T-Waves Thoughts for
Trading Week of 10-25-2009
by Stephen Tetreault, T-Waves | October 26, 2009
PrintI still believe unlike those on the various bubble-vision networks that we are in now in the top/bottom of the ninth inning in this proverbial game with regard toward this huge swell of bullish tonality and the rally off of the march Lows and as such we need to forge ahead in a very cautionary environment (especially if you are induced into taking on new long positions, by the spinsters/hypsters) as we are now trending in my opinion within a proverbial mine field and one slip and boom/bang…a bouncing betty will trigger and cut you in half…one false move and this house of cards will come tumbling down. I am staring to prepare my portfolio on the SHORT side! If you are LONG please trade cautiously as I believe the large trading desks can smell blood in the water and the sharks are starting to circle
I have found it quite strange and bearish that U.S. CEO’s are once again sending mixed signals about the economic recovery in their earnings comments. We have seen that the comments from many CEO’s about the so called green-shoot economic recovery, and the real demand that is being hyped as many CEO’s have been quick to issue very cautious guidance that presents a more worrisome outlook.
They have been consistently alluding to the fact that the proverbial real-road to recovery will be difficult, even as firms are reporting third-quarter earnings that are handily beating expectations (analysts seldom get it right, most firms are beating on the EPS side, due to slashing expenses [most often employees] and currency repatriation benefits from the weaker dollar and the deferment of expenses like taxes). And with another plethora of earnings coming next week, investors may be facing more of the same guarded and lackluster guidance (so far they have ignored the contagion) as the bullish tonality is still prevalent.
More lackluster guidance (remember the best of the best report early) could easily ignite a wave of selling as I believe that many traders/investors are already as skittish as a long-tailed cat in a room full of rocking chairs, as many of the propriety trading desks of the mustn’t tough “to big to fail” banks (many of whom have been taking on more risk through increased derivative exposure) most of whom helped to orchestrate the march-relief rally, and who through cheap and easy money policies (promoted by the Fed and Treasury) have pushing the markets higher….also helping has been the so called greenback-carry-trade as witnesses by the surge in commodities!
The so called benchmark SPX the index that the majority of mutual-funds and hedge funds are benchmarked against is up about 59% since its recent 12-year low posted 3-6-2009 partly because of stronger-than-expected pro forma economic data (restocking and survey-bullish-biases) and the hope and a prayer that 3rd quarter earnings would eclipse 2nd quarter earnings results and that firms would start to show improvement in their revenue lines and real organic demand.
There's appears to be a clear reluctance for the CEO/CFO’s to publicly build up and hype their guidance and forward-outlooks as they see first hand the demand for their products (probably why insider buying during the past 6-months is at historic lows)…I have seen many try to defer and talk down optimistic-rhetoric either in their statements, or their guidance forecasts. I betting that their legal-teams have cautioned and warned the CEO’s and CFO’s to be on target or somewhat conservative.
This week and next we will have seen the results from the majority of the SPX firms so far we have seen nearly 200 SPX firms report so far (the best of the best), and get this….after this mega relief rally 3rd quarter earnings are now expected to drop 18.2% from a year ago, and of course this was heralded as a positive as its better than last week's estimate for a drop of 22.6% (banks and energy firms have been the winners) according to Thomson Reuters. Its now estimated that a whopping 81% of the SPX firms are beating earnings expectations (at least the EPS numbers) and this is significantly above the 61% for a typical earnings period according to Thomson.
What we have seen is short-term-memory loss, as the proverbial game of massaged earnings guidance wherein firms set the proverbial bar so low that a snake could hurdle over the earnings-bar is alive and well! During this bear-market I believe that many CEOs have also done what we call under-promise and then have to slash expenses to beat on the top EPS line….as such they have let many a lemming analyst (with their sand-bagging guidance) publish earnings estimates that have handily been beaten. Lets face it folks we continue to see earnings surprises every quarter because firms, especially over the past 9+ years, have gotten very astute at reducing expectations and then beating them (the proverbial sand-bag…hell almost no-one really reads the reports and sees that when you strip away the one-time charges that happen every-quarter, and the pro forma earnings the real-earnings are often significantly weaker then first promoted)….I have yet to see the consumer coming out of their hibernation fall out shelters, and discretionary spending will surely be negatively impacted with the surges in commodities (especially since crude risen from $48.00 a barrel in March to $81.00 now an increase of 68%.
Remember when in doubt CASH is always King/Queen. I believe we are closing in on another MAJOR -MAJOR significant inflection period for the markets (11-06-11-13), so please trade cautiously and be quick to protect profits, as they are only a good thing when you place them into your account.. We have a horde of economic data squeezed into this week, so there should be plenty of great trading opportunities!
I have tried to be open minded and to check my bearish-sentiment concerning the indexes over the past couple of weeks but it is becoming harder with every day that passes. The volatility this week is confirmation to me that we are probably going to face some market weakness before October expires. We have seen some really large manipulated earnings surprises but other than the initial short covering spike there has been no follow through…so to speak. As I have written about during the past several weeks the major indexes are showing the kind of volatility that normally appears at market tops. More than on one occasion in recent weeks I have leaned to my bearish side on a Friday because the indexes gave the bears a perfect setup of failed highs and a close on Friday at the low for the week. And much to my dismay for the past 4-Mondays the situation was reversed because of some event that supposedly was a proverbial savior for the Brahma-bulls. The next couple weeks are going to be tough economically with major reports and events and none of them are likely to be bullish for the market (but then again I have been wrong...it will be my day soon I believe).
The dichotomy of third-quarter earnings, in which positive surprises have outweighed the negative by about 4 to 1 though stock gains have been muted. In fact, since the Dow crossed 10,000 on Oct. 14, stocks have done almost nothing despite a flurry of better than expected EPS earnings reports from some of Wall Street's biggest names. Investors' reaction, in fact, has been decidedly lackluster to all the hyped (cheerleaders are all over the bubblevision networks) seemingly good news. The overall market really seems very fatigued at this point in the rally. The key question that will soon be resolved is whether this past weeks price action is just a pause because decent earnings were expected and then we move upward after a small-pullback, or has the bullish relief rally started really to wane and are we due for a significant 35-60% pullback?
On the bullish-front if there's one thing that inspires near-unanimous agreement by the various bubblevision networks and amongst the fund mangers being pranced about is that the worst is over (B-52 Bernanke and Geithner have saved us from the cesspool), especially compared to the horrid state in which Wall Street found itself a year ago (hell they were the main driver of the credit-crisis. Then again the perma-bulls were stating that the market has just taken a healthy pause after a more than 50-55% run up from the March bottoms in the past 8 months, a healthy alternative to a major sell-off that earnings disappointment could have produced.
The primary indication (and triggers for a continued bull-market) that the professional fund-managers sought from this season was a growth in revenues meaning additional “top line” growth” and organic demand rather than merely profits enhanced by and driven by massive cost cutting and deferments added into the bottom line. The latter phenomenon was almost solely responsible for powering second-quarter earnings, where upside surprises beat the downside 3 to 1. What they wanted to see going forward (yet to really materialize) is organic earnings growth driven by core businesses. If we look at the financials as an example, (they posted nice gains due to very strong trading activities whish they have been given insider privileges in my opinion by our government). In the long term you want to see banks increasing lending (lending is still contracting). That's where they should be making their bread and butter, not trading and rising asset and commodity prices due to their privileged status. While most of the big names topped expectations, the overall picture for the industry has been very lackluster.
Another of the primary reasons the markets haven't moved much in the past few weeks is that investors actually were expecting a strong quarter and, with the news now out in the open and now that everyone knows that the preverbal emperors (CEO’s/CFO’s of the major corporations) have no clothes on, as such many a real astute investor and real value fund manager will need significantly more convincing to keep up the buying at these nose bleed levels as with out the banks and energy stocks the SPX is trading at a forward P/E of 49-53 very rich valuations indeed, since real organic is not visible yet (the bulls are stating that the companies will mature and again grow into these lofty P/E multiples (hell AMZN has a P/E of 79, INTC 48, QCOM 41, GOOG 48, RIMM is still losing money CSCO 24 and MSFT 21.00…and these are the big players making up almost 40% of the NDX). I believe that the markets are at an inflection point here based on corporate pro forma profits or lack thereof earnings and revenue expectations. The markets will soon tell us what's going to happen in the future as its adjusts prices to reflect expectations, and when expectations are fulfilled it will be a classic sells into any news negative or positive!
We have seen instances (RIMM, IBM, and others) where there was a bit of disappointment that earnings didn't post even stronger positive EPS beats as so many analyst estimates were adjusted below reasonable targets, and when many have failed to beat the so called “whisper-numbers” which professional traders and fund mangers have priced in (as process and matrix upon which traders often decide in their own-venues what the real earnings number should be); have not been living up to expectations. It leads me to infer that there's a plethora of financial manipulative-engineering transpiring within the fuzzy-math guidelines (that constantly change to enhance the financial standing of firms especially banks) called GAAP (generally accepted accounting principles). The magnitude of EPS surprises to the upside speak to the fact that these firms were also bumping up against very low expectations, however I am still of the opinion and belief that our economy has not even begun to turn around yet, but on the surface due to political pressures it appears less worse than it was a year ago.
Earnings forecasts are even more important now than ever as we head into the next year as our numbnuts holding government positions prepare to withdraw the massive taxpayer handouts and taxpayer stimulus (and lets not forget the massive amount of new-toxic debt being floated on the Fed’s balance sheet…(In the past week, the balance sheet of the Federal Reserve exploded, hitting an all time high of $2.174 trillion. Furthermore, total reserves of banks with the Fed also hit an all time high of $1.047 trillion; So much for the premise that banks are lending this newly printed money out to businesses and Americans in search of credit.).
We saw a Bloomberg-story wherein that show that the U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year. New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks (again at the taxpayer expenses). This amount of taxpayer bailouts works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. Note our nation’s gross domestic product was only $14.2 trillion in 2008.
Soon here this pro forma (green-shoot) economy of ours will have to stand on its own two feet (not be supported selectively by massive taxpayer bailouts) and very soon the punch-bowl of liquidity (easy and free money) as we have been awash in a massive tsunami wave of liquidity, and the downside of such a measure of liquidity retraction is starting to become front and center in people's minds. There is growing consensus that the B-52-inflation and bubble creator at the Federal Reserve and the Treasury department will have to be more skillful in how they deploy their respective exit strategies than many can even consider as possible. Bernanke and Geithner will have to “pull a rabbit out of their hats”. They will have to land their B-52 into a small-craft airport. They will need to have the skill of a brain surgeon an the finesse of a diamond cutter when they attempt to pull back the massive amounts of liquidity as to do so too quickly and they will kill off the economic green shoots like an industrial weed killer, and if they do it too slow they could spur a huge wave of inflationary pressures.
Its hind time that fund-managers, traders and hedge-fund-managers alsike take some profits off the table as not to do so could be devastating for those caught in a sell-off-rip-tide….as the recent market rally has in my opinion not been founded on fundamentals or real-profits or demand-growth. I think right now is an excellent period to take some money off the table and to start to leg into protection scenarios to protect the pent up profits as fund managers get bonuses on performance not on profits realized than squandered away.
As such the markets could struggle in the weeks ahead as the market's 8-month rally shows signs of exhaustion, as investors focus shifts to a series of significant economic news as we get the first peak at third quarter GDP numbers this Thursday. This release could be a huge market mover in that it could mark the end of the recession with the first quarter of growth since second quarter, 2008…as economists are in general expecting a number of 3.0-3.2% or better, after the second quarter's drop of 0.7% (likely due to restocking depleted inventories). We have bullish economists now projecting third quarter GDP to be as high as 4.0-4.1%. And if the GDP number disappoints because growth is weaker than expected because of inventory liquidation the bulls will certainly be touting that we will see even larger gains in 2009Q4. So we could see that the market will perceive that a lower headline number because of lower inventory liquidation is more bullish for growth than a high headline number from inventory building.
This week we have a very robust economic calendar….and it gets even more robust next-week, so the markets will certainly have data to react too. Actually the next two weeks are filled with critical economic events including another FOMC meeting and another non-farm payroll report along with a peak at the 3rd quarter GDP numbers. On Friday the GDP for the U.K. was released and showed a 0.4% drop instead of the 0.2-0.4% gain economists had expected. The European markets dropped on the news and the British pound plunged 1.5% against the dollar in early trading. The reason this is so critical is that the U.K. is basically a mirror image of our economy. The lagging September durable goods report, due out on Wednesday will also be a key data point for the week because it will give more information on overall demand in the current quarter.
They have implemented many of the same stimulus programs as the U.S. and they are still in recession. This should have made those cheerleaders being pranced about on the various bubblevision networks touting a strong robust economy question their hype for Thursday's Q3 GDP estimates. I believe this was a material motive for the market weakness experienced on Friday.
The stock market has been climbing the proverbial wall of worry climbing the slippery slope on bad news for a prolonged period, and now when we see what's hyped and perceived as great news, but now it appears that the market's may have gotten a little ahead of itself and the good news looks to be fully priced in.
Another source of tension in the markets has been the weakening greenback which has slipped lower as risk assets, like stocks and commodities have moved higher, due to the constant printing of US monopoly money by the Fed and Treasury. There should be a growing concern that the shriveling green back is inflationary, making everything from corn, sugar, wheat, gasoline, crude more expensive as it’s priced in dollars and as a result diverting investors from U.S. assets…the weak dollar is a risk yet to be fully priced into the markets. It dampens the effect of monetary and fiscal policy.
Another focus for markets to dwell on this week will be another round of “record” Treasury issuance in the, starting with Monday's 3 & 6-month bills and 5-year TIPS auctions. The Treasury auctions $44 billion in 2-year notes Tuesday; $41 billion in 5-years Wednesday, and $31 billion in 7-years Thursday. Bonds were under pressure this past week.
On Friday we saw that Existing Home Sales for September jumped from 5.10 million to 5.57 million units (annualized) mostly with the assistance of the $8000 homebuyer stimulus program. The 9.4% increase in one month was the strongest up-tick since August 2007, and strangely we saw that inventories markedly improved to only a 7.8-month supply. Unfortunately these data points in this report are misleading; as the only homes moving are at the lower end of the spectrum; as those are exactly the folks being assisted by the first time homebuyer credit. The internals showed that those homes under $100K accounted for 21% of sales; while those homes priced in the $100K to $250K range accounted for 48.5% of sales (thus 69.5% of the sales were for homes under $250,000) homes priced from $250K to homes in the millions accounted for 30.4% of all sales and the majority of those sales were on the lower end (250-350K) as once you move over $500,000 the sales numbers are declining…so we can extrapolate that the numbers of sales of the lower priced homes are skewing the overall home sales statistics.
I have been writing about the various index rising-wedge patterns for several weeks now, and the Elliot-Wave patterns that I have been observing…and they are anything but bullish…and as the hedge funds and mutual funds close in on their year-end-book-closing (many close their books the last day of October)…we could be seeing some clear profit taking and reallocation!
I believe that the indexes and especially the hotly-followed beta stocks are rising into their final up-wave for this rally that started from the extreme oversold conditions of the March lows….wave c-up of (E) up could have concluded today…or is very close to being concluded…..as this wave c-up which is a distinct 5-wave move, needs just one more run (what could be a blow off top!) From my count waves 1-up and 2-down have been completed. And yesterday’s rally was part of wave 3-up of c-up. The top of the Dow should come at the 10,250-10,355 area…..Nasdog at 2,225-2255 and the SPX at 1127-1135+/-. This could take a week to a few days of potential wild romps which is interesting as it places a top for this rally around my next major/major turn date (11/04 to 11-06) and this corresponds to a multitude of Fibonacci time-cluster variants as well.
As I have pointed out in my technical sections….I am very closely watching the various Rising Bearish Wedges in the major indexes and especially the high-beta momo-favorite plays for the large trading desks. They are getting very close to completion….and the downside target are at a minimum 50-60% retracement of this parabolic move off of the march lows…and if the selling gets nasty the patterns could easily retrace 100% of the march to October moves.
There is the possibility of a tad-bit more upside over the next few weeks. However, I am posting this huge red-flag warning that this particular bearish stock pattern…we could see a manipulated…push what will likely be one last push on anemic- volume over the top of the wedge a head-fake break-out spike above the converging upper boundary, or the move could be truncates right at the top of the wedge, meaning we fail to reach the top boundary and then we see a death-roll on expanding volume.
I am seeing expanding negative volume divergences during the past several weeks and these negative (lackluster volume moves) are also signaling a top is very close at hand! Similar divergences were present at the October 2007 top that led to a one and a half year plunge. We saw similar divergences at the October 2007 top that led to a mega death-roll. Currently both the Daily and Weekly Full Stochastics are very overbought, and are also warning a top of significance is fast approaching.
Please take on new LONG-positions with caution….and start to roll out into selected SHORT/PUTS…..you could also look at credit spreads and put-spread-trades…..the risk to being long here is compounding daily
The next major-turn/market inflection period comes into play in the range of 11/06-11/12; this is a very interesting inflection period as the major indexes on the weekly charts are quite overbought and they are encroaching into major overhead resistance levels, and the majority of the earnings season will have passed! On an Elliot wave basis (pattern-count) we have accounted for a potential wave (A) down which started on at the beginning of October (10/9/2007) ….the first leg-down of this nasty bear-market….what I believe is a Super-cycle (A)-wave down
- The Dow dropped from 14,198 to the March 6th 2009 intraday-bottom 6,469… a drop of 7,729-points or 55% and this drop lasted about 17-months
- The SPX dropped from 1,576 to the March 6th 2009 intraday-bottom 666…a drop of 910-points or 57% and this drop lasted about 17-months
- The Nasdog dropped from 2,861 to the March 6th 2009 intraday-bottom 1,265… a drop of 1,596-points or 56%and this drop lasted about 17-months
Since this bear-market leg has started we have experienced 2-distinct and significant relief up-waves (wave 1 and 3 of a 5-wave pattern) and now we are embroiled in what I believe is the third (wave 5) and last wave up in this corrective pattern what I believe is a (B) wave up and I believe we are very close to finishing this up-wave!
According to my wave analysis the 1st sub-wave of the (B) corrective wave up was (a) which lasted 68-69 trading days from 3/6/09 to 6/11/2009….thereafter the second wave (b) down lasted from approximately 6/11/209 to 7/8/2009 a mere 18-trading days….and this was a very shallow retracement….here is the tricky part if wave (c-up of the B up corrective wave) tops in the next 5-10 trading days (likely in and around my next inflection period (11/6 to 11/13, we have a weekend and a holiday Veterans day on the 11thin the mix) it would mean that the (c) wave lasted approximately 68-up-days plus 18-down-days or 86+/- days now not all Elliot-wave patterns are exact-linear-counts but I would pay particular attention to the 11/9/2009 date as it would be 86-trading days from the 7/8/2009 bottom!
Now for my bullish friends….I issue this red-flag-warning as if I’m correct and I believe that I am when the up-leg of this (B) relief rally is completed…we will become embroiled in a very-nasty (many will be in the land-of denial) plunge, and this will be the third leg of this bear-market super-cycle-down-draft, and this plunge will catch many if not all of the perma-bulls in a state of shock and utter denial…I believe that history will be repeated and we will unfortunately plunge our economy into a deep and protracted recession (hopefully not another great-depression)
With the price of crude eclipsing the proverbial $80 a barrel mark, the national average price of gasoline has jumped a whopping $0.13 a gallon in the past 7 days; not very friendly for American Consumers, and their discretionary spending! According to AAA, U.S. motorists are paying an average of $2.64 a gallon for regular self-serve, up from $2.51 a week ago. The average price of diesel fuel is $2.78 a gallon, up from $2.65 a gallon.
In California, the average price today is $3.01 a gallon. The most expensive market is San Francisco, where the average price is $3.151 a gallon. The cheapest California market is Yuba City, with an average price at the pump of $2.803 a gallon.
Gasoline prices appear to be taking their cue from rising crude prices and a weaker greenback. This week crude hit its high for the year on the NYME even though there was little change in inventory/ stockpiles. So this week's dramatic run-up in pump prices could (key-word=could) be short-lived. Economic giddy optimism and dollar weakness can only take crude prices so far north. Demand for most petroleum products despite some signs of improvement (called green-shoots) remains very soft. We saw this past week that US supply of gasoline also remains significant despite falling by more than five million barrels last week, as evidenced by the recent move of some refineries to reduce gasoline production in the hopes of clearing some more of their existing stockpiles.
‘Underwater’ U.S. Mortgages May Hit 48%, Deutsche Bank Report The overly percentage of properties “underwater” is forecast to rise to 48%, or 25 million homes, as property prices drop through the first quarter of 2011, according to Deutsche Bank analysts Karen Weaver and Ying Shen.
Wow, I guess Deutsche Bank didn't watch Cramer or Kudlow call for and claim that we have seen the housing market bottom and house prices have found a bottom, I bet they forgot to watch the cheerleaders on CNBC!
Deutsche Bank estimates 26% of homeowners are currently underwater. And Deutsche Bank sees the next wave hitting prime borrowers is looming:
While subprime and Option ARMs are currently the worst cohorts with underwater borrowers, we project that the next phase of the housing decline will have a far greater impact on prime borrowers (conforming and jumbo)...By 2011Q, we estimate that 41% of prime conforming borrowers and 46% of prime jumbo borrowers will be underwater (meaning they will owe more on their home than its market value, a huge drag on the proverbial wealth affect), a significant increase over the percentage of these borrowers in Q1 2009. The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding.
In a recent WSJ article I read that……Home price declines may be luring more home buyers back to the market, but they’re also leaving more American homeowners with negative equity. Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.
Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, just one year ago. Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more. This is a massive contagion and it’s not getting better anytime soon.
The rising share of homeowners without equity and the continued increase in foreclosures is the Tsunami I have been warning all my loyal readers for several years now and Mark Zandi, chief economist at Moody’s agrees with my long standing premise as: “That such a high proportion of homeowners are underwater is testimony to the severity of the foreclosure crisis and the risk that it still poses to the broader economy,” he stated this past week. To date, most foreclosure-rescue efforts have focused on lowering monthly payments by reducing interest rates, in part because the housing crisis began with mortgages that were resetting to higher payments. But the looming negative-equity problem could put more pressure on policymakers to come up with a modification plan that includes reducing loan balances, and not just lowering interest rates. “The modification plans that they have in place … will become increasingly ineffective as more homeowners fall deeply underwater,” Zandi stated!
More Homeowners ‘Upside Down’ on Mortgages Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.
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Copyright © 2009 Stephen Tetreault
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