Overall, Fundamentals Are Still Deteriorating

Recapping the events of last week:

• Texas Instruments (TXN) posted a lower than expected profit and cut their outlook for the year.
• American Express (AXP) blew out earnings. However, those estimates had already been lowered for the year.
• Yahoo (YHOO) matched estimates and announced plans to cut 10% of its workforce. Yahoo also reduced their revenue estimates for the year.
• DuPont (DD) beat and said they expected weakening demand in North American and Western markets for the remainder of the year.
• Fifth Third Bancorp (FITB) badly missed estimates and stated that they are considering taking part in the Treasury’s plan of buying Tier 1 securities from banks.
• US Bancorp’s (USB) profit disappointed as they stated that future performance could further suffer due to market conditions. They also mentioned that they were not fully convinced that the Emergency Economic Stabilization Act of 2008 would be able to completely stabilize the financial system or other economic conditions.
• Blackrock (BLK) profit fell prior to the previous year.
• Coach (COH) beat estimates by a penny citing strong demand in Asia. They also cut their sales outlook for the year, but kept the earnings outlook for the remainder of the year.
• Apple (AAPL) beat earnings, but gave a weak outlook for the year.
• Boeing (BA) profit fell sharply on concerns of the company's outlook going forward.
• AT&T (T) missed expectations despite gaining subscribers.
• McDonald's (MCD) beat expectations as consumers were looking for cheaper places to dine.
• Wachovia (WB) posted a $4.8 billion dollar loss.
• Kimberly Clark (KMB) posted a lower quarterly profit and cut their full-year profit forecast.
• ConocoPhillips (COP) beat earnings on higher oil prices.
• Lockheed Martin (LMT) beat estimates and raised its full forecast for the year.
• Amazon (AMZN) cut revenue and income forecasts for the year saying the holiday quarter would fall short of analyst expectations.
• Microsoft (MSFT) records a rise in profit, but lowered its full year earnings forecasts.

and finally..

• Jobless claims rose to 478,000 as Friday’s gain of 15,000 claims was more than expected.
• And the FDIC says a bigger mortgage fix is needed because $750 billion was not enough.

There are a couple things we need to touch on here.

First, the overall theme for earnings thus far has been “lowered outlook” or “cut forecasts.” This leads us to believe that estimates for the remainder of the year are still too high. The same could be said going into 2009. Currently, the S&P trades at a P/E of around 24. That is a number that could easily fall into the next few months.

Secondly, there has been a lot of news over the past few weeks concerning the loss of jobs in the United States, with General Electric (GE), Goldman Sachs (GS), and Coca-Cola (KO) being the headliners. Current unemployment in the United States has been most recently figured at 6.1%. California’s most recent data came in at 7.7% and since California can tend to be a leading indicator of where the economy might be headed, we would look for that number to also rise into the remainder of the year.

Overall, the fundamentals are still deteriorating. There are some places of strength (bio-tech, agriculture, etc.), but for the most part, the trend is still down.

Only three charts to focus on today:

Friday’s action left us with a much more bearish bias going into this week. The fact that we closed below 900 on decent volume was definitely not what we were expecting going into Friday. In order to see any rally from here, we need to get back above 900 in a hurry. If we fail to do that, then the shorter-term trend is lower. The next support level on the S&P is at 855. 900, 960, and 1010 continue to provide resistance on the way up.

The financials came close to retesting the lows set a little earlier this month. Could we get a pop from here? Maybe, but seeing as how the S&P traded last Friday, don’t try to bottom pick around this one. 

Back in early August, we noted that the XHB was trading at very high levels around that $20 area and in a little less than three months, the XHB has fallen about 40% from those levels. We also managed to form new lows over that period. $14.35 remains firm resistance and from there, the trade would be short. We would not be trying to pick any bottoms here, though, because it’s literally been straight selling for the past four weeks.  

And that’s about it. Keep in mind that these are only our views on current market conditions, and they should be used only as that. Good luck.

Disclosure: none

Comments

[mag:]

you needed to waste so much of your time for this article? Isn't it clear? Your headlines would be quite sufficient. Spend time doing something more productive.

2008 Oct 27 06:09 AM

[MichaelZZ:]

Paraphrasing Isaac: Objects in motion tend to remain in motion, objects at rest tend to remain at rest, and to change either condition, requires energy.
In this case the energy factor should be effected by Congress by legislating the appropriate fiscal adjustments, i.e., immediately (do not wait until 2010) repeal those portions of the Bush tax legislations for those with taxable incomes in excess of $200,000 (arbitrary, i.e., could be $225M, $230M) and legislate permanent tax reductions for those with taxable incomes under $80,000.
This will be the energy factor, which will prime the engine of our economy. The longer it takes to do this, the more problematic will be the results.
A one-shot stimulus package will not work, as the recipients will pay down debt or add to savings due to insecurities, whereas a permanent tax reduction will mean that they will see their net paychecks increase and will have greater confidence. Unless consumers increase their collective confidence and spend, the situation will become much graver.
The parameters of the first traunch of $125 billion should be changed:
1) Only those institutions who want the funds should receive, i.e., none should be coerced into taking
2) The dividend rate should be changed to, at least 11%, for the purpose to stimulate the institutions to attempt to raise capital from private sources. They would know that they have the backstop of the 11% preferreds.
3) The conversion factor should be significant
4) As in the case of the Buffett purchase of GS preferreds, there should be substantial long-term warrants
5) The "fund" should be given seats on the Boards.
6) All dividends, other than any preferred stock dividends should be deferred for one year and will be re-assessed at the end of the year
7) There should be a moratorium for any bonuses and this will be reevaluated at the end of the first year
8) Those institutions which do not accept the "fund's" requirements and eventually fail, and which have exacted bonuses will place in civil and criminal jeopardy those recipients of the bonuses. The punishments will include imprisonments and the return of the bonuses plus substantial monetary penalties.
The common shareholders will be adversely affected (much of which has already been reflected), but that is appropriate.
Capitalism will be alive and well.


Michael Z.
Sherman Oaks
[e-mail]

2008 Oct 27 09:05 AM

[RCA:]

Good post, Andy.

Isn't it funny how there are so many "experts" out there laying in wait to take pot-shots at someone who is taking the time and making the effort to provide a viewpoint?

Mag, rather than snipe at virtuous posts, adding no value whatsoever, why not give us your insights? This isn't a competition. It is a forum to share and debate ideas. If done right, we all benefit. You may not gain anything from any given post, but what benefit is provided by hollow and unprovoked vitriol?

2008 Oct 27 09:17 AM

[Warnin4U:]

I checked out your note about the loss of jobs and Coca-Cola (KO) and found no significant mention of job cuts by KO. So me Coca-Cola bottlers announced targets. Pepsi Cola did announce major job cuts a few weeks back. I would
encourage you to check your facts. You are not dealing with peoples emotions (like Jason Blair) you are providing information that can influence peoples investments.

2008 Oct 27 10:50 AM

[hwood007:]

The market will not like "all stock dividends" being put on hold for a year and such an act could cause more harm than good. I surley would not buy a stock without a dividend although I own two which have recently suspended their dividend. I am thinking over my options on these two.

2008 Oct 27 01:13 PM

[MichaelZZ:]

TO: hwood007: Obviously, you would never have thought about buying Bershire BRK.A) aka Warren Buffett (LOL).
Whereas the stock is selling around $110,000 per share, it has NEVER paid a dividend. The market is composed of all information and all types of buyers and sellers. Under what rational theory would you suggest that it is not rational to defer dividends?

Michael Z.

2008 Oct 27 05:14 PM