Yes, That Was the End of the Rally

As queried yesterday, the split decision by the major indices, resulting in paltry gains and losses across the board, appears to have signaled at least a pause of optimism for the markets.

News flows were both good and bad (depending on one's perspective) prior to the open, highlighted by JP Morgan Chase (JPM) trying to get away with reporting second quarter results which included unusual one-time gains. The usual protocol is for one-time charges or gains to be stripped out, as the vast majority of analysts predict on such a basis.

The Financial Times reports that JPM's earnings "Signal end of Wall St. rebound" and even Wall Street darling CEO Jamie Dimon couldn't get away with reporting $1.09 per share, when analysts were seeking 70 cents, excluding one-time charges. JPM decided to pad earnings by lowering their loan-loss reserves by $1.5 billion. Stripping those out, the venerable House of Morgan made 75 cents per share in the quarter, though there were likely other crafty accounting tricks employed.

For their efforts, investors sold off the nation's second-largest bank to the tune of a little more than a point at the lows of the day. When all was said and done, however, and the Wall Street connivers couldn't stand a little decline, all stocks were boosted in a furious final half-hour, which saw the Dow gain about 70 points and JP Morgan close 11 cents higher on the day, closing at 40.46.

The final push was attributed to passage of the long-overdue Financial Regulation bill by the Senate, but stocks finished mixed again. As the Dow and NASDAQ finished higher on Wednesday, today's two winners were the S&P 500 and NYSE Composite, a complete reversal. So, for the past two days, all the markets did was vaporize a lot of money.

Also prior to the open Initial jobless claims for the week reportedly totaled 429,000, down 29,000 from the previous week. Following last week's precipitous drop, continuing claims climbed by almost 250,000 to 4.68 million. Separately, the Producer Price Index (PPI) for June fell 0.5% month-over-month, another sure sign that deflation is well-entrenched.

The NY Fed Empire Manufacturing Index fell to 5.08 in July, from 19.57 in June, a seven-month low.

Industrial production gained 0.1% in June, while Capacity Utilization stalled out at 74.1% over the same span. All of these indicators cause stocks to sell off at the open, but career further and deeper into the red after 10:00 am when the Philadelphia Fed announced that their manufacturing index fell from 8.0 in June to 5.0 in July.

If there isn't a double-dip or recession headed our way, you sure can't tell it from the spate of negative statistics sprouting from every corner of the economy.

Dow 10,359.31, -7.41 (0.07%)
NASDAQ 2,249.08, -0.76 (0.03%)
S&P 500 1,096.48, +1.31 (0.12%)
NYSE Composite 6,916.81, +13.45 (0.19%)

Decliners again led advancing issues, 3601-2789, and new highs remained ahead of new lows, 172-71. Volume was weak, owing to the uncertainty of the marketplace.

NASDAQ Volume 1,980,588,625
NYSE Volume 5,214,455,500

Crude oil sold off, losing 66 cents, to $76.62, but gold was higher once more, up $1.30, to $1,208.10. Silver gained 7 cents, to $18.35. All traders in commodities are due for a rude awakening at some point, when deflationary forces can no longer be contained and demand eventually falls off a table. Those not in cash (unlike myself and ardent followers of this blog) should begin shedding all semi-liquid assets, including futures contracts, as all signs point to a resumption of the bear market, though this time bottoms could be severe - far lower than expected.

After the final bell, Google (GOOG) was ravaged as it missed analyst expectations of $6.52, by seven cents, or $6.45 per share. To understand the absurdity of Wall Street, one must realize that Google is among the most profitable companies in the world. GAAP operating income (revenues after expenses) was $2.37 billion, which is a pretty good sum of money for any three-month period. Nonetheless, some traders saw fit to wallop the stock down more than 20 points in after hours trading, or, by more than 4%.

Maybe it was a touch overvalued at $494 a share, or, 22 times earnings. Live and learn.

This earnings season can't be over with already, can it? We've just gotten started. There are sure to be wild gyrations tomorrow on options expiration and over the next two weeks, which will only be fun if you're winning.

Is This the End of the Rally?

Stocks may have gotten a little ahead of earnings schedule, as there was absolutely no lift to the markets, even after Intel's (INTC) blowout quarter, announced last night after the close.

Struggling all day to find any buying interest, Dow and S&P stocks sent the majority of the day trading just below the flat line, with the NASDAQ sporting slim gains.

After the FOMC minutes were released at 2:00 pm, stocks abruptly turned lower, but traders boosted them back to nearly positive by the end of the session, ending with two indices up and two down, though marginally. Overall, the FOMC minutes may have had the most impact, as the opinions expressed revealed that a majority of Fed governors felt that while the economy would not fall into recession again, growth would be moderate and it would take five or six years for the US economy to regain a solid footing.

That kind of sentiment cannot be encouraging to the general sentiment and it showed up immediately in the lackluster trading and rocky internals.

What seems to be most disconcerting to stocks are technical n nature, as the indices are all toying with the space between the 200-day moving average and the 50-day. In each case, the two have crossed, with the 200-day now declining, along with the 50-day. Moving past the 200-day line will take some very positive news, though any gains in such a sloe environment are unlikely to be lasting. It seems as though the entire earnings season has already been wasted on the past six days, in which the indices already gained 7-8%, a big enough move in any environment. Adding to the confusion is options expiration this Friday, which has no doubt contributed in a big way to the sudden upside surge.

Dow 10,366.72, +3.70 (0.04%)
NASDAQ 2,249.84. +7.81 (0.35%)
S&P 500 1,095.17, -0.17 (0.02%)
NYSE Composite 6,903.36, -4.42 (0.06%)

Declining issues led advancers, 3535-2828, though new high remained well beyond the reach of new lows, 176-41. It should be noted that at this time last year, stocks surged powerfully, and that should negate any strengthening of new lows for a considerable period. Volume was just about average.

NASDAQ Volume 2,165,528,750
NYSE Volume 4,653,667,000

Stocks weren't the only assets stuck in neutral. Commodities hugged the unchanged mark most of the day. Oil lost 11 cents, closing at $77.04. Gold dropped $6.50, to $1,206.80, while silver added 4 cents, to $18.27.

Financial stocks are next up on the calendar, along with PPI and CPI on Thursday and Friday, respectively. JP Morgan Chase (JPM) reports prior to the open on Thursday, with Bank of America (BAC) and Citigroup (C) releasing on Friday.

There have been no major surprises, though retail sales were reportedly weak (not surprising) and Intel's earnings - in an ordinary environment - would have ignited a powerful rally in techs, though none was forthcoming.

An air of extreme caution and pessimism about the future seems to have fully enveloped Wall Street.

All Aboard! CSX Prompts 6th Straight Day of Gains

This is what earnings season is all about.

Investors and traders have waited patiently through two months of severe selling for days in which stocks could outshine a slew of negative economic reports, and it appears - for some, at least - that the waiting is finally paying off.

Stocks surged for the 6th straight session after rail operator, CXS reported strong earnings after Monday's close, citing net income gains of 36% in the second quarter, beating analysts' expectations. Revenue grew 22% to just below $2.7 billion.

Despite the strong report, shares of CSX were lower by about 1.5% on Tuesday, but the upbeat sentiment associated with the company, which hauls coal and countless other raw materials, parts and integrated supplies across the United States, gave traders confidence to bid a wide array of stocks higher.

Dow 10,363.02, +146.75 (1.44%)
NASDAQ 2,242.03, +43.67 (1.99%)
S&P 500 1,095.34, +16.59 (1.54%)
NYSE Composite 6,907.78, +113.30 (1.67%)

Gains were solid across all of the indices and internals were in line with the headline numbers. Advancing issues pummeled decliners, 5486-1025 (5:1), and new highs soared past new lows, 179-48. Volume, however, was not particularly strong, as reticence among potential stock purchasers remained high.

NASDAQ Volume 2,140,849,750
NYSE Volume 5,288,201,500

Commodities trended mostly higher on the day. Crude oil, on the August futures contract, rose $2.20, to $77.15. Gold gained $14.80, to $1,213.30, while silver was up 34 cents, to $18.24.

Announcements after the close on Tuesday were forthcoming from two important companies in vastly different sectors: Intel (INTC) and Yum Brands (YUM).

Intel achieved a smashing success in the second quarter, the best ever in the company's 41-year history, with gross revenue of $10.8 billion, 67% gross margins, operating Income of $4.0 billion, net Income of $2.9 billion and EPS at 51 cents.

The results were well ahead of Street estimates, and completely overturned year-over-year results. For instance, the 51 cent EPS was 183% better than the second quarter of 2009. The company also was very positive about the remainder of the year, with growth expected across all business units.

Stock players were impressed, as shares rose more than 5% in after-hours trading.

When YUM Brands (YUM), owners of KFC, Taco Bell and Pizza Hut, reported second quarter results, sentiment turned decidedly negative. The company beat analyst estimates narrowly, posting EPS of 58 cents, 3 cents better than the 55 cents anticipated, but revised its full-year forecast to $2.43 a share, with Wall Street expectations at $2.48.

This sent the stock tumbling more than 3% in after-hours trading.

These two bellwether stocks demonstrate the cross-currents in the markets quite adequately. While general economic reports - especially those concerning housing and employment - remain a drag on the economy, companies insist that they are lean and profitable, as shown by the results from YUM Brands and Intel.

What is a conundrum for many, however, is the multiple, or PE at which specific companies are trading. Across the S&P 500, the current cumulative PE is about 15, historically high. Intel is right on that number, including this quarter, at 14.45. YUM's trailing PE (using the most recent past four quarters) is an astronomical 19.22.

In other words, it would take 19 years to recoup an investment in YUM Brands based on earnings per share, and just shy of 15 to break even in Intel. In an economic environment beset with an overburden of debt still growing (government) and some being worked off in the private sector, investors may not feel comfortable with such high multiples. That will keep sentiment on the negative side until these multiples come down to levels more in line with the reality of a slow-growing economy. Something in the neighborhood of 9-12 might be suitable, perhaps even lower.

In the small business world, which is arguably more risky, companies rarely sell for more than six times earnings. More often than not, companies sell for three to four times annual earnings, as small business owners seek minimization of risk and quickly recoup their capital. The big business world of Wall Street, operating on a far loftier basis, may be overpriced by a wide degree. Small investors will not stay put in longer term equities with questionable outcomes.

A return to more reasonable valuations would send stocks into a tailspin, though, following on the deflationary backdrop which has been the dominant trend for the past two to three years, a severe correction, on a valuation basis, may be forthcoming.

Stocks Stall on Aloca Waiting Game

Ahead of earnings from Alcoa, officially kicking off 2nd quarter reporting season, stocks were flatter than paint on a wall. Additionally, volume was at levels not seen in many months, completely lacking in conviction from buyers or sellers.

Still, three major averages managed to post their fifth consecutive day of gains, while the NYSE Composite surrendered a fractional loss.

Dow 10,216.27, +18.24 (0.18%)
NASDAQ 2,198.36, +1.19 (0.06%)
S&P 500 1,078.75, +0.79 (0.01%)
NYSE Composite 6,794.48. -14.23 (-0.22%)

Declining issues finished well ahead of advancing ones, 4185-2170, though new highs registered well in excess of new lows, 158-65. It's likely, as earnings reports begin to appear with regularity, that stocks will get a reprieve from the previous two months of fairly-uninterrupted selling. While corporations may report excellent second quarter results, the underlying economies - in the US and Europe, especially - remain under pressure from excessive government spending and overall flagging economic statistics.

NASDAQ Volume 1,329,977,875
NYSE Volume 2,923,618,750

In the commodities space, gold gained $6.70, to $1,205.20; silver added 18 cents, to $18.08, but crude oil slipped $1.14, to $74.95, as oil continues to show reluctance to move past the $75 per barrel mark.

Alcoa (AA) announced a .02 beat of street estimates, which is just barely good enough to satisfy skeptics.

Forget Double Dip, the Next Bottom May be Deeper

Stocks continued their now four-day rally with the weakest volume of the week on Friday. Most of the buying - mostly positioning for earnings releases beginning next week - occured in the final two hours of the session.

Nonetheless, it was a stellar performance for the holiday-shortened span, with stocks rebounding sharply after two months of relentless selling.

Dow 10,198.03, +59.04 (0.58%)
NASDAQ 2,196.45, +21.05 (0.97%)
S&P 500 1,077.96, +7.71 (0.72%)
NYSE Composite 6,808.71, +52.90 (0.78%)

Advancers buried decliners, 4901-1497, and new lows were trampled by an onrush of new highs, 168-72. Volume was the lightest it has been in weeks, typical for summer trading, though potentially disconcerting to some trend-watchers who have noted many recent higher moves on inadequate volume. It's called speculation, and there's still plenty to go around.

NASDAQ Volume 1,601,902,625
NYSE Volume 3,999,371,000

Commodities were again positive for sellers, with oil up 65 cents, to $76.09, gold rocketing higher by $13.80, to $1,209.60 and silver tacking on 20 cents to the price of an ounce, at $18.05.

Following up on a recent post - June 1, US Markets the World's Laughing Stock; Second Great Depression Still Looming in which I compared current stock market conditions to those of the Great Depression, along come two esteemed commentators, Donald Luskin of Trend Macrolytics LLC, writing for the Wall Street Journal, and Daryl Guppy of GuppyTraders.com to solidify my position and rationale.

Luskin's article, Why This Isn't Like 1938—At Least Not Yet, carries my argument about the similarities a step further and somewhat in another direction, comparing today's stock market, and economy, to that of 1937-38, a recession within the Great Depression which exhibits an eerily-similar pattern to the recent S&P 500. Offering an over-imposed chart of the two periods, it's difficult to argue against his analysis, especially when he mentions:

In 1937 the economy was in a strong recovery from a severe crisis, and there was complacency that the worst was over—much like the exuberance about a "V-shaped' recovery this April. But after 1937 the economy relapsed into what historians call "the recession within the Depression," a downturn so severe that in any other context it would qualify as a depression itself.

It was triggered by a set of very specific policy mistakes. The Fed tightened by raising reserve requirements. Consumers were hit with new taxes to pay for the then-new Social Security program. Worried about excessive deficits, Roosevelt cut government spending. At the same time, his administration accelerated antibusiness rhetoric and regulation.

Those conditions sound quite a bit like what is directly ahead for the US economy, some of the same policies already set in motion.

Guppy's point is that there's a head-and-shoulders pattern developing that looks just like the one at the start of the Great Depression, the period to which I referred in my June 1 post. His analysis was released on July 5, when most of us were still enjoying the tail end of a three-day weekend, so it's unsurprising that many missed it.

Whether or not anyone agrees with history repeating itself, charting or comparisons, it certainly seems worth considering what might happen over the next 6 months to 6 years. Using reasonable market assumptions being a key tenet of any sound financial plan, might it not be time for people to begin using models which predict lower rates of return, possible deflation - instead of inflation - and benchmarks taken from actual conditions rather than the rosy assumptions (7-9% y-o-y gains, 3% inflation) usually thrown around by "respected" financial planners and analysts?

Which brings up yet another point of contention. Bull or Bear, optimist or pessimist, everyone has to have some kind of time horizon for investments, and, there being no better time than the present to plan for the future, one wonders just how long it might be before stocks return to the all-time highs of October, 2007.

I'll toss out a number here, just for argument's sake. With the Dow right around 10,000 today, I'll say that the index won't return to the 14,164 number (October 9, 2007) for maybe thirty years. How's that for perspective? Too gloomy? Bear in mind that it took more than 25 years years from stocks to recover from get back to the previous pre-crash high. The Dow Jones Industrials closed at 381.17 on September 3, 1929 and didn't rise back to that level until November 23, 1954, when they closed at 382.74. Surely, conditions were dire during the Great Depression and through world War II, but, considering the massive amount of debt overhang (still growing) and unfunded liabilities of around $130 Trillion (unfunded and unresolved), one might suggest that economic conditions are far worse, by degree, than they were some 80 years ago.

Just using a simple formula of 7% gains, compounded annually, it would take five years to retake the 14,164 level, and is anybody predicting five straight years of 7% returns? None that I know of, and if you know of any, do yourself a favor and seek out other opinions. With the ten-year treasury hovering around 3% and the 30-year around 4%, we all should be well aware that explosive growth is not in the near-term cards.

That's why I keep saying that cash is king, because if stocks and other assets decline in value, your cash will buy more down the road. That's what deflation is all about.