July
14th 2008 Edition
Weekly review of the
markets
Last week
Last
week, we were expecting a bullish start to the week mainly due to the proximity
of strong support levels and the oversell conditions of the markets. The
rebound did occur early Monday but it was fast but shortlived. It was a very
volatile day for the indexes; for example, the Dow had a daily spread of 278
points.
The
main weakness came from the financial sector, again which closed down 4%.
Indexes entered “bearish” territory, ie 20% lower than the absolute high a few
months ago i.e. 2850 for the NASDAQ, 1580 for the S&P500 and 14300 for the
DowJones. The S&P500 even crossed the 1250 level but fortunately closed
higher…
Tuesday,
markets traded without any direction until the early afternoon when Mr Bernanke
said the Fed was dedicated to financial stability and would take the necessary
steps to prevent the US financial system from collapsing. The
financial sector obviously reacted strongly to the news and the rest of the
market followed, helped by an another price reduction of oil. Oil reacted to a
report from the Iran President that stated they wanted to avoid going to war
against the US and Israel. Oil price came down 3.8%, to $135,99 from $143,50. So Tuesday
saw a nice rebound.
Wednesday
we were hoping to see a continuation of the day we just had, especially in the
financial sector who had a 5.7% bounce! It didn’t happen. The opposite occurred in fact. It lost almost all of its
gain from the day before losing 5,2%. This is only confirming how fragile this
sector is especially since we didn’t even any bad news in this sector to explain this fall. Even worst: the lack of
reaction of oil prices to an annoucement that the inventory was lower than
expected should have provoked a positive reaction in the markets. How bad would
it have been if we wouldn’t have had this news? Scary in deed…
Thursday
the only economic news was the jobless claims and it confirmed a stabilizing
situation on that level. WallMart announced
a rise of 5.8% in “same store sales” and we all know the importance of
WallMart in our economy… Good results were also reported by BJ’s
Wholesale and Costco. It seems like consumers are turning to rebate stores. Oil
price rose 5$ but we managed to close slightly up on the day.
Friday,
oil broke a new record at $147 while the markets reamain concerned with the solvability
of Fannie Mae et Freddie Mac; we think they’re
going to have to rise capital very soon. The day opened lower and tried to
rally up twice during the day but it didn’t work; the Dow even crossed the
11000 level!
This Week
Last
week's trading confirmed we are now in a “Bear Market”. Losses since October
2007 are now higher than 20%... This week will be supercharged with economic
news and will be the first of three weeks of corporate earnings annoucements. On
the news side, it all starts Tuesday with the PPI (see below for details). Look
out for the inflation impact on the core. Retail sales levels will also come in
but since we already know the “same store sales” are doing good ( see last week
news) we are not too worried on that front but if bad news was to transpire
look for an over-reaction (sic).
Wednesday look out for the CPI, Industriel production and the FOMC minutes
and their impact on the trading day… Thursday the “Philly Fed” report is the
one to look out for.
On the earnings front, Tuesday, look out for Charles Schwab (SCHW) and the US Bancorp (USB), Thursday the
Bank of New York (BK), PNC Bank (PNC), TD Ameritrade (AMTD) and Merrill Lynch
(MER). Finally Friday Citigroup (C) will be the main driver in the financial
sector. Smaller regional banks should also be taken into account since they are
very vulnerable right now… On the technology side, big players are up to the
plate: Intel (INTL), EBay (EBAY),
Advanced Micro Device (AMD), Google (GOOG), IBM (IBM) et
Microsoft (MSFT). Expect a very volatile week!
Technically,
we are now confirmed into a bearish trend. Last week we saw a rebound pretty
much where we predicted. For the S&P500 it occurred around 1250. The rebound
was only a classic pull back on a triangle break. Theory tells us that over the
next 6-8 months the S&P500 should briefly cross the 1000 level
The Dow is the most negative of all 3 indexes;
it didn’t even rebound last week… It just took a breather before continuing its
fall. The 11000 level is a major support level and it should slow down this “spiral
of death” but not for long I’m afraid. Once again here, the theory tells us that
over the next 6-8 months the Dow Jones should briefly cross the 10000 level and
even go lower...
The
NASDAQ who recently has been the most positive of all three indexes will officially
become bearish if it crosses 2200. With a triangle base of 650 points, this
index could fall back to the 1500 area within 6-8 months…
Another
factor to consider is that over the next three weeks earnings announcement could be decisive
in terms of the next 3-4 months so pay attention!
Once
again, this will not be a easy week so if you can’t take the heat I suggest you
act accordingly.
Economic calendar
(Reports I consider will impact the market the most with definitions and
expectations)
Tuesday
Producer Price Index
8:30 ET
Consensus 1.4%
Core 0.3%
Definition
The Producer Price Index (PPI) is a measure of the average price level for a
fixed basket of capital and consumer goods received by producers.
Why Do Investors Care?
The
PPI measures prices at the producer level before they are passed along to
consumers. Since the producer price index measures prices of consumer goods and
capital equipment, a portion of the inflation at the producer level gets passed
through to the consumer price index (CPI). By tracking price pressures in the
pipeline, investors can anticipate inflationary consequences in coming months.
While
the CPI is the price index with the most impact in setting interest rates, the
PPI provides significant information earlier in the production process. As a
starting point, interest rates have an "inflation premium" and
components for risk factors. A lender will want the money paid back from a loan
to at least have the same purchasing power as when loaned. The interest rate at
a minimum equals the inflation rate to maintain purchasing power and this
generally is based on the CPI. Changes in inflation lead to changes in interest
rates and, in turn, in equity prices.
The
PPI comes in three versions: finished goods; intermediate supplies, materials
& components; and crude materials that need further processing. The
finished goods PPI is most often cited in the media. This index covers final
products bought from producers by businesses to sell to consumers or to use for
capital equipment.
The
PPI is considered a precursor of both consumer price inflation and profits. If
the prices paid to manufacturers increase, businesses are faced with either
charging higher prices or they taking a cut in profits. The ability to pass
along price increases depends on the strength and competitiveness of the
marketplace.
Producer
prices are more volatile than consumer prices. The CPI includes services
components - which are more stable than goods - and the PPI does not. Wages are
a bigger share of the costs at the retail level than at the producer level.
Commodity prices react more quickly to supply and demand. Volatility is higher
earlier in the production chain. Food and energy prices are major sources of
volatility, hence, the greater focus on the "core PPI" which excludes
these two components.
The
bond market rallies when the PPI decreases or posts only small increases, but
bond prices fall when the PPI posts larger-than-expected gains. The equity
market rallies with the bond market because low inflation promises low interest
rates and is good for profits.
Retail Sales
Consensus is 0.5%
Definition
Retail sales measure the total receipts at stores that sell durable and nondurable
goods. Consumer spending accounts for two-thirds of GDP and is therefore a key
element in economic growth.
Why Do Investors Care?
Consumer spending accounts for more than two-thirds of the economy, so
if you know what consumers are up to, you'll have a pretty good handle on where
the economy is headed. Needless to say, that's a big advantage for investors.
The pattern in consumer spending is often the foremost influence on stock and
bond markets. For stocks, strong economic growth translates to healthy
corporate profits and higher stock prices. For bonds, the focus is whether
economic growth goes overboard and leads to inflation. Ideally, the economy
walks that fine line between strong growth and excessive (inflationary) growth.
This balance was achieved through much of the nineties. For this reason alone,
investors in the stock and bond markets enjoyed huge gains during the bull
market of the 1990s. Retail sales growth did slow down in tandem with the
equity market in 2000 and 2001, but then rebounded at a healthy pace between
2003 and 2005.
Retail sales not only give you a sense of the big picture, but also the trends
among different types of retailers. Perhaps auto sales are especially strong or
apparel sales are showing exceptional weakness. These trends from the retail
sales data can help you spot specific investment opportunities, without having
to wait for a company's quarterly or annual report.
Wednesday
Consumer Price Index
8:30 ET
Consensus is 0.8%
Definition
The Consumer Price Index is a measure of the average price level of a fixed
basket of goods and services purchased by consumers. Monthly changes in the CPI
represent the rate of inflation.
Why Do Investors Care?
The consumer price index is the most widely followed indicator of inflation in
the
Inflation is an increase in the overall prices of goods and services. The
relationship between inflation and interest rates is the key to understanding
how indicators such as the CPI influence the markets- and your investments.
If someone borrows $100 dollars from you today and promises to repay it in one
year with interest, how much interest should you charge? The answer depends
largely on inflation as you know the $100 won't be able to buy the same amount
of goods and services a year from now. The CPI tells us that prices rose about
4.7 percent a year in the
Inflation (along with various risks) basically explains how interest rates are
set on everything from your mortgage and auto loans to Treasury bills, notes
and bonds. As the rate of inflation changes and as expectations on inflation
change, the markets adjust interest rates. The effect ripples across stocks,
bonds, commodities, and your portfolio, often in a dramatic fashion.
By tracking inflation, whether high or low, rising or falling, investors can
anticipate how different types of investments will perform. Over the long run,
the bond market will rally (fall) when increases in the CPI are small (large).
The equity market rallies with the bond market because low inflation promises
low interest rates and is good for profits.
For monetary policy, the Federal Reserve generally follows "core"
inflation-inflation excluding volatile food and energy components. The Fed's
preferred inflation measure is the core personal consumption deflator but core
CPI data largely make up the core PCE deflator and CPI numbers come out sooner
each month. In the long run, the overall CPI and core CPI track each other.
Industrial Production
9:15 ET
Consensus is 0.0%
Capacity Utilization Rate 79.3%
Definition
The index of industrial production measures the physical output of the nation's
factories, mines and utilities. The industrial sector accounts for less than
one-fifth of the economy but for most of its cyclical variation. The capacity
utilization rate reflects the usage of available resources among factories,
utilities and mines. A high and rising operating rate may signal that resources
are being utilized to their fullest capacity -- a warning sign of inflationary pressures.
Why Do Investors Care?
Investors want to keep their finger on the pulse of the economy because it
usually dictates how various types of investments will perform. The stock
market likes to see healthy economic growth because that translates to higher
corporate profits. The bond market prefers more subdued growth that won't lead
to inflationary pressures. By tracking economic data such as industrial
production, investors will know what the economic backdrop is for these markets
and their portfolios.
The index of industrial production shows how much factories, mines and
utilities are producing. The manufacturing sector accounts for less than 20
percent of the economy, but most of its cyclical variation. Consequently, this
report has a big influence on market behavior. In any given month, one can see
whether capital goods or consumer goods are growing more rapidly. Are
manufacturers still producing construction supplies and other materials? This
detailed report shows which sectors of the economy are growing and which are
not.
The capacity utilization rate provides an estimate of how much factory capacity
is in use. If the utilization rate gets too high (above 85
percent) it can lead to inflationary bottlenecks in production. The
Federal Reserve watches this report closely and sets interest rate policy on
the basis of whether production constraints are threatening to cause
inflationary pressures. As such, the bond market can be highly sensitive to
changes in the capacity utilization rate. In this global environment, though,
global capacity constraints may matter as much as domestic capacity constraints.
Housing Market Index
13:00 ET
Definition
The National Association of Home Builders produces a housing market index based
on a survey in which respondents from this organization are asked to rate the
general economy and housing market conditions. The housing market index is a
weighted average of separate diffusion indexes: present sales of new homes,
sale of new homes expected in the next six months, and traffic of prospective
buyers in new homes. (National Association of Home Builders/Wells
Why Do Investors Care?
This provides a gauge of not only the demand for housing, but the economic
momentum. People have to be feeling pretty comfortable and confident in their
own financial position to buy a house. Furthermore, this narrow piece of data
has a powerful multiplier effect through the economy, and therefore across the
markets and your investments. By tracking economic data such as the housing
market index, investors can gain specific investment ideas as well as broad
guidance for managing a portfolio.
Whether the housing market index reflects new home sales or home resales, once a home is sold, it generates revenues for the
realtor and the builder. It brings a myriad of consumption opportunities for
the buyer. Refrigerators, washers, dryers and furniture are just a few items
home buyers might purchase. The economic "ripple effect" can be
substantial especially when you think a hundred thousand new households around
the country are doing this every month.
Since the economic backdrop is the most pervasive influence on financial
markets, home sales have a direct bearing on stocks, bonds and commodities. In
a more specific sense, trends in the existing home sales data carry valuable
clues for the stocks of home builders, mortgage lenders and home furnishings
companies.
FOMC minutes
14:00 ET
Definition
On
Why Do Investors Care?
The FOMC has changed dramatically in the transparency of its operations. It now
discloses policy changes at the end of each meeting. Historically, the Fed used
to keep investors guessing about policy changes. Historically, Fed officials
did not appear on the speaking circuit as frequently as they do now.
In today's environment, where disclosure is
more pronounced, reading the minutes of the previous month's meeting is not
always as enlightening as it used to be. However, the minutes do include the
complete economic analysis compiled by Fed officials and whether or not any
FOMC members have voiced opinions at odds with the rest of the group.
Investors who want a more detailed
description of Fed opinions will generally read the minutes closely. However,
the Fed discloses its official view at the end of each FOMC meeting with a
public statement. Fed officials make numerous speeches, which freely give their
views to the public at large.
The FOMC has changed
dramatically in the transparency of its operations. It now discloses policy
changes at the end of each meeting. Historically, the Fed used to keep
investors guessing about policy changes. Historically, Fed officials did not
appear on the speaking circuit as frequently as they do now.
In today's environment, where disclosure is
more pronounced, reading the minutes of the previous month's meeting is not
always as enlightening as it used to be. However, the minutes do include the
complete economic analysis compiled by Fed officials and whether or not any
FOMC members have voiced opinions at odds with the rest of the group.
Investors who want a more detailed
description of Fed opinions will generally read the minutes closely. However,
the Fed discloses its official view at the end of each FOMC meeting with a
public statement. Fed officials make numerous speeches, which freely give their
views to the public at large.
Thursday
Housing Starts
8:30 ET
Consensus 0.960M
Definition
Housing starts measure initial construction of residential units (single-family and multi-family) each month. A rising (falling) trend points to gains (declines) in demand for furniture, home furnishings and appliances.
Why Do Investors Care?
Two words...Ripple Effect. This narrow piece
of data has a powerful multiplier effect through the economy, and therefore
across the markets and your investments. By tracking economic data such as
housing starts, investors can gain specific investment ideas as well as broad
guidance for managing a portfolio.
Home builders usually don't start a house unless they are fairly confident it
will sell upon or before its completion. Changes in the rate of housing starts
tell us a lot about demand for homes and the outlook for the construction
industry. Furthermore, each time a new home is started, construction employment
rises, and income will be pumped back into the economy. Once the home is sold,
it generates revenues for the home builder and a myriad of consumption
opportunities for the buyer. Refrigerators, washers and dryers, furniture, and
landscaping are just a few things new home buyers might spend money on, so the
economic "ripple effect" can be substantial especially when you think
of it in terms of more than a hundred thousand new households around the
country doing this every month.
Since the economic backdrop is the most pervasive influence on financial
markets, housing starts have a direct bearing on stocks, bonds and commodities.
In a more specific sense, trends in the housing starts data carry valuable
clues for the stocks of home builders, mortgage lenders, and home furnishings
companies. Commodity prices such as lumber are also very sensitive to housing
industry trends.
Jobless Claims
08:30ET
Consensus 378K
Definition
New
unemployment claims are compiled weekly to show the number of individuals who
filed for unemployment insurance for the first time. An increasing (decreasing)
trend suggests a deteriorating (improving) labor market. The
four-week moving average of new claims smoothes out weekly volatility.
Why Do Investors Care?
Jobless
claims are an easy way to gauge the strength of the job market. The fewer
people filing for unemployment benefits, the more have jobs, and that tells
investors a great deal about the economy. Nearly every job comes with an income
that gives a household spending power. Spending greases the wheels of the
economy and keeps it growing, so a stronger job market generates a healthier
economy.
There's
a downside to it, though. Unemployment claims, and therefore the number of job
seekers, can fall to such a low level that businesses have a tough time finding
new workers. They might have to pay overtime wages to current staff, use higher
wages to lure people from other jobs, and in general spend more on labor costs
because of a shortage of workers. This leads to wage inflation, which is bad
news for the stock and bond markets. Federal Reserve officials are always on
the look out for inflationary pressures.
By
tracking the number of jobless claims, investors can gain a sense of how tight,
or how loose, the job market is. If wage inflation threatens, it's a good bet
that interest rates will rise, bond and stock prices will fall, and the only
investors in a good mood will be the ones who tracked jobless claims and
adjusted their portfolios to anticipate these events.
Just
remember, the lower the number of unemployment claims, the stronger the job
market, and vice versa.
Philadelphia Fed Survey
10:00 ET
Consensus -17%
Definition
The
general conditions index from this business outlook survey is a diffusion index
of manufacturing conditions within the Philadelphia Federal Reserve district.
This survey, widely followed as an indicator of manufacturing sector trends, is
correlated with the ISM manufacturing index and the index of industrial
production.
Why Do Investors Care?
Investors
need to monitor the economy closely because it usually dictates how various
types of investments will perform. By tracking economic data such as the Philly
Fed survey, investors will know what the economic backdrop is for the various
markets. The stock market likes to see healthy economic growth because that
translates to higher corporate profits. The bond market prefers more moderate
growth which won't lead to inflation.
The Philly Fed survey gives a detailed look at the manufacturing sector, how
busy it is and where things are headed. Since manufacturing is a major sector
of the economy, this report has a big influence on market behavior. Some of the
Philly Fed sub-indexes also provide insight on commodity prices and other clues
on inflation. The bond market is highly sensitive to this report because it is
released early in the month and is available before other important indicators.
That’s it for the economic
calendar this week.
There
are obviously other reports but these three are the ones that are most
susceptible of creating an impact on your portfolio so act accordingly.
Yours
truly,
www.trading-and-investing-for-beginners.com
Legal Notice
The Publisher has strived
to be as accurate and complete as possible in the creation of this report,
notwithstanding the fact that he does not warrant or represent at any time that
the contents within are accurate due to the rapidly changing nature of the
Internet.
The Publisher will not be
responsible for any losses or damages of any kind incurred by the reader whether
directly or indirectly arising from the use of the information found in this
report.
This report is not
intended for use as a source of legal, business, accounting or financial
advice. All readers are advised to seek services of competent professionals in
legal, business, accounting, and finance field.
No guarantees of income
are made. Reader assumes responsibility for use of information contained
herein. The author reserves the right to make changes without notice. The
Publisher assumes no responsibility or liability whatsoever on the behalf of
the reader of this report.