
Here's What You missed Last WEEK
A SLOW WEEK FOR THE CALENDAR COULD BE AN ACTIVE WEEK FOR THE BEARS
10.08.2327 As specified in an e-mailed note last Thursday, Ive turned
decidedly more bearish. With a holiday fast approaching, and the Earnings & Events
Calendars thinning out, the bears could become more active just as the remaining bulls are
looking to lighten up in front of late summer vacations and the Jewish Holidays, which
fall the same week as Labor Day.
Toll Brothers report Wednesday made for an irresistable opportunity to quote a
comment from D.R. Hortons CEO, Donald Tomnitz, during DHIs recent
post-earnings conference call. "We wanted to give every buyer the opportunity to buy
and close on a home. And so, if they had a pulse and they were warm, we wrote"
{contracts}. In all probability, other homebuilders did the same. That was the effect of a
tax credit on home purchasesto hell with whether theyd qualify for a mortgage,
or not; Writing a contract with every warm body, qualified or not, is why any appearance
of strength in new home sales until April 30th will not translate, one-to-one,
into closings. (The extension of the tax credit until September for closings of homes
contracted by April 30th probably wont make a difference to many hopefuls
who simply wont qualify for loans.) Instead, theres risk of a bounce up in
cancellations, the deeper we get into summer, until the deadline for closings in
September. (Do the builders blame the banks for losing so many sales opportunities, when
9/30 roles around?) Thats just an example of the way targeted stimulus can distort
reality. Despite using TOLs earnings as an excuse to cite the quote that all but
blew me away, it wont necessarily apply to TOL. Buyers of TOL homes are not nearly
as influenced by tax credits as DHIs buyers were. In fact, many TOL buyers may earn
too much to have qualified for the credits. Toll sells homes to wealthy people who are
more likely to be influenced by losses in stocks and bonds than an $8.5K tax credit. And
since builders Sales of New Homes are counted at contract, Existing Home Sales on
closings, its July Existing Home Sales, out Tuesday, that could continue to see the
effect of the tax credit not expiring until September, for contracts signed by April 30th.
TOL, though, was no doubt, helped, some what, in extraordinarily expensive markets, by FHA
raising loan limits. For an additional look into the high end market, therell, also,
be a report from Tiffany, Friday. Otherwise, the retailers reporting this week wont
be influential on the marketexcept for their coments on the early returns for Back
To School shopping.
Then again, the scariest item for stocks, this week, may be Fridays revisions to 2Q
GDP. The Street knows the Trade Deficit rose so much it willl subtract from GDP but
traders always act as if they hadnt a clue, even when a well telegraphed revision
down is released. That may be a function of optimism dying hardthe hope things will
turn out better than common sense says it should, despite the evidence. So, despite a
handful of firms yet to release their economists new guesstimate on GDP, and the
likelihood that most will coalesce around 1.2 to 1.4%, stocks should sell off Friday again
Friday after the release, unless it surprises to the upside.
And speaking of optimism, we might as well touch on Fridays final U. Michigan
Consumer Sentiment. At the bottom, in March 09, neither business executives nor
consumers were optimisticsurveys said sentiment was probing new lows but the fact
is, the economy was already improving and markets were about to scream higher. The big
risk to markets, now, is that all the talk about a double dipall the talk about a
renewed or second recession becomes a self-fulfilling prophsey. Luckily, consumers often
say one thing and do another, as they surely did in the fall after 9/11.
Last week, the President of the Minnesota Federal Reserve Bank echoed comments made in
this space last week: The FOMC never intended the market to react so negatively to the
committees decision to keep its balance sheet constantto reinvest funds that
come in on its bond holdings in US Treasuries. This week therell be more chances for
similar comments, not just from Evans on Tuesday but out of the Kansas City Feds
annual Jackson Hole Symposium, which will kick off with a speech from Ben Bernanke,
himself, at 10am. Of course, by Friday, those who need to square away their positions for
end of month will probably have allready done so. Those turning Labor Day weekend into a
long holiday, probably wont get started quite this early but, instead, will make
next Thursday or Friday their last day of work until the weekend after Rosh Hashana
(09/0809).
One piece of good news should arrive via the Mortgage Bankers Assocns
Mortgage Apps, Wednesday, given how many homeowners must be aching to refinance, with
mortgage rates at generational lows. A 30 year fixed can be had for as little as 4.49%
according to Freddie Mac, for the best qualified borrowers. We saw the first of that last
week, when refi apps rose 17% but this week there should be more new financings, as
parents seek to close on their homes and move prior to the start of the new school year.
Be on the look-out for comments from analysts conducting Back To School Mall Tours or
commenting on the appeal of chains fall lines Analysts cant predict what
consumers will buy any more than retail managements can and, usually, the analysts are
worse. Furthermore, analysts have been shocked at how well missy retailers and department
stores are performing compared to teen stores, though it makes perfect sense to me. Women
are shopping again, after a hiatus that began as long ago as fall 2006. Theyre also
buying more for their homes, again, and missy sized women dont shop at teen
retailers. They do at both missy specialty and department stores. As Ive said
before, teen retailers will not recover until teen hiring picks up. Not only do teens
spend most of their earnings before they leave the mall but their friends visit them at
work, and shop while theyre there--eat in the food court while theyre there.
Parents often prefer department stores, whether its for the in-house store card
points they can rack up towards gift cards or because of the diversity and a level of
comfort with the less intrusive staff at department stores. Parents "trust"
department stores and dont really enjoy, say, walking into an Abercrombie &
Fitch which is pricey and assaults the senses with music blaring and air drenched in a
smell (ANFs house fragrance is Mark) to the point of nausea. Teen retailers can cure
what ails them by hiring more teens. End of teen story. On the other hand, binge and purge
is typical of the way people shop. Women had built a lot of pent of demand after skirting
stores for all but necessities, in the last 4 years. When they, finally, shopped again,
last winter they went all out at deeply discounted prices. They are next likely to return
when the weather cools enough to warrant fall clothing. Until then, all the discounts in
the mallall the 60--75% off plus an extra 15, 30, 50, or 65%
off--deals will fall on deaf ears. Times have changed. The days of silly shopping are
over. We live in more frugal times, exactly why an Abercrombie & Fitchs stock
got killed when it said it boosted inventories by 47%, despite the fact that the
cogniscenti all agree, the chains inventory got TOO lean this past season.
And speaking of large adjustments, the 2nd Phase of the new Credit Card Rules
are effective as of today, 08/22. One of the new rules says late payers can be charged
either $25 or the minimum payment due, rather than the $39 often charged in the past.
However, the late fee can be boosted to $35 for repeaters. As of today, Card companies
will have to review the rates they charge every six months and LOWER interest rates for
those to whom they were raised, if the card holders are back in compliance. Bank of
America shocked by saying it might have to take an $810B charge in the valuation of
its credit card business, because of the new rules, while Discover projected a more modest
$8090m. Still, many companies havent quantified the lost revenues, which
wont stop analysts from taking a crack at it for the silent. Thats likely to
hurt those the analysts choose to speak about. On the other hand, the first tranche of new
rules went into effect last February, giving card issuers plenty of time to adjust their
businesses to compensate for this phase of the new rules. A risk to American banks, this
week, is reports from Canadian banks like BMO, Canadian Imperial Bank of Commerce (aka
CIBC), and Royal Bank of Canada which, largely, avoided the mortgage debacle to which
domestic banks succumbed. Then again, BHPs report is expected, as well, and
its knock out offer for Potash wasnt enough to support stocks any more than
Intels offer for McAfee could. If a sudden rash of big deals come in rapid
succession, that would do a lot to boost banker sentiment but not, necessarily,
consumers.
Two other items of note this week, includes Durable Goods, Wednesday, and the SEMI Annual
Forecast, the same day, for the equipment makers. Oddly, Morgan Stanley is hosting a Semi
& Semi Equip Conference the same day, in an entirely different city, the names
speaking at that meeting, more chip designers than equip names. During an otherwise pretty
slow week for name brand events, Barrington's Healthcare Conference could make more waves
than usual. Do note, though, that RBC is marketing with bigger companies than usual, this
week, including Intel & Colgate though neither should have anything revealing to say
and are more likely to reiterate comments made after their recent earnings reports. One
can only hope thy sound more convicning, the second time around. The only earnings report,
this week, other than TOL and TIF that could really get the Street talking is Diageo (DEO)
because "people have to eat."
As stated bluntly in last weeks e-mail, expect a bounce Monday morning, typical of
any Monday immediately following an Expiry. That may be the last chance to sell longs and
position for a deeper downside probe. Whether the press is talking about the
"Hindenburg Omen" or rising wedge matters notexcept to those wholl
tell you all that negative noise is precisly why you should be buying stocks now. (Gary
Kaminsky, on CNBC, insisted in late April that stocks "never crash when so many
stocks are making new highs" but, in fact, the steep correction that started in late
Aprilhad already started by the time he made those comments--felt a lot like a crash
for the speed and depth of the sell off.) Its the time of year when hedge and mutual
funds started raising cash, while consumers have other things to pay off, like the credit
card bill for summer vacations, or tuition for the kids school. IT appears retail
investors and pros, alike, have been piling into Treasury Notes, Bonds, and hi-yielding
quality stocks like telcos and tobacco. In a less talked about corner, Preferred
Trust Notes have been catching a lot of flows, as well. Thats a way to play yield
and stock gains, while protecting the downside from the full brunt of a steep sell off.
This Monday mornings bounce might be quite spirited, given two rumored deals over
the weekend, a form Chinese finance official quoted as saying China is more interested in
supporting the economy than slowing it down, and is more likely to cut reserve
requirements than increase them. Those comments, at least, should help offset the
disaapointing earnings and outlook from a Buffett favorite, BYD. But dont be fooled
by an enthusiastic start to the week. The risk seems all to the downside, for the time
being.
ECONOMIC: (More Here)
EARNINGS: (For Subscribers, Only)
EVENTS: (UFor Subscribers, Only) ) (Earlier Outlooks Here)
© Sandi Lynne 2010 Nothing contained in this commentary should be
construed as a recommedation to buy or sell any security. The opinions expressed are the
authors, alone, and should be just one factor in more complete due diligence.
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Regards,
Sandi Lynne