Outlook for the week of 5-4-09

By Ryan Wheeler

Will this Rally Hold Ground? I say “No”

When I look at the equity market and attempt to predict short-term movements, I look at a few different factors. I start by looking at the expected news flow in the coming week. The relative strength of the news (its ability to move the market) will usually give me a decent idea about whether the following week is primed for volatility. Next, I look at the past few weeks’ news, the strength of that information and how the market reacted to it. This tells me the mood of investors and how they are generally assessing the information. The last thing I look at is the bond market; specifically intermediate term Treasuries. I generally believe that monitoring relative movements of the bond market compared to equity indices can tell you a lot about what direction money is flowing (bonds to stocks or stocks to bonds).

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This week’s Newsletter only includes the Outlook portion. The Recap will be back next week.

Outlook

By Ryan Wheeler

I would be curious to get into the minds of some of the CEOs of top banks at this point. Needless to say, they have had a whirlwind of issues and struggles to deal with over the last 18 months, but there are still so many possibilities of what can happen. We are fully immersed in earning season right now, and banks are still the main focus. Along with earnings, we are hearing inklings of news about a stress-test progress report. While bank earnings have shown some signs of strength in certain business units, any negative reports from regulators about capital adequacy could rock the financial sector again. We are also getting mixed news about lending activity among banks who received tax-payer money through TARP. According to an article in today’s WSJ, bank lending in February dropped at a higher rate than the 2.2% month/month decline reported by the Fed on Wednesday. The Journal uses a different method of calculation that shows a 4.7% drop. For my purposes, those two numbers are ambiguous because we don’t know what the situation would have been like without the program (better or worse). The fact is that, at the current rates, mortgage refinancing is picking up, treasury rates are unattractive, and riskier-asset yields are begging for investors to play. People are slowly feeling out some of the “lower quality” bond issues for extremely rewarding yields. As that happens, Treasury rates will start to drop and the see-saw will start to balance out. Now I know what a lot of you are thinking… “It is not that easy” and “There are so many other things that need to happen first”. I agree. We are not in a position where this stuff is just going to fix itself. We have a long road of regulation fights, debt runoffs, liquidity program reductions (hopefully), and consolidation. All I am saying is that the laws of supply and demand along with market efficiency theories will play out over the next year.

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The Recap

 By Steve Romasko

 The S&P 500 ended the holiday shortened week up 1.7%, led by financials. Trade was volatile despite only four sessions that had a relatively small amount of news and economic reports. The upside move came despite Alcoa (AA) kicking off first quarter earnings reporting season on a weaker-than expected note.

 On Tuesday evening, Alcoa reported a loss of $0.59 per share, $0.02 worse than the First Call consensus that called for a loss of $0.57. Alcoa said the sharp drop in revenue resulted from the impact of the economic downturn on the company’s end markets — automotive, transportation, building and construction and aerospace. Despite the miss, the results were better than many had feared, and as a result Alcoa finished the week with an 4.0% gain.

 There were some upside earnings results, however. Wells Fargo (WFC) preannounced record first quarter earnings of approximately $3 billion and earnings of $0.55 per share, topping the consensus estimate of $0.23. Wells Fargo expects revenues of $20.0 billion, versus the consensus of $18.98 billion.

 The news gave a healthy boost to financials, which ended up 15.9% on the week and provided a measure of confidence going into the coming week when JPMorgan Chase (JPM), Goldman Sachs (GS) and Citigroup (C) report their quarterly results. On a related note, life insurers also helped lift financials, gaining 15.9%, after it was reported that the Treasury will soon announce it will extend the TALF program to aid some life insurers.

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Recap of Last Week

By Steve Romasko

Despite the short trading week due to the Thanksgiving holiday, the market managed to spark a 12% rally, largely driven by government action. The week opened with the announced rescue of Citigroup, Obama’s new economic team and an $800 billion plan from the Federal Reserve. Read the rest of this entry »

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Recap of Last Week

by Steve Romasko

Despite a historic affair in politics, with the election of Barack Obama, Wall Street turned a blind eye after Tuesday and put economics front and center. Posting the biggest Election Day rally ever, gaining 4.1%, the S&P 500 snapped an 18% rally in the previous 6 trading sessions and gave way to a 10% decline in equities on Wednesday and Thursday. Concerns mounted on Wednesday when ADP’s employment report showed a contraction of 157,000 jobs. This report came in tandem with poor auto sales for Oct, and set the tone for Friday’s government report on employment. Adding to the pressure came several other economic reports—September’s factory orders declined 2.5%, October’s ISM Services Index dipped below expansion (>50) coming in at 44.4, 3^rd Quarter productivity fell from 3.6% to 1.1%, and continued jobless claims spiked to 3.84 million.

 Economics quickly coupled with poor earnings and cautious guidance from cyclical corporations as the last heavy release of earnings wound down. In retail, same-store sales declined -0.9%; 4.2% ex. Wal-Mart, who showed a 2.4% gain. Wal-Mart’s sales are relatively impressive from a bottom-up perspective, but does not bode well from a macroeconomic point-of-view as this suggests that cash-strapped consumers are shifting from the higher-end retailers to the lower-end alternatives to fit into the constrained needs of their personal budget. Moving to Central Bank action, the ECB cut rates 50bps to 3.25%, in line with expectations. The Bank of England acted aggressively, slashing its rate by 150bps to 3.00%—suggesting that they are behind the curve and underestimated the severity of the situation.