Stocks sink deeper in nationalization quick-sand
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Week Ending February 27, 2009

Stocks sink deeper in economic quick sand...
Leaders point higher
Earnings just keep falling...
And so do housing markets
New billionaire buy & hold blues band - Warren and the Prince

Feb 27-09
Feb 20-09

Last Week

Feb 20-09
Feb 13-09

Quote of the week
"When governments come knocking, investors run out the back door." - Bespoke Investment Group in a newsletter this week.

Stocks sink deeper in nationalization quick-sand
Stocks sank for their third consecutive week of across the board losses for the major indexes as more key support levels were broken and both the Dow Industrial Average and S&P500 put in twelve-year lows. Should anyone not have known how the market would view increasing intrusions by governments into the nation's board rooms, we got another demonstration of just how unpalatable the "N" word is to investors. This is not surprising since we are seeing the greatest (and most troubling) efforts to socialize free markets and companies since the FDR approach during the Great Depression.

We also witnessed some rueful revelations this week from the world's most famous buy & hold investors as both shared their pain in different ways - Warren Buffett in his annual Berkshire Hathaway corporate report and Prince Alwaleed bin Talal, who was asked to take a back seat as by the U.S. government strengthened their drive to control Citigroup, a company in which the Prince is a major shareholder (see Synopsis). 

However, there were a couple of rays of hope amid the carnage. What are they and what might they mean for markets in the coming weeks?

Technically Speaking
Leaders point higher
This week Dan's portfolio of eight stocks to watch included Amazon, (AMZN), (BIDU), CF Industries (CF), Energy ConDev (ENER), MasterCard (MA), Mosaic (MOS), Potash (POT), and streetTrackersGold ETF (GLD). His picks were unique in that that not only did they outperform the major indexes, they ended in positive territory gaining more than 2% versus a drop of 2.4% last week and 3% drop two weeks ago. This is mildly bullish for stocks next week.

Figure 1 - Five-day performance of Zanger's last Sunday pix (green) compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX), Nasdaq Composite (IXIC), Russell 2000 (RUT) and MSCI Emerging Market ETF (EEM). Data courtesy of The Zanger Report, performance chart courtesy of

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Weekly volumes jumped to well above average for the major indexes this week, as a number fell further below key support levels and the Dow and S&P dropped back to where they were in 1997. That this drop below key support levels occurred on rising volume is bearish as the market continued to plumb for a bottom.

But as Bespoke highlighted this week, although the S&P500 hit a new bear market low Friday, the number of S&P500 stocks making new 52-week lows fell to 19% down from 21% last week when the index closed nearly 5% higher. From a chart reading point of view, this is positive divergence and a bullish indicator especially when we consider that 84% of S&P500 stocks hit new 52-week lows on October 10th. It shows that behind the scenes, investors are selling less and buying more.

As well, the Market Volatility Index (VIX) fell this week to close at 46.35 down from 49.30 last week and that is bullish as it shows investor fear abating if only just slightly. But based on the action this week, the heightened levels for the VIX above historic norms show that investor fears remain. It is important to point out that the VIX is a short-term indicator however.        

Since rebounding off its December 5 bottom, the 19 commodity NYFE CRB Index moved marginally higher this week thanks is large part to the jump in oil prices as the CRB closed at 352.45 from 345.94 last week but down from 359.45 two weeks ago. Since hitting a high of 611.51 in July the index is down 43% from its peak. 

After anther the big surge in gold to $1001.10/oz last week, the precious metal fell to $942.60/oz or about where it was two weeks ago on a very bearish weekly candlestick pattern suggestive of a top. As we mentioned last week volume and open interest had been declining which is bearish in a rally, especially at the potential double top last week. To confirm the double top, gold will have to break the pattern neckline at $700/oz so the pattern has little short-term trading value. However, if this happens, it will imply a downside double top target on gold of just below $400/oz but we are getting ahead of ourselves. Given the technicals, we still believe gold has the potential to drop further in the coming weeks in spite of what the fundamental gold pundits and dollar bears would have you believe.   

Meanwhile the US Dollar Index hit a potential double top peak of its own when it hit a high of 88.49 this week, just above its peak of 88.46 during the week of November 21, 2008. This level is resistance which we will continue to watch in the coming weeks as the dollar closed at 88.15. Since bottoming in July, the U.S. Dollar Index is up more than 22.6%.  

Crude oil futures firmed again this week to close at $44.12/bbl up from $39.80/bbl last week.  Volume was around average this week, well off the extreme high two weeks ago and the chart so far continues to support our contention of a capitulation point off the recent bottom from which prices have a good potential to rally - a contention further supported by the rally in the Baltic Dry Index (see below) given its habit of leading oil in the last few months. Oil is down nearly 70% from its mid-summer high of $147.20 and could rally on any supply problems or brighter economic news.

The U.S. bank prime rate and the Fed funds target rate held steady again this week at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate firmed to 0.23% (from 0.21% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) jumped again to 1.26438% (from1.24875% last week and 1.2375% two weeks ago).  This compares to LIBOR 52-week high of 4.81875% last October.  

Meanwhile Freddie Mac mortgage rates firmed this week to 5.07% (from 5.04% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) ticked up to 4.81% (from 4.8% last week). 

The Baltic Dry Index, an indicator that tracks the cost of shipping dry goods by sea, took a break this week closing at 1986 down from 2099 last week, but still up nearly 200% from its December 5, 2008 low. This is bullish from an economic perspective as it shows that demand for cargo transport has been climbing which is bullish for oil prices.

*LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. Corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. About 6 million U.S. mortgages, including the vast majority of subprime home loans as well as 41% of prime ARMs are linked to LIBOR.


Q4 earnings - just keep getting worse
With a total of 2641companies accounted for in the eighth week of Q4-08 earnings reporting season (up from 2328 last week), the net (loss) on continuing operations widened to -$123.91 billion (from -$93.12 billion last week) versus +$128.1 billion in Q4-07) which works out to a change of -197% from Q4-07. This compares to -171.7% last week, -156.4% two weeks ago, -150.7% three weeks ago, -144% four weeks ago, and -46% in the opening week. The final result for Q3-08 was -62% from Q3-07.

The largest percent drops in Q4 earnings have occurred in the following sectors: Basic Materials (104 companies) down 418%, Financials (611 companies) down 394%, Consumer Goods (223 companies) down 308% and Consumer Services (339 companies) down 302% since Q4-07.  

Earnings continue to experience their biggest drops since first turning negative and we expect this trend to continue at least into the next reporting season. 

As of last week, 400 of the S&P500 companies that had reported for Q4-08, lost a combined $75.5 billion and S&P projects a per share loss of $11.97, which would be the first quarterly net loss since 1936, according to Bloomberg.

According to economist Robert Shiller, the SPX price is now 12.8 times trailing ten-year earnings (PE), the lowest this long-term indicator has been since 1986.

Economic Reports
Housing markets still falling, so is economy...
After the bad news from the new housing sector last week, optimists were hoping that news from the existing home market might be better this week. It wasn't. On Tuesday, we learned that the S&P/Case-Shiller home price index for the 20-city composite showed a drop in housing prices of 18.6% in December from December 2007, versus 18.2% the prior month. The first sign that a bottom is in sight will be when the rates at which new and existing home sales and prices are dropping starts to moderate and that that just isn't happening.

This was followed by existing home data from the National Association of Realtors (NAR) showing that annualized sales fell 5.3% in January to 4.49 million from 4.74 million the month before following a 4.4% gain in December while the median price of an existing home dropped 3% to $170,300. More importantly on a year-over-year basis, sales are down 8.2% and median prices down 15.7%. From their peaks in 2006, the NAR shows existing homes prices have fallen 26% while the Case-Shiller index shows a drop of 27% for the 20-city composite over the same period - so much for earlier NAR criticisms that Case-Shiller data weren't truly representative. Although the inventory of unsold existing homes slipped to 3.6 million from 3.7 million, the expected time to sell climbed to 9.6 months from 9.4 months in December due to slower sales.

Then on Thursday, we learned that new homes sales dropped to yet another new low as January new home sales dropped to 309,000 (annualized) which was a 10.2% drop from upwardly revised sales of 344,000 in December. Inventories dropped to 342,000. There are now more homes for sale than sold in the year - a situation that first occurred in December pushing the time to sell a new home currently to 13.3 months according to Census data. On a year-over-year basis, sales have fallen 49.1% and are down 70% from their peak in December 2006. And like existing homes, new home median prices are dropping more rapidly falling to $201,100, a 9.9% drop from $223,200 in December.

We also got January durable goods data showing a drop of 5.2%. December was revised down from 2.6% to -4.6%. With revisions, durable goods orders have fallen an average 4.5% per month since September. Overall the data show that businesses are sharply curtailing spending on large items such as machinery, equipment and vehicles with durable goods shipments off 3.7% in January - an important component of the GDP. Defense orders were off a whopping 28.3%.

On Thursday, the country got an advance peak at Obama's new budget with a record $3.94 trillion in spending with a projected budget deficit of $1.75 trillion for 2009 which included as much as $750 billion in new aid for the financial industry.  This deficit amounts to 12% of GDP and that assumes GDP doesn't drop significantly over the next year. It also means the amount of US Treasuries the government will have to sell jumps from $100 billion as of last week's estimate of a $1 trillion deficit to $146 billion each and every month! As a point of reference, Treasury international capital flows have averaged $64.6 billion/month over the last three years according to data from U.S. Treasury.

Last but certainly not least, we learned on Friday that GDP tanked and the new estimate for Q4-08 GDP is -6.2% which would be the worst performance since -6.4% in Q1-1982. It is important to point out that GDP data is issued by the government and is ameliorated through some interesting statistical tricks that have been invented over the years such as imputations and hedonics, so in fact are significantly worse than reported in any given month. Ditto for unemployment data. Statistics such as CPI and inflation data are manipulated the make them look more benign than reality. In other words, inflation is higher and GDP growth lower than we are led to believe.

Warren and the Prince sing the buy & hold blues...
Warren Buffett, the worlds' most famous buy and hold investor, was singing the blues this week about the state of the economy and what he sees for 2009. In a recent annual corporate earnings report, Berkshire reported that Q4 earnings had fallen 96% from the year before. Below we see a chart of Berkshire Hathaway (BRK-A) showing the stock down 48% since its December 2007 peak price just above $150,000 per share.

It is interesting to note that his stock turned down well in advance of the 2000-2002 downturn (see chart below). After peaking in 1998 at $84,000 cratered to put in a bottom as the Nasdaq Composite was peaking in March 2000 and did quite well during the last recession. However, this time around it appears to be suffering along with the rest of the market so may not provide the same recession proofing that it did last time around.

And the next most famous buy & holder, Prince Alwaleed bin Talal, dubbed the Warren Buffet of the Gulf who once declared when asked about his intentions with one of his biggest holdings, Citigroup declared "I never sell!" has seen the value of his holdings decimated.  His publicly trading company Kingdom Holdings of which the prince is the biggest shareholder has fallen from its peak of $14 per share in December 2007 to $4 as of Friday's close, a drop of 71.4%. This is due in large measure to the performance of Citigroup which closed at $1.50 Friday down 97.3% from its peak of $56.67 in December 2006.  Meanwhile, Citigroup was in the news again this week when the government agreed to a third rescue (!?) of the troubled company in a stock conversion that would make taxpayers a 36% shareholder in a move that many see as a prelude to nationalization.

So what will it take to get shareholders their money back? Buffett and company will need to generate returns of 108.3% to get Berkshire Hathaway shareholders their back to even. However, the Prince faces a much more daunting task. Just to get his Kingdom Holdings shareholder's portfolio totals back to where they were 15 months ago, he will need to generate a return of 250%.

And Citigroup shareholders including the Prince will need to see that stock price rise more than 3600% to get them back to where they were in 2006 - not an easy task at the best of time but a near statistical impossibility with the government as your major (and very annoying) partner!

Figure 2 - Weekly chart of Buffett's Berkshire Hathaway A shares over the last decade with current downturn performance compared to that of the last recession. Chart by

Stories of interest this week...

Obama Seeks $1 Trillion Tax Increase in Budget Plan

Buffett Says Economy ‘In Shambles,' Promises Better Days Ahead

Credit crunch may only have just begun, S&P warns

U.S. Banks Post First Quarterly Loss in 18 Years

Obama Will Seek More Aid for Banks If Necessary

S&P heads to first quarter ever of negative earnings

Yale's Tobin Guides Obama From Grave as Friedman Is Eclipsed

Fed Assets Rise to $1.92 Trillion After Mortgage Bond Purchases

Fannie to Draw $15.2 Billion From Treasury After Loss

Citi Gets Third Rescue as U.S. Plans to Raise Stake

Bringing Down House With Credit Default Swaps May Hit Yen Too

Baltic Currency-Peg Defense Cuts Reserves Amid Regional Slump

American Budgets Have More to Spare for Cars, Home Than in 1955


Inside the Meltdown

Rick Santelli strikes a cord with his take on the government bailouts

On the lighter side...

An appeaser is one who feeds a crocodile, hoping it will eat him last.
- Winston Churchill

Working for your wealth,
John M. McClure

John M. McClure, President & CEO
EquiTrend, Inc.

Posted 02-27-2009 9:11 PM by John M. McClure
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MadeOmoney wrote re: Stocks sink deeper in nationalization quick-sand
on 03-05-2009 9:21 AM

Thank you!