Good morning and welcome back from the long weekend. Futures are perky this morning. S&P futures are up 2.60, Nasdaq futures are up 3.00 and Dow futures are up 26 points.
The economic and earnings calendars are quiet this morning.
Lots of talk about holiday sales over the weekend -- while the numbers are all over the map, double-digit increases seem to be the norm among all the surveys. While traffic was solid, we'll see as more companies begin to talk about volume, average tickets and margins. On balance, a positive day.
Merck (MRK:NYSE) announced this morning it will cut 7000 jobs and close or sell five of its facilities in an attempt to restructure and cut costs. The company says it will execute the plan between now and the end of 2008.
Energy prices continue to inch lower. With weather warming in the Northeast in the near term, heating oil and gasoline should benefit. Gasoline is now below $2.00 per gallon in many parts of the country. Interestingly, a survey showed only 9% of consumers were impacted by gasoline prices when making holiday purchase decisions over the weekend.
Have a great day.
Position: None
To signal a new bull market, all equity averages must be set to move higher simultaneously. This was the configuration a year ago, but all equity averages began 2005 with overbought weekly chart profiles. The averages were thus set for disappointment.
The Dow retested its March 7 high of 10,984 last week, but is well shy of its all-time high at 11,750 set in January 2000. Similarly, S&P 500 Futures reached a new 52-week high of 1272.7 last week, still lower than the all-time high of 1574.00 set in March 2000. The Nasdaq is still far below its March 2000 high of 5132; it's foolish to think of that level, but the May 2001 high of 2328 is not far away as the Nasdaq probes new 52-week highs. My quarterly risky level remains 2319, which keeps my theme of, "Nasdaq 2300 or Bust," or "Nasdaq 2300, Then Bust" intact. The Philadelphia Semiconductor Index (SOX) should be providing the lead but isn't, and the January 2004 high of 560.48 is still well above the SOX's 52-week high of 486.64.
The Dow: (10,932) The five-day modified moving average is 10,802 with a daily pivot at 10,929, and last Wednesday's high matches the March 7 high at 10,984. The five-week MMA/weekly support is 10,619/10,552 with quarterly resistance at 11,620.
S&P 500 Futures: (1270.3) The five-day MMA is 1253.14, with a daily pivot at 1271.5 and a new 52-week high tested last Wednesday at 1272.7. The five-week MMA is 1232.9 with quarterly resistance at 1318.1.
The Nasdaq: (2263) The five-day MMA is 2232 with a daily pivot at 2266, last Wednesday's new 52-week high at 2269 and my quarterly resistance at 2319. The five-week MMA and weekly support lag is at 2177/2171.
Position: None
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Cody Willard |
| Consumer Just Fine, Thank You Very Much |
11/28/2005 9:16 AM EST
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It was rather interesting to keep tabs on all the retail-sales data flow over the weekend: "Blistering Pace" headlines would sit next to "Disappointing Start."
I'd simply step back from the guesses of what the consensus was, is or should have been and note the facts are that the consumer was strong and spending grew. Still.
Steady as she goes? Nah, surely not.
Position: None
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Justin Ferayorni |
| Morning Action in Merck, American Pharmaceutical |
11/28/2005 9:17 AM EST
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Merck (MRK:NYSE) announced their much anticipated restructuring which includes broad-based cost structure rationalization and 7,000 job cuts, mostly in manufacturing. Merck has joined Pfizer (PFE:NYSE) in initiating the first steps toward horizontal industry specialization, which should improve profitability and shareholder returns. Merck remains an interesting trading stock from my perspective -- buying it on adverse legal outcomes and selling as the stock reflates. Along the way, you'll be able to clip a few coupons as well.
American Pharmaceutical Partners (APPX:Nasdaq) finally collapsed its parent/sub structure with Applied Biosystems (ABI:NYSE). I can't say if the price is right for the APPX shareholders, but it will certainly rationalize the Abraxane asset and remove the conflict of interest questions that surround the two companies. Long term, this is the right move for shareholders.
Position: Long MRK, PFE
Last Tuesday, I disclosed that I bought a little Sandisk (SNDK:Nasdaq) personally. I sold it this morning at $52.29. I felt the one-day, nine point selloff was too much.
When I bought the stock, I felt it was reasonable that the name would retrace a big chunk of the nine points quite quickly. While I am glad the trade worked, what I think is important is the process.
Like most folks I watch a lot of stocks, a lot more than I actually own for clients, Sandisk being one of them. I believe this lets me learn what the stock is capable of doing. This was the case with Sandisk.
I knew it would have some snapback. I am not a trader by any stretch of the word, but that does not mean I do not take the occasional trade that is obvious to me.
I think it is also important to be disciplined with trades. I was hoping to get about 10% very quickly. I did, (lucky or not) and exited the trade.
Position: Flat
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Aaron Task |
| Inversion, Anyone? |
11/28/2005 10:09 AM EST
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Somewhat lost in the discussion about the stock market's recent rally and the retail sales data is that the yield curve resumed its flattening last week after a brief elevation at the long end.
This morning (as of now) the 2-year (at 4.34%) is yielding more than the 3-year (4.33%) and the same as the 5-year. Meanwhile, the spread between 10- and 2-year yields is back under 10 basis points (8, at present).
Position: wondering what this says about economic growth in 2006
I've been concerned about inversion for a while and I have been writing about on my blog as well.
For what it's worth, I am not concerned in and of itself of an inversion of the two-year and the three-year. Inverted curves are making bank lending unprofitable. Most banks don't borrow for two years to lend at three.
I see one of two outcomes given that the Fed looks like it is going to at least 4.5%. Either the ten-year will yield less than t-bills (inversion) or the curve will normalize and the yield of the ten-year will be much higher than it is now.
Both outcomes create big headwinds, at a minimum, for equities. I've been formulating a thesis for a rough 2006 based on this and a few other things.
We'll know soon enough.
Position: None
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Howard Simons |
| Of All Versions, "In"Version Is Best |
11/28/2005 10:54 AM EST
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Aaron/Roger: It used to be such a slam-dunk that an inverted yield curve meant recession, doom or even worse. Yet that has not been the case so far. As I noted in my Nov. 22 column, the groups supposedly vulnerable to a flatter yield curve, particularly the financials, may have been suppressed relative to what they would have been otherwise, but have not suffered absolutely.
Other high-yielding groups, such as energy, have been among the market leaders all year.
A lot of corporate financing these days is done at floating rates or at a spread to swap. Swaps rates embed the shape of the yield curve, and so you just do not have the old vulnerability to a change in the curve's shape.
The flattening trend has been in place for close to a year and one-half. During this period we have lurched from pillar to post in our views of economic growth and inflation. If the curve's message was that strong, wouldn't our opinions have been a little more consistent?
This is the Conundrum Decade. A lot of standard relationships have not worked in recent years. The old rule that an inverted yield curve meant a recession should be added to this list.
Position: None
It's more bullish for the market to sell off out of the gate today than starting a midweek decline after another ramp-up. I expect this is just a quick shakeout and we'll see new highs, probably before Friday's close. In other words, buy the dip.
Position: None
There is no way I'm going to out-debate Howard on anything and I certainly hope he is right.
While I'm not trying to outguess the market on this, that this yield curve inversion (should it happen) could be different is not a bet I am willing to make with client money.
Position: none mentioned
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Howard Simons |
| Da Bears, Da Bulls, Da Bate |
11/28/2005 11:48 AM EST
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Roger, in August 2003 the spread between the 10-year and 2-year was almost 275 basis points. Now it is about 8 basis points. And we are worried about what happens if those last 8 points disappear and the spread inverts?
I am going to go on the basis that we have seen the bulk of the damage from the flattening and from higher short-term rates. Stocks supposedly are discounting mechanisms, and I'll keep drinking that Kool-Aid. That means we are on to the next phase of the curve, be it a continued bullish flattening or a quick bearish steepening or anything in between.
If in August 2003 you anticipated correctly the curve would flatten to this extent and feared negative consequences for stocks, what would the results have been? When the curve was at its steepest, the S&P 500 was at 997. It is 1263 right now. Ten-year yields were at 4.50%. They are at 4.40% right now.
If the first 267 basis points of flattening did not kill financial assets, why would the next 8?
Position: Long Chicago sports references
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Roger Nusbaum |
| Flat Doesn't Have To Be Bad |
11/28/2005 12:01 PM EST
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I'm sure you're sick of hearing from me!
I have no concern about a flat curve. The curve was horizontal for a while in the late 1990s. I am not aware of precedent for bad things coming from just flat.
When the curve inverts it makes accessing needed capital more difficult. Lack of that access is what causes problems.
To be clear my concern is if the curve actaully inverts (and I hope I'm wrong) not threatens to invert.
Position: seeking clarity
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Howard Simons |
| The Yield Curve And Financing |
11/28/2005 12:20 PM EST
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You are raising a key issue, one that I will address in my column for next week, and that is whether the flatter curve has restricted financing.
Ten-year swap rates barely have budged since the peak of the curve's steepness. In August 2003, they were at 4.98% and they are at 4.94% today. Anyone who is financing on the swap curve has been able to pay pretty much a constant fixed rate over the last 2-plus years. Will this change if and when the curve inverts? Maybe.
Has the flattening seen to-date restricted financing? If so, we do not see it in real estate, in commodities, in equities, in corporate balance sheets or in corporate credit spreads. As Aaron and others are fond of pointing out, the money supply has been growing and now the black-helicopter crowd is out there saying the dropping of M3 from the money supply reports is an attempt to hide runaway money growth.
I certainly understand your concern about the Federal Reserve squeezing credit and shocking the economy. However, this has not happened since Regulation Q interest rate ceilings on time deposits were eliminated after the Depository Institution Deregulation Act of 1980. I would say 100% of the value of derivatives, maybe more, has been in developing and protecting financing sources immune to the Federal Reserve's depredations.
Position: None
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David Merkel |
| An Inverted Perspective |
11/28/2005 12:24 PM EST
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Aaron, we're down to about 7 basis points between 2s and 10s, with 2s and 5s being equal in yield at present. Presently, the market is factoring in foreign demand, which is keeping the long end low in yield. The short end is factoring in two more 25 bp tightenings, but that's about it for now.
I think the FOMC might pause after two more tightenings, but absent a blow-up, I don't think the cycle is done there. We are due for a change in the language of the FOMC policy statement, but most of the heavy lifting there will be done after Mr. Bernanke arrives.
So, I expect the curve to continue to invert, and to hear an increasing din of commentators argue that it should not be so, it won't be so for long, etc. This has been a weird FOMC tightening cycle; we shouldn't expect it to get normal now.
Practical applications:
Avoid interest spread-based financials.
Barbell exposure on the curve -- long and short, but not the middle.
Take a cautious stance toward the market generally; inversions are typically not winning times. Then again, this is a rare FOMC tightening cycle: financials, homebuilders, utilities, and the market as a whole have rallied. Very unusual, so more unusual things may happen.
But I will be playing it cautious, excluding my long bonds, which I admit, are a speculative/contrarian play.
Position: none
I spoke to CNBC's Steve Liesman earlier today about the absurd NRF retail announcement. We discussed what I called "flaws" in the NRF report, and its methodology.
Note that I didn't call this sales data -- that's because this is NOT sales data -- its a survey of what people say they are going to buy (or already bought).
If the report discussed people's sentiment or intentions, you can use this survey. But that is very different from saying based on this opinion poll, sales went up 22%. Anyone who makes that claim based on this survey is a mathematical illiterate.
Here's what we know about NRF's report: They conducted a survey on Black Friday and Saturday. They asked 4,209 consumers how much they were planning on spending. From this opinion survey, they extrapolated the total National spending of 145 million shoppers over both the long holiday weekend and the entire holiday shopping season - all without seeing any actual retail receipts or data whatsoever. .
If I were their mathematics or statistics professor, I would give them a grade of "F," strongly urging them to consider a less mathematically rigorous major (English, perhaps).
Here's what data and actual observation reveals: ShopperTrac showed slightly softer sales on Black Friday, down less than 1% year over year. Note that this is based upon actual purchase data from 45,000 retailers, and not opinion polls. Further, note that retailers engaged in much more aggressive discounting when compared with last year's holiday season. Third, according to Visa, Credit Card usage was up dramatically - about a 14% increase over the holiday weekend when compared with '04. This implies that consumers are stretching to spend money they do not have.
Its more complex than space allows for here, but the bottom line is the NRF report is false, and based upon unsupported assumptions -- an unsavory combination of recklessness and incompetence. Investors who rely on it as investment advice are sternly warned they do so at their own risk.
Position: if only I could get long stupidity . . .
Remember, retail sales should be DOWN big, they were not by any stretch of the imagination, the only question is whether they were up small or big... don't get fooled or shaken out here....
Position: none
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Steven Smith |
| Retail Option Sentiment Still Optimistic |
11/28/2005 2:57 PM EST
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Bernie Schaeffer, in his article on the right, seems to draw the conclusion that the large put option open interest in the Retail HOLDRS (RTH) is indicative of pessimistic and bearish outlook for the sector, and this sentiment should be taken as a contrary indicator. But it's worth pointing out that the put/call ratio on many of the individual components, such as Wal-Mart (WMT), Target (TGT), Costco (COST) and Best Buy (BBY) are all at their lowest levels in three months or longer, indicating a basically optimistic outlook for the group. The high P/C in the RTH is actually quite typical of many ETFs as investors use the relatively cheap puts of an index product to secure downside protection for their long holdings in the individual names.
This put protection can act as safety net and therefore support for the group but I wouldn't take the P/C ratio on the RTH in isolation for determining the sentiment towards the sector.
Position: OptionsAlert Newsletter bearish put spread in BBY
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Barry Ritholtz |
| Why should retial sales be down? |
11/28/2005 3:32 PM EST
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hey Jim,
Why do you think retail sales should be down? Gas prices have plummetted over the past 8 weeks. That's the key to why I am looking for 3-4% or so in holiday sales gains.
I know that the credit card minimums have doubled (from 2% to 4%), and that cash out refis have slowed dramatically. Oh, and real income is down (after inflation) and that savings rate has been negative for the past 5 years, after a half century of the Greatest Generation being strong on savings. But U.S. consumers are continuously underestimated for their ability to go deep into debt.
These structural problems may eventually matter, but I doubt their impact this holiday season will be much more than reducing the year-over-year gains from last year (6% increase) in half or so.
Position: none
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James Cramer |
| Leverage to more than gasoline |
11/28/2005 3:51 PM EST
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If i thought that gasoline were all that mattered i would think they should be flat....
Position: none
Jim,
You answered my question on air within seconds of the post going up!
I don't think the issues you mentioned -- Iraq, Presidential approval ratings, etc. -- matter as much as Gas Prices, Interest Rates, or the amount of Cash Out Refis available.
But I get your main point . . .
Position: NA
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Cody Willard |
| Quietly Complacent Bulls |
11/28/2005 5:10 PM EST
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Sorry for the silence today, I've just been working on back office stuff that needed attention (new primary laptop among other things, supposed lack of killer apps notwithstanding). Bulls are awfully complacent about this selloff. I shorted some more index hedges today, did a little trimming and that's about it from the trading front. Have a great night.
Position: No posns
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Aaron Task |
| Squaring the Inversion Circle |
11/28/2005 5:28 PM EST
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Those following today's earlier discussion about the yield curve might find the following of interest: "Studies suggest that it is the yield spread between 10-year Treasuries and 3-month T-bills that carries the most predictive value in terms of the economic outlook and
the performance of the financial markets," according to a report by Miller Tabak strategist and RealMoney contributor Tony Crescenzi. "The focus is therefore excessive with respect to the amount of attention paid to the forthcoming inversion along the rest of the yield
curve."
Crescenzi cited an study by Fed economists Arturo Estrella and Frederic Mishkin which showed the yield curve to be a better
predictor than the stock market of future economic activity and that "the yield spread between the 10-year T-note and the 3-month T-bill was one of the most successful models of recession four quarters into the
future."
According to Tony C, at the current spread of 49 basis points, as of today's close, the probability of recession 12 months hence is about 15%, based on the findings of Estrella and Mishkin.
Position: appreciating RM's collective firepower
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