Monday, May 08, 2006

DELL Lowers Forecast

Monday’s trading seemed quite muted and that could very well be due to the big news coming during the week, the Fed’s announcement on interest rates.  Due out on Wednesday, the FOMC will most likely raise rates another 25 bps, the market is certainly expecting this.  What they are anxiously hoping to hear is the course of future interest rate moves anticipated by the Fed.

Last Friday, with a weak jobs report, the market responded with a large up move because a weak economy means less pressure on interest rates and therefore the stock market can move even higher.  We like to remind you of the twisted logic that the market uses to decide when to buy and sell.  These are the things that often start to make sense to people in the stock market, especially after the media pounds this logic into their heads.  We reject this thinking due to the total lack of logic that it really holds.  Stocks need good earning power to drive the prices up, not lower interest rates in a weak economy.

Right after the market closed, DELL indicated that it would not make its earnings forecast and said that revenue would come in at the low end of their targeted range.  This announcement gave the stock a jolt of reality, unlike the twisted market logic in the last paragraph.  The stock was down in after hours about 6% even though the Fed might stop raising interest rates after this week.  That didn’t seem to help DELL.

In other news, the Warren Buffett show was on in Omaha over the weekend.  The headline has been that Buffett thinks real estate will slowdown in the near future.  He does have a bit more experience in these things than most of us but he does agree with us that the housing market will slow down.  No, I don’t think he reads the Update but comes up with this thinking all on his own.  We have extrapolated that thinking to the entire economy due to the weakening buying power of the consumer as the large ATM they live in stops spitting out money whenever they might need it.

The technical side of the market is showing overbought again after this little run up even though the momentum has slowed dramatically.  Here you have it, higher prices in the Blue Chips/large cap stocks and weak momentum and a tepid response from the broader market. We think the ideal time to sell will be this month even though we have endured a little bit of Dow upside and we have been out of the market for some time.  The move down from here could be swift so we hope that you…

Sell in May and Go Away and that you Be careful out there.

Dow Industrials:  11,584.54  +6.80
RYVNX:   18.17
RYAIX:  21.79
TLT:  83.65
BEGBX:  13.44

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