In The Money

The Man Who Crashed The World

2009-07-10T09:45:00.001-07:00

That's the title of a great new article in Vanity Fair that delves into the collapse of AIG, and the man who many feel is responsible for taking down the insurance giant.

The article starts:

Almost a year after A.I.G.’s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved—the silent, shell-shocked traders of the A.I.G. Financial Products unit—and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees.

By Michael Lewis August 2009

You can read the rest of the story here, at VanityFair.com

Consumer Sentiment Dips Again

2009-07-10T08:23:00.000-07:00

The market is trading lower this morning after the Michigan Consumer Sentiment index dropped to 64.6 in July, versus consensus for 70.0. This datapoint seemed to move the market more than the U.S. trade data that came out, and showed the trade deficit fell in May as exports picked up.

In corporate news, GM is exiting bankruptcy after just 40 days, with a new corporate structure and improved balance sheet. Financials stocks are lower after the WSJ reported that firms looking to buy back the warrants held by the govt. are complaining the Treasury is demanding too high a price. Also, there is chatter that CIT may not be able to get FDIC backing on its bond issuance.

Markets were mostly lower in Asian overnight. Reports out of China showed that exports fell for the 8th straight month as the global recession cuts into demand. I don't see how China doesn't experience a slowdown from its recent, torrid pace of growth.

The dollar is higher today, weighing on oil and commodities; energy stocks are under selling pressure, while tech is holding up the best; the 10-year yield is lower again, down to 3.28% (have you locked in a good refi rate?); and the VIX is hovering right at that key 30 level we've been watching.

Trading comment: The market has not had the kind of bounce I thought it would from the SPX 870-875 level. As such, I want to look to use any strength to add some more etf hedges to the portfolios. But I do not want to get too bearish, as I think investor sentiment has already moved heavily to the bearish side of the equation, and that in and of itself should keep future selloffs contained. I still expect a rangebound, choppy market for most of the summer. I just want to have longs and shorts on to trade around and try to scalp incremental profits.

Kass Weighs In

2009-07-09T10:32:00.000-07:00

Recently, I have been saying that I felt the markets would be choppy and rangebound for most of the summer. Today, my colleague Doug Kass weighed in on RealMoney Silver with similar comments.

Doug said, "Consistent with my expectations of a sideways correction, the world's stock markets appear to be poised to go to sleep for the balance of the summer. Over the course of the next two months, I expected the S&P 500 to trade in a relatively narrow range of between 850 & 925."

Stocks Bounce As Oil Falls Below The $60 Level

2009-07-09T08:14:00.000-07:00

The S&P and Nasdaq are modestly higher on Alcoa (AA) results that topped estimates and initial jobless claims that fell to the lowest level since January. That said, continuing claims hit a new high, and that couple with generally weak same-stores sales results looks to be keeping a lid on any buying enthusiasm.

Retailers are reporting June sales that are generally weak. The Gap (GPS) fell 21 cents to 15.05. Abercrombie and Fitch (ANF) is down 47 cents to 23.53. Costco (COST) said comparable sales dropped 6%, which is in line with expectations and the shares were down 12 cents to 45.92.

In merger news, Data Domain agreed to be acquired by EMC for $2.1 billion. Data Domain lost 48 cents to 33.43. EMC is up 8 cents to 12.60. Also, Broadcom (BRCM) is walking away from its offer to buy Emulex (ELX), which is hurting the latter's shares pretty big.

The dollar is weaker today, which is helping gold prices rise. But oil is lower, breaking below the $60 level. Despite the drop in crude oil prices, energy stocks are still the leading sector so far (+1.2%), while healthcare stocks are the weakest (-1.5%). Financials are the second strongest group so far (homebuilders are bouncing also).

Asian markets were mixed overnight, although there was some surprising news that auto sales in China surged +36% in June. Seems odd.

The 10-year yield is up to 3.38% after a BIG plunge lower yesterday following the auction of 10-year notes. Demand at the auction was very strong, flying in the face of the conventional wisdom that demand for US Treasuries was sure to weaken. Seems the appetite for safe returns is higher than most people think.

The VIX spiked over the key 30 level yesterday, a level that I have been keying in on to gauge the potential for volatility (and selloffs) to increase. Today, the VIX is trading -3.6% lower, right at that key 30 level. Keep an eye on this one.

Trading comment: Yesterday morning I covered more of our short positions/etf hedges, and added some trading long positions in AMZN and GS. I haven't added any new long etf positions, as my near-term outlook is for the market to enjoy and oversold bounce, but then to experience more downside probing before finding a better support level.

long AMZN, GS

The Head & Shoulders Top

2009-07-08T16:36:00.001-07:00

The chart above was posted on Briefing.com today in reference to the technical "head and shoulders" top formation that so many traders are talking about.

I see it pretty clearly, and it could come to fruition in the near-term, but first I think we will see an oversold bounce from the SPX 870-875 level which was tested today. If the SPX is unable to get above its 50-day average and hold there, then we could see another leg down in the SPX 845-850 area.

But I think these technicians are missing a bigger pattern, and that is the larger head and shoulders bottom that is developing on the charts. Tomorrow I will try to post what I think is a potential H&S bottom formation in the making, and this pattern has longer-term bullish implications.

Have a good night--

IMF Says Global Economy Improving

2009-07-08T08:18:00.000-07:00

The market was higher in the first hour of trading, but is currently back in negative territory. This comes despite some positive comments out of the IMF, as well as a couple of solid earnings reports to kick off this quarter's earnings season.

The IMF upgraded its outlook for the global economy, and said it expects it to expand +2.5% in 2010. Some of the skepticism among investors might stem from comments out of the G8 meeting, where participants said they believe the global economy still faces risks and could need more help.

Earnings season officially kicks off today, and the first two reports from Pepsi Bottling (PBG) and Family Dollar (FDO) were better-than-expected. Healthcare stocks are bucking the weakness so far, being boosted by positive drug news out of Amgen (AMGN), which is boosting its stock.

The exchange stocks (CME/ICE) are under considerable pressure, as the CFTC is weighing options for implementing position limits in the futures markets to deal with speculation. This is likely weighing on the overall financial sector as well, as big trading outfits like Goldman Sachs(GS) would also be impacted.

On a related note, oil is trading lower for a 6th straight day, leading to further losses in the energy sector. Although materials stocks are not down as much.

Asian markets were lower overnight, despite news of improved consumer sentiment in Japan; the dollar is mixed right now vs. the Yen and Euro; the 10-year yield is falling further, now down to 3.40%; and the VIX is +3.5% higher to 31.93, breaking above its 50-day and signaling a pickup in volatility.

Trading comment: Yesterday's session was ugly, but volume ran lower than the previous day on the NYSE, thus avoiding a distribution day. This cannot be said for the Nasdaq, which suffered its 2nd straight day of distribution. There is a lot of chatter about the head and shoulders top patter in the market, and right now I feel that this is becoming a self-fulfilling prophecy.

But as the S&P hits the 875 level that has been a key level to watch, I still expect a bounce in the near-term. This is why I took some partial profits on my shorts/hedges, and am looking to add to my long positions into this weakness. I expect the summer months to be choppy, and will try to take advantage of the trading ranges as they develop.

long GS

Newsflow Slows Ahead of Earnings Season

2009-07-07T07:53:00.001-07:00

There is somewhat of a lack of newsflow this morning, and it is likely to stay that way until earnings season kicks off later this week when Alcoa (AA) reports.

Healthcare is the only sector positive today. The Washington Post reports that hospitals have agreed to contribute $155 billion over 10 years towards covering the cost of healthcare for those who are uninsured. Energy stocks are the weakest on another drop in oil prices, now down below the $63 level.

In other news, President Obama mentioned that a second stimulus package could be a possibility. I think that is a mistake, as there has not bee enough time to allow the first two stimulus packages to work. We already have a big combo of both monetary and fiscal stimulus in the pipeline, and we know these initiatives always work with a lag. Plus, the govt. can't afford another stimulus plan. Maybe they should focus on making this first one more effective as the dole out projects.

Asian markets were lower overnight; the dollar is lower today, helping support gold prices; and the 10-year yield is lower to 3.49%. The VIX could not get above 30 yesterday, and is currently trading around 29.60. I am watching the 30 level as an indicator that above that level we can expect a pickup in volatility, and below that level we can continue to expect "normal" trading.

Trading comment: Yesterday I mentioned that I was taking partial profits on some of our etf hedges as well as short positions. This morning, I have taken more profits in additional short positions (AMZN, CRM). The S&P has been down for 3 straight weeks, and I think a bounce is likely. I will probably look to buy some SSO for a trade to play a potential bounce.

short CRM

Monday Morning Musings

2009-07-06T07:52:00.000-07:00

Good Monday morning. My regularly scheduled Sunday evening wind down was interrupted last night by a trip to the emergency room with my 5-yr old daughter. But after a couple of hours, and 5 stitches to her chin, everybody was back home safe and sound. Just a little more tired this morning when my alarm went off at 5am. Getting up that early is for the birds.

The market is lower this morning, as selling pressure from Thursday seems to have continued into today's session. Although Friday saw a steep selloff, volume was extremely light, which shows a lack of conviction in the selling, even as trading was light ahead of the holiday weekend. Interestingly, the put/call ratio jumped back above 1.0 on Thursday, which means folks are jumping on the bearish bandwagon quickly again.

There was a good economic report today, which showed the June ISM Services Index rose to 47.0 (vs. 46.0 consensus) from 44.0 in May. While the manufacturing index gets more attention, the services component of our economy is much larger.

The dollar is higher today, after the German Financial Minister said the U.S. dollar will keep its role as the leading reserve currency. The strong dollar is pressuring commodities, with oil back down below $65, and gold trading lower as well.

Asian markets were lower overnight, led by India where reports that their deficit could grow worried investors; the 10-year yield is higher to 3.52%; and the VIX is spiking another +8% higher back above the 30 level. It will be interesting to see if the VIX breaks above this long downtrend that has been in place since March.

Trading comment: The S&P has now been down for 3 weeks in a row. I covered more of my shorts this morning, and took partial profits in some of our etf hedges (DUG, SDS). I said for a while that I wanted to get more hedged as we got into the July/August timeframe, and that hasn't changed. But with the SPX testing its 200-day, and slightly oversold, I would not be surprised to see a bounce this week.

That said, the action looks to me like the SPX will probably test the 875 level that we were watching closely back in May. That level might provide a better buying opportunity. Big picture, I think the market will likely be choppy at best this summer.

long DUG, SDS

Jobs Data Disappoints 'Green Shoot'ers

2009-07-02T08:06:00.000-07:00

The chart above shows the recent trend in the jobs data. This morning, the govt. report showed that the economy lost 467,000 jobs. (vs. -365,000 consensus) and the unemployment rate rose to 9.5% (vs. 9.6% consensus).

This came as a big disappointment to investors, who were hoping that the above trend of lessening job losses would continue, or at least not get worse. These jobs figures tend to be volatile from month to month, so one month's figure shouldn't be read into too much, but its still a disappointment. Consumer spending is the biggest component of GDP, and consumer spending is highly correlated to employment for obvious reasons.

The news is similar in Europe, where the unemployment rate also hit 9.5%, a 10-year high. This prompted the ECB to leave its benchmark rate unchanged at 1.00%. ECB President Trichet said that economic activity this year is likely to remain weak, but declines should lessen, with a full recovery expected by mid-2010.

Asian markets were lower overnight; the dollar is higher today, which is pressuring oil, gold, and commodities; the energy sector is the biggest laggard this morning (-2.9%); the 10-year yield is lower at 3.50%; and the VIX is up +7.5% to 28.20.

Trading comment: As the market rolled over yesterday afternoon, I started to add to some of our etf hedges in portfolios. I started with positions on the S&P (SDS), and also hedged some energy exposure with the DUG. In aggressive accounts, I also shorted some AMZN and ADBE. Today those are all working out well, but I will continue to monitor and adjust our overall net long exposure based on how the market responds to today's selloff over the next few sessions.

long DUG, SDS; short AMZN, ADBE

Mutual Fund Monthly

2009-07-01T15:48:00.000-07:00

The market was flat for the month of June, with the SPX starting and ending at the exact same level, despite ample intra-month volatility. For the year (as of 6/30), the SPX is up +1.75%. But growth has outperformed value in a big way so far this year. To wit, the growth-laden Nasdaq 100 is up +22% for the year. That is quite a bit of outperformance.

Growth has outperformed value in just about every category. The biggest discrepancy is large-cap growth, which is up +16% ytd, vs. large-cap value, which is down -5.8% over the same time period.

Here are some of the top and bottom performing (ytd) mutual funds that are part of our universe at my firm:

Top 5

+55.8%: TRowe Emerg. Europe (TREMX)
+41.8%: Janus Overseas (JAOSX)
+38.1%: Ivy Global Nat. Resource (IGNAX)
+31.2%: Legg Mason Opportunity (LMOPX)
+28.8%: Driehaus Emerg. Mkt (DREGX)

Bottom 5

-6.4%: CGM Focus (CGMFX)
-4.5%: Stratton Small Value (STSCX)
-4.0%: Rydex Mgd. Futures (RYMFX)
-3.9%: Brandywine Blue (BLUEX)
-2.0%: Nakoma Absolute Return (NARFX)

Among sector ETFs, steel (SLX) +43.4%, metals (XME) +34.2%, and brokers (IAI) +29% are leading the way so far this year; while regional banks (KRE) -36.4%, real estate (IYR) -9.7%, and transports (IYT) -6.7% are lagging.

As for international ETFs, Russia (RSX) +59.8%, Brazil (EWZ) +52.5%, and Hong Kong (EWH) +34.2% are on fire, while Germany (EWG) -3.7% and Japan (EWJ) -1.0% are the big laggards.

Investors Shrug Off Weaker Jobs Data and Push Stocks Higher

2009-07-01T07:44:00.000-07:00

The market is higher in early trading, despite a weaker than expected ADP payrolls report. The ADP report showed private payrolls were cut by 473,000 in June vs. expectations for -395k. This report isn't the official jobs report. That one comes from the govt. and will be released tomorrow. So maybe for today investors are focusing on the positive reports that have come out.

The ISM Manufacturing Index for June came in at 44.8 (in-line), up from last month's level of 42.8. (Anything under 50 still represent contraction in the industry) Pending home sales in May increased +0.1%, but that comes on the heels of April's +7.1% surge.

General Mills (GIS) reported solid earnings, gave upbeat guidance, and also hiked its dividend. That news is helping push the consumer staples (XLP) stocks higher by +2.0%.

A bounce in commodity prices is also helping energy and materials stocks bounce, led by gold miners shares. The dollar is weaker today vs. the Euro, but up slightly vs. the Yen.

Asian stocks were mixed overnight, despite positive news out of China (+1.7%) that its manufacturing sector index rose to 53.2, marking its 4th consecutive month of expansion; the 10-year yield is higher to 3.58%; and the VIX is right at 25 (-5.1%) for the first time since Lehman's bankruptcy last September. A return to normalcy?

Trading comment: Today could be new mutual fund money coming into the market and being put to work, so I don't want to read into it too much. Let's see how the market closes, and how volume comes in. I am still leaning towards adding to some hedges, but I have also noted a rise in bearish sentiment lately, so I will have to weigh that into the equation as well.

Check back later for my mutual fund monthly update--

Market Dips On Last Day of a Very Good Quarter

2009-06-30T09:22:00.000-07:00

The market is seeing some selling pressure after a weaker than expected consumer confidence report came out, which showed that consumer confidence fell to 49.3 in June vs. 54.9 last month and expectations of 55.3 this time. The drop in confidence in June appeared to reflect a weak labor market. End-of-quarter window dressing by portfolio managers could give stocks another upward pull today.

The S&P 500 is up +15% this quarter, which I believe is the best quarter since Q4 1998. And some markets in Asia had their best quarter in 15 years.

The govt. is planning to roll out its PPIP program, which was once touted to be as big as $1 trillion, but is now expected to get off the ground with as little as $50 billion in investments. This is the plan aimed at lifting the toxic assets off the balance sheets of banks.

In other news:

A report on home prices showed a decline of 18.1% compared to a year ago in the 20 largest U.S. cities. The drop was not quite as severe as anticipated.
H&R Block rose 97 cents to 16.64 after reporting better-than-expected profit in the latest quarter.
Apollo Group, owner of the University of Phoenix, rallied 6.01 to 71.92. Its earnings also beat estimates, and Apollo increased its share buyback.
General Mills gained 33 cents to 56.17 after hiking its quarterly dividend.
Corning said demand is growing faster than expected for glass used in LCD TV’s. That could be an indicator of the consumer mood. Corning shares were down 7 cents at 16.20.

Asian markets were mixed overnight; the dollar is higher, which is weighing on gold and commodity prices; the 10-year yield is higher at 3.50%; and the VIX is popping +7.8% to 27.33.

Trading comment: No big moves for me in the last few days. I am still mulling adding to some of our etf hedges and we enter July, and also may look to take some short positions (or inverse etfs) in the energy space. I think oil looks toppy, and is due for a correction similar to last summer. Intraday, I may play this market for some sort of bounce as the bulls may try to take a stand on this last day of the quarter.

Monday Morning Musings

2009-06-29T08:06:00.000-07:00

With the lack of any market moving news this morning, I have been watching the coverage of the Madoff sentencing, which will be announced shortly. As someone who works to help people acheive their financial dreams, it is heartbreaking to listen to these victims. I hope the judge gives Bernie a heavy sentence, even if it offers small comfort to those who have lost everything.

Oil is the only real story this morning, which is higher on news of a pipeline attack in Nigeria combined with a story that China is looking to boost its oil reserves by 160%. Also, the IEA cuts its annual oil demand forecasts through 2013 by about 3 million barrels per day due to the economic slump.

Energy and industrial stocks are leading the way, while healthcare stocks are lagging. Also, while most of the indexes are higher, small-caps (IWM) are still negative.

Asian markets were mixed overnight; the dollar is slightly higher, while gold is slightly lower; the 10-year yield is drifting down a bit to 3.50%; and the VIX is lower again to 25.86.

Trading comment: The market has had its quarter-end bounce I was looking for. The S&P 500 has bounced roughly 38 points, or +4%, since tagging SPX 888 last week. That's not a huge bounce, but it is still pretty substantial. Now the test will be to simply hold those gains into quarter-end. Trading will likely lighten up as we near Thursday, as the markets are closed Friday for the 4th of July weekend.

I have not added any new trading positions so far. I am still considering adding to some of my hedges later in the week.

Quick Recap

2009-06-26T13:40:00.000-07:00

Here is a quick recap of what was for the most part a quiet session:

Wall Street ended the week on a mixed note. The Dow fell modestly on the day, while the Nasdaq was able to hang on to a small gain.
Palm supported the Nasdaq. The company predicted that it will be cash-flow positive by the end of the quarter. Palm shares gained 2.23 to 16.22. Sprint, which provides services for Palm Pre phones, closed up 31 cents at 4.99.
Energy stocks fell as oil slipped by over a dollar per barrel.
Health care stocks weakened as Congressional rhetoric supported reform of the industry.
Economic news appeared neutral. The U.S. savings rate jumped to a 15-year high in May. That may be good news long-term for the economy, but in the short term, it suggests lower consumer spending.
A call by China for a global currency put pressure on the dollar.
The Dow closed down 34.01 at 8438.39.
Rebalancing of Russell stock indexes created a flurry of activity at the close, and NYSE volume totaled over 2.3 billion shares.
The S&P 500 was down one point.
The Nasdaq gained 8.68.
Advancing issues beat decliners by 3-2 on the NYSE and by nearly 2-1 on the Nasdaq.
The 10-year Treasury note rose 4/32 to yield 3.52%.
For the week, the Dow was down 101 points, or 1.2%. The S&P 500 was down 2 points, or 0.3%, and the Nasdaq gained 10 points, or 0.6%.

Strong Rise In Personal Incomes

2009-06-26T08:45:00.000-07:00

The market is down only slightly this morning, which is normal given the strong rally yesterday. We got some good economic news, with personal incomes for May rising +1.4% vs. expectations for a +0.3% increase. Personal spending only rose +0.3%, in-line. People continue to hoard money, build savings, and hopefully pay down debt. At some point, this will lead to an unleashing of pent-up demand, and result in very strong economic growth.

All 10 of the major economic sectors were trading lower, but tech (XLK) just peaked into positive territory. Semis and biotechs are also strong relative to the overall weakness, while healthcare and staples are the biggest laggards. Energy and financials are mixed.

In the ag space, POT warned of lower revenues and weak demand. I would have expected all of the ag stocks to be down a lot more today as a result, but the love affair with these stocks has kept the selling muted at best. Odd. I still think these stocks will work lower as we get into earnings season.

Today's session could see some added volatility as it is the annual rebalancing of the Russell indexes around the close. So expect volumes to rise, although its always hard to game in what direction the buying/selling will push the market.

Asian markets were higher overnight; the dollar is lower, but oil (lower) and gold (higher) are mixed; the 10-year yield is lower to 3.50%; and the VIX is up slightly, but still low at 26.53 after a big plunge yesterday.

Trading comment: Yesterday's rally was along the lines of my expectations that the oversold conditions would lend themselves to a quarter-end rally. I sold my SSO yesterday, and I also sold all of our MOO after POT lowered guidance. I have not yet added to our etf hedges, but I am leaning toward doing so if it looks like the market is running out of steam into early July.

Bernanke Unfairly Grilled Before Congress

2009-06-25T08:19:00.000-07:00

This morning's post is a bit late because I haven't been able to take my eyes and ears off of this Congressional hearing with Fed Chair Bernanke. The real issue they're trying to get at is whether Bernanke and Paulson strong-armed BofA's Ken Lewis into acquiring Merrill Lynch.

I think these Congressmen are forgetting that we were in the midst of a total meltdown in the financial system, and I think Bernanke did a good job stabilizing the system. Hindsight is always 20/20, and I'm sure there are things that could have been handled better, but I don't think that warrants this public flogging.

And if were so easy to pressure a big bank into buying an investment firm, why couldn't the Fed have found a buyer for Lehman? They could have stemmed some of the meltdown in the financial markets last fall. Why doesn't anyone bring this up?

In other news, BBBY reported better-than-expected earnings last night, and their stock is higher. It is also helping boost retail stocks today, which are one of the leading groups. NKE also beat estimates, but disappoint future orders is hitting the stock this morning. In housing, LEN reported that cancellation rates are dropping, and that is providing a big boost to the homebuilding stocks (+3.8%).

In economic news, final Q1 GDP was revised slightly higher to -5.5%, from its previous -5.7%. But continuing jobless claims ticked higher to 6.74 million (from 6.71 million), which to me shows that this economy continues to need the stimulus, as opposed to the criticism of the Fed yesterday that they should have mentioned plans for the removal of the stimulus.

Asian markets rose overnight, with more reports of strong new lending in China; the dollar is higher today, but commodities are also higher; the 10-year yield is lower to 3.65%; and the VIX is falling -5.75% to the low level of 27.38.

Trading comment: If the market is about to embark on an imminent decline, like the bears would have you believe, it sure isn't on the radar of options traders. The VIX continues to move to lower levels, and is not signaling an immediate pickup in volatility. Speaking of bearishness, the AAII poll today showed that bears have spiked to 48.4%, while bulls have fallen to 28%.

Yesterday's rally faded after the FOMC announcement, but still finished positive. Today's session is adding to those gains so far, which would mark the 3rd straight positive session. I would not be surprised to see the market lift further as we near quarter-end. As I mentioned, I am still looking for some spots to take partial profits. I have sold my SSO position, and also taken profits on ESRX, which I added a couple of months ago.

FOMC Holds Rates Steady, Reiterates Asset Purchase Plans

2009-06-24T11:29:00.000-07:00

The Fed didn't offer any surprises, although they did sound a touch more constructive on the economy. Here is the statement that was released:

According to the Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.
Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 bln of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 bln of Treasury securities by autumn.
The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Stocks Rally Ahead of FOMC Meeting

2009-06-24T08:17:00.000-07:00

Stocks are rallying in early trading, which is a bit of a surprise ahead of a big FOMC meeting. Usually trading is somewhat quite ahead of the meetings, and then the real action starts after the announcement. It will be interesting to see if we can build on these large, early gains after the Fed meets today.

In economic news, new home sales were a bit disappointing, falling -0.6% vs. consensus of +2.3%. Homebuilding stocks (XHB) are rallying nearly +3% nonetheless. But the durable goods orders were much better than expected, rising +1.8% vs. expectations for +0.9%. This is helping boost industrial stocks (XLI) +2.5%.

There was also a solid earnings report from ORCL last night, which is helping the tech sector as well. ORCL beat estimates, and also raised guidance a bit.

Before the open, the WSJ reported that the OECD said that the global recession is close to bottoming out. This likely improved sentiment, but it is a different picture than the World Bank recently tried to paint recently, when it reduced its forecast for the global economy.

Asian markets rose overnight; the dollar is up a bit, but so are commodities today (oil, gold); the 10-year yield is a touch higher to 3.65%; and the VIX is back down below the key 30 level, down -5.7% to 28.80.

Trading comment: Could today be the start of the oversold, quarter-end bounce I have been talking about? Holding those trading positions overnight worked out for me. I took profits on FCX and GS this morning. I am still holding my S&P 500 etf (SSO), as I think the market should hit a higher level at some point before quarter-end. If that occurs, I will look to take profits on some of our etfs, and add to my hedges. The summer months are usually sideways at best, and maybe down, so I want to decrease my net long exposure accordingly.

long SSO

Stocks Not Bouncing Yet, Despite Oversold Condition

2009-06-23T07:52:00.000-07:00

The market experienced a nasty selloff yesterday, with most of the major indexes down by more than 3% on the day. Moreover, downside volume on the NYSE totalled 93%, so selling pressure was strong. But overall volume did not rise materially, helping the market avoid a major distribution day.

Considering the big downside volume figure, it appear that it was as much a "buyers strike" as anything. That is, there were few large buyers willing to step up and buy stock, while sellers were locking in profits from earlier in the rally, or cutting losses on newly entered positions that have quickly rolled over.

This morning, the market was slightly higher at the open, but right now the indexes have faded into negative territory. The market is now pretty oversold, so a bounce would seem normal.

The existing home sales report this morning showed home sales for May rose +2.4% month-over-month, which was slightly below forecasts. Also, due to the high number of foreclosure sales, median home prices sank -16.8% vs. last May.

Asian markets were also down sharply overnight; the dollar is lower this morning, helping commodities; the 10-year yield is lower to 3.65%; and the VIX is roughly flat at 31.20.

Trading comment: My daytrades yesterday didn't work out great, but it wasn't all bad. Actually, I let a couple of the positions ride into today. There is an old adage on Wall St. not to let a bad trade turn into an investment. While I don't want to violate that rule, I bought some GS and FCX, and just want to give the positions a little more wiggle room as I do expect some sort of bounce.

The SPX has broken below the 900 level, and many traders are now back to talking about the SPX 875 level as offering the next area of support. The SPX is already down -7% in less than 2 weeks, which is a pretty sharp pullback. It looks like right now, investors are more concerned with locking in profits they have. I still expect some window dressing into quarter end, but that may be an even that doesn't start until after the Fed meets this week.

long GS, FCX

Monday Morning Musings

2009-06-22T08:13:00.000-07:00

The market is under some heavy selling pressure this morning. Energy and materials stocks are down the most, as commodity prices fall. Utilities and staples are down the least, but all 10 major sectors in the S&P 500 are lower so far.

There is a tendency for the market to be weak on the Monday following options expiration, so some of this weakness could be stemming from that. Otherwise there is not much in the way of market moving news.

The World Bank cut its forecast for global growth, and said that developed economies would be weaker than previously forecast. Also, George Soros told Reuters that the worst of the global economic crisis is over.

It was reported over the weekend that Steve Jobs had a liver transplant 2 months ago. AAPL stock is -1.8% lower, and the reaction to the news is mixed. He is still slated to come back to work at the end of June, although it may not be full time work.

Drug stocks are lower after drug makers agreed to help cut Medicare drug costs. Oil & gas stocks are weak as oil falls -3.5% to near $67. Gold stocks are also lower, as gold prices are under pressure due to a stronger dollar today.

Asian markets were higher overnight, amid news that new lending in mainland China accelerated in June; the 10-year yield is lower to 3.71%; and the VIX is spiking +13% higher this morning to 31.65, though still below its 50-day average.

Trading comment: The 2-month SPX 875-950 range is still intact. Today, we are testing the 900 level, which is right around where the 200-day average resides. A down day today pushes the market further into oversold territory, but I continue to think this sets us up for a bounce into quarter end.

The market quickly fell -2.0% today, and I have bought some stocks/etfs to play for an intraday bounce. I bought a little FCX and RIMM again, and also some SSO to play the S&P 500. Many of the energy and materials stocks have pulled back quite a bit, and could make for some good bounce candidates soon.

long AAPL, FCX, RIMM, SSO

Markets Open Higher On Options Expiration Friday

2009-06-19T08:48:00.000-07:00

The markets are trading higher in early trading, with this being options expiration day. Healthcare and retail are leading the early action, while utilities and consumer staples are lagging.

Last night, RIMM reported solid earnings, but offered conservative guidance. The stock is trading -3.5% lower today, and is getting closer to a good buy point, imo. AAPL released its new iPhone today, and the lines are once again big as demand is off the charts. I think the smartphone revolution is still in its early stages, and both of these companies continue to lead this secular growth wave.

Healthcare stocks have been doing better the last couple days as reports come out that the Senate's draft of health care reform calls for most people to buy insurance, which is in opposition to the President's public option.

In economic news, the IMF indicated that the decline in the world economy is moderating. Also, officials form the European Union see a sustainable recovery without more stimulus.

Asian markets rose overnight; the dollar is down a bit this morning, but commodity prices are firm; the 10-year yield is down a bit to 3.79%; and the VIX is now -6.4% today, well below the key 30 level to 28.10.

Trading comment: Yesterday I took partial profits on our URBN position, as recent retail reports have been dismal. It is possible that URBN bucks the trend, but I want to lock some in just in case. This morning, I took small profits on a trading position in CELG, which has had a nice bounce. I have not made any big moves in our ETF accounts.

long AAPL, CELG, URBN

Jobless Claims Heading In The Right Direction

2009-06-18T07:49:00.000-07:00

There were a couple more economic reports released this morning that show the economy is headed toward the path of recovery. The Philly Fed Index showed a much smaller than expected decline for June, coming in at -2.2 vs. expectations of -17.0. This is a small positive sign for manufacturing in that region.

Also, the weekly jobless claims data came in-line at 608,000, but the continuing claims figure fell to 6.69 million vs. expectations that they would total 6.84 million. That is a nice drop, and supports the thesis that the worst of the job losses are behind us.

The early leadership in the market is coming from financials and healthcare, while the laggards are tech and retail.

Asian markets were lower overnight; the dollar is mixed this morning, while most commodities are lower (oil, gold); the 10-year yield is bouncing to 3.76%; and the VIX is -3% lower to 30.53.

Trading comment: The market remains overbought, with added volatility due to tomorrow's options/futures expiration. The S&P 500 tested its 200-day average yesterday, and is successfully bouncing from that level today. The market also remains oversold, so my thesis that we could see a push higher into quarter end is still valid.

Yesterday was mostly a trading day for me, but two positions that I did hold overnight include new long positions in FCX and QSII. Both of those look like they should continue to bounce, but I am using tight stops. POT also looks like a good bounce candidate if it gets down to the 92 area.

long FCX, QSII

S&P Puts California on Negative CreditWatch

2009-06-17T08:44:00.000-07:00

I was sent this article from a contact at Bear Stearns, but I think its worth posting the whole thing--

Action Comes as Budget Crisis Drags On

Bond Buyer Wednesday, June 17, 2009
By Rich Saskal

SAN FRANCISCO — As lawmakers in Sacramento this week showed increased signs of coming to an impasse over California’s severely unbalanced budget, Standard & Poor’s placed the state’s A-rated general obligation bonds on negative CreditWatch.

In its late Monday analysis, Standard & Poor’s, while stating its belief that California “retains a fundamental capacity to meet its debt service,” also raised the specter of an increased risk of missed debt-service payments should the state fail to adopt the budget actions needed to avoid a liquidity crisis.

A spokesman for state Treasurer Bill Lockyer castigated the rating agency for those comments.
“Once again, Standard & Poor’s has understated California’s ability to meet its debt service obligations and overstated the risk that we won’t,” said Tom Dresslar, Lockyer’s spokesman. “This commentary raises undue alarm over what they call the potential for missed payment.”

The Standard & Poor’s action affects approximately $59 billion of GO debt as well as $8.1 billion of A-minus rated appropriation debt. It’s the second such rating action since the end of May, when Fitch Ratings revised its outlook on California’s A rating to negative. Moody’s Investors Service retains an A2 rating and stable outlook.

The action comes as state lawmakers this week, through a special conference committee, attempt to formalize their response to Gov. Arnold Schwarzenegger’s plan for $24 billion in budget solutions, including some $16 billion in program cuts.

While that committee, over the past two weeks, has voted on aspects of the budget on a piecemeal basis, it hasn’t yet put all those actions into a spreadsheet that delivers final totals, according to a spokesman for the committee’s chair, Assemblywoman Noreen Evans, D-Santa Rosa.

The votes it has taken, however, have diverged from the governor’s proposals in a number of significant ways — mostly ways that widen the budget gap.

Lawmakers voted to preserve programs the governor proposed eliminating, and also rejected his plan to borrow $2 billion from local governments.

H.D. Palmer, finance spokesman for Schwarzenegger, said the Standard & Poor’s action underlines the severity of the state’s predicament and the need for action.

“It is independent confirmation of what we’ve been saying for some time: that the failure to adopt a solution to close this $24.3 billion budget gap in a very short period of time is going to have very dramatic consequences for the people of California,” he said.

Lockyer, a Democrat, has told lawmakers that they need to adopt budget revisions equal to the governor’s proposals, including a significant reserve in order to avoid a cash crunch by the end of July. He said those actions are needed to persuade investors to loan California up to $10 billion to manage the state’s cash flow over the course of fiscal 2010, which begins July 1.

But Dresslar said Lockyer strongly disagrees with Standard & Poor’s even hinting that the state’s liquidity crisis would have any impact on its ability to service its bond debt.

“There is zero risk that California will fail to pay its bond investors on time and in full,” Dresslar said.

California’s constitution gives debt service payment priority just under education. Standard & Poor’s, in its analysis, said the state, after meeting its education obligations, should have more than $50 billion in resources available in fiscal 2010 to pay its approximately $5.74 billion in debt service obligations.

If the state is unable to adopt a budget solution that allows it to borrow to meet its immediate cash needs, the result is likely to be that the government begins deferring payments, or issuing registered warrants, a form of IOU, to lower-priority obligations, including those to vendors, for student aid, and for tax refunds, according to Standard & Poor’s .

“A failure to address the structural budget gap leading to significant use of registered warrants, payment delays, and more acute liquidity strain could cause the rating to fall below the 'A’ category,” its analysis said.

Credit analyst Dick Larkin, a senior vice president at Herbert J. Sims & Co., said California is likely to face downgrades to triple-B levels.

“I think that the rating agencies haven’t acted sooner because they have been under pressure to recalibrate ratings higher under the 'global rating’ concept,” Larkin said in an e-mail yesterday. “As a result, I don’t think that the raters would consider ratings below investment grade. The last time a state came close to a non-investment grade rating was Massachusetts in September 1990.”

A California default is unlikely, in Larkin’s view, but not impossible.

“Could there be a situation where California tries to pay maturing short-term debt with Raws (basically IOUs)? I think so,” he wrote. “But if the crisis came to a missed payment, I believe that the state would cure it very quickly, because it cannot afford to be locked out of credit markets.”

Being on CreditWatch doesn’t mean a rating change is inevitable, according to Standard & Poor’s, but reflects short-term trends that require special surveillance from its analysts.

Standard & Poor’s last put California on negative CreditWatch in December, citing concerns about cash shortfalls. It removed it from watch in February in conjunction with a downgrade to A from A-plus.

One Inflation Indicator Shows Biggest Decline Since 1950

2009-06-17T08:10:00.000-07:00

For those inflation hawks, I don't want to rain on your parade, but the CPI figures released this morning showed that overall CPI fell -1.3% year-over-year, which is the largest decline since 1950.

That's quite a statistic, and at the very least indicates that inflation is not a current problem and those that are microfocused on inflation are at least premature. I'm not saying inflation won't creep up at some point, but we are currently still battling with deflationary pressures, rather than inflationary.

A couple of items that weighed on sentiment and knocked stocks lower at the open were comments from FedEx (FDX) giving weak guidance, and a revised outlook from Standard & Poor's on the banking system.

FDX topped earnings expectations, but gave guidance that was well below the consensus forecast. Management said the rising fuel prices, and the slump in manufacturing make the current environment "extremely difficult" at least through November.

In the bank sector, S&P lowered its ratings and revised its outlook on 22 U.S. banks, citing less favorable operating conditions that exist.

Europe was also lower this morning, while Asia was mixed to lower overnight. The Times Online said the UK unemployment hit a 12-yr high in Q1, but the pace of decline is easing. The dollar is lower today, but that isn't helping commodity prices. Energy and materials stocks are suffering the biggest declines so far, while healthcare and consumer staples are positive on the day.

The 10-year yield is lower to 3.62%; the VIX is also lower to 31.91, after a big spike the last couple of days; and the put/call ratio opened at a very high 1.41. I cannot recall off the top of my head the last time I saw it that high, but it indicates that a lot of investors all decided to rush out and buy puts at the same time.

Trading comment: The market opened lower this morning, day 3 of weakness. But the extreme high reading in the put/call ratio makes me want to fade the early selling. I have taken some daytrading long positions in SPY, RIMM, and FCX for bounces. RIMM reports earnings tomorrow, fyi.

The market has moved further into oversold territory, and more stocks/sectors look like they are rolling over. This is likely why there was a rush to buy puts this morning, but with option expiration looming on Friday, this could add to the short-term volatility this week. Beyond that, I am still looking for a bit of a bounce into quarter-end.

long FCX, RIMM, SPY

Positive Economic Data Provides Small Boost For Stocks

2009-06-16T08:06:00.000-07:00

The market is slightly higher in early trading after some positive economic reports. Also, the IMF has upgraded its view of the U.S. economy, while the American Bankers Association said it now thinks the U.S. economy will emerge from recession in Q3 of this year. That would be a welcome sign indeed.

In economic news, the May PPI figures came in below expectations, suggesting little inflationary pressures right now. Moreover, capacity utilization was in-line at 68.3%, but this figure needs to move much higher before we need to worry about inflationary pressures.

Housing starts were much better than expected (+17%), and building permits were above consensus as well. These figures bode well for a housing bottom, even though there are still those who feel that housing starts need to stay low to work off the current inventory glut.

Not much in the way of corporate news. Best Buy (BBY) topped expectations, but offered 2010 EPS guidance within a wide range from $2.50 - $2.90, vs. consensus of $2.79. Weekly retail sales were down -4.6%, which marks the worst 2-week slide since 1996. Not a great datapoint for the state of the consumer.

Asian markets were lower overnight amid concerns about the economic recovery. But the Bank of Japan upgraded its view of the Japanese economy; the dollar is lower this morning, helping boost gold and commodities; the 10-year yield is higher at 3.73%; and the VIX is flat near 30.80, after a big spike higher yesterday.

Trading comment: I didn't make any trades yesterday. The market was sharply lower on a rise in volume, which isn't saying that much considering how low volume was on Friday. This week is options expiration, so we should expect some increased volatility. Also, the market is now back into oversold territory, but only slightly. Nonetheless, I still think that it sets us up for another push higher into quarter-end.

I will be watching investor sentiment if such a push higher develops. If the market is unable to breakout above its recent highs, and if investor sentiment grows overly bullish, it could be time to take some chips off the table for the summer.