Weekly Recap & Outlook – 5/15/09

Tower Private Advisors

Capital Markets Recap

May 15, 2009


  • Modest correction
  • Alan Greenspan
  • Wordle
  • Withering green shoots

Here’s a look at equity market action this week.





$ Chg

% Chg

S&P 500





DJ Industrial Average





S&P Mid Cap 400





Russell 2000





NASDAQ Composite Index





Dow Jones World & Region – World x U.S.





Last week’s dispatch said that we were looking for a modest correction in stocks, and that’s what we’ve gotten so far.  Today is option expiration for May, and it always makes for some funky market action, both in the days leading up to and following it, so next week could be telling.  Here’s our idea of support levels on the S & P 500 and the Dow.supportDow Support  On last bit of technical analysis.  Dow Theory began in the early 1900s and focused on action in the Dow Industrials and the Dow Transports.  At the time, the Transports were a huge part of the economy representing, largely, the railroads.  The thought was that if the economy was doing well, the railroads would be doing well since they transport the goods of the economy.  It introduced the idea of confirmation, in that one index confirmsthe other’s action.  If one index didn’t confirm the other, it suggested the index of the other might not be–for lack of a better word on my part–valid.  That’s what we have now, where the Industrials index is making a marginal new low, while the Transports index is not.  Either the Industrials will hook back up with the Transports or the Transports will confirm the Industrials.  If rising stock prices are good, then the former would be preferable to the latter.  Anyway, here’s the current action.dow-theory



 Last Week

$ Chg

% Chg

10-year Treasury





30-year Treasury Bond





Interest rates have finally started to ease.  That should augur well for stock performance, as well as mortgage rates, which had begun to creep up.



 Last Week

$ Chg

% Chg

Light Crude Oil – Continuous Contract          58.62          58.63



Natural Gas – Continuous Contract            4.29            4.31



Gold – Continuous Contract        928.40        914.90



United States Dollar Index          82.96          82.53



The dollar closed back above its 200-day moving average today.  The long-term future of the dollar doesn’t look promising, and yet even a dark fundamental future doesn’t prevent rallies in oversold indexes/securities.  Still, in light of that gold was able to rally by a few bucks.  It looks overbought based on sentiment toward the metal.

Top Stories

Meredith Whitneyis a 39-year old analyst, formerly of Oppenheimer & Co., who after a couple of spectacularly-right [negative] calls on the banks left Oppy to start her own firm.  You can read about her prescience by clicking here. This week she said that bank stocks are “grossly overvalued,”and that the sharp rally in the stocks was “based on no fundamental improvement.”  (You can read the complete Bloomberg story by clicking here.) That may be the case, but one shouldn’t assume the rally–or at least part of it–wasn’t merited, as these stocks had become very oversold.  Now, however, they have reached a record overbought status–according to Ned Davis Research, by 13 standard deviations.

There was an interesting juxtaposition of headlines on May 12 when the first headline on the Bloomberg terminal read, “Greenspan Detects Bottom in U.S. Housing . . . ” and the second read, “Home Prices in U.S. Fell Most on Record in First Quarter.”  Let’s take the first first.  Here is a man who on June 9, 2005, said,

 ”Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”

So now the Maestro, after defending his Federal Reserve’s non-handling of growing bubbles . . .

“As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact — that is, when its bursting confirmed its existence. Moreover, it was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity — the very outcome we would be seeking to avoid.”   August 30, 2002, Jackson Hole, Wyoming speech.

. . . claims to be able to see the end of the decline in housing.  At the same time, the second headline stands in stark contrast.  He may be right, but–hey, seems like the right place for some song lyrics . . .

You may be right
I may be crazy
But it just might be a lunatic you’re looking for
Turn out the light
Don’t try to save me
You may be wrong for all I know
But you may be right

“Japanese Housewives” is the name given to the class of investors we, in the West, refer to as retail investors.  The name comes from the fact that the Japanese housewife used to be in charge of family finances.  The Bloomberg terminal had a story on May 12 about how Japanese Housewives had a six-nonth high number of margin contracts in which they shorted the yen against some foreign currency.  Both the Yen and the dollar serve as havens in global market storms and both strengthen in such cases.  If the global storm is over, the Yen should weaken and the housewives will be able to profitably cover their short bets.  Unfortunately, they have a spectacularly poor record of succesfully doing so as the chart below, from sentimenTrader (info available here), shows.


 As you know, much of the rally from March has been on news that is less bad than expected–the use of the calculus terminology has been so overdone as to make me loathe to ever resort to it again.  For the rally to continue, it’s time now to shift the burden from less bad to outright good news. The company-specific news this week wasn’t much help.

    • Intel’s Otellini Says Quarter Better Than Forecast So Far
    • GM Union Retirees Said to Cede Dental, Prescription Benefits
    • Chrysler Seeks to Break 789 Dealership Contracts
    • Nike to Cut About 5% of Global Workforce
    • AIG’s Liddy Will Tell May 13 Hearing Insurer Doesn’t Need More U.S. Funds

This might possibly be the week’s strangest soundbyte.  Pardon me if I’m stepping on your political tootsies with this one, but does the President think his 60%+ approval rating allows him to say whatever he wants to say?  Take this, for example, from a May 14 speech in Rio Rancho, New Mexico:

But the long-term deficit and debt that we have accumulated is unsustainable.  We can’t keep on just borrowing from China, or borrowing from other countries — (applause) — because part of it is, we have to pay for — we have to pay interest on that debt.  And that means that we’re mortgaging our children’s future with more and more debt, but what’s also true is that at some point they’re just going to get tired of buying our debt.

Time for some Wordle art from that speech . . . riorancho2Click on the thumbnail to expand.  Click here to create your own.


This Week

What started out in the first part of March as a bounce from depressed, armageddon-like stock prices has turned into bubbling enthusiasm as evidenced in this chart of the Bloomberg Confidence index. aa1It shows that survey participants are feeling better than they did at the beginning of 2008.

The only bit of housing data came in the form of the weekly MBA Mortgage Applicationsindex. Applications fell by 8.6% as the national mortgage rate ticked up slightly.  Purchase applications were up modestly, while refinance applications were down slightly.  With refi applications several times that of purchase applications these days, slight increase + slight decrease = sizeable drop.

Prices at the producer level in April were as predicted by economists.  The Producer Price Index rose by 0.2% at the headline level and by 0.1% at the core level in March.  On a year-over-year basis, headline prices are down by 3.7% and core prices are up by 3.4%.  The drop in headline prices is the largest 12-month decline since the late 1940s

Initial Jobless Claims bounced sharply this week, rising from 610,000 to 637,000, while last week’s data was revised upward from 601,000 to 605,000.  So long as next week’s figure is less than 645,000 we will still be able to say that the short-term trend is downward, a series of lower lows and lower highs.claims

The Consumer Price Index came in about where economists expected, which is to say, flat in April; up by 0.3% at the Core level.  Year-over-year, prices are down by 0.7%.  Like with the wholesale price data, one has to go back to an earlier generation–this time back to the mid-’50s–to find a similar reading. 

The Empire State Manufacturing index registered a -4.55, far better than what economists expected (-12.00) and far better than April’s reading (-14.65).  That’s the best reading since August 2008, and the year-to-year change in the series is about back to zero.  Technically, zero marks the difference between an expanding and contracting New York state manufacturing economy. 

Capacity Utilization continues to head down.  The last time this series blipped north was in October 2008.  Before and since then it continues to drop further into all-time (post 1961) lows.  The first blip in the index is going to send stocks higher.  This series is released along with Industrial Production, which registered a drop on the significant drop in Mining (-3.2%) output (Utility output was 0.5%; Manufacturing output was -0.3%).  In addition, March’s decline was revised downward.

Finally, University of Michigan Consumer Confidence was slightly better than economists expected and marked an improvement over the final reading for April.  A good healthy kick to the groin of the stock market would likely put a damper on the enthusiasm as one can see from the following chart which shows confidence closely tied to stocks.Stocks and Confidence






Next Week

A light week is in store for us next week, but if housing remains the lynch pin to the economy, then we’re going to get a pretty good look at the pin.

Monday – the week kicks off with the May survey of the National Association of Home Builders.  Economists expect a reading of 16, which would mark a doubling from the January low.  Sounds good, but what it means is that just 16% of builders are happy. 

TuesdayHousing Starts and Building Permits are released, and both are expected to have ticked up.  Economists expect that building permits rose at a 527,000 unit annual pace; building permits, at a 530,000 pace.  I don’t mean to throw cold water on your happiness parade, but with 10.7 months of new home inventory, we don’t need upticks in building permits and starts.  Maybe the administration should force homebuilders to not build homes for two months in an effort to reduce inventories. A year ago we would have laughed at the notion.  Now, with contract law dismissed (Chrysler bond holders), salary caps on finance sector workers, companies nationalized (autos, banks), it’s not so far fetched.

WednesdayMBA Mortgage Applications index is released.  No estimates available.  They fell by 8.6% this week for reference’s sake.

ThursdayInitial Jobless Claims are announced.  We’ll want to keep a close eye on claims to make sure they continue the downward trend and don’t begin to violate the lower highs mentioned above (645,000).  Also important will be the revision of this week’s figure.  We wrap up the week with Leading Economic Indicators for the month of April.  Economists look for a reading of 0.8%, which marks a strong reversal of last month’s -0.3%, which was the third straight negative reading.  The LEI is comprised of ten components:



Average weekly hours


Average weekly jobless claims


Manufacturers’ new orders – consumer goods


Supplier deliveries


Manufacturers’ new orders – capital goods


Building permits


Stock prices


Money supply


Interest rate spread


Consumer Expectations


Even though most of the components are already mostly known, there’s still a little estimating to do.  Still, it seems like a stretch to look for an improvementjust yet.  For example, last week’s Nonfarm Payrolls report showed the shortest average work week on record, and that swings 25.5% of the index weight, and stock prices, which have clearly been on the rise are a modest 3.9%.  We shall see, shan’t we?  My guess is that economists have been stricken with the same rampant enthusiasm present of the Japanese housewives.  A more timely report, the Philly Fed report for May is expected to show much the sameas other economic reports:  less bad, still not good.  At some point, I’d guess that the folks at Bloomberg and other news outlets are going to tire–as will investors–of headlines like, “stocks continue to rally on less bad than expected news.”  That sort of thing can only take us so far.

Graig Stettner, CFA, CMT

Investment Management Services

Tower Private Advisors

 This e-mail, its cynical style, ignorance of punctuation convention, and a host of other aspects, assuredly do not represent the views of Tower Bank or Tower Private Advisors. In fact, there are folks here who likely cringe upon receipt of it. If anything you have read here has offended your sensibilities, well, tough. Also, if there are typographical, grammatical, or stylistic errors above, you can see why we don’t teach English Composition. The passive tense, where used, is regretted. If you have suggestions for improvement, keep them to yourself. Just kidding . . . really; send ‘em in.


One Response to “Weekly Recap & Outlook – 5/15/09”

  1. [...] can see a more detailed discussion of Dow Theory by clicking here or here.  Here’s a critical view of it, probably written by a professor somewhere who [...]

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