pushing the Dow and the SP 500 up while leaving our NASDAQ indexes behind since they have no oil stocks in them.  The interesting thing is that the SP 500 was not able to break above its high set a couple of trading days ago and our NASDAQ indexes were down.  

There seems to be much bullishness out there or maybe we should use the word complacency.  So many people think that the market just can’t go down or it seems like every day the market is going up.  Looking at just the Dow, that does actually seem to be true but this is not true when looking at other indexes.  

We recommend caution out there as usual.  The bull’s time is almost up.

Dow Industrials:  12,471.32  +30.05 (Yes, another new record)
VIX: 10.30
QQQQ:  43.85
RYVNX:   17.25
RYAIX:  21.68
RYCWX:  35.38
TLT:  89.64
BEGBX:  14.12

Monday, December 18, 2006

Bearish Trading Pattern

The trading pattern in the stock market for the last two days has been bearish with a strong opening and then a sell off that doesn’t recover (much) before the end of the session.  We normally recommend selling into early morning strength (and likewise buying into early morning weakness—although we haven’t recommended that strategy recently).  This technique allows you to trade like the pros.  

This early morning strength has been caused by some “bullish” news items like last Friday’s Goldilocks CPI number coming in “just right” and Monday’s merger mania.  These event driven early morning spurts have both been sold and causes us to firm up our bearish position.  

For a market to turn over and go down, several days of this nature will occur because the bulls want to believe but there are sellers that come in to hold the enthusiastic buying from getting out of hand.  The important downturn will follow several intraday reversals such as the ones we have seen the last two days.  If you look back on December 7th, the market put in an outside down day.  That is the same type of pattern we saw in the last two days.  These are very bearish indicators because they are distributing stock to the bullish contingent.  Most people do not see these patterns and just think it is business as usual, just a reason to buy.

On a day like Monday, generally the strongest day of the week, the public watches the Dow and sees it down only about four points.  If they would look under the covers just a little ways they would see that the NASDAQ was down nearly a percent.  The barely changed Dow masks the true weakness in the market.  While the Dow has managed to make new record highs, the NASDAQ meanwhile has not broken above its November high.  

Tuesday brings us the PPI report along with the ICSC store sales index as well as new housing starts.  In the grand scheme of things, these items should be important to the market but it will probably just shrug them off and trade the way it wants to.

Monday was a big win for the bears and now we will see if there is any follow-through.

Dow Industrials:  12,441.27 -4.25
VIX: 10.60
QQQQ:  43.99
RYVNX:   17.13
RYAIX:  21.61
RYCWX:  35.53
TLT:  89.76
BEGBX:  14.05

Sunday, December 17, 2006

Strong Start on Friday Fades

On the eve of another Monday trading session, we look back on the Friday options expiration for some clues as to this week’s trading.  Just before the market opened on Friday, the Labor Department let us know that the inflation at the consumer level remained unchanged for November.  This news was greeted with what you might think, buying, both stocks and bonds.

With consumer prices remaining level, the market interpreted this to mean that the Fed could now stop this silly notion that they may need to raise rates.  With “core” CPI over the last year dropping to its lowest level since June, the market felt confident that the Fed surely could start lowering rates again sometime soon.  

We have been saying the Fed Can’t raise rates for the time being which means we have to agree with the market—it does pain us contrarians so—but we don’t believe the market should be going up because of it.  There does seem to be no one at the wheel at the moment but that’s an old story.  

As trading began, stocks and bonds opened on what would turn out to be the high of the day.  Yes, for stocks the Dow was trading in record territory while the NASDAQ indexes were lagging behind.  Shortly after the opening bell, both stocks and bonds fell for the better part of the day but stopping short of going into the red.  Volume was heavy as we suggested in last week’s post but it was mostly due to the unwinding of those derivative positions in options and futures.  

All in all it must have been a frustrating day to both bulls and bears.  As we surveyed the market over the course of the day, there didn’t seem to be much of a theme.  Some stocks performed better than others, so what else is new.  In the headlines this evening we note an article speculating that the market can go higher, as CNN said “Wall Street looks primed to rack up another strong week, into the new year unless some bad news would occur to stop it.  Well, that’s what makes a market—differing opinions, fear and greed, confidence and deception.  We here at the Update think the market is in a tremendous confidence game at the moment and recommend extreme caution.  

As for the coming week, there seems to be little impetus from the standard economic news to make a case for any real big moves in the market but the bullish undertone is still prevalent.  This is a bearish thing in our mind and as we look at the VIX making new multiyear lows there does seem to be very little in the way of fear and a lot in the way of complacency.  Let’s see how Monday trades after this expiration and then we’ll know more about the future course of the market.

Dow Industrials:  12,445.52  +28.76  (another world record close)
VIX: 10.05  (barely back above 10)
QQQQ:  44.43  (no new high here)
RYVNX:   16.79
RYAIX:  21.39
RYCWX:  35.49
TLT:  89.73
BEGBX:  14.06 (dollar is still rising)

Thursday, December 14, 2006

Quadruple Witching

Before we mention anything else, we should say that the December options expiration is Friday December 15th.  This is normally a big event due to the so-called quadruple witching when futures expire along with options.  The volume can be extraordinary given there are big positions to unwind.  This expiration could be somewhat responsible for the burst of energy in the market early Thursday when the Dow popped about 75 points in the first half hour of trading.  The broader market got the same push as the Dow.

The other item about Friday is that it is the day we see the CPI numbers, you remember, the important “core” rate that the Fed is watching.  For the most part the market doesn’t seem to care too much about inflation because the Fed has been harping on it for a few months now.  The Fed keeps saying the “core” rate is over the amount that they would like to see and still Nothing on the interest rate front.  Yes, we have mentioned it many times before and tonight is no different—the Fed can Not raise rates, Period.  The expectation for the CPI is a modest increase of 0.2% for both the CPI and the “core” CPI so we will have to wait to see what they really are.

In the news, after the close, DELL announced that it is delaying its 3rd quarter filing due to its ongoing probe by the SEC on its accounting practices.  We seem to remember that there was a flurry of activity back in late November when DELL said that its preliminary numbers were going to be above forecasts by 25%.  That news popped the stock 10% helping the NASDAQ indexes to enjoy a new 52 week high which was Not bested by today’s ramp up.  So, after rising 80 cents during the day, DELL sold off to the tune of 24 cents after that news.  Well, that makes sense doesn’t it?  Maybe not.

In the past few weeks we have seen the markets back off the late November highs and trade in a narrow band.  We have mentioned that this looks to be a natural pattern and begs for another thrust higher in prices.  The main goal here is to complete the pattern that the market wants to finish.  

With today’s rally in the Dow, pushing it up to a new record high, we are now in a position to complete the pattern.  We recommend extreme caution in this last spike upward because at any moment the spike could be over.  In fact, today’s spike to a new high is all that is required for a top to be recorded.  We don’t really think that is highly likely but it is possible.  With Friday’s options/futures expiration and the CPI news, there is a significant possibility that we will see the final top this week in the Dow.  We think it more likely that we will see it come in the first week or so of the new year.  

There are many reasons to believe that the top will come when the most people believe that the market can only go up.  Looking at today’s VIX, recording a multiyear low, the complacency is running high.  Caution is the name of the game.  Confidence in the market is at a very high level and these are the times that the market can slice and dice its participants.  Friday could be a very interesting day.

Dow Industrials:  12,416.76  +99.26 (new record high)
VIX: 9.97  (hit a multi-year low on Thursday at 9.64)
QQQQ:  44.37  (did Not break the November high)
RYVNX:   16.87
RYAIX:  21.44
RYCWX:  35.62
TLT:  89.68
BEGBX:  14.14  (dollar making a comeback)

Wednesday, December 13, 2006

All That Glitters is Not Gold

Before the market opened on Wednesday, we learned that retail sales for November were up a very surprising 1%.  Even with expectations of only a 0.2% increase, we were certainly not even expecting that given what we’ve already heard from several retailers but the number is now in front of us.  The stock futures popped a little on the news but the bonds predictably dropped.  By the end of the day, bonds were down pretty hard (yields rose) while the dollar liked the retail sales number and rallied.

The stock futures were only up going into the trading day and as soon as trading started we saw the high of the day with prices drifting down into mid-morning and just bouncing around in a fairly narrow range the rest of the day.  Stocks were pretty flat at the end of the day with the Dow up a buck ninety two, so not much going on there.  

We did find a couple of interesting items in the news that we thought we would highlight this evening.  The first is the one about pennies and nickels.  We find it amazing that as commodity prices have been moving up over the past couple of years that the US Mint doesn’t want to mint any more pennies.  You might ask why that is and the answer they tell us is that the cost of making a penny costs more than a penny is worth as currency.  

So, for the first time in a very long time you can actually have something valuable in your pocket or purse, pennies.  Now, it seems that the US Mint is trying to institute new rules about preventing the melting down of said pennies for their metal value.  Here for the last several years we thought you had to buy gold coins in order to have something more valuable then the face amount.  

The more serious item is the one about homeowner “equity extraction”.  The online WSJ article entitled “Homeowners Borrow Less Against Equity in Their Homes, Data Show” says that homeowners only took $113.5 billion of equity out in the form of loans.  This amount is the lowest quarterly amount since the fourth quarter of 2003.  In the third quarter of 2005 homeowners extracted a high of $235.9 billion.  These numbers don’t sound all that big given some of the numbers we see about the economy but the way the article puts it is that the $113.5 billion is 4.7% of households’ after tax-income and the $235.9 billion is 10.4%.  This is like a 10% raise only this one you have to pay back.

Meanwhile, mortgage delinquencies continue to rise.  The article points out that the delinquency rate for one-to-four residential units rose to 4.67% in the third quarter up 23 bps from the third quarter of 2005 and up 28 bps from 4.39% in he second quarter.  That means, says the article, that roughly one out of 20 mortgage holders is at least 30 days behind in their payments.  For subprime adjustable-rate mortgages, the rate is 13.84% delinquent, more than one in eight.  As this is going on, the volume of mortgage applications climbed to the highest level in more than a year.  

Dow Industrials:  12,317.50  +1.92 (just another big day)
VIX: 10.18
QQQQ:  43.88
RYVNX:   17.27
RYAIX:  21.68
RYCWX:  36.19
TLT:  90.01
BEGBX:  14.21 (dollar stronger after retail sales report)

Tuesday, December 12, 2006

BBY Spoils the Party

Before we heard from the Fed, the market put on its best bear act for some time with the Dow dropping about 60 points in a half hour.  The broader market seemed a little worried that the Fed might actually raise rates???  

Then when the Fed finally did announce, there was a bit of a relief rally which took the Dow back near the morning highs.  This didn’t play quite the same in the broader averages as they didn’t make it back to the early morning highs.  Basically, Tuesday was not the best bearish day of all times and maybe not the second best either but it was bearish.

Before the market opened, BBY (Best Buy) announced earnings that were not causing happy thoughts among its investors.  BBY ended the day down nearly 5% after trading much lower than that early on.  BBY indicated that price cuts were required to stay with the competition and their policy of meet or beat competitors’ prices kept their margins down but that they would do it again if they had to do it over.  CC (Circuit City) fell in sympathy.  

Wednesday brings retail sales for November which we somehow think will not be as robust as everyone is hoping for.  With the news from BBY being a little less than expected, the rest of the retail world probably didn’t fair so well either.  

The Fed changed its comments on the housing market to “a substantial cooling of the housing market” adding the word “substantial”.  This may not mean much to the average person but you and us it means that the housing ATM is not performing up to speed plus the normal purchases for homes will not be made if “a substantial cooling of the housing market” is going on.

We think the Fed is very much painted into a corner.  Their options are limited at best right now.  If a slowing economy doesn’t bring “core” inflation down, they will be forced to raise rates.  At least, that’s what they are saying, we don’t know if they actually can or will.  The dollar is sitting on some support right now and didn’t get crushed after the Fed news, probably because of the sheer obviousness of the decision before hand.  But, if the dollar weakens due to a weak economy, the Fed will be thinking of raising rates but it may not be able to.  Day after day, month after month, these guys are Hoping for the economy to bail them out.  The Fed is a non-event.  

Clearly, the market does not agree with the Fed’s position that it may need to raise rates.  Bill Gross even made the statement that the Fed funds rate will be a full percent lower a year from now or so.  What does he see that the Fed doesn’t?  Well, one thing is they are trying to hold up the dollar.

Steve Kaplan at the True Contrarian says that with gridlock in Washington, the chances that the dollar is going up are good.  At the same time, he thinks the precious metals are in a position to drop quite a bit.  Take a look at the link to the left.  

Dow Industrials:  12,315.58  -12.90
VIX: 10.65
QQQQ:  43.80
RYVNX:   17.29
RYAIX:  21.70
RYCWX:  36.21
TLT:  90.82
BEGBX:  14.29

Monday, December 11, 2006

Tuesday is the Big Fed Day

The stock market had a day very similar to Friday and the results were on the positive side.  Not much really happened except right after the opening bell when stocks vaulted higher for the second day in a row.  

Tuesday we hear from the Fed about their decision on interest rates.  We have said that they can not raise rates at this meeting and can hardly raise them any time soon due to the underlying weakness in the economy amid an already inverted yield curve.

In conversations on Monday, there were some forward looking comments by our colleagues who thought that the Fed may be telling the truth that they are really looking at inflation and may actually raise rates.  That thinking process derives from the inherent desire for all of us to believe in the Fed.  True, the all important “core” inflation is running a bit ahead of where the Fed would like it to be.  But, the inverted yield curve hasn’t been able to change that for a year so why do they think that an even more inverted curve could do the job.  

We have said many times that the Fed doesn’t “tighten” when it raises rates.  It only makes the cost of borrowing a little higher.  We would say that going to the bank to ask for a loan 25-35 years ago would have resulted in most of us being turned away due to lack of collateral.  These days, we get checks in the mail with low interest rates and we don’t even have to go to the bank to get them.  How times have changed!

In a related note, we were very impressed with an article in Monday’s WSJ.  If you saw the article or can find the article, we highly recommend it to you.  The article is entitled “The Retirement Lies We Tell Ourselves” with a subtitle of “The biggest—and most risky—assumptions that people make when planning for the future.”  The first one is that “I’m going to work in retirement.”  We urge you to pick up and read this article.

We’ll see you back here tomorrow after the big Fed news.  We expect that some relief will be given by the lack of action but we are wondering what the statement will be.  Could it be that it will be strong enough to change the mindset of the market?  Probably not but we can always hope.

Dow Industrials:  12,328.48  +20.99
VIX: 10.71  (big drop)
QQQQ:  44.06
RYVNX:   17.09
RYAIX:  21.57
RYCWX:  36.12
TLT:  90.63
BEGBX:  14.26

Sunday, December 10, 2006

Fed Meeting Right Around the Corner

The jobs report turned out a Goldilocks’ type number with a few extra jobs thrown in to make the porridge just right.  The numbers from the prior months were revised upward so as to confuse the markets.  For the first hour we saw some see-saw motion and then like a shot, we took off.  What was the reason for that?  Well, apparently the new Treasury Secretary felt he would give the markets something to think about.  His comments were that the dollar needs to be strong and that China needs to let its currency rise against the dollar.  Huh?  How can both currencies get stronger?  Maybe the rest of the world’s currencies have to get cheaper versus the two strong ones, here and in China.  Ok.

That confusion gave the stock market ample room to rally hard for about an hour to the highs of the day but failed to get up to Thursday’s high.  Stocks ground lower the rest of the day but did manage to go out higher than Thursday.  

The big news of the upcoming week is the Fed meeting on Tuesday and this should be a nonevent due to the Fed likely leaving rates alone this time around.  You know how we feel about this.  The Fed should raise rates just to save face and gain some credibility with the markets but we both know that is just not going to happen.  They have been out talking about how the Fed didn’t ever say it would lower rates and is instead thinking of raising them.  Now is their chance to make good on those Idle words.  The Can Not raise rates this week.  What can their statement be?  Well, we looked at the current economic conditions and decided that it doesn’t warrant an increase in rates at this time.  But, we are certainly going to be hard on inflation if it should occur.

Let us be clear on this point.  The Fed is not concerned about inflation.  It is allowing much credit to be generated all around the financial system.  This is to keep the economy going.  These policies have given the extreme liquidity required to keep the stock and bond markets up.  With cheap credit, the markets can stay afloat but we don’t think the path of least resistance is up, quite the opposite.  The problem is that the Fed has created a highly debt laden economy and has little room to help the economy if it should need it in the next year.  

Be careful out there.

Dow Industrials:  12,307.49  +29.08
VIX: 12.07
QQQQ:  43.90
RYVNX:   17.19
RYAIX:  21.64
RYCWX:  36.24
TLT:  90.24
BEGBX:  14.24  (possibility the dollar has bottomed)

Thursday, December 07, 2006

Market Wants to Go Down

The market got off to a big start with the Dow moving up 50 points very quickly.  The news was that the Dow was in record territory.  As the morning wore on, those headlines changed to Dow flirts with record and by the end of the day there were no records to be made on this Thursday.  The Dow was down but only 30 points.  The real story is in the way the market responded to that early morning spurt.  

The market could not hold those gains and never did recover them.  We have said the market has felt like it needs one more pop and then we might have a good pullback.  Could it be that Thursday’s action was that pop?  We’re not the only one’s who know that the jobs’ report is coming out on Friday so there was some talk on Thursday that the market was showing restraint ahead of that number.

The other headline on CNN Money was “The Fed That Cried Wolf”.  We normally are concerned when the mainstream media starts writing the way we do but maybe the tide has turned.  There are just too many data points that show the Fed is out of touch with the economy and the market.  

We said several months ago that the Fed has lost its ability to control the markets.  As soon as they said they would pause, they gave it up and now they are impotent.  The ONLY thing they can do to get it back is to Raise rates next week and we say they Can Not and Will Not do that.  The market decides what the rates should be and the market says that rates will fall during the course of the next year.  

We are putting off the discussion of what the market will do in the coming days so let’s get to our crystal ball.  The way the market fell away on Thursday morning, it seems that the only thing that could have done that is a real exhaustion in the buying power.  Just for kicks let’s think about what the number could be on Friday.

If the number is over the 110K by any substantial amount, we have to believe that the market would wonder what to do, healthier economy but more likelihood of a Fed rate increase (this can not be what happens).  If we get a Goldilocks type number, then the market can breathe a sigh of relief but we don’t think there would be a compelling reason to buy.  If the number comes in substantially below 110K (this should not happen because these are government numbers and they can’t be scaring the public or the world), the market may find itself with another conundrum:  The Fed won’t raise (but they know that already) and the economy is weaker than the Fed is telling us.  

Whatever the number is, the market will view that number as something that will give the Fed the impetus to do something other than keep rates flat—like we think they have to do.  So, we think the market has to figure out that the Fed is not going to be able to save them and all of a sudden there will be some lights coming on with traders.  This can not be a good thing from our perspective.

We here at the Update are hoping for a weak jobs’ number so we can get a bond market bounce so we can sell at least some of the bonds we hold.  We have been patiently sitting on some cash and some bonds in order to take advantage of the next down move in stocks.  Our opportunity may well be upon us.

Dow Industrials:  12,278.41  -30.84
VIX: 12.67
QQQQ:  43.70
RYVNX:   17.35
RYAIX:  21.73
RYCWX:  36.37
TLT:  90.90
BEGBX:  14.35.

Wednesday, December 06, 2006

Housing Still a Big Deal

On Wednesday, the stock market took a little breather and we expect that it will be short lived.  The market’s ability to rally one more time will come into play over the next few days of trading.  We see that the Friday jobs’ report has expectations of reporting 110K new jobs for November.  That is a safe estimate for the stock and bond market.  

Try to imagine what kind of number that really is—it’s low.  With the supposed strength the Fed sees in the economy that number should be 300K not a measly 110K.  The prospects for the biggest job growth engine in the economy are going a little soft.  You know what we are talking about, housing.  

Housing is now being touted as being in a bottoming phase.  The wheels are about to Fall off the housing train but we still hear about how that market is bottoming.  There is plenty of inventory and very few buyers.  The big home builders are running away from options to buy land but at the same time they tell us that things are starting to look up.  Why would they be dropping these land options if things were so good?  

Our point has been for a year that the housing market would eventually pull the economy down with it.  So many jobs have been created in this space—realtors, construction, mortgage bankers, appliance, carpet and furniture manufacturers, lawn and garden supplies, you name it.  All of these will suffer from the slowdown in housing.  

So far we are just starting to hear about the difficulties of people trying to sell their houses and that they’re “not going to sell their houses at such low prices”.  Well, then we say, they won’t sell their houses.  The builders are willing to cut some deals but not these home owners.  

What about the speculators who now have two or three mortgages.  They are going to wait it out and hope that a buyer comes along or that prices go up again.  We mentioned the Subprime environment this week and the problems it is having.  These delinquent Subprime homeowners don’t really have a choice in the matter.  The housing market will not bail them out.  The houses they are living in will become more excess housing inventory.  This will be a vicious cycle.  

Ok, Ok, enough ranting.  The market tried to fall in the morning but that selling gave way to buyers later in the day.  The lows of the early morning were it.  Yes, there was some timid selling in the middle of the afternoon but it didn’t really move the market down very much.  

We really do think the time is very near.  Please consider what you own and find some good exit point.  We know the end of the year is close but the tax man can not be minded right now.  You have your investments to think of.  If they are in a tax deferred plan, then the tax man doesn’t even care.

In tomorrow’s post we will try to determine the course of the market over the next week or two.  The Friday jobs’ report and next week’s Fed meeting are starting to get close.

Dow Industrials:  12,309.25  -22.35
VIX: 11.33
QQQQ:  44.26
RYVNX:   16.93
RYAIX:  21.46
RYCWX:  36.18
TLT:  90.97
BEGBX:  14.37

Tuesday, December 05, 2006

Dull Tuesday

We are starting to see more and more talk about the Fed meeting scheduled for next week.  We don’t recall a time when so many disagreed about the direction of interest rates right ahead of an FOMC meeting.  The disagreement appears to be most glaring between the Fed itself and the bond market.  The Fed has repeatedly said in the last few weeks that they are struggling with the idea of whether to Raise rates or not.  Meanwhile the bond market is pricing in a possibility of a rate cut at Next week’s meeting along with some more cuts next year.

We wish to remind you that the Fed will not and can not raise rates next week.  There are some economic data points that could be construed as reasons to raise rates but the biggest reason would be to support the dollar.  We might be inclined to revise our position if the powers that be actually wanted to hold the dollar up, but from our vantage point that just doesn’t seem likely.  

There was some early morning action that tried to confuse the players but after the first hour of trading there wasn’t much going on in prices.  The Dow traded in a narrow 50 point range for the day and about a 30 point range the last three and a half hours.  All in all, it was a pretty dull trading day.  The SP 500 did manage to get to a new relative high and the Dow is only a few points away from a new record high but the market basically rested on Tuesday.

The news items seemed to be off expected enough to cause some movement in stock prices but the market shrugged it all off both good and bad.  The bond market didn’t like the ISM Non-Manufacturing report moving higher than expected; but the reaction wasn’t very bad, just a small, almost imperceptible, move.

As you know we are keying in on the period around the jobs’ report which is Friday.  As mentioned above, the Fed meeting is just a few days behind that report and this period of time could hold the high in the stock market.  The market seems like it wants to make one more move higher before anything dramatic happens on the downside.  The key time for this spike is over the next week.  

As we have said, we are prepared to unload our bonds on Friday if conditions are right.  We were uncomfortable with the little down move experienced on Tuesday but we hung in there for a possibly better trade on Friday morning at the opening.  We’ll see if that looks best as the week progresses.

Dow Industrials:  12,331.60  +47.75
VIX: 11.27
QQQQ:  44.42
RYVNX:   16.81
RYAIX:  21.39
RYCWX:  36.05
TLT:  91.15
BEGBX:  14.43

Monday, December 04, 2006

Price Move Monday

On page one of the WSJ you will find and article entitled “More Borrowers With Risky Loans Are Falling Behind” with a subtitle of “Subprime Mortgages Surged As Housing Market Soared; Now, Delinquencies Mount.”  We recommend this article and hope that you can find the time to read some or all of it.  According to the article the Subprime market has had some historically low delinquency rates until the past year.  “But as the housing market peaked and loan volume leveled off, some lenders responded by relaxing their lending standards.  Now, the downside of that strategy is becoming more apparent…’We are a bit surprised by how fast this has unraveled,’ says Thomas Zimmerman, head of asset-backed securities research at UBS.  Roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments, the bank says.”

The article goes on to say that “Delinquency rates have been rising steadily since the middle of 2005.  But the trend has accelerated sharply in the past two to three months, according to an analysis by UBS.  The figures don’t include loans that lenders were forced to repurchase because the borrower went into default in the first few months; such repurchases also have increased sharply this year.”  

We point out this article, that you will no doubt see for yourself if you pick up the WSJ on Tuesday, because we are paying attention to the housing market and how it will ultimately affect the stock market, however, not today, apparently.  Today, the market heard that PFE (Pfizer) was pulling one of its drugs out of clinical trials and investors decided to pull out of the stock.  PFE dropped about 10% and it is part of the Dow.  

Still, there seemed to be no stopping the Monday bulls on their way to a 90 point Dow advance and an SP 500 advance that took that index to a relative new high.  We did say that these new highs need to be respected but they should occur with other indexes doing the same thing And on chunky volume.  Those two things did not happen on Monday.  Volume was light and priced moved up strongly.  

We remind you that we have our sights trained on Friday’s jobs’ report.  We are looking at maybe unloading our bonds on Friday morning if we get the weakness in the jobs that we think.  That should give bonds a nice boost and give us a chance to sell our TLT’s.  We will monitor this situation this week for insight on whether to make this trade or not.  We have been comfortable in bonds for the past year or so and the last couple of months have shown strong price moves.  Now, we are thinking it may be time to step back.  With Bill Gross of PIMCO getting nervous about bond spreads, we are thinking it’s getting time to protect some profits.      

Dow Industrials:  12,283.85  +89.72
VIX: 11.23
QQQQ:  44.26
RYVNX:   16.91
RYAIX:  21.45
RYCWX:  36.31
TLT:  91.58
BEGBX:  14.43

Sunday, December 03, 2006

ISM Manufacturing Shows Contraction

For the first day of the month, Friday seemed to be having a bit of trouble.  The stock market opened down a bit but when the ISM manufacturing report was released a half hour into the trading session, the market reacted pretty violently.  As we mentioned in our Thursday post, the Chicago purchasing managers’ index showed contraction by closing ever so slightly below 50 at 49.9.  

The bulletproof bulls tried to shrug that number off as it was just for Chicago; but, when the National ISM manufacturing number came out below 50, the market decided it needed to go down.  Buyers decided to step back and the market, in terms of the Dow, dropped about 110 points in about 45 minutes.  Then the market did its normal thing and rallied somewhat from there.  The Dow traded stronger than the NASDAQ indexes but still finished the day down.  After having dropped more than the Dow, the NASDAQ Comp finished down about ¾ of a percent after being down about twice that during the day.

But, this is a new week with new challenges for us to face.  We have an eye toward Friday’s release of the jobs’ report and we know there are other items in between.  The bigger ones are the pending home sales on Monday and Tuesday’s factory orders and ISM Non-Manufacturing index.  

As we greet Monday, we think the market is on borrowed time and we mean that in the credit sense and in the figurative sense.  As long as credit is easy to be had, the thought has been that housing should be ok—that hasn’t really worked out, as many analysts and home builders are scratching their collective heads and wondering how this slowdown occurred with such a strong economy.  We would submit that the economy is Not strong.  

We are going to try to talk some more about the carry trade being squeezed this week.  Our first thought is that Japan has been the center of the carry trade with its remarkably low interest rates over the past several years.  This is slowly changing and the Japanese currency, the yen, is starting to gain some steam along with the Euro.  As the dollar drops, and the yen/Euro rise, there are some dollar holders that are questioning their position:  “Interest rates in the US are slowly going down and so is the currency.  Why should I be in those dollar assets???”…more on that the rest of the week.  If you have any areas of interest that we could discuss here by all means put your thoughts out on the comment section.  We could get a good conversation going.  Plus, if you are interested in any special topics (any that we know anything about, or other readers), please post them out on the comments, too.

As the top of this market rolls over, there will be much more difficulties to deal with.  Right now we can get the discussions started and maybe be more prepared for anything that may happen.  The next year should be a wild ride and we are looking forward to it.

Dow Industrials:  12,194.13  -27.80
VIX: 11.66
QQQQ:  43.66
RYVNX:   17.38
RYAIX:  21.74
RYCWX:  36.84
TLT:  91.42
BEGBX:  14.44

Thursday, November 30, 2006

Would You Buy Home Builders Now?

Here we are at the turn of another page on the calendar, this time it’s to December.  Would you care to venture a guess as to how much the Dow went up in November?  Would you believe it if we said it was 140 points?  Granted the NASDAQ has outperformed the Dow but not by that much.  As a percentage the Dow was up 1.2% while the NASDAQ Comp was up 2.7%.

Right, these numbers are pretty good for a month but this is a month that saw five brand new all time highs in the Dow.  The momentum has cleared ebbed the last month and we think it is possible that the last high in the Dow has been seen.  Of course, even if the Dow goes to another record high in the coming weeks, we don’t think that it will be a significant event for the broader market.

We were a little disappointed this afternoon as the market traded above our Fibonacci levels that we mentioned in our last post but in the last half hour the market dropped quickly and closed slightly down on the day.  In the last half hour, the Dow dropped over 50 points, much to our amazement.  In our evening reads, we noticed that some large brokerage firms have fiscal years that end on November 30th.  Their desire to keep some of the prices up on the week could explain some of the rallying the last few days and some of the heavy trading volume on Thursday.  It can’t explain the sudden drop at the end of the day.  

Let’s get to the news of the day which we thought was a little surprising.  We don’t generally talk about the weekly jobless claims figure which is announced on Thursday mornings.  This morning’s number is noteworthy as last week was Thanksgiving which eliminates a day when claims can be made but these numbers are adjusted; but, even with expectations of a drop of about five thousand, the actual number was up 34 thousand to a total of 357,000.  

Next, we saw that the Chicago purchasing managers’ index fell below 50 which indicates contraction.  The number was 49.9 which isn’t much below 50 but expectations were for an increase to 54.8%.  Friday brings the ISM manufacturing business index which is a national number so we’ll see how that compares.  That is expected to go up a little from 51.2 to 52 but with the Chicago area number down, it is possible to see the national figure drop, too.

Just in time for Christmas, we saw that an analyst at Banc of America raised his rating on the industry from cautious to neutral and raised his rating for several home builders from an out and out sell to a neutral.  Well, you can imagine what that did to those stocks.  The stocks have been hard hit over the past year but to us that is not a good reason to buy them.  The analyst did say that inventories are a “wild card” with seasonal increases in inventories in the spring could lead to further pressure on prices and additional cancellations.”  Please note, we do not feel the same way.  These stocks could have a long ways to go down.

Then there was the story about Kirk Kerkorian selling his stake in GM.  Maybe he thought he had made enough money.  This can’t be good for the price of that stock.

The US dollar, our last item, was under pressure again on Thursday.  What can we say about this situation?  This week the Chairman of the Fed, Bernanke, stated that the Fed was considering raising rates—did we mention that this was to prop up the dollar, which it did for one day.  Henry Paulson, Treasury Secretary, has been making statements this week that we need a strong dollar.  The WSJ is reporting that now the secretary needs to engineer a gradual descent for the dollar so it won’t hurt the economy.  The possible further weakening of the currency could be a way to reduce the continually expanding trade deficit.  

Do you feel bullish?  That’s a dangerous thing.  Be Careful.  Sell any rally.  We remain bearish against last week’s highs.  Any move that goes above the last week’s highs must be respected.  How many times that can happen is a good question?  What we do know is that at some point, there will be a final high.

Dow Industrials:  12,221.93  -4.80
VIX: 10.91
QQQQ:  44.04
RYVNX:   17.05
RYAIX:  21.53
RYCWX:  36.64
TLT:  91.53
BEGBX:  14.33 (52 week high, dollar down again)

Wednesday, November 29, 2006

Perfect Rally

Before the market opened on Wednesday, we found out that the new revised GDP number was a little better than the first preliminary one we saw a few weeks back. The number improved from an initial reading of 1.6% to the latest 2.2%.

Predictably the stock market was doing its Happy Feet dance but we’re not really sure if it was due to the upward revision of the GDP. The reason we’re not sure is that the bond market was up on the opening too. That was the high for the bond market as it drifted lower all day (interest rates move up when bonds go down).

The Dow was up about 40 points at the bell and 90 minutes into the session it jumped up to about 90 points higher. From there we saw some flat to down trading going into the afternoon. The drop was more dramatic over in the NASDAQ indexes as the Comp almost got back to even after being up over 20 points early. The NDX actually dropped into negative territory. From there the market rallied into the close with the Dow up about 90 points on the day.

The other interesting news of the day was the new home sales and the Fed’s beige book, a sort of report card for the economy. New home sales were down slightly but the median price turned up for a change of pace. We think the report should not be construed as a positive sign for housing because there are many ways to keep the prices up like paying for upgrades but there is no up tick in the number of buyers.

Taking from the WSJ, the beige book indicated “US economic growth was mostly moderate in the early part of the fourth quarter, as consumer spending grew and labor markets remained tight despite further cooling of the housing market.” There it is, the economy is ok even though housing is cooling. So there is no reason to worry.

In our last post we mentioned that we thought the market would rally on Wednesday and we thought you might like to know why. Part of it was just the time of the month. Here we are with one trading day left this month and there just needed to be a rally. The other reason is that the market was looking to “correct” the decline experienced on Friday and Monday which brings us to…

Just a little tech talk this evening because we like to see Fibonacci relationships and sometimes they need to be pointed out to you. As we looked at the price drop we saw from last Friday to Tuesday’s open we thought it would be interesting to calculate the normal Fibonacci retracement level. Without going into a lot of detail, the prediction was for the NASDAQ Comp to return to 2438.50 and Wednesday’s high was 2436.61, pretty close so far. For the Dow, the calculation yields 12,251 (we rounded up because we thought you wouldn’t believe such a round number) and Wednesday’s high was 12,240, again quite close.

Dow Industrials: 12,226.73 +90.28
VIX: 10.83
QQQQ: 44.07
RYVNX: 17.02
RYAIX: 21.51
RYCWX: 36.61
TLT: 90.93
BEGBX: 14.20

Tuesday, November 28, 2006

Big News Day, Slow Market Day

As we indicated in our last post, the news doesn’t matter so much as the market’s reaction to it.  On Tuesday, durable goods were reported Down 8.3% with existing home sales up slightly but prices recorded a record year-over-year drop and inventories were up to a 7.4 months’ supply, and consumer confidence was down after expectations for a small rise.  Durable goods orders were down the most since 2000 and “core” orders of capital goods fell for the first time in six months.  Orders for computers and related products were down a strong 25%.

As far as the housing numbers are concerned, we read the news that the national median home price was down 3.5% from a year ago.  The report said that this is the largest year-over-year drop since records have been kept (1968) and the guess was that it was the largest drop since WW II.  The realtors’ association (National Association of Realtors) said that last month was the first increase in sales in eight months and that sellers were starting to cut prices which, combined with low mortgage rate, was helping to spur sales.

Most analysts were scratching their heads on the consumer confidence figure because the job market is “so good” and the market has been rising.  The best article was from the AP quoting Gary Thayer, chief economist at A.G. Edwards & Sons, Inc.  He said consumers “are not feeling really good now…We are still positive on the consumer sector.  I think it will be a good holiday season.”  Isn’t it amazing?

Meanwhile, the stock market is meandering all day, crude oil is moving up, bond market is moving up (rates are going down) and the dollar continues to slide.  We think the picture is getting clearer for the stock market but there could come some significant clarity if the dollar weakens much more.  The Euro has been steadily advancing on the dollar and interest rates are still moving up in Europe.  Enter Bernanke…

The eminent central banker gave a message to the world today that he thinks the Fed may actually have to raise rates.  When the Fed decided to pause, it was trying to decide whether they had taken rates high enough or whether they needed to be edged higher.  (Sarcasm coming, just thought we’d prepare you.)  The Fed chairman would have us believe he and his band of bankers are going to be tough on inflation.  You don’t think his hawkish comments were meant to curb the dollar’s decline, do you?  We didn’t think so.  Please.  

We have said it before and we will say it again, the Fed is impotent right now.  They have left the party when they said they were going to pause.  Their idle talk is just that and in order to gain some credibility with the world’s markets both currency and stocks, they Have to raise rates.  We both know, and so do the markets, that they Can Not do that.  

The stock market did not give us much information on Tuesday but we expect more on Wednesday.  We would guess that the market would like to try another rally on Wednesday just to show it can but we don’t like its staying power.  

Dow Industrials:  12,136.45  +14.74
VIX: 11.62  (falls hard on a quiet day)
QQQQ:  43.77
RYVNX:   17.26
RYAIX:  21.66
RYCWX:  37.17
TLT:  91.15
BEGBX:  14.26 (dollar still falling)

Monday, November 27, 2006

Are You Feelin' Lucky?

After the weekend, the market had a rough go of it at the bell but then got off to its normal rally mode…Wait a minute, that’s not right.  Over the last several months, the market has been able to shrug off many little early morning drops but not Monday.  On Monday, the market made a steady down hill for most of the morning with the Dow being down about 150 around lunch time.  From there the market found a trading range and closed near its noon lunch time lows.

You may have heard the news of “why” the market was down on Monday but I think the scary thing is that there really was no hard news for a drop like this.  For us here at the Update, this is the way a turn down should look.  It should get started modestly like last Friday after Thanksgiving and then drop hard for a day without any serious selling news.  

Yes, the analysts were quick to point out that the dollar has been in a low volume drop over the past several trading days, Wal-Mart indicated a poor November including Black Friday (WMT was down 2.7% on Monday), and oil traded back above $60 a barrel.  Analysts also said the drop “wasn’t surprising” due to the Dow’s near 15% run up since the beginning of the year.  There was bullishness in some of their statements as they thought it possible that the dip would be temporary because of traders wanting to buy some stocks to “boost” their portfolios.

Well, the market does not really pay much attention to those of us who are making statements about it.  It does whatever it wants to and we need to respect that.  The past several months have been some of the most head scratching trading months ever.  The bulls are just smiling every single day with no worries.  Every time the market goes down just a smidgen, the buyers come back in and bid it up again…but not Monday.  

The question of whether or not the market will continue down is now sitting out there for everyone in the world to wonder about.  All of a sudden the market has a chance to drop and drop hard, right here and right now.  The market can do whatever it wants to but we believe that the market needs to go down, maybe not on Tuesday and maybe not this week but Sometime soon.  

OK, what is going on?  We must now focus on what the market is doing.  The news is only going to distort the picture the market is trying to paint.  The main point will be how the market reacts to the various pieces of news.  On Tuesday we get to see durable goods and existing home sales for October.  There are some retail sales figures coming out and the November Conference Board consumer confidence report.  We would now say that we should ignore the numbers for the most part and watch the market.  We of course think the home sales are important for the long term but even those are not as important right now as how the market trades.

Most players should be “expecting” a rally on Tuesday so if one develops we should pay special attention to its strength.  If one doesn’t develop and selling continues, there could be a very bad week on tap for the market.  We believe that the current stock holders have some of the weakest hands for holding stocks.  The minute the market looks like it wants to go down, there will be a dearth of buyers and sellers will swamp the market.  Greed will turn to Fear very quickly.  This event could have started on Monday, well, even last Friday.  

Now, we know that we could be getting ahead of ourselves a bit but you can never be sure what is going to happen.  The market is on a precarious peak and when it goes over the edge, there could/will be a major drop.  The question is “Are you feelin’ lucky?”  That’s the best Clint Eastwood line we could come up with on short notice.  Seriously, the question is whether the market is going to continue going down right now or not.  Do you want to keep your money on the table or in the bank?

Dow Industrials:  12,121.71  -158.46
VIX: 12.30 (15% jump)
QQQQ:  43.66
RYVNX:   17.35
RYAIX:  21.72
RYCWX:  37.25
TLT:  90.95
BEGBX:  14.18

Sunday, November 26, 2006

Black Friday Requires a New Name

After a nice long weekend, we are now ready to begin another week of waiting for the stock market to decline. There are several economic reports due out this week and we will take a look at them as the week progresses. The big ones are durable goods, existing and new home sales, and GDP preliminary report. The jobs report isn’t due until next week Friday due to the first falling on Friday.

As for a review of last week’s action, there really isn’t much to say. As reported in our last post, DELL announced their delayed earnings and the stock managed to pop about 10% and gave a lift to the NASDAQ indexes on Wednesday. The news wasn’t particularly bullish in our view but the stock went up anyway. This stock has been one that has participated in the rally the last several months—again, we’re not sure that the outlook for DELL is all that positive. That said, someone thinks it is worth 40% more than it was in the summer?

We expect much chatter about the Black Friday results over the next few days. The analysts will try to put a bullish spin on the numbers as we go into the Christmas buying season. As we see it, the retailers put on huge discounts to get people into their stores. Black Friday needs to be renamed because it used to be the day the retailers were able to get into the Black for the year. We figure margins were barely positive for the weekend and very negative for Black Friday Morning. The consumer is there if you sell something about 25% under cost.

That reminds us of the local paper we saw today. On the front page there were two articles. On the left was a picture of a couple sitting in front of their 96 inch screen watching a TV show they had recorded. On the right was an article about how foreclosures had increased. Exotic mortgages were to blame in the article, the author saying that people had gotten into them without really knowing what they were. We wonder how many of them had bought large screen TV’s on the same type of notion.

The bulls are very complacent about the current run up in the stock market but we do wonder if their days are numbered. We will be watching and waiting. Let’s see how the week gets started, shall we?

Dow Industrials: 12,280.17 -46.78
VIX: 10.73 (5% jump)
QQQQ: 44.65
RYVNX: 16.60
RYAIX: 21.24
RYCWX: 36.30
TLT: 90.62
BEGBX: 14.16 (new 52 week hi with dollar falling)

Tuesday, November 21, 2006

DELL Reports

As we look at the market this evening, we see a whole lot of bullishness and very little price movement to justify the bullishness. Yes, the indexes are at relative new highs and the Dow itself is near a record high. Still, with all of the optimism out there, prices are very well contained. Looking at the NDX, the NASDAQ 100, for the last five days, it has traded in a 20 point range. This is not the type of “breakout” move you would expect for an index that has just made multiyear highs.

We suggest that the advance is definitely “long in the tooth”. (What does that mean???) The market wants to stop going up but it has followed a very narrow channel on the way up from the lows of this past summer. This means there has been no room for the bulls to catch their collective breath. We think that the market will just have to hiccup and the bulls will scramble to the safety of cash.

Tuesday’s trading was very narrow and on pretty light pre-holiday trading. The Dow was up a magnificent 5 points. But then the market closed…

That’s when DELL announced their delayed earnings. While saying the earnings were preliminary, because of government and internal investigations into its accounting, DELL said that earnings were higher than expected in its third quarter. The stock enjoyed some very intense buying after the announcement pushing the stock up over $2. What is going on here? The stock should be something that scares people but it has decided not to go down during this period.

We expect very light trading over the next two days, Wednesday and Friday. The Friday after Thanksgiving has had some very big down days, usually on light volume, and this Friday could deliver one of those types of days. We will wait and see what happens due to the shortened holiday trading.

With that in mind, the Update will not publish another post until Sunday evening.

We wish all of you a delicious Thanksgiving. This is our favorite weekend of the year so we will be enjoying it. There are many things to be thankful for. One thing for us is your continued interest in the Update. See you back here again next week.

Dow Industrials: 12,321.59 +5.05
VIX: 9.90 (single digits again)
QQQQ: 44.45
RYVNX: 16.80
RYAIX: 21.29
RYCWX: 36.01
TLT: 90.31
BEGBX: 13.90

Monday, November 20, 2006

Economists Predict...

The online WSJ (Wall Street Journal) had two articles side by side on Monday. The first was an article describing the housing situation in several markets around the county. The chart had two statistics on it, one, the percentage of homes that have reduced prices, about 40%, and, two, the change in the number of homes listed, about even or a little down. The other article was a report summarizing economists’ views on housing. The article said that by a two to one margin economists think that the worst of the housing bust is over. They cited the fact that the number of homes going on the market has slowed and that has to signal a turn around.

We here at the Update would caution these so-called experts that the true mark of a turn around is when the buyers return and not before. Just because sellers have given up on trying to sell their houses does not mean there is an increase in buyers. The speculators in real estate have basically vanished into thin air. They had accounted for as much as 40% of sales in the last few years. And, where were these experts a year ago when the housing market turned down?

In the news on Monday, the LEI, leading economic indicators, were up as expected and as we expected, it had very little influence on the trading day. This is an ongoing situation as the market seems to continue to grind higher day after day.

We recommend that you take a look at volume and you will see that there isn’t enough volume to really keep this market going. We have seen small upward price moves but very little volume to back up these moves. That’s why you don’t see very strong days, just a steady grind higher on most days.

Our momentum indicator seems to have topped and is now moving down. This has happened before in the last few months as the market seemed to get a little overbought and needed to correct a little. This time, the market is correcting a little and we will see if it will finally roll over. There is a good window here where the market has a chance to go down. You may think that the market can’t go down because it hasn’t for a few months but, just as it has been going up recently, it can go down easily. It is overbought and needs a break.

Look at the VIX below, it has now gone into single digits. Complacency rules—and that is very bearish.

Be Careful out there, real careful.

Dow Industrials: 12,316.54 -26.02
VIX: 9.97 (single digits)
QQQQ: 44.39
RYVNX: 16.78
RYAIX: 21.35
RYCWX: 36.04
TLT: 90.09
BEGBX: 13.87

Sunday, November 19, 2006

Housing Starts Collapse

Last Friday, seems like a long time ago, the market experienced options expiration for November and before the market opened we saw a very poor housing number.  October starts were down about 15% last month to a six year low, expectations were for about a 5% drop.  Here at the Update, we were not surprised by the number because after all it is the central tenet in our theory that the stock market will drop due to the housing market.  Still, with the housing dropping over the past year, the stock market has kept going up for whatever reason.  The fundamentals are still in place to hurt the stock market.

Anyway, the stock market did open down a bit on the news but did not seem to feel compelled to stay down.  The Dow put in its low within about 15 minutes and then ground higher all day to close out at another new record high.  The NASDAQ didn’t come out of negative territory but managed to close mostly even on the day.  The bond market had a good day but failed to best its Tuesday high.  Bonds have been the one bright spot in our portfolio the last few months but they have not been able to contain our losses in the stock market.  

We will see how this plays out over the next week as we go into the holiday season with Thanksgiving this week.  Black Friday should be given some attention by the market but the market doesn’t seem to be concerned with any kind of news, good or bad.  Speaking of news, the leading economic indicators will be announced on Monday and they will be ignored, too.

As we look out over the world markets this evening, the Asian market stands out.  The Japanese market is down over 250 points (1.5%) and the Hong Kong market is down about a half a percent.  In Australia, their market is down about 1.5%.  Our overnight futures are down a little but not much.

The market needs to show its hand again but we think it’s going to be a slow week.  That doesn’t mean it will and we plan to be here to analyze what is going on.

Dow Industrials:  12,342.56  +36.74
VIX: 10.05 (major complacency)
QQQQ:  44.30
RYVNX:   16.83
RYAIX:  21.38
RYCWX:  35.88
TLT:  89.95
BEGBX:  13.86

Thursday, November 16, 2006

Another Day Another Record Dow

On Thursday morning, we found out that the CPI was almost a distant memory being down another half a percent matching the last month’s decline. The media has now started to focus on the full CPI because it is now showing better decreases than the “core” CPI and that is more appealing to the public. With that in mind before the market opened, stocks were sought after and so were bonds. The bonds didn’t hold their gains but the stock market ground higher all day. As an added benefit oil was down over $2.

Ten days ago the NDX traded below 1700 and Thursday it closed above 1800. That’s a pretty good run for a tired bull, about 5%. One of these days the market will need to slow its upward pace. Friday is options expiration and with it we hope there will be some natural slowing in the bullishness.

Afte the market closed, HPQ (Hewlett Packard) showed some strong earnings. This is in sharp contrast to DELL's announcement on Wednesday evening when it said it would delay its earnings announcement until later in the month. Still, the overnight market is not celebrating the HPQ news. We will see how options expiration Friday trades.

There is an article out on CNN Money (check the link to that site at the left) that mentions the “fear gauge” or the VIX as we talk about it here at the Update. The article says that it’s at one of its lowest points in a decade but of course goes on to explain that this is not a problem. We see complacency as a large problem but so far this month, or since late July, the bulls have been cleaning up and we have been gasping for breathe.

We still have some dry powder and we have had much of our assets in bonds or cash equivalents and have been earning a fairly decent 5% return or so on it. We are anxious to cash that in and go short with at least some of it but we are going to wait until the market decides it wants to go down.

We do think that it’s at these times that those of you who own blue chip type stocks, this is represents a good time to sell, again. We just know that you probably think there is no reason to sell since they are just going up every day, but here’s what happens: You will watch them go up and then you will watch them go down and you will say I can’t sell now, they have come down too far. If they go back up again I’ll then sell and they never do.

As we survey the technical landscape, we still see volume lighter than it should be, an overbought momentum indicator, relatively weak price moves on the way up, just to mention a few.

Just, please be careful. That’s the best we can say this evening. Have a good weekend.

Dow Industrials: 12,305.82 +54.11
VIX: 10.16 (new 52 week low)
QQQQ: 44.30 (new 52 week high)
RYVNX: 16.79
RYAIX: 21.35
RYCWX: 36.06
TLT: 89.44
BEGBX: 13.81

Wednesday, November 15, 2006

DELL Delays Earnings

Wednesday’s trading was pretty much a follow up to Tuesday’s rally just a little more subdued. The only fly in the ointment on Wednesday was the Fed’s minutes which indicated that the economy could still be plagued by inflation. They are watching the weak housing market to see if it slows economic growth. With that news the market slowed down its advance and pulled back slightly into the close.

Then after the market closed, DELL announced that it was going to delay its earnings report until nearer the end of the month. The original date was supposed to be Thursday (today for you). Although DELL did say that the SEC stepped up an investigation into the company’s accounting, DELL said that wasn’t the reason for the delay in reporting. DELL announced that it wouldn’t be having a conference call on earnings either. So, what’s an investor to do? Well, in after hours the stock was hit for 3 Whole %. Wow, what a blow!!! In an uncertain world, DELL should be down 30% on this kind of news.

The market seems to be powering through any and all bad news. We expect that the reason is that temporarily the feeling can be that the Fed won’t have to raise rates. (Maybe last week’s election is playing into the thought process, too, although we don’t really know why.) That Fed thing is getting to be a tired reason for a rally but that is in a nutshell what we think the market is doing. When the realities of the economy start showing up at home, the stock market should have dropped. Can you follow the tense there?

What we mean is that the market seems so blind to the future according to our view. We think the market should be looking into the future to see what is going on. This current rally is certainly not lining up with our vision for the future so there are a couple of things: First, the market is definitely smarter than we are, which normally is true. In the current arena, we just don’t think so. Second, we could be right and the market is wrong, which if that is the case a day of reckoning is coming. Of course, that is our current position. Every day we have another little rally, the pain is still there.

The latest read on our momentum indicators based on Wednesday’s trading is that the market is again overbought and has not been oversold for nearly four months. That’s a long time and we don’t think it can keep this up much longer.

Dow Industrials: 12,251.71 +33.70
VIX: 10.31
QQQQ: 44.11
RYVNX: 16.94
RYAIX: 21.44
RYCWX: 36.37
TLT: 89.85
BEGBX: 13.84

Tuesday, November 14, 2006

Another Record Dow

With very little time this evening, we thought we’d just recap some highlights. First, the October PPI seemed a bit odd with a drop of 1.6% with expectations running for only a 0.6% drop. The “core” PPI fell also, down 0.9% with expectations for a rise of 0.1%. The reason cited was the drop in the price of energy. Thank you very much. When prices of energy were going up, it didn’t seem to be reflected in the PPI but now that it’s going down, it is. Where are the referees???

Energy was cited as the reason for the drop in retail sales, too. With all of this Deflation going on how did the markets do? Well, the bond market did like it and traded to a new intermediate high but it wasn’t really too convincing. The stock market thought it was ok early but fell such that mid-morning, the Dow was down about 45 points. From there, it was up and away.

In the afternoon, one of the hawkish Fed members, Poole, stated that the housing market seemed to have further to go on the downside. This was taken to mean He was no longer hawkish on interest rates and neither was the Fed. From there the stocks jumped and the Dow closed up about 85 points.

Well, what can we say? All four of our indexes traded to new highs for at least a year or more on Tuesday. This would indicate that there are very few sellers around. We will provide more information in our next post.

Dow Industrials: 12,218.01 +86.13
VIX: 10.50
QQQQ: 43.93
RYVNX: 17.06
RYAIX: 21.52
RYCWX: 36.58
TLT: 90.19
BEGBX: 13.88

Monday, November 13, 2006

Just Another Manic Monday

The NASDAQ sprinted to a new high in early trading today taking the NASDAQ 100 with it. There has been buying in all things tech, for those of you who know the term beta, this is called beta chasing. For those of you that don’t know, beta is the name given to describe how stocks move with the market. High beta stocks move more than the market while low beta stocks move less than the market and negative beta stocks move opposite the market.

We note that Monday’s volume was again on the light side. With all these new “highs” going on without volume, the bulls should be a little concerned but they seem not to have a care in the world. They seem to think the market has made it past all of the bad news concerning the economy, especially the housing market. The problem is that people have tightened their collective belt and will now start needing to pay down some of the credit they have strapped themselves with.

In the news for Tuesday is the PPI report which shows an expectation for another good sized drop of 0.6% with a “core” rate increase of 0.1%. These numbers compare to last month’s drop of 1.3% in the full number with an increase in the core rate of 0.6%.

The other Tuesday number is the retail sales. We don’t want to talk about expectations here because they could be off the mark. With Christmas sales right around the corner, there should be some concentration on these numbers. We expect some market reaction to them.

As is the case more and more, Tuesday will be a busy day and watching the market much at all will be difficult task. With that in mind we will be relying on our normal reads to tell us what’s going on during the day. Please leave a message in the comment section if you see anything unusual happening. Thanks.

Note: As a reminder the True Contrarian, at one of the links on the left, has put up a new post describing the course of the economy and gold over the next year or so. It's worth a quick read if you haven't read it already.

Dow Industrials: 12,131.88 +23.45
VIX: 10.87
QQQQ: 43.46 (new 52 wk closing high—highest in 5 years)
RYVNX: 17.44
RYAIX: 21.75
RYCWX: 37.10
TLT: 89.84
BEGBX: 13.85

Sunday, November 12, 2006

Market is Trying to Made a Top

The stock market managed a bounce out of the minor Friday sell off.  There is precious little to report this evening on the state of the market even though the next week does have some significant items such as the inflation data in the form of the CPI and PPI as well as housing starts on Friday.  

In the wake of the election the market doesn’t seem to have much to trade on, or maybe we should say that the media doesn’t know what to say.  What does the market have to say?  

As we look at the last 2-3 weeks and compare the highs on October 26th with the highs on November 8th, we see some subtle weakness in the technicals over that same period.  The first thing to notice is that the SP 500 did not make a new high along side the INDU and the NASDAQ Comp on November 8th.  

Our momentum indicators suggest the momentum high happened back on the October 26th with the price high happening on November 8th.  Obviously, the market (Dow) reserves the right to make another new high but we look at last Wednesday as being a key point.  

The biggest indicator is volume, in our opinion.  Looking at volume, it has sort of dried up on this late run to new highs.  Again, subtle weakness has appeared on this last high with the 5 day average upside volume lower than it was at the earlier high.  

We do like to see how the 5 day average new highs for the NYSE confirm the new highs and they peaked back on October 27th at 314 with the high last week being 241 which occurred on Friday, two days after the new Dow high.  

By themselves they don’t build a case to say we’re going down but collectively there is a stronger signal.  We are going to keep an eye on the market every day to see if something significant happens with regard to price.  Until then, we must wait.

Dow Industrials:  12,108.43  +5.13
VIX: 10.79
QQQQ:  43.03
RYVNX:   17.78
RYAIX:  21.96
RYCWX:  37.30
TLT:  89.86
BEGBX:  13.91

Thursday, November 09, 2006

CSCO Can't Hold Market Up

Thursday’s big items were the CSCO news from Wednesday evening, the trade deficit reduction, the final democrat senator wins to push the democrats into the majority in both houses, the jump in the precious metals, and the market’s response to all of the news. CSCO screamed out of the blocks in early trading and opened on the High of the day at 27.44, a new 52 week high, in fact the highest price for that stock since early 2004. From there the stock drifted lower most of the day and closed near its lows of the session, still up at a new high for the year.

The reduction in the trade deficit didn’t do too much to the stock market or the bond market. The news is just so bad on that front that people have been ignoring if for a long time. Later in the day the precious metals jumped maybe in response to the trade deficit news but maybe not. Gold was up 3% and silver was up 4% with the HUI up about 4%. The precious metals market was joined by crude oil which spiked a couple of percent. Do you think the markets are starting to try to figure out what the election means?

We think the stock market was fairly loud and clear today as the early morning jump spurred by CSCO could not hold. The market, at least the tech heavy NASDAQ, started out about 0.75% higher, spent the rest of the day leaking, this on the highest NYSE volume since October 4th. We know that the market has been known to thrown us bears a bone or two now and then and immediately come take it away but we have a lot of hope built into the market at this time and a nice drop from these crazy highs would be good. We think the bulls would benefit from a healthy correction, too, or so we would tell them. They would say that a 73 point down day in the Dow is all the correction necessary. What would you say?

Here it is again, Thursday evening and we have watched another week of action go past us. We can only wait for an opportunity that we like. Have a good weekend.

Dow Industrials: 12,103.30 -73.24
VIX: 11.01
QQQQ: 42.80
RYVNX: 17.99
RYAIX: 22.08
RYCWX: 37.29
TLT: 89.47
BEGBX: 13.86

Wednesday, November 08, 2006

CSCO Gives Added Push

The biggest anticipated item this evening is the stock market’s reaction to the election. We’re not sure the market made any definitive statement about that on Tuesday. That could be because there were still some open questions as to whether the democrats would take both houses or just one.

While we knew the republicans couldn’t roll over and concede defeat, we didn’t expect the giant change in the secretary of defense as their answer to the election news. Having Rumsfeld “resign” and announcing his successor the day after the election seems like an attention grabbing move to take the spotlight off the election negatives. CNN put it that “The announcement came after exit polls from Tuesday’s election showed that nearly 60% of voters were unhappy with happenings in Iraq.” In any event the stock market seemed to be trying to pay attention to too many things.

The news out of one of the home builders, Hovnanian, was not that great and kept that group from participating in the little up move in the stock market. All of these builders seem to have been rallying with the market since the July lows. Now, in the last three weeks, they look like they’re about to drop again. Maybe people are starting to get the sense that housing is not coming back like they thought it might a few months ago.

Hovnanian’s (HOV) said "Our financial results for the fourth quarter continued to be negatively impacted by high cancellation rates and increased use of concessions and incentives, particularly on the resale of those homes which experienced contract cancellations." The company said that it is walking away from deposits on some land options saying that “Although it is painful to incur these non-cash charges, we believe it is much better than proceeding to build out these communities at very low returns or losses over the coming years.”

Toll Brothers (TOL), another home builder, reported on Tuesday evening that it too was experiencing some higher than normal cancellations. In the quarter that ended on October 31st, cancellations amounted to 37% of the contracts signed in that quarter compared with 18% in the third quarter. Back in August the company said it would be delivering 7,000 to 8,000 houses in fiscal 2007 (starting November 1st) but said this week that number would be closer to a range of 6,300 to 7,300.

In the “good” news department, CSCO announced their earnings this evening and the stock jumped over 7% after the news. CSCO’s John Chambers is normally a little excited about his company’s results and that was the case this evening. He told the market that his company’s profit rose 28% on a 25% increase in revenues in their first fiscal quarter. This comes after the company purchased Scientific Atlanta earlier this year. That purchase added greatly to these numbers in the quarter.

We note that the news on CSCO is generally something that the market takes to heart since it was one of the market darlings in the late 90’s. The market was very happy about the news this evening and we’ll see how strong it opens in the morning. There definitely is some strength in the overnight futures.

Dow Industrials: 12,176.54 +19.77 (new record)
VIX: 10.75
QQQQ: 43.03
RYVNX: 17.79
RYAIX: 21.96
RYCWX: 36.85
TLT: 89.53
BEGBX: 13.80