Tuesday, November 3, 2009

Morning Update/ Market Thread 11/3

Good Morning,

Equity futures are lower this morning in overnight action across the board:

The Dollar is significantly higher, up a half percent overnight, bonds are flat. Oil is down, gold is down but not as much.

Warren Buffet bought the remainder of the Burlington Northern Railroad in a deal worth about $44 billion. He bought at a time that the railroad’s price to earnings is about 18 – what I consider a very high valuation for that type of move. He’s pumping it as, “an all-in bet on the economy.” Ahhh, okay, good luck with that Warren, I think you’re too early and showing signs of impatience with your cash.

Johnson & Johnson announced they are going to lay off 6 to 7% of their 118,700 workers. Nokia announced they are laying off 5,760 jobs as their sales decline.

The Goldman ISCS came out showing a .1% gain month to month, Redbook came in at .9% growth yoy. Neither report has any basis in reality and should be discounted entirely except for the effect they have on others.

Factory orders are released at 10 Eastern, and Motor vehicle sales will be released throughout the day. Today will be the first day of the FOMC meeting with the “results,” i.e. wordsmithing, to be released tomorrow. This should keep moves from being too large in advance of the announcement.

Yesterday on the Daily Thread I pointed out a small inverted H&S pattern on the dollar. It did reach its target of 76.8 overnight and has pulled back slightly. Equities have been moving in inverse lock-step with the dollar, but the move lower overnight was not commensurate with the move in the dollar. The last time that happened equities fell sharply to catch up. One or the other is likely to move.

Over the past couple of days both the S&P and the DOW have traced out what could be a small descending wedge. McHugh picked up on those and is thinking that those wedges could signal the end of wave 1 down is coming. He believes we have one more decline, likely today, and then we should begin a wave 2 bounce. I think that may be premature as those wedges are not well formed, AND should equities descend to catch up with the move in the dollar they should break to the downside of those wedges. Then again, an underthrow of those wedges would not be unusual.

The small descending wedge is a logical formation here as prices have fallen into support at the 1,020 area and have run into the bottom Bollinger bands. It takes time to turn those lower, but like all moves, the longer we stay at this level, the more likely it will eventually break.

Yesterday’s action was interesting, it was typical consolidation following a huge down day. The DOW retraced a perfect 61.8% of the previous day’s move and closed right on the 38.2%. When I see relationships like that, I am inclined to believe that the movement was more natural with less intervention. The XLF, Transports and a few others did make potential bottom looking candlesticks, though, again a function of running into support. Another interesting point in the charts is that the Transports finished lower and on higher volume, diverging yet again from the Industrials that finished higher and on lower volume. What does that volume relationship tell you?

Overall it still looks like wave C down has probably begun. We are in an area where a bounce could happen, but I would not expect too large of a move in front of the FOMC announcement tomorrow. I’ll be watching the dollar closely as well as those small descending wedges and the downtrend channel that’s been etched out so far.

Below is a 10 day, 10 minute chart of the SPX showing the descending channel so far along with the descending wedge that I outlined in blue. Again, if that wedge is in play, then we should go lower and then move higher in the short timeframe.

Here is a chart showing how the Utilities clearly broke down below support. Both the Utilities and Transports are lower than they were three months prior.

Hey, I know it sounds arrogant to “diss” Buffett’s plays; after all, he certainly is far more wealthy than me. However, the historic conditions of 30+ years of uninterrupted growth during his adult lifetime was perfect for his buy and hold personality. Like many investors who were wiped out during the Great Depression, he is investing as if now is just like the times he experienced before. It has already been proven to be unlike anytime before in his lifetime, yet he is still not acknowledging the level of correction that is needed. Making huge buys at 18 earning multiples is not buying on the cheap! At least not on a longer term historic basis. Also, he is not acknowledging the end of the era of leverage of which he symbolized. Rates moved from their peak in 1980 to zero, a thirty year downtrend in which having debt (leverage) was good. Will the next 20 or 30 years look the same? I think not! I think eventually something has to give and that something is leverage. It’s going to be a long process regardless of how the cleansing occurs. Those who are working on the basis of “same as it ever was” are in for a surprise.

Talking Heads – Once in a Lifetime: