Factors Impacting the Market, and How: 10 tips from the penguin posse
1) Economic reports: though relatively rosy, there are weaknesses. Chips, which often lead tech, are not projecting well till 9 months out, which means they oughta bottom 6 mos before that. Low interest rates and zero financing have moved up sales, borrowing sales from the future. How many times can ya refinance that mortgage? Bubbles in homes, autos, plus furnishings and suppliers of each are starting to deflate.
2) Earnings season: a rotational effect is being observed. As one sector falls, another rises, based on which sectors are reporting in a given week. As well, with the Russell indexes updating, there's a rotational impact as small and midcap indexes decline and bigcaps bounce. Near index bottoms that occur in earnings seasons, often such rotational effects are observed till most of the best known companies have reported, after which a final decline can occur.
2a) A sector of note is the biotechs, whose bubble has been unwinding since November. Recovery in this sector is likely to be valuation-based on earnings, sales and growth. And within related pharmaceuticals and healthcare, the popular outcry for affordability is pressuring all these aligned sectors.
3) The terrorist threat exists, but it has dimmed as a concern and will dim considerably more if no attacks come while we dilly-dally near the short-term bottoms.
4)Fleeing investors- most of the foreign capital fleeing our markets is likely near done. Now it's the LTBaH US investors fleeing in droves. Having lost 30 billion in the past year, they're seeking saner, safer investments, like bonds. However, world events are likely to limit the return of wealthy investors, particularly from the Middle East, due to disagreements with US foreign policies in the region. And the locals aren't likely to return till they see evidence that numbers are sound and a sustainable rally has begun.
5) Debt- in essence, a working capitalist economy is a form of a pyramid scheme, but one that corrects instead of collapsing, if it has proper checks & balances in place. For markets to grow, affordable credit must be extended that permits businesses and individuals to buy, and the demand drives the prices of the supply. The markets can then speculate on who will grow the fastest and furthest. Buying stocks is a manner in which marketeers extend credit to publicly held companies.
Currently, the overuse of credit is most visible in the low savings rate of personal households while larger amounts of debt are being carried, and in our foreign trade deficit, fuelled by cheaper goods made elsewhere in the NAFTA/GATT global economy. Signs abound that personal consumers are transitioning by moving from stocks to bonds, to preserve capital, and by the high numbers of bankruptcies being filed. In business, as excess inventory has mostly been reduced to proper levels, many still look for signs of higher demand before taking on fresh investments and building fresh inventories. The lack of insider buying at this bottom shows this hesitancy clearly.
But far and away the most worrisome debt is that carried by our governments, especially the federal one. Since a good portion of that is provided by foreign investors, their faith in the US economy is essential. That's been hurt by the accounting scandals, and by the amount of funds the Feds have been spending in structural and mercenary anti-terrorist actions.
Add to that rising unemployment and potentially tapped out consumer demand, and that translates to declining tax revenues to governments at all levels. Not only does this set the stage for coming elections, allowing the two political parties to -yawwwwwwwn - berate each other in typical fashion for raising taxes (Democrats) or hidden taxes (sin taxes, fees, licenses, etc which is the Republican forte), but those tax demands eat capital that won't be invested by business nor get spent by consumers.
Income to government is necessary to provide essential services, but it is one of the least productive engines of growth going. With no signs of slowing defense spending (in fact, the building of a not-so-secret command center in Eritrea from which to launch a war on Iraq within the next year suggests it will only increase), the inevitable result that keeps our credit lines open to foreign capital is a decline in the US dollar (I think it'll rise from 104 to 108 then decline to 88 by November).
6) Did I mention the terrorist threat? I did? Well, factor in rising civil unrest in Iran. That, the situation in Israel and other such events increase the odds of Hezbollah and other groups venting against US in new and dangerous ways. With Iran as an advanced society, capable of more than others in the region...
7) Energy prices. Typical late summer declines in prices occur while Saudi Arabia tries to negotiate cheap natural gas contracts that western drillers won't buy into. SA can't budge with anti-US street sentiment high and the drillers/suppliers won't budge when investor demand for growth is so high. Stalemate. With all else going on in the ME region, a resolution probably awaits the heating demands of winter.
8) Key events ahead: the first is 7/31 when the feds release the revised economic numbers for 1999-2001, with a downward revision likely. This is where the champion of bookcookers - our feds - get unmasked.
The second is the August 14th signed statements of 900+ CEOs of the largest public companies. But don't expect a massive revelation day. As we can see, currently one after another is going public in advance of the deadline so they can sign off by deadline day with a straight face.
These two dates likely will keep us churning at these new-each-cycle bottom levels for another week or three. I still say don't call it a bottom till we hit someplace between 1200-1280 in NASDAQ and 8200-8650 in the DOW.
The third date of importance is October 31st, when institutional tax loss writeoffs occur. That guarantees at least six weeks of declines prior to that date. Which means, considering all the dates, the best window of opportunity for any significant rally is likely to be August 9-Sept 12.
9) Rally to where? The optimal rally would see NASDaq bottom at 1254 and run to 1760. It's likely that neither number will be hit.
10) What to play in the meantime? Well, during the next week or three of churntime, there may be some bottomfishers that do okay but it'll likely be safer in the bigcaps with the best valuations/projections/volume, alternating into gold and silver.... or you could just locate reasonable shorts supported by TA & DD.
I now have a better understanding of Zeev's nearterm projections of rising to 1500-1550 (I'd say 1470-1525) before we set a summer bottom.... or retest what's been set, over the next week or three. If that plays out per his call, and we get the second, real rally into Sept that I think, I'd look to the midcaps and smallcaps during that period. Then catch the final gold & silver train of the year into tax-loss-selling season.
With gold & silver stocks, pay close attention to the TA, to past resistance points on 5 and 10 year charts, and to earnings dates, as they may peak on different days. And as a final plum, that adds to my appreciation of HL and provides insight into some of the better plays (plus shorts) I offer this link from a gent named Jason Leavitt (anyone know 'im?) stockcharts.com which was one of the better finds among links provided by the Lady Didi Subject 37468 |
