Was it the beginning of a near-term correction or just a healthy pause? The
fell for five days in a row last week, dropping below the magic 12,000 mark. Mixed data offered more fuel for the debate over whether the economy is softening in a healthy fashion or not, and gold prices jumped.
bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the
. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Let's take a look at
on Wal-Mart's problems,
on evaluating the market,
on why a bubble may develop over the next few years,
on why small-caps remain in favor,
on why bonds ignored this week's poor labor data, and
The Street Research Team
on a bearish bet in online retailing.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: Wal-Mart's Woes Worsen
Originally published on 10/30/2006 at 8:27 a.m.
You have to be mystified by the benefit of the doubt that
keeps getting. Here's a company that was predicting 2%-4% sales gains a month ago for October, then took them down to 1.3% last week and they ended up
coming in at 0.5%.
Of course, you will hear all day about how the consumer must be slowing down, because there's no way that Wal-Mart could be losing customers that quickly. You will also hear that now Wal-Mart has to discount furiously because it will have too much inventory and that will bring down every retail player.
But what you won't hear is that perhaps Wal-Mart's falling apart. You can't get that kind of decline in the sales of a company without there being something really wrong, not just in the forecasting but in the merchandising. There's a cataclysmic misread of shoppers at Wal-Mart, and the company's decision to shrink expansion won't answer it.
Shopping's a major part of the American experience. We love it. We aspire to be rich when we shop. That means avoiding Wal-Mart at all costs. I smell panic at the chain. Perhaps that is warranted.
It may simply not have a clue. No clue of merchandising. No clue of forecasting.
Let's hope they take down
with it. You may not get such a stellar buying opportunity as this one before the holiday season, which used to begin a month from now but most likely will be talked about in two weeks.
At the time of publication, Cramer had no positions in stocks mentioned.
Rev Shark's Blog: Bulls Are Right, but So Are the Bears
Originally published on 10/30/2006 at 8:47 a.m.
"Where we have strong emotions, we're liable to fool ourselves."
-- Carl Sagan
The strong move in the major indices off the lows of July has stirred up some very powerful emotions in market players. There are those who believe that the strength is merely a manifestation of the many obvious positives that exist, and they feel quite strongly that the market will continue to run steadily higher. We have positive seasonality kicking in, the Fed on the sidelines and a pretty good economy. There are plenty of bulls who are confident that this market is going to keep on going.
On the other hand, there are plenty of bears who feel equally confident that this market is doomed and as soon as market players come to their senses about the dangers that exist it will be a slippery slide down the slope of hope. If you want the bearish take on things, just read Doug Kass over on
who does a nice job of spelling out the things that can take this market down.
One of the interesting things about a market that has run up big like this one is that both sides, bulls and bears, tend to become even more convinced that they are right as the trend continues. The bulls look at the strength and tell us its proof of how good things are; the bears look at the same strength and tell us it's proof of how stupid the market is and sets the stage for some major pain.
The truth about the market, at least in the shorter term, lies somewhere in between. Strong markets don't tend to just suddenly fall apart and go straight down. There tend to be plenty of folks who missed the move and are looking to buy on a pullback. Most large mutual funds do not chase stocks. They look to buy on weakness, and therefore they help prevent a sudden collapse unless there is a news catalyst of some sort.
We have some underinvested bears to support things, but once a market falters a bit like we did on Friday, there are going to be some sellers much more intent on protecting recent gains who will pressure things. They don't want profits to slip away, so when the trend starts to slow and shows some signs of stress, they will look for opportunities to take gains and make it harder for the market to resume its uptrend.
Try to keep a very open mind about the market at this point and let the bulls and bears at the extremes trade their arguments back and forth. The best way to make money is to maintain a mix of positive and negative thinking that allows you to profit both ways as the market sorts out where it goes from here. There is no reason to be a true believer as the uptrend slows; opportunities will persist on both sides of the ledger.
We have a little carryover of Friday's weakness to start the day. There is some nervousness about technology, but weak oil is helping to boost things. Overseas markets were weak and buyers are tentative this morning. Keep in mind we have month-end; it's also the end of the fiscal year for many big mutual funds, which may help hold the market up.
Also, check out my
, published earlier on
Cody Willard's Blog: Get Perspective on 'Bubble'
Originally published on 11/1/2006 at 9:34 a.m.
Sometimes we focus so much on the near-term action that we lose perspective on the broader market.
We all see how the major indices are up double-digits since the July lows and admire this rally's strength -- and rightly so, as it's been an impressive one indeed. But it certainly hasn't taken us to any ridiculously overvalued area, as the price-to-earnings ratio on the market is comfortably in its historical range.
When I say that we might experience an
echo techo bubble, I invariably get asked why I think the market is in a bubble. To be clear, I don't think the current market is anywhere near a bubble. I think one might develop over the next couple years, though.
Let's get some perspective.
is still down about 60% from its peak in 2000. Since Nov. 1, 2001, the Nasdaq is up nearly 40%. The
Dow Jones Industrial Average
is up about 30% in the past five years, as is the
are down fractionally since then, as is
These are not bubblicious figures. They are indicative of a steadily climbing market that has reflected a steadily growing economy.
To be sure, any bubble that might develop in tech would be an outlier event and not something that we should count on developing. But it is indeed on my radar as a possibility, and it's something for which I plan to position as we head into 2007, using some small capital on some long-dated out-of-the-money calls.
People make plans and God laughs, but I will tell you the rough plan I have in my head for the next couple of quarters.
I won't get overly aggressive, as
I've explained that it doesn't make much sense for me to do so. But I do believe that this economy has cooled to a point that will worry the market at some point in the next few months. And I expect that amid that decline, the
will have to cut rates to pump liquidity aggressively back into the system. I expect I'll want to buy aggressively into such a macroeconomic-inspired selloff, especially if the decline happens after the calendar has flipped to 2007.
What if the markets don't come back down into year-end and the economy heats right up again? I expect I'll steadily put money to work in the first quarter of next year, as I think that tech will lead even a non-bubbly bull market higher.
A million different factors will impact this economy and market over the course of the next six months. That's why we listen to scores of conference calls, read reports and talk to salespeople and executives and so on -- so we can continue to navigate and formulate theories that help us shape our trading strategies.
Lots more work to do. Let's get back on it.
At the time of publication, the firm in which Willard is a partner was net short SMH and net long Microsoft, although positions can change at any time and without notice.
Steven Smith's Blog: Rotation Theory Lacks Real Evidence
Originally published on 11/3/2006 at 7:53 a.m.
This morning's focus will, of course, be on employment data. Forecasts are calling for 125,000 new nonfarm payrolls and for unemployment to hold steady at 4.6%.
I believe the general tendency for profit-taking that has developed over the past few days will persist, and whatever the report contains, it will lead to moderate selling in stocks.
One sign of increasing caution that emerged Thursday was a surge in put activity in the
iShares Russell 2000
. The put/call ratio in the small-cap ETF rose to 5.5% on volume that was nearly double the daily average.
Much has been made of the rotation out of small-cap stocks and into large-caps, but this has not been borne out in performance. Since the market bottomed in late July, the
has gained some 12%, while the
has climbed 11% during the same period.
While we know that people often don't do what they say, the talk of rotation is not reflected in sentiment, either. Investors seem to be taking a more cautious view of large-caps than small-caps. This is evidenced by the put/call ratio on the Russell 2000 and IWM, which are around 1.5, or near 52-week lows. While implied volatility is around 19%, this is only 5% above the index's 30-day historical volatility reading.
This compares to the S&P 500 index and the
, which have put/call ratios in the 2.1 area, near the top end of the 52-week range. While the IV of its options is just 11%, that is actually a 25% premium over the 30-day historical volatility of the index.
Tony Crescenzi's Blog: Why Bonds Ignored Bad Labor Data
Originally published on 11/2/2006 at 9:42 a.m.
The bond market has turned its back on the very unfriendly data onproductivity and unit labor costs for the third quarter, clearly suggestingthat the market is treating the data as backward-looking. The marketrecognizes that with job growth having slowed, labor costs will eventuallymoderate. Moreover, most understand that productivity trends tend to be attheir worst when the economy slows from a fast pace, as has been the caserecently.
On a year-over-year basis, unit labor costs are now up 5.3%, matching themost since the fourth quarter of 1990, which was the most since the fourthquarter of 1982. It is worth noting that the gains in both of those periodsoccurred as a result of economic recession, further underscoring the natureof this data series and helping to explain why the bond market isignoring the data.
The increase in unit labor costs is the result of employment gains, higherwages and lower output. All of these factors will be mitigated by thecurrent slowing in the economy, if it persists. The
surelyrecognizes this, which is why the recent economic slowdown is desirable tothe Fed and why the Fed will not be in a hurry to cut rates.
As can be inferred by the sharp gain in unit labor costs, productivity gainshave slowed. The year-over-year gain is now just 1.3%, the smallest gainsince 1997 and less than half the pace seen in the three years ended inJune. The slowing in productivity combined with slower growth in the laborforce is reducing the economy's non-inflationary growth potential, nowwidely seen as 3% or so. This means that growth would have to be below 3%for an extended period for the Fed to feel that enough slack has developedin the economy in order to consider an interest rate cut.
Stock Talk Blog: Virtual Shelves Overstocked at Amazon
Originally published on 11/2/2006 at 7:35 a.m.
I'm very bullish on certain retailers as we head into the Christmas season, but I remain highly bearish on one name despite its recent rally:
While Amazon continues to face enormous competition and weak margins that are below most retail names, its inventories appear quite bloated.
Amazon ended the third quarter with $736 million in inventory, which was a 41.3% sequential increase, a much bigger change than the 19% sequential increase seen in the year-ago third quarter. Year-over-year, inventory rose 61% vs. a 28% change last year. Put another way, days of inventory are at 32.5, vs. 27.4 last year.
On top of that, Amazon's revenue growth rate has slipped a bit. It has a ton of merchandise to move this holiday season, and it is likely to suffer further margin degradation in order to move it. According to management, the increase in inventory reflects "expanded selection and improved in-stock levels across product categories," but the numbers speak for themselves.
Is this terrible fundamental trend priced in at the current stock price? Most definitely not. Amazon is now trading at 54 times 2007 earnings and 20 times 2007 EBITDA, a vast premium to countless other stocks with much faster growth, less competition and more stable profitability.
In keeping with TSC editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
David Morrow is editor-in-chief of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.