Here's What You missed Last WEEK    

                                             A SLOW WEEK FOR THE CALENDAR COULD BE AN ACTIVE WEEK FOR THE BEARS

10.08.23—27 As specified in an e-mailed note last Thursday, I’ve 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. Horton’s CEO, Donald Tomnitz, during DHI’s 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 purchases—to hell with whether they’d 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 30^th will not translate, one-to-one, into closings. (The extension of the tax credit until September for closings of homes contracted by April 30^th probably won’t make a difference to many hopefuls who simply won’t qualify for loans.) Instead, there’s 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?) That’s just an example of the way targeted stimulus can distort reality. Despite using TOL’s earnings as an excuse to cite the quote that all but blew me away, it won’t necessarily apply to TOL. Buyers of TOL homes are not nearly as influenced by tax credits as DHI’s 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, it’s 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 30^th. 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, there’ll, also, be a report from Tiffany, Friday. Otherwise, the retailers reporting this week won’t be influential on the market—except for their coments on the early returns for Back To School shopping.

Then again, the scariest item for stocks, this week, may be Friday’s 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 hadn’t a clue, even when a well telegraphed revision down is released. That may be a function of optimism dying hard—the 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 Friday’s final U. Michigan Consumer Sentiment. At the bottom, in March ’09, neither business executives nor consumers were optimistic—surveys 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 dip—all 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 committee’s decision to keep its balance sheet constant—to reinvest funds that come in on its bond holdings in US Treasuries. This week there’ll be more chances for similar comments, not just from Evans on Tuesday but out of the Kansas City Fed’s 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 won’t get started quite this early but, instead, will make next Thursday or Friday their last day of work until the weekend after Rosh Hashana (09/08—09).

One piece of good news should arrive via the Mortgage Banker’s Assoc’n’s 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 can’t 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. They’re also buying more for their homes, again, and missy sized women don’t shop at teen retailers. They do at both missy specialty and department stores. As I’ve 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 they’re there--eat in the food court while they’re there. Parents often prefer department stores, whether it’s 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 don’t really enjoy, say, walking into an Abercrombie & Fitch which is pricey and assaults the senses with music blaring and air drenched in a smell (ANF’s 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 mall—all 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 & Fitch’s stock got killed when it said it boosted inventories by 47%, despite the fact that the cogniscenti all agree, the chain’s inventory got TOO lean this past season.

And speaking of large adjustments, the 2^nd 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 $8—10B charge in the valuation of its credit card business, because of the new rules, while Discover projected a more modest $80—90m. Still, many companies haven’t quantified the lost revenues, which won’t stop analysts from taking a crack at it for the silent. That’s 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, BHP’s report is expected, as well, and it’s knock out offer for Potash wasn’t enough to support stocks any more than Intel’s 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 week’s 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 not—except to those who’ll 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 April—had already started by the time he made those comments--felt a lot like a crash for the speed and depth of the sell off.) It’s 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 telco’s and tobacco. In a less talked about corner, Preferred Trust Notes have been catching a lot of flows, as well. That’s a way to play yield and stock gains, while protecting the downside from the full brunt of a steep sell off. This Monday morning’s 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 don’t 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 author’s, alone, and should be just one factor in more complete due diligence.             

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Regards,
Sandi Lynne