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world stock market, us stock market
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5/05/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: BEBE; CHTT; BLUD; DGX; CNMD
Trailing stops: None issued
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- GM giveth and GM taketh away, but market survives.
- Retail sales deemed 'sluggish,' but the winners keep winning.
- Productivity easily beats expectations, gives Fed some breathing room for 'measured' pace.
- What impact will GM have upon Greenspan?
- Very solid day of rest after Wednesday follow through.
- Jobs report dominates headlines, but not the overall market outlook.
GM gets 'junked' by S&P but that does not alter the overall moved the tender offer sparked.
There were a lot of 'I told you so' comments Thursday as S&P downgraded GM and F to junk status and the market suffered a midday jolt as a result. The large caps were knocked back pretty hard, but after the initial drop, stocks held their ground above support and posted a modest rebound into the close. They did not reach positive overall, but the losses were quite modest. Volume was modest, breadth was modest, and losses were modest. The market took a potentially damaging piece of news and figured it did not mean major trouble for the economy.
Thus stocks held up just fine following a solid upside session that provided follow through to Friday's rebound from year lows on NASDAQ. It was rather amusing to hear the financial station market reports bemoaning the 'lack of follow through' to the Wednesday surge. Wednesday was the follow through session to a rally that had already started. There can be more follow through sessions, indeed the more the better. Thus the lower volume flat session Thursday did no damage to the move in progress. Similar to the early 2003 pullback where many heralded the return of the bear market but we saw as just a low volume consolidation, Thursday was just a low volume consolidation. It showed some guts as well as stocks basically shrugged off two of the big three auto makers (maybe just the big 2 now that Daimler owns Chrysler) were basically lowered to speculative status. Once the market gets past the jobs report it should be ready to move higher once more.
The domestic auto makers must change fundamentally or fail.
Speaking of GM, it has a lot of problems that Kerkorian cannot fix unless there are major changes in its labor structure. It is a healthcare company and a finance company that also builds cars. Do we have that backwards you may ask. Well, just look at what GM can and cannot do in making cars. If the car market slows or it cannot compete with other manufacturers say from, I don't know, JAPAN, what can it do? Most companies would try to get better product and make necessary cuts to better compete. New product development takes time, so that means the interim step is to cut costs. Because of its labor contracts, however, GM CANNOT idle certain plants or lines. In short, no matter what the market conditions are, GM has to run certain plants. The labor is telling management how to run the company; the tail is wagging the dog.
Thus, just like the federal government, it has entitlement spending that it cannot get rid of unless there is fundamental change. Put another way, there has to be new, realistic attitudes toward the world and the market today. The auto market is no longer a three ring circus run by the US makers; the US makers are losing to the foreign makers. That is not new, but the rate of change is rising and the US makers, because of their labor agreements that are throwbacks to the 'big 3' days, cannot keep up and compete. Unless there is fundamental change in the structure of the domestic auto business it will not survive. Steel had to change and it did, helped by surging demand. That made it easier. GM and F have no easy road ahead, but the Kerkorian 'threat' may engender the realization that change is needed, and they had better do it themselves or have it done for them.
GM tender offer may not save GM but it sure helped change the market attitude.
While the Kerkorian offer may or may not spur the needed change in GM, it did spur the market. Many say Kerkorian could 'unlock value' in GM by forcing a split, e.g. selling the valuable Cadillac brand. What his offer did for the market was unlock value; in other words it opened some eyes that stocks could be a bit low in price. If Kerkorian thinks GM is at a price where it is ripe for buying and harassing into change then other areas and businesses in the market could be equally ready. Right now big money is poring over potential breakup buys. Sounds like the 1980's and Gordon Gecko's 'greed is good' speech, but it may be a big player in how this market proceeds. Don't believe this is like the 1980's? Well recall that back then there were California freeway shootings just as there are now. The parallels make you shiver, huh? Human behavior runs in cycles and is reflected in the markets and how we treat each other. Anyway the M&A activity is up with companies loaded with cash. They are looking to use the cash to buy, cannibalize, keep the strong, toss the chaff. It is a way to run the market higher, though it is no one's favorite.
THE ECONOMY
Same store sales 'mixed' once more.
The teen retailers were surging, the luxury marketers were solid, but the rest of the retail market was sluggish. In short, no change. AEOS +20%, URBN +11%, WTSAL +35%, ANF +16%. Kids are spending with their usual wild abandon, something else that started back in the 1980's when marketers discovered a multibillion dollar market in baby boomer children. They are the next 'I want it now' generation (pioneered by their parents), and they are getting it now.
Contrast WMT's 0.9% gain, JCP's lowered guidance, and misses from TGT, LTD, DDS. The 'usual' crowd was posting the 'usual' results. Discounters have it tough now that the recession is over. There is a lot of political talk about how the economy never really recovered, and while the job market has not recovered to its pre-recession norms (and it may not for years given the fundamental changes in the economy) and has left many hurting to this day, the fact that discounters are no longer dominating retail sales as they were in the recession speaks for itself. If things were that bad still, then the discounters would still be ruling the day in retail.
This is just a cycle in a familiar theme. Back at Christmas 2001 and even 2002 the department stores and other specialty retailers along with the retail commentators were moaning about poor sales. At the same time WMT, TGT, KSS, COST and the other discounters were stockpiling the cash in the back rooms because it was coming in so fast. That is the nature of retail today; depending upon what cycle the economy is in, one group wins, the other loses, and the teen retailers rule. That was affirmed again with the Thursday sales.
Q1 productivity at 2.6% swamps the 1.8% expected and beats 2.1% in Q4.
Greenspan watches a lot of 'indicators' when sizing up inflation pressures, a holdover from the late 1990's when he found his old yellowed, crumpled copy of the Phillips Curve, saw his shadow, and crawled into the 'protectionist' mode. What is that? It happens when the Fed suddenly gets scared of prosperity and starts playing to protect the lead from creeping inflation. Greenspan came up with a whole laundry list of inflation indicators, most of which sane people would say are indicia of prosperity. Indeed they are. The Phillips Curve equates low unemployment and strong production with inevitable inflation. If you go by this measure, you walk in fear of being too happy.
The productivity argument is a bit more accurate than the 'fear prosperity' model outlined in the Phillips Curve. The theory is that if productivity is high then businesses can absorb costs such as rising materials and even labor because they get more out of each worker. Companies have been playing that to the hilt in this recovery as they have been quick to continue layoffs but slow to hire. Thus even though unit labor costs rose 2.2%, topping the 1.7% from Q4, the rising productivity helps keep pricing pressures offset.
Thus strong productivity helps offset rising prices because companies can produce goods and services more efficiently and thus cheaper. That sure sounds like the supply side. Indeed, it is, or at least part of it. Productivity is a subset of supply, and when supply is strong then there are less inflationary pressures. Problem is, the Fed only looks at productivity and does not really buy into the supply side/inflation connection directly. Instead it looks at output gaps, slack demand and the like and thus leans too much on demand. Not that it could do much about supply with just rate hikes or cuts, but it would help if the Fed stopped being so PC (Phillips Curve) and embraced prosperity. Despite his proclivities to revert to the PC, Greenspan still understands the value of free markets. We are very concerned a post-Greenspan Fed will be even more PC. Too bad Bob McTeer decided to leave the Fed; he would have made a great chairman.
In sum, the productivity reading will give the Fed some comfort that inflation is not running wild (long term inflation is well contained, right?) and thus no desire to jack rates higher at a faster pace. It won't change the Fed's course of action, but it will help keep the Fed from worrying itself into a hiking frenzy.
GM versus Greenspan.
Here is one to consider. GM is a big, big company. So is Ford. A downgrade to junk status, though expected, does not change the fact that they are considered a poor risk to survive. That is what this means. Their paper is rated as junk because the paper raters believe it won't ever be paid. It does not mean failure is imminent, and indeed, it does not mean there will be failure. It does bring up that possibility, however. Chrysler got a bailout in the 1970's. Would GM and F warrant the same? Are they too big to fail? Moreover, does their problems translate to the rest of the big names?
Some are saying that this downgrade is the harbinger of the Fed closing out its rate hiking campaign. To us that presumes that the Fed will view GM's problems wider spread and that it is too big to allow to fail. With companies flush with cash (from what we hear and from the tax collections) the problem does not seem widespread. The auto industry's problems are with labor and how that has impacted its ability to compete with foreign makers. Drawing the conclusion the Fed will not hike further because of this debt downgrade is thus dubious.
It does not hurt, either. The Fed funds futures are still showing just two more hikes by the Fed in this campaign, and problems such as GM and F certainly won't extend the hiking. Moreover, you cannot ignore what the market is telling you. When the downgrade hit the wire homebuilders jumped higher along with other interest rate sensitive stocks. When they move higher that is an indication that the market is pricing in the end to rate hikes. You cannot ignore the market or key individual sectors.
THE MARKET
Indeed the market, despite the losses, performed well. After a strong day the market often takes a breather. It was doing that, but had recovered to slightly positive territory before the GM/F news. A hard intraday drop, but stocks held support and then rebounded in the last hour to close basically flat. A good day of rest in the face of some potentially bad news. It weathered it, and indeed it looks as if it will turn bad news into a positive and continue higher after this pause. It has the look of pricing in the end of the rate cuts similar to the end of 2004. It may or may not be right this time, and we still will likely get a test of the recent lows, but we are playing the move as strong stocks show us solid breaks higher.
MARKET SENTIMENT
VIX: 13.98; +0.13
VXN: 18.12; -0.2
VXO: 13.34; +0.21
Put/Call Ratio (CBOE): 1.13; +0.14. Again the ratio was up though the market was down. Still a lot of put activity though it is hard to quantify it as downside speculation. Many stocks remain weak and in downtrends even as leaders break higher. The higher reading is likely attributable to downside plays on weak stocks as well as closing positions on other shorts.
NASDAQ
Went nowhere on lower volume, holding at the recent late April peak.
Stats: -0.43 points (-0.02%) to close at 1961.8
Volume: 1.772B (-8.92%). Volume decreased as tech stocks took a breather, very good price/volume action continues to develop. We note that through Wednesday volume had increased three of the last four sessions, all of which posted gains. That shows the institutions, the big money, coming into the market once more, and doing so on the upside.
Up Volume: 919M (-581M)
Down Volume: 821M (+411M)
A/D and Hi/Lo: Advancers led 1.03 to 1. Flat just liked the price.
Previous Session: Advancers led 2.19 to 1
New Highs: 57 (+6)
New Lows: 79 (-24)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Flat on lower volume right at the late April high (1962.41). On the candlestick chart NASDAQ showed a doji and that can indicate a pullback ahead, but that is not likely the case here. The index just joined in with a follow through after a violent back and forth slugfest in April. After this pause it looks ready to test the bottom of the recent range (1974), the 200 day SMA (1991), and the 50 day SMA (1995).
NASDAQ 100 showed the same action and looks ready to move to test similar resistance at the 50 day EMA (1467) and the 200 day SMA (1482). If it makes it through there it is showing some real strength. It may take a turn back down for the test at that point. Intel said it was seeing good demand Thursday, and that could help.
SOX rallied but gave back the gain on the general market pullback. It held the 18 day EMA (393), still ready to rally higher in its trading range toward the 50 day EMA (404.45) and the 200 day SMA (407.12). After that is the bottom of the late April/early March consolidation attempt at 410.
SP500/NYSE
Modest loss on lower, below average volume as the large caps had to deal with the GM and F debt downgrades. Still solid action, recovering off the lows and cutting its losses by the close.
Stats: -3.02 points (-0.26%) to close at 1172.63
NYSE Volume: 1.612B (-10.35%). Good lower volume Thursday as the NYSE indices held steady, keeping their gains despite bad news. Well poised to continue the move.
Up Volume: 869M (-1.092B)
Down Volume: 1.094B (+777M)
A/D and Hi/Lo: Advancers led 1.13 to 1. The mid-cap SP400 helped keep breadth positive with their 0.2% gain.
Previous Session: Advancers led 3.23 to 1
New Highs: 82 (+6)
New Lows: 20 (-10)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 tried the 50 day SMA (1180.54) on the intraday high (1178.62) and then the GM news hit and took it to negative territory. A solid last hour rebound cut the losses as volume backed off. SP500 cleared a key resistance point on the Wednesday follow through move and now it is at another at 1175 and the 50 day SMA along with some prior price lows at 1187. Now it is yet at another test point where it has to prove itself; coming back from selling is never easy. For now this is just a rest stop, but we are going to keep our eyes open as SP500 moves through the 50 day SMA and on toward 1200.
The small cap SP600 closed flat, right below the late April peak where the 'hump' to the short double bottom is (313). This move left it in the same position, still facing the 50 day EMA (315.64), and more resistance at 321 (the 50 day SMA is at 319.67). Another tough road higher, but set up to make the move.
DJ30
Managed quite well despite the news, tapping at the 50 day EMA (10,404) on the high before selling. Lower volume as it came back, so no real damage done to the recent rebound off of 10,000. It is at the late March lows (10,400) as well; several layers of ice to crack through here. As has been the case the past two months, DJ30 has had to deal with one of its components imploding. Thursday it handled the news much better than usual.
Stats: -44.26 points (-0.43%) to close at 10340.38
Volume: 236 million shares Thursday versus 275 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The jobs report is the marquis event, but we feel that it won't dominate where the market is heading over the next week even if it disappoints. As for the actual number, 175K non-farm jobs are expected, and the weekly claims and private surveys indicate this is in line. Indeed a 200+K month may be in the works. Either way we don't feel the result will have a lasting impact into next week.
We have a positive outlook for the market overall near term with the follow through and some good leadership moves. It does not hurt that some are factoring in that the Fed is very close to being done and that oil is still near a breakdown at $50/bbl (if only it would). Nonetheless there are also many stocks still locked in downtrends and thus far unable and not showing any signs of reversing the trend. It often takes time after a follow through for the rest of the market to come around, and some, such as the auto and auto related stocks may not do it.
Thursday gave many stocks a breather from strong breaks higher. If they continue from here that shows renewed interest and strength and some will be worth a buy as the market continues this rebound from the hard selling and then sets up some downside to set a better bottom as the summer rolls around.
Support and Resistance
NASDAQ: Closed at 1961.80
Resistance:
1962 is the recent lower high.
Late 2003 highs from 1960 to 1970 and the March/April consolidation low at 1974
Early October high at 1971 and the March low at 1973.
The 50 day EMA at 1984
The 200 day SMA at 1992
The 50 day SMA at 1995
Price lows at 2028.
Support:
1950 (top of October to December 2003 consolidation)
The 18 day EMA at 1947.
1904 is the April low.
1900 from October 2004, March 2004, October to December 2003 (consolidation range bottom) held on this last test.
1876 from the May 2004 low and November 2003 low.
1860 from the late September 2004 low.
S&P 500: Closed at 1172.63
Resistance:
1175 second high in that double top that spanned late 2001 and early 2002
The 50 day SMA at 1181
The April high at 1192.
1196, the mid-January high and the early December peak in the left shoulder.
March 2003 up trendline at 1197
1200
Support:
The 50 day EMA at 1173
1164 is the January/March neckline to the head and shoulders pattern.
The 18 day EMA at 1163
The 200 day SMA at 1156
1137 the recent April low.
1138 the August 2003/August 2004 up trendline
1129 to 1125
1100 to 1095
Dow: Closed at 10,340.38
Resistance:
The 200 day SMA at 10,378
10,400, the bottom of the November/December range
The 50 day SMA at 10,491
Price consolidation at 10,600
10,754 is the February high
Support:
The recent April highs at 10,264
The 18 day EMA at 10,271
Some price resistance at 10,250
10,065 from March 2004 lows.
10,000 the recent lows.
9988 from September 2004.
9933 to 9900
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
May 02
Construction Spending, March (10:00): 0.5% actual versus 0.3% expected and 0.5% prior (revised from 0.4%)
ISM Index, April (10:00): 53.3 actual versus 55.0 expected and 55.2 prior
May 03
Factory Orders, March (10:00): 0.1% actual versus -1.2% expected and -0.5 prior (revised from 0.2%)
FOMC policy announce (14:15): 25 BP rate hike and no drop of 'measured pace' language or keeping the same language. No mention of stopping the rate hiking, and indeed it locked in another 25 BP hike by keeping the measured language and taking out the language regarding energy prices not passing through to consumers, implying they are passing through.
May 04
ISM Services, April (10:00): 61.7 actual versus 61.0 expected and 63.1 prior
May 05
Initial Jobless Claims, 04/30 (08:30): 333K actual versus 324K expected and 322K prior (revised from 320K)
Productivity-Prelim., Q1 (08:30): 2.6% actual versus 1.8% expected and 2.1% prior
May 06
Non-farm Payrolls, April (08:30): 175K expected and 110K prior
Unemployment Rate, April (08:30): 5.2% expected and 5.2% prior
Hourly Earnings, April (08:30): 0.2% expected and 0.3% prior
Average Workweek, April (08:30): 33.7 expected and 33.7 prior
Consumer Credit, March (15:00): $6.0B expected and $5.6B prior
End part 1 of 3
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