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Today's Market WrapUp 01.27.2009 Mon Tue Wed Thu Fri Barbera Archive Tepid Markets and More Bad News Over the last few weeks, it has been hard if not impossible to avoid seeing and hearing indications of the nation's worsening economic plight. Without question, the nation's plunge into the economic abyss continues unchecked as many people are now deeply concerned about what the future holds. America, it seems, has reached a point where many long overdue chickens are unfortunately now coming home to roost. With a dearth of national savings, and far too much debt of all shapes and sizes, the economic carnage continues to mount on an almost daily basis. On Monday, January 26th, a day dubbed “Bloody Monday,” over 50,000 job cuts were announced by seven major companies, including Caterpillar cutting 20,000 jobs, over 8,000 at Pfizer (10% of workforce), Sprint-Nextel cutting over 8,000 jobs, Home Depot 7,000 jobs, ING over 7,000 jobs, Texas Instruments cutting 3,400 employees, and Deere reducing 700 jobs. A few days earlier, Microsoft announced its first job layoffs ever with over 5,000 job cuts at its Redmond, Washington corporate headquarters.
Elsewhere, on the Housing front, Tuesday was the S&P release of the latest figures for the Case-Shiller 20 city home index, which fell 2.2% in the latest period, and a record 18.20% in the past 12 months. According to Case-Shiller, home prices are now down 25% from the peak in mid-2006, with prices in Pheonix, Arizona down 33%, 32% in Las Vegas and 31% in San Francisco representing some of the areas hardest hit. According to CBS Marketwatch and High Frequency Economics, housing wealth is now falling by $380 billion per month, or about $370 per adult per week. In our work, we often monitor the trend in Median Home prices as a directional indicator for the overall housing market, which was dropped a further 7% in the last few months since we last updated the chart. In my view, it is still quite clear that a great deal of further downside movement is likely in the median home price with our downside target of $162,500 still in effect. Over the last few months, median home prices have cracked the Double Top on the chart to the downside, decisively breaking the key $220,000 mark. From here, a trip to the 10 year lower band is likely to play out with a more important bottom potentially seen toward the middle of 2010. For home prices, 2009 is actually likely to be a bigger decline than the sell off seen in 2008, with much of the high end communities rolling over. That’s the message we see in the data where MACD on Median Home prices is making new generational lows. That speaks to building downside momentum, and a further collapse in home prices in the year ahead. Between now and year-end 2009, I believe the Median Home price will break down below $190,000 dollars with the recent low in October 2008 at $214,500 dollars.
Above: close up view, US Median Home price with long term bands and moving average (upper clip), and Moving Average Convergence-Divergence gauge (MACD) bottom clip. In light of all this negative news, it was not surprising to see today that Consumer Confidence fell in January to a historic new low, with the overall Conference Board gauge at 37.70, down from 38.60 in December. As can be seen in the chart below, the index is now well below the +70 reading which we use to define a US recession. For what its worth, using just this gauge of recession, the recession would have started around March 2008, which is a bit later the NBER start date of October 2007. Within the sub-components of Consumer Confidence, this month's reading on Forward Expectations fell to 43.00 from 44.20, while Present Situation also fell from 30.20 to a reading of 29.90. While the Ratio of Forward Expectations to Present Situation actually declined slightly from 1.463 to 1.438, the overall trend of the ratio remains strongly up and is above the moving average indicating a recession remains in force. Within these gauges, the next few months will be important to focus on the Forward Expectations component as that is always the first indicator to show an improvement and provide some advance warning on when today’s sad state of affairs may begin to relent.
Above: top clip, US Present Situation, Middle: Forward Expectations and lower: Ratio of Forward Expectations to Present Situation. While on the subject of sentiment, we see a number of conflicting signals at work in the markets right now. This suggests it is a good time for traders to go slow and really wait for patterns to set up. In the stock market I note that while prices have managed to bounce a bit off the recent lows, over the same period of time the Volatility Index has declined rather substantially. Over the last five days, the S&P has bounced off a low of 804.47 and moved up to the area near 845.71. That’s about a 29% retracement of the preceding decline which totaled approximately 140 S&P points. At the same time, the VIX Index has moved down from a high of 56.25 on 1/20 to a low today of 40.57. Considering that the 1/6/09 low was at 38.52, we see that VIX has retraced nearly the entire advance indicating an abrupt drop off in the level of fear. Unfortunately, this kind of outcome is usually not a good sign where bear markets are concerned. It suggests a certain level of rising ‘apathy,’ and that can be an indicator that a further decline still lay ahead.
At the same time, in looking at the price action of some of the largest US Financials, a tentative bullish case could be made that a number of these stocks are deeply oversold. For the XLF, which is a Financial ETF, there is strong near term resistance at $9.40. It remains very possible that prices could in the very near term retest the prior lows, or make token new lows. Still, the Obama Administration appears to be talking up the idea of an ‘aggregator bank’ which could eventually lift the toxic bad debts off the books of the zombie banks. While that might be months down the road before becoming reality, a trading rally ‘on the news’ for the financials would not be too great a surprise but should be attempted only by those with a strong stomach and a lot of time to keep a close watch on prices during the day. Where trading the financials is involved, stops in this climate are a must.
Other cross-currents we have noted are the robust move up in Gold, which thus far, has not been remotely confirmed by either the Aussie Dollar or the Canadian Dollar, both of which are miles below their equivalent September highs. Does this mean that gold is breaking away from the pack and becoming a bonafide ‘safe haven play’ once again? Or does is mean that their gold is vulnerable given what appears to be strong deflationary pressures still present in the charts of the resource currencies? As a result, we see a global economy that continues to sink and investment markets that at the present time are best suited for ‘hit and run’ trading as the near term trends for most markets are now very flat. Against this larger backdrop, we would theorize that any drop off in volatility is likely to be a short-term affair, and only a temporary lull in the action. At the close, the DJIA ended up 58.70 index points at a reading of 8174.73, with the S&P 500 up 9.14 at 845.71. NASDAQ was strong today gaining 1.13% to end with a gain of 16.84 index points at 1506.30. The 10 Year Bond yield fell to 2.52%, down 11 basis points, while Gold also fell ending the day at $897, down $11.00 per ounce. That’s all for now. From Bloomberg Business News and Challenger, Gray & Christmas Inc Jan. 27 (Bloomberg) -- U.S. companies have announced more than 519,895 job cuts since the Election Day victory by Barack Obama, who has proposed a plan to create as many as 4 million jobs to boost the economy. Following is a list of dismissals announced since Nov. 1, based on information compiled by Bloomberg News and Challenger, Gray & Christmas, the Chicago-based executive search firm. Only companies with 500 or more job cuts are included in the table.
============================================================== Nov-08 Citigroup 75,000# Dec-08 Merrill Lynch (Bank of America Merger) 35,000 Source: Challenger, Gray & Christmas, Inc. and Bloomberg # -- Combined total for the year. Frank Barbera Copyright © 2009 All rights reserved. CONTACT
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