Weekly Street Sentiment: Facts Are Stubborn Things

Weekly Street Sentiment

• Overall market sentiment declines by 1.51%.
• Most bearish industry reverts back to Financials.
• Most bullish industry reverts back to Energy for first time in 3 weeks.
• Sell-side certainty turns positive.
• Most active area for idea generation is Energy.

WEEKLY COMMENTARY

Sentiment on the Street declines by just over 1.5% heading into market open Monday. Energy rebounds to become the industry with the most bullish sentiment at near record high levels while Financials unseat Consumer Discretionary as the industry generating the most bearish sentiment. Finally, a turn in the First Coverage Sell-Side Certainty Index [FCSSI] as it rises above 100 and indicates that the Street is once again, after a month of hedging, willing to allocate new capital on both sides of the market with strong conviction.

LOOKING AHEAD

“Facts are stubborn things!”

At least that’s what John Adams once said. Or, to let the facts get in the way, that’s what Paul Giamatti once said when he was pretending to be John Adams.

Regardless of who said it, that’s definitely what Wall Street seems to have learned this past week!

Just as it was beginning to feel like one of those dreams where everything works out, just as It had started to feel like the credit crisis which nearly took down the entire financial services industry had come and gone without the aftershocks we were all bracing for, just when it seemed ‘safe to get back into the water’… those stubborn facts faced off against emerging optimism and in the end,…optimism never stood a chance.

Fact: AIG (AIG) suffers first quarter loss of over $7.8 billion coupled with a surprise capital raise of $12.5 billion.

Fact: Fannie Mae (FNM) announces $2.2 billion loss, $6 billion capital raise and then has their regulator reduce capital requirements. (Does anyone else find that combination of events ….odd?)

Fact: UBS (UBS) plans to reduce its workforce by over 5,000 jobs while at the same time managing (although clearly without planning) to reduce profits by more than $11 billion.

Fact: Oil sets record price levels surging 8% over the course of the week.

After three consecutive weeks of general uncertainty and relatively minor shifts in sentiment, facts have allowed conviction on the sell-side to resurface and with it a clear indication that old trends die hard.

Bulls returned en masse to what’s worked before as Energy hits near record levels of positive sentiment. Surprisingly, as Energy re-assumed the top spot, the Dow Jones Transport Index remains near record-high levels and is up almost 26% since January lows. Barron’s this week picked up our theory that, ‘One of these markets will eventually be proven wrong,’ and then went one step further in stating that ‘figuring out which market is wrong isn’t as important as figuring out which market is battier’. While we are intrigued by this notion that Wall Street has become nothing more than a giant game of ‘chicken’, (and we hear some of you asking, “when has it ever been anything but exactly that?”) we were impressed to see the Chief investment Officer at Harris Private Bank address this debate, sound definitive and yet hedge all his bets in one concise sentence when he was quoted as saying, even though he feels the Oil bet is wrong, “I’m afraid the transport trade will end badly,…all because an irrational energy market will stay irrational for longer than we think.”

This week we also witnessed another round of our favorite game…‘Who has less money…the banks or the consumers?’ According to the Sell-Side, Financials won in walk. (We know better than to use the words ‘run’ and ‘bank’ in the same sentence.) Martin Sulliven, CEO of AIM was quoted this week, (or should that be this week’s CEO of AIM was quoted), as saying he had "no illusions about the challenges ahead.” Firstly, to his public relations department, we ask…what part of that comment is supposed to act as ‘comfort’ to his shareholders? Secondly, as we await a tersely worded response from said department, we are able to say based on our data that at the same time AIM, Fannie Mae and others shrugged off any previously held illusions and faced reality this week, the rest of the sell-side came along for the ride and once again began strongly advocating short financial positions to their buy-side clientele.

Rougher market ahead, higher energy prices and lackluster Consumer & Financials…seems like we’re right back where we started.

PREVIOUS SENTIMENT INDICATED

On April 21st: What investors have been standing on for the last two weeks in the Financial Sector was not in fact the ‘bottom’ but a ledge that was crumbling beneath their feet.

What’s happened since: Financials have fallen over 1.3% since that day while the broader market is flat.

On April 14^th: We can’t tell if the Energy bulls on First Coverage are right or wrong in taking a stance that there’s room to move to the upside, however we can immediately state that they are definitely zigging while many others seem to be zagging.

What’s happened since: S&P 500 Energy Sector has increased by almost 7% and last week reached and closed near record highs.

Until next week…

Comments

[ponchovilla]

The attention span of the average person is about ten seconds. The herd moves on "headlines" and 10 second snippets without context. Except for a rare few (Kill the messenger) who can put meaning behind the "data" or "possible facts" the pundits grab 90% of the headlines.
Consider the following:
"It's hard to change people's minds with facts" Thomas Sowell

“The market can remain irrational longer than you can remain solvent.” - John Maynard Keynes
As I tell my daughter in Manhattan, "My advice and $10.00 may get you a cup of coffee at Starbucks"

[BrucePile]

The market seems to be in limbo between ending a short bear decline and proceeding to a bigger decline. On the one hand, you have two lead groups, the transports and the retail index, acting like they want to lead in a break of the decline. But on the other hand, you have the broad indexes still showing classic bear market rally technical signs.

If you look at how the previous bear market played out on the VIX chart, you see that post 3/'00 the VIX declined to about 18 just prior to each major sell off (Aug. '00, Feb. '01, Apr. '02). Currently, the VIX drifted down to around 18 in Oct. '07 (the top before the decline) and it also drfted down to 18 in Dec. at the top of a bear market rally just prior to the Jan '08 sell off. In each case ('00-'03 and now) you can actually draw a straight trendline across the tops of the bear rallies and label where VIX 18 occurs and the 18s all fall very close to the line. Guess where the VIX is at right now - smack on 18 again, which seems to be something of a red flashing warning light with siren and a sign that reads "get out of Dodge!

But my advice, to add to the Starbucks coffee above, would be to maybe wait on the deployment of any new money to stocks and to watch carefully how the market works itself out of this repulsive limbo condition.