Archive for July, 2009

Weekly Recap & Outlook – 07.31.09

Friday, July 31st, 2009

Tower Private Advisors


    • Broccoli
    • Earnings peak
    • Mixed economics

      Don’t miss a couple of posts to the blog.  One’s comical; the other, frightening.  Click the hyperlinks below.



      Capital Markets Recap


      Chart School

      The chart below is a two-year history of the S & P 500.  I chose two years since it captures the all-time high in the index.  I’ve overlaid it with a series of lines that cause my colleagues to roll their eyes.  The most incorrigible among them seems to always reference broccoli in his side-bursting witticisms.  The lines are based on a series of numbers determined by Leonardo of Pisa.  He was the son (filius, Latin for son) of Bonaccio; thus, Fibonacci.  He came up with the series by pondering a question about the reproduction rates of rabbits.  [I'm not kidding.]  In doing so he came up a series of numbers that are found throughout history (Egyptian pyramids), art (many of Leonardo da Vinci’s paintings) , nature (broccoli), and security prices.  You may recall the word from Dan Brown’s The Davinci Code.  If you are some sort of math fiend you can find more information by clicking here.  If you’re more likely to get invited out to dinner by Joe the Plumber, click here.

      In short, the Fibonacci sequence goes like this:  0, 1, 1, 2, 3, 5, 8, 13, 21, and so forth, where the preceding two numbers add up to the following (e.g. 0 + 1 = 1; 8 + 13 = 21; etc.)  There’s a relationship between each number and the one that preceded it:  1.618 (e.g. 89/55).  There’s also a relationship between each number and the one that follows it:  0.618 (e.g. 55/89).  There are minor relationships as well, including 50% (e.g. 1/2).

      We can apply those ratios to the distance between the bottom and top of a security’s price action to come up with likely support and resistance levels in corrections.  This is called a Fibonacci Retracement.  While I don’t do it here, we could also find where a security’s likely to go once it’s making new highs by making a Fibonacci Projection.


      What we can take from this is that the index should run into trouble at about 1015, which marks the 38.2% retracement, then 1122, then 1230.  1015 should prove to be a considerable hurdle for the market, maybe even more than the 1000 level, which proved to be just a rest stop on the way down.  A common criticism of technical analysis is that it works because so many people expect it to.  That may be, and you may have your own weighty criticisms, but irregardless (yes, I know) the 1015 neighborhood will prove to be considerable resistance, mark my typage, and keep in mind that risk goes up as prices go up.

      We may be rubes at Tower Private Advisors, but the 1000 level of the Standard & Poor’s 500 makes us nervous.  We will likely raise some cash in accounts on a sprint through that level.  The index needs some time to consolidate the gains from the mid-July move, which it hasn’t yet had.

      Imagine playing Red Rover against a line of big kids.  It’s not the lean and quick little runt runt who makes it through; rather, it’s the big lumbering bruiser who eventually gets through.

      And the dreadful macroeconomic backdrop to the markets still gives us pause.  So long as that continues ugly, we’re going to have itchy sell-trigger fingers.

      Top Stories

      This week marked the busiest of the second quarter earnings reporting weeks.  148 companies reported results, and 75% of them beat the expectations of the sheep analysts.  That was the same rate at which they had bettered results in the weeks prior, which is better than the usual 68% rate.  For once, the Finance sector companies didn’t turn in the worst results.  Those were turned in by the Energy sector (-83.3% year-over-year earnings drop) and the Materials sector (-70.1%).  Again, Health Care had the best results (+5.69%), along with Utilities (+2.11%).  Want to do relatively well the next time the market goes in the loo?  Own Health Care and Utility stocks.  Want to get left out in the next rally?  Own Health Care and Utility stocks.  There’s a cost to consistency.  Next week’s earnings action is dominated by Utilities, Energy, and Finance sector releases, as 94 companies arrive at the confessional.

      This Week

      As happens around turning points the economic data points were mixed this week.  New Home Salesrose sharply compared to May results (384,000 v. 342,000) and encouraged the bulls who didn’t bother to look at the heights from which home sales had fallen. nhsbounce Judge for yourself from the graph below if perhaps folks are getting a little too excited.

      According to a blog post at The Big Picture, sales were boosted by Federal first-time home buyer credits and California tax credits, as if the land of fruits and nuts can afford that.  Indeed, sales in the West were up by 22.6% in the West, but that was only good enough for third place behind the Northeast (+29%) and the Midwest (+43.1%).  Encouragingly, inventories fell to a level of 8.8 months worth, which was the lowest since late 2007.  That was the week’s first bit of good news, but in the face of falling home prices it does bring into question the strength of housing just now, and you can see that in the chart below.  As always, click to enlarge.nhsp

      MBA Mortgage Applicationsfell this  by 6.3%, after rising last week.  Then there was the Case-Shiller Home Price Index data.  It showed home prices continuing to decline on a year-over-year basis, but at a declining rate, which you can see in the chart below and to the right.  Note that while the line has turned up, it remains well below the zero line.  The turned up portion is Ben Bernanke’s “green shoots” and the White House’s “economic recovery.”greenshoots

      Durable Goods Orders were, on their face, disappointing, as they fell by more than four times as much as economists expected.  When large orders for things like airliners are factored out, however, the report was quite strong.  In fact, it was infinitely stronger than economists expected (+1.1% versus 0%).

      Initial Jobless Claims rose by 30,000 (from an upward-revised 559M to 584M).  Continuing Claims–the rolls of those continuing to collect insurance–fell, surprisingly, but was likely the result of benefits running out for some.

      Second Quarter GDP was the report that was awaited all week, and it contained a mix of good and bad.  First, we didn’t know how bad the first quarter really was.  GDP for the first quarter was revised down from -5.5% to -6.4%.  Second, the Q2 release was -1.0%, which was better than economists expected (-1.5%).  Much of this Advance release was estimated and will be revised lower or higher in the ensuing two months.  Last week’s dispatch mentioned looking at GDP net of Inventory adjustments to come up with Final Sales (aka Aggregate Demand).  We do that by adjusting the headline figure (-1.0%)  for the drop in inventories of (-)0.83%.  That produces Final Sales of -0.17%, which marks a big improvement over the (-)4% drop in Q1.  Not surprisingly, given the increase in consumer savings, Personal Consumption fell (-1.2%) versus the first quarter (0.6%, revised downward from 1.4%).

      Next Week

      Monday - the week kicks off with a look at ISM Manufacturing, the nationwide survey of purchasing managers.  Economists expect it to have edged closer to the demarcation line between expansion and contraction.  Last month’s report showed strength in all but one of the component indexes (new orders, production, employment, supplier deliveries.)  Naturally, that was the employment component.  Chances are high it’ll be the weak link this time, too.  Total Vehicle Sales are due to be released on Monday, too, and economists expect a slight uptick (+3%) in volume (from 9.7 million annual rate to 10.0 million).  Judging by the success of the Government’s Cash-for-Clunkers program, there might be an upward bias to the release.

      Tuesday – on this day we get Personal Income and Spending, which report will also give us the Savings Rate.  Some savvy folks expect the savings rate to have dropped after last month’s spike.  We shall see, but it remains a critical component to the economy’s recovery path and likely presages a lousy back-to-school shopping season, which always correlates strongly with the holiday shopping season.  We also get the first of two housing data points in Pending Home Sales.

      Wednesday – on the heels of it comes MBA Mortgage Applications, which have largely been re-finance related and, not surprisingly given that, entirely dependent on mortgage rates.  The more important report of the day will be the ADP Employment Change index.  It is expected to show a drop in employment of (-)335,000.  Intended to front-run Friday’s employment situation report, it usually fails miserably.  The ISM Non-Manufacturing composite is due out.  As silly as the moniker “non fiction,” the report could better be called the ISM Service Sector report.  This index was one of the last ones to throw in the towel as the economy began to decline, and it’s also had a shallow decline.  Although it sports a higher number (48) than the Manufacturing version, its component indexes don’t look as good.  Given the transition of our economy to more service driven, this is a series to watch closely.

      ThursdayInitial Jobless Claims is the only report of interest to us on this day.  Economists expect another uptick to 595,000, while we expect 619,000.  Hopefully, we’re way high.

      Friday – none of any of that will matter at 8:30, with the release of Nonfarm Payrolls, which is probably the single-best gauge for what’s going on in the economy, although the trend is more important than one month’s data.  Economists expect that (-)340,000 jobs were shed in the month of July, with 100,000 of the decline having come from the manufacturing sector.  If those economic dreams come true, they will mark considerable improvements in the rates of decline in both.  Meanwhile, the Unemployment Rate, which comes from the Household Survey, is expected to have ticked up by 0.10% to 9.60%.  From September 2008, the unemployment rate rose in a virtual straight line until June, when it rose by just 0.10%, so a similar reading should cement the trend.  As much as you’d hate to, don’t forget the chart below.  It’s the one that shows the government spin job, which doesn’t seem to have a political party preference (click to enlarge.)


      Here’s hoping you enjoy the shorter days of summer as we charge into August, the 2/3 mark of the year.

      Graig Stettner, CFA, CMT – Vice President & Portfolio Manager – Tower Private Advisors


      Tim Geithner can’t sell his house

      Friday, July 31st, 2009
       The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
      Home Crisis Investigation
      Daily Show
      Full Episodes
      Political Humor Joke of the Day

      New recommended portfolio position: fetal

      Thursday, July 30th, 2009

      Maybe you’ve heard this by now, but, if not, put sharp objectives away before you read this.

      The 1929 – 1930 rally lasted 147 days and pushed stocks up by 46%.

      The present rally has lasted 145 days and has pushed stocks up by 46%

      Why worry, you say?  After the rally ended in 1930, stocks felly by 85%



      Weekly Recap & Outlook – 07.24.09

      Friday, July 24th, 2009

      Tower Private Advisors


      • It’s all better now/Sugar Ray Leonard
      • Earnings season in full swing
      • Recession over [INSERT BOILERPLATE HERE]
      • Warning:  no spell checking today

      Capital Markets Recap











      Last week’s missive cautioned against being too bearish for the next month and a half, while this one will caution against the opposite.  You’ll see the caution below to avoid investing by headlines.  The next worse thing to do is to follow the advice of sell-side (so named because they’re in the business of selling stuff) brokerage firms.  Recently, we’ve seen such stalwarts as Goldman Sachs, HSBC, and others raise their estimates of where stocks might go.  Thanks a lot fellas.  Where were you three months ago?  Hunkered down in cash, that’s where. 

      So far, gauges of sentiment are not showing rampant enthusiasm, and so long as that’s the case, one should stay invested, but when sentiment starts to get overly optimistic it’s time to dance closer to the door.  Stay tuned.  For now, enjoy the headlines, but don’t invest by them.  If you do, you could be getting set up like Sugar Ray Leonard did Muhammed Ali.

       Top Stories

       It’s all about earnings again, although it can be amusing to have congress people display their ignorance on American Grandstand as they question Chairman Bernanke–or Bernonckey, as one managed to address him.  Let’s not forget, as The Virginian blog pointed out, what they’re capable of:

      It was [Ohio Representative] Ms. Kaptur who only a year or so ago began her round of questions to Dr. Bernanke with the statement, “Mr. Treasury Secretary.” Dr. Bernanke said, very calmly, “I am not the Treasury Secretary.” Ms. Kaptur responded in a stament that should be entered into the Hall of Fame of Congressional faux pas, “Who are you then, Sir?”

      This week 144 companies in the S & P 500 announced earnings.  107 (74.3%) reported better than expected results, also known as a positive surprise, while 35 (24%) announced negative surprises.  On a year-over-year basis, in aggregate, companies this week saw earnings fall by 26.15%, with the worst sector being–no surprise–Finance, with a drop of (-)66%, and the best being Health Care, with an increase of 1.40%.  Care to guess the second-best performing sector on a year-over-year basis?  With only eight other sectors remaining, one can’t say you’ll never guess, but it surprised me to see it was Consumer Discretionary.  Quick, what’s the hottest group this year?  Technology.  What’s the only group to have produced more negative than positive surprises?  Yep.

      To date, this earnings season is progressing better than the sheep stock analysts expected, with 75.1% of companies reporting positive surprises.  The typical ratio is more like 2/3.  Next week is the heaviest week, with 149 (29.8%) of companies reporting.  The following week will feature 93 confessions.  Next week’s heavies include ExxonMobil, Chevron, Walt Disney, Metlife, and a handful of others.  The majority will be Financials and Industrials.

      Recently, we’ve seen increasing calls that the recession is over.  Last week, in this space, I pointed out that Dennis Gartman had made such a call, based on the spike lower in jobless claims.  This Monday, Ned Davis Research gave several reasons for why the recession ended in June and why July would be the first month of recovery.  Dennis Gartman, in his eponymous letter of today, however, highlighted fears of ours:

      But we are also certain that the economic rebound shall be tepid, weak, hobbly, poor, ineffectual, terrible, meandering, less-than-hope-for, fraught with poor comparisons to past economic advances et al. We trust we are clear. This will not… repeat loudly and often, NOT!…be like typical rebounds of years and decades past. 

      This Week

       Economic indicators were mostly positive this week.  Leading Economic Indicators grew by 0.7%.  That was better than what economists expected (+0.50%), but below May’s reading of 1.2%, which was subsequently revised to 1.3%.  That put the 12-month change in the LEI closer to the zero line, but below.  The Co/Lag index, discussed last week, further solidified its upturn, which, as also noted last week, has been a very reliable indicator, in the past, of recession’s end.  Ned Davis Research reports on the percentage of LEI components that are higher than they were six months ago.  That index hit 50% with this release.  That’s the highest reading since we entered the recession, but a far cry away from the zone (75%) that suggests “strong upside momentum.”

      Housing data was good this week.  Mortgage Applications ticked up by (+)2.8%.  With home sales still anemic, most of the growth applications comes from refi activity, not purchases.  The broad-based Home Price Index was up by (-)0.9%, naturally that left the economists nonplussed, one of the more bizarre words in our language, although one of the frequent states of economists.  So if they weren’t confused, would they be plussed?  No, in this case “non” does not mean “not.”  Instead it’s from Latin, and you can learn more by clicking hereExisting Home Sales rose to an annual pace of 4.89 million homes, from 4.77 million.  That last bit caused the Fort Wayne Journal Gazette to put up the following top-half headline of “Housing Market Mounts Comeback.”  The basis is that existing home sales have risen for three straight months for the first time in five years.  Beside the twisted data mining–couldn’t they have eked out an “in more than five years”?–this series is so far off its highs that it’s more akin to the bounce a dead cat makes.   The last paragraph, if you made it that far before buying some homebuilder stocks, did point out that “about one out of three homes sold in June was foreclosure-related.”  Oh, do you think that might have had something to do with it?  Here’s some free but invaluable investment advice:  if you value your personal net worth do not invest by the headlines.  That’s not a sucker punch.  Instead, it’s like when one kid goes behind you and stoops down while his crony gives you a gentle push backward.

      Initial Jobless Claims popped back up, to 554,000, well above last week’s upwardly revised (from 522,000) figure of 524,000.  Keep an eye on the revisions.  They’re still going the wrong way.

      University of Michigan Consumer Confidence came in at 66.0, up from the mid-month reading of 64.6 and a point higher than economists expected.  That marked, however, a five point decline from the end of June.  I’m just guessing here, but with the stated economy looking better (e.g. mindless headlines like the JG’s), earnings okay, which has pushed stocks higher, that the disillusionment is coming from the Administration and its actions.  Before you come unglued, I’ve got no GOP axe to grind here.  I actually find myself with Librarian leanings.

      Next Week

      Monday – we get the same number of housing data points next week as this week, with next week’s swinging a bit more weight.  On this day we get New Home Sales for the month of June.  This index could jump by a cool 20% and it would only look like a superball cat.  This index is at all-time (post-1963) low and should be little affected by the foreclosure dynamic that caused the JG to wax optimistic.  According to the book, Using Economic Indicators to Improve Investment Analysis, the survey covers sales at any point in the construction process and that about 25% of homes are sold upon completion.  One other aspect of the report might be especially important this time round:  cancelled sales are not considered.  Once the paper’s signed, the house’s sold.  The Dallas Federal Reserve releases its Manufacturing Activity survey, marking the first of three regional activity reports.

      Tuesday – the much respected Case/Shiller Home Price Index for the month of May is released.  Note the three-month lag, which may come to bear shortly if the JG (sorry) is to be believed.  Analysts expect the rate of year-over-year decline to have slowed, although not dramatically, from (-)18.12%  to (-)17.90%.

      Wednesday – housing data point number three comes in the form of Mortgage Applications.  Economists don’t fire up the linear regression/extrapolation machine for this series.  But they do pull it out for Durable Goods Orders, calling for a decline of (-)0.5%; excluding transportation orders, they’re expected to be down by just (-)0.2%.  Later in the afternoon the Fed will release its Beige Book report on economic activity in all 12 Federal Reserve districts.

      Thursday – it appears that the economists will reach into our playbook and call for increased Initial Jobless Claims of 580,000, while our highly-sophisticated Collinear Regressed-Analytical Prognosticator© shoots for 588,000. 

      Friday – we get our first glimpse of Second-Quarter GDP, and with a guess of -1.5%, economists will surely play their role of making meteorologists look good.  We’ve been saying for a while that inventory restocking could provide a quick pop for GDP.  Businesses have been very slow to rebuild stocks, doing everything possible to avoid ordering more.  They don’t, however, want to miss out on an upswing in orders, so they’ll eventually reorder goods.  To be fair, that could produce a crack-cocaine boost to the economy, but unless it’s ultimately supported by increased demand it will be a Thomas Dolby in this cycle of the economy.  To get a look at what’s called Final Sales, we simply will take GDP and reduce it by the change in Inventories, so a drawdown will increase final sales, and a build will reduce them.  This is also known as Aggregate Demand.  We will also want to look closely at Personal Consumption.  Economists expect it to have contracted by (-)0.50%.  Later in the morning we get the second two regional surveys with the NAPM Milwaukee survey of purchasing managers in that area, which is expected to have peaked above the expansion/contraction line, and Chicago Purchasing Managers’ survey, which is expected to have made improvement under the line.

      Have yourself a great weekend.

      Graig Stettner, CFA, CMT

      If you have stumbled upon this blog posting in error you have our regrets.  It’s a sorry excuse for analysis and regularly ignores conventions of grammar and unintelligible usually is.  Blogs are cool, and it’s this writer’s intention to get cool.  Heed its advice at your own peril and report any objectionable material to


      Cool Picture

      Thursday, July 23rd, 2009

      Found this picture on Wikimedia Commons, the site for royalty-free pictures. 

      Click to expand.