Clues to the Trend and Cycle Direction of This Market

by: Bill Cara

It makes no sense that Goldman Sachs (NYSE:GS) can soar +16.3% in market capitalization in a single day when quarterly earnings were reported to have plunged -53% in the comparable quarter.

Even if EPS of $3.23 beat the Street's consensus of $2.58, that is - just by 65 cents, multiplied by four quarters it's just $2.60/share in annual earnings above consensus. Was this “surprise” really worthy of a $10 billion bump in Goldman market cap, or did the moon-shot have more to do with HB&B (ie, the Club on Wall St.) protecting one another?

It could be that Humungous Bank & Broker have a humungous valuation problem that they’d prefer to sweep under the carpet this month end, which just happens to be the end of the quarter.

So, as I see it, this is just putting on appearances. Now, I could be wrong, but, following the pump for the same reason from Morgan Stanley (NYSE:MS) and Merrill Lynch (MER), we’ll not have to wait long to see. I suspect that around the end of the month, equity market levels will return to the elevator heading down.

Does anybody here see the earnings of these broker-dealers strengthening this quarter and next? Therein lies the clue as to the trend and cycle direction of this market.

Also, the gold stock leader Barrick (NYSE:ABX) is in real trouble. For the change of trend to be confirmed, there is a need for a Triple Bottom ($49 on ABX.T) breakdown to $48.00. If any of you own this Cara 100 stock, it is time to be very cautious. It is the reason, I published my Buy/Sell Advisory on Goldcorp (NYSE:GG), which I think is now headed to the mid to low 30's.

Wednesday, Credit Suisse came out with an analysis that the worst of the world's financial conditions is yet to come. Here is the conclusion of this particular report:

Following today’s smaller-than-expected cut, we have decided to retain our baseline forecast that the federal funds rate will reach 2% in the near term, before the FOMC pauses to assess the effects of impending fiscal stimulus on the US economy.

The Fed has done a lot over the past week, to put it mildly, with two separate actions to address liquidity issues in the markets and today’s 75-basis-point cut in the funds rate. In fact, today’s statement suggests that Fed officials have grown uncomfortable with the speed and degree of intervention, and will be reluctant to do much more unless absolutely necessary.

Nonetheless, we still see the risks to our funds rate forecast as tilted to the downside. In the short term, either a particularly bad batch of economic data or a resumption of financial market stresses could push the FOMC to a 50-basis point cut when it meets on April 30, rather than the 25 we currently expect. With the economy likely to grow below trend for much of the next year, we see a possibility of further rate cuts in early 2009 as the fiscal boost wanes.

To end on a positive note, I believe that we ought to be lining up the stocks of ten to twenty companies to start accumulating. When you look back over charts and see the price and volume tracking so much higher, you can say, “There but for the grace of God and the wisdom of this community and the knowledge I have acquired here, go I.”

Comforting, isn’t it?