bizzXceleration: Performance, Value and Profit

Market Situation

Shares Rally as Oil Continues to Fall  In what has become a familiar pattern on Wall Street, stocks surged Friday, a day after falling sharply. The immediate impetus for the rally appeared to be a big drop in commodity prices, including a 4.1 percent fall in crude oil, which settled below $116 a barrel for the first time since early May. The dollar also continued to gain strength, rising 1.7 percent against a basket of six major world currencies. The Standard & Poor’s 500-stock index rose 30.25 points, or 2.39 percent, to 1,296.32, its biggest one-day gain since April. The Dow Jones industrial average was up 302.89 points, or 2.65 percent, to 11,734.32; the Nasdaq composite jumped 58.37 points, or 2.48 percent, to 2,414,10. In recent weeks, the stock market has swung between strong rallies and steep drops. The S.& P. 500 has moved by at least 2 percentage points on 6 of the last 25 trading days since July 4. By contrast, there were only two days with 2 percent changes from the end of 2003 to the end of 2006. Despite all the sharp moves, the S.& P. 500 index rose just 0.3 percent from July 4 to Thursday’s close. Friday’s jump increased that gain to 2.7 percent. Some analysts say the volatility indicates that investors are increasingly uncertain about the economy. While they are encouraged that oil prices have fallen more than 20 percent from a high of $145.29 in early July, the housing market and the economy over all are still showing significant weakness. Earlier on Friday, Fannie Mae, the government-chartered mortgage giant, slashed its dividend after reporting a $2.3 billion quarterly loss. “Strictly from a psychological standpoint, it tells you that there is not a lot of conviction,” said Barry L. Ritholtz, chief executive of FusionIQ, an investment firm in New York. “Fund managers that are hot to buy one day, turn around and sell the next.” But others see reason to hope the market may have bottomed in mid-July and is starting a slow and hesitant rebound. These analysts note, for instance, that recent economic and housing reports may be bleak but the data is often better than expected.

The Stars Have Yet to Align for Stocks CONDITIONS are most ripe for a bear market to end and a new bull market to begin when investor sentiment and fundamental and technical factors are all in alignment. Unfortunately, the rally that began three weeks ago is fully supported by investor sentiment alone, suggesting that the bottom of this bear market has not yet been reached. First, consider the technical evidence. Compared with the initial rallies after previous bear-market bottoms, the rally that began in mid-July has been disturbingly weak. In fact, during the first days of the climb, a relatively large number of stocks actually fell. That has led many analysts to conclude that the upward trend is likely to fizzle.Take note of one particular indicator — based on the proportion of shares trading on the New York Stock Exchange that rise in price in a given session. If July 15 were the bear-market low, according to many technical analysts, there should have been at least one trading session in the subsequent rally in which at least 90 percent of total trading volume was from shares rising in price. Now consider the stock market’s fundamental foundation: stocks are still not cheap, at least in relation to corporate earnings. On the contrary, the market remains more expensive than it has been at most other times in recent decades. This is well illustrated by the price-to-earnings ratio for stocks in the Standard & Poor’s 500 index. It is now at 20.0 when calculated on the basis of trailing 12-month earnings…The Larry Kudlow Recession Summer Rally, 300 Point Dow Gains? During Bear Markets ONLY,

• 300 Point Rally follow up Let's consider Bespoke's Analysis on the subject: They note that average returns three months after all 300+ point moves has been 0.06%, with positive returns 50% of the time. Buying the 1997 and 1998 300+ days made you money (if you held on long enough). But as my marked up version of their chart (below) shows, every subsequent 300+ day led to an eventual lower low. Marked Up Chart (you need to look at this !!)

Investors, taking long view toward recovery, lift stocks Oil prices are touching three-month lows, the latest milestone in a steep reversal for commodity prices that is supporting stocks around the globe and easing inflation concerns among investors and policy makers. Markets rallied across Asia and Europe on Wednesday after sharp gains on Tuesday on Wall Street, even though the falling prices reflect, at least in part, a slowing global economy. Investors, however, seem to be looking further down the road, believing that the weakness is likely to be short-lived - with the promise of stronger growth and corporate earnings down the road. U.S. shares were narrowly mixed Wednesday afternoon, held back by a report of a steep loss at Freddie Mac, the mortgage-finance company. "The market wants to be bullish. It's sick of being bearish," said Paul Mortimer-Lee, head of market economics at the London office of BNP Paribas. "Is the glass moving from half empty to half full? We're not out of the woods yet, but there are a few rays of hope." The surge in the past year in prices of raw materials, driven by demand from growth in developing economies, had threatened to anchor higher inflation and severely curtail the purchasing power of consumers in the West. Now, however, with inflation fears receding, policy makers should be free to focus on trying to stimulate faltering demand rather than fighting price pressures.

Credit and Currencies 

Money Markets `Plagued' by Libor, TED Spread That Fed, ECB Fail to Reduce A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it's ever been. The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December. Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world's biggest banks and promote lending have had limited success. The London interbank offered rate, the basis for at least $150 trillion of financial products, is within 0.06 percent of the highest since November 1999 compared with the Fed's benchmark interest rate. The largest financial companies have lost almost $500 billion from subprime-linked securities. Credit markets seized up a year ago as banks suddenly became wary of lending to each other because BNP Paribas SA halted withdrawals from three investment funds on Aug. 9 after the French bank couldn't value their holdings of securities linked to U.S. subprime mortgages. That same day the ECB made the unprecedented move of offering unlimited cash as losses spread. Securities firms are only now realizing how little the securities are worth. Last week, New York-based Merrill Lynch & Co. said it sold collateralized debt obligations with a face value of $30.6 billion for 22 cents on the dollar. Three-month dollar Libor rose to 2.40 percentage points above yields on Treasury bills on Aug. 20, the widest margin since December 1987. While the so-called TED spread, which measures the difference between the rate banks pay to borrow and the U.S. government's costs, declined to 1.15 percentage points, it averaged 0.5 percentage point over the previous five years. ``The money markets have ceased to function as they should, as nothing has been resolved with regards to the lack of trust between banks,'' said Marius Daheim, a senior bond strategist in Munich at Bayerische Landesbank, Germany's second-biggest state- owned bank. ``This is why you're seeing such demand for central bank money 12 months on from the start of the crunch. These measures were only supposed to be temporary, and they're looking increasingly permanent.''

Copper, Oil Lead Decline in Commodities as Global Economic Growth Weakens Copper and crude oil led a decline in commodities on concern that slower global economic growth will curb demand for raw materials. Copper headed for its biggest weekly drop since March, crude oil fell to the lowest compared with closing prices since May and silver reached its cheapest since January. Italy's second-quarter gross domestic product unexpectedly shrank, the statistics office in Rome said today. Japan's economy probably contracted in the three months ended June, according to the median estimate of 25 economists surveyed by Bloomberg News. ``People understand that we might face a difficult two or three quarters ahead of us,'' said Christoph Eibl, who helps manage more than $1 billion of commodities at Tiberius Asset Management AG in Zug, Switzerland. ``Industrial-related commodities will not outperform.''  Commodities, as measured by the UBS Bloomberg CMCI Index of 26 raw materials, have advanced for six consecutive years, bolstered by demand from China, the world's largest consumer of metals. The Reuters/Jefferies CRB Index of 19 commodities jumped 29 percent in the first half, the most since 1973. Crude oil fell $2.60, or 2.2 percent, to $117.42 a barrel on the New York Mercantile Exchange, as of 12:26 p.m. in London. That's the lowest compared with closing prices since May 2. Oil is trading 20 percent below the record $147.27 reached July 11. A stronger dollar reduced the appeal of commodities as a currency hedge. The euro slumped to a five-month low against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.

Oil and the Dollar Oil continues to sell off, and is now below $114 per barrel (Brent Crude Oil nearest futures). Meanwhile the dollar is rallying. These are two important stories. As I noted late last year, the dollar had fallen enough to make a significant dent in the ex-petroleum trade deficit. Unfortunately for the trade deficit, oil prices were surging. This graph shows the U.S. trade deficit through May. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The current probable recession is marked on the graph. The oil deficits in June, July and probably August will be ugly, but it now looks like the oil deficit will decline sharply later this year. Although there are other factors that impact exchange rates, this decline in oil prices will have a significant impact on the overall deficit, and might mean the dollar has finally bottomed (heresy to some I know!).

Euro Falls the Most in Four Years on Reduced Bets for Higher Interest Rate The euro slumped the most in more than four years against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows. The euro also fell to a three-week low versus the yen after ECB President Jean-Claude Trichet said economic growth will be ``particularly weak'' through the third quarter and policy makers kept the benchmark rate unchanged yesterday. The South African rand led losses among the most-traded currencies on speculation the central bank will cut borrowing costs. Crude oil fell, heading for its fourth decline in five weeks. ``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth. It's tough to stand in the way of this dollar rally.''

Signs Suggest Recovery  For U.S. Hasn't Arrived  (WSJ) Dead-end rallies often pervade bear markets, and while some negatives for stocks have turned positive, a laundry list of challenges still needs to be overcome. It hasn't been a smooth ride, but the stock market's ability to hold onto gains posted since mid-July once again is raising hopes that a bottom finally is in place. Not so fast. The problem is that bear markets are chockablock with dead-end rallies, and while some negatives for stocks have turned positive, a laundry list of challenges needs to be overcome. Strains continue in the credit markets, banks and brokerages may need to raise large sums of additional cash to stabilize balance sheets, home prices keep falling, and consumers are pulling back on spending as Washington's stimulus checks are used up. For now, though, a drop in oil prices and a rebound by the dollar, both of which bolster the spending power of consumers, are fueling a surge in stocks. The Dow Jones Industrial Average's 3.6% jump to 11734.32 last week, capped by a 2.6% rise Friday, put the index 7% above its July 15 close. The Dow is down more than 12% this year and 11% in the past 12 months. Among the signs that suggest a genuine recovery isn't here yet, the most daunting are lingering problems from the collapse of the real-estate market and credit crunch. Clarity and stability in corporate earnings are needed for a sustained rally. The picture continues to worsen. Operating earnings on companies in the Standard & Poor's 500-stock index are on track to post a 22% decline in the second quarter, according to Thomson Reuters. That is nearly double the loss expected at the start of July. Third-quarter earnings forecasts, meanwhile, have been cut in half in recent weeks. Analysts expect just a 6.4% increase. David Kostin, equity strategist at Goldman Sachs, says attention is turning to 2009 earnings, but the outlook will be muddied for months by the tapering off of the fiscal stimulus that propped up consumer spending in the second quarter. Mr. Kostin, who had been bearish on stocks, has turned modestly constructive with the market down sharply from where it started the year. He is encouraged by the resiliency of earnings outside of financials. Given the unknowns about the economy and earnings, "it's not like we're pounding the table."