Media Scratches Their Heads, Day Two

Market participants were being pummeled from many directions on Wednesday. First there was the news from Costco on Tuesday after the close that sales in August were up just 2%. This news drove the retail stocks down along with COST. Do we need to remind you that August should be a big back to school month for retailers in general?

Then there was the news that pending home sales had dropped 12% from last month to the lowest level since the month that included 9-11. This news should have brought visions of rate cuts into the minds of the bulls; but, there were some worry warts out there who just didn’t think that was all that good of news. Needless to say, the media just had no idea what to make of the day.

Next came the ADP employment data, an advance notice of the real jobs’ number coming on Friday. These numbers suggest a weak month for job growth, seemingly another feather in the bulls cap for a Fed interest rate cut. (ADP is the payroll company that administers checks for many companies. Their report is not as sought after as the jobs’ report but their numbers should be fairly credible due to the very nature of their company’s business.)

The big news came when the Fed’s beige book was released in the afternoon. The beige book didn’t lay out a direct plan to cut interest rates and in fact suggested that the mortgage mess didn’t seem to be affecting the real economy. Is that so? Well, we recommend the Fed starts to look at the latest numbers that, to be fair, were not available to them at the time the beige book was put together.

The evening’s news goes back to Countrywide, a company that has been in the news and in our blog quite a bit lately. The company is going to have to lay off some more workers this month; apparently that $13.5 billion of capital isn’t enough for them to keep all those people on staff.

In the overnight markets, there is a sense that Thursday's early morning will be a gift from Europe with no rate hike. The world is anxiously awaiting this news this evening with the US futures market bouncing as we write this.

Turning to one more item, more direct stock market link, is the news from AAPL. They announced a $200 reduction in the price of the iPhone. This is curious in its timing if nothing else. When the iPhone came out it was supposed to be the hottest new gadget in history. The price didn’t seem to be an object to the buyers. That price was on top of the monthly phone charges from AT&T. The main reason for this third off sale has to be that sales weren’t quite up to expectations and they have too many sitting around gathering dust.

We look at this in consideration of the price of AAPL which happens to be one of the four horseman, as we have mentioned here before. On Wednesday, AAPL dropped about 5% even though we don’t have any concern about the 5% just the point where it occurred. Back in late July, AAPL put in a strong performance moving up to nearly 150. Then it dropped nearly to 110 leading the market down into the lows of August. Now it’s back up in the 140’s this week, leading the market up on Tuesday. We wanted to point out that it has so far failed to get back to its late July price. This is a big deal for a stock like this that has such a big following. AAPL’s customers who had bought the iPhone earlier were complaining about the price drop because they had no way of getting their money back; but, when AAPL goes down this time, the shareholders will be complaining about a price drop, too. (Just one more sign that the credit crunch is affecting sales.)

The market is at a critical point here. The pattern is right for a down turn; the momentum indicators are overbought and turning over; the volume in this latest advance has been low by recent standards; and, the Dow has failed to achieve any milestone on this rally…so we think the time has come for the market to go down. The prices are the big thing. When people look at their stocks or the Dow and say it isn’t even back to 14K, much the same as AAPL above, they start to question the market. Of course, they won’t sell until prices drop which will by definition push prices lower, faster.