TIB Weekly Newsletter “The stock market pulse”

($49.95/month Value)

June 16th 2008 Edition

Weekly review of the markets

Last week

Last week following the strong Friday, we suspected we would have a bullish week or at least a strong start but it didn’t happen. Monday didn’t go anywhere. At 8h30, the New York Empire State index showed a surprising drop confirming a weakened economy. Experts were expecting a drop of 2% but it came out at -8.7%. Oil also played a role by reaching another record level, pre=market, at 139.89 even though Saoudie Arabia announced they would increase their daily output by 200 000 barrels. The market had a bearish open but oil price drifted down to 133.82 by the end of the day which brought some relief to a volatile day, closing slightly up. An interesting observation is that lately we have noticed extreme volatility in the price of oil and this usually means investors and speculators alike are nervous which, acknowledging oil prices have been driven up by speculation, could announce a severe correction. We just don’t know when…

Tuesday, another bad news awaited us when the PPI came out at 1.4% when the consensus was 1% with a yearly read of 7.2%. But, the underlying index came out as predicted at +0.2% fir a yearly read of 3.0%. Industrial production also came out lower ( -0.2% vs +0.1%) than anticipated so did the capacity utilization rate ( 79.4% vs 79.7%) These numbers all confirmed inflation was ever present in this weak economical environment… Tuesday was a bearish day.

Wednesday the economic calendar wasn’t a factor but Goldman Sachs et Fifth Third Bancorp both announced they would raise some more capital to balance their balance sheet. Oil prices turned back up after the announcement the reserves were lower than expected. With the weakness of financial markets and the oil prices pushing higher markets continued their bearish trend with the 10 sub-sector of the S&P500 closing lower for the day…

Thursday, at 10AM the leading indicators came out stronger at 0.1% vs 0% and the “Philly Fed” surprised with a strong drop at -17.1 vs -10. The biggest drop came from China. China was artificially holding the price of gas with subsidies but finally announced they would increase the price at the pump by 18% dragging the price of oil down ( higher prices means lowering demand…) and a bullish reaction in the markets.

Friday pressure came from the financial markets and from an oil price rebound. In the financial sector the rumor was that Merrill Lynch was about to announce a “profit warning” . Another one came from Citigroup who were suppose to announce an important debt radiation, the announcement that Washington Mutuel just cut 1200 jobs and the downgrades of MBIA Inc. and Ambac Financial Group ( lost their AAA rating) made us realize that our assumptions that the worst was over in the financial sector was indeed erroneous. Add to that the price of oil which gained close to 4$ overnight plus the fact that this Friday was one of those rare « quadruple witching friday »; on this day 4 types of options expired creating increased volatility at the beginning and at the end of the day. At the open, indexes all around dropped significantly and remained depressed all day ending much lower.

This Week

Last week proved that inflation was now public enemy number one in a slowing down economy and the financial sector wasn’t out of the woods by a long shot making credit arduous. This week the FOMC reunion will be interesting because of their decision on the interest rates and their jsutification for wahtever theydecide to do. We can expect a slow start to the week as everyone will be in a “wait and see” mode. Tuesday the consumer confidence index could cause some volatility. Wednesday the faint of heart should be out of the markets since the FOMC will come out with their announcement which always creates volatility. The rest of the week will be impacted by this annoucement and the interpretations of it.

Technically, on the S&P500 daily chart, we can see that we are at the lowest part of the channel which means we shoul dremain over 1320 until Wednesday around 2:30PM (…) at which point we will go one way or the other…

The Dow Jones sure seems like it’s continuing its downward spiral having broken through our 12000 level. The next support level is at 11600…

The NASDAQ seems to be in the same positin as the S&P500: it will likely hold until Wednesday at which point we will

either head up towards 2550 or head down towards 2250…

All in all the tone is quite negative, good news are rare and earnings season is around the corner which will brings its lot of bad news.

If the Dow is a leading indicator like some gurus allude to, we will surely make some new lows in the near future so act accordingly…

In the shorter term, once again, you can expect a roller coaster trading week so be patient and use good money management.

Economic calendar
(Reports I consider will impact the market the most with definitions and expectations)

Tuesday

FOMC Meeting Begins

Definition

The Federal Open Market Committee consists of the seven Governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year in order to determine the near-term direction of monetary policy. Changes in monetary policy are now announced immediately after FOMC meetings..

Why Do Investors Care?

The Fed determines interest rate policy at FOMC meetings. These meetings occur roughly every six weeks and are the single most influential event for the markets. For weeks in advance, market participants speculate about the possibility of an interest rate change -- or a change in the wording of the post-FOMC announcement that suggests a shift in policy -- at these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars: when bonds yield 10 percent, they will attract more money away from stocks than when they only yield 5 percent.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

Consumer Confidence
10:00 ET

Concensus 56.5

Definition

The Conference Board compiles a survey of consumer attitudes on present economic conditions and expectations of future conditions. Five thousand consumers across the country are surveyed each month. While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month.

Why Do Investors Care?

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Consumer confidence did shift down in tandem with the equity market between 2000 and 2002 and then recovered in 2003 and 2004. Consumers became more pessimistic in 2005 when gasoline prices surged.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.

Wednesday

Durable Goods Orders
8:30 ET

Concensus 56.5

Definition

Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. The first release, the advance, provides an early estimate of durable goods orders. About two weeks later, more complete and revised data are available in the factory orders report. The data for the previous month are usually revised a second time upon the release of the new month's data. (Bureau of the Census, U.S. Department of Commerce)

Why Do Investors Care?

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. Rising equity prices thrive on growing corporate profits - which in turn stem from healthy economic growth. Healthy economic growth is not necessarily a negative for the bond market, but bond investors are highly sensitive to inflationary pressures. When the economy is growing too quickly and can't meet demand, it can pave the road for inflation. By tracking economic data such durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios.

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduces the prospects for inflation.

Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy, and therefore a major influence on their investments.

New Home Sales
10:00 ET

Concensus 515

Definition

New home sales measure the number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends and, in turn, economic momentum and consumer purchases of furniture and appliances.)

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, new home sales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the new home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

FOMC Announcement
2:15 ET

Definition

Why Do Investors Care?

Thursday

Corporate Profits
8:30 ET

Definition

Corporate profits, as reported by the Bureau of Economic Analysis (BEA), are summarized briefly as the income of organizations treated as corporations in the national income and product accounts. The BEA reports several measures of profits. Profits from current production (corporate profits with inventory valuation and capital consumption adjustment), are also known as operating or "economic" profits. Capital consumption adjustment deals with the differences in depreciation allowances used for accounting and income tax purposes. Inventory valuation adjustment (IVA) deals with the difference in measuring the cost of inventory replacement. Book profits amount to operating profits subtracting out inventory valuation and capital consumption adjustments. After tax profits are book profits after taxes are subtracted. The Econoday reports will focus on after tax profits reported by the BEA, since these are the most relevant.

The corporate profit figures that are derived from the national income and product accounts (NIPA) depend on GDP growth. They don't always move in the same direction or the same magnitude as the profit data reported directly by individual companies or even the S&P 500.

Why Do Investors Care?

Corporate profits are the lifeblood of investment spending. Profits are the income of a corporation. When profits are strong, then companies will be able to increase their capital spending. This could allow better growth prospects for a company and is likely to increase its underlying value. When corporate profits decline, then capital spending tends to decline. Without the potential for growth, a company could be at a disadvantage, particularly in our global economic environment.

Corporate profits also reveal the health of an organization. When a company's profits are anemic during economic expansion, it suggests that the company is not performing efficiently. The value of an inefficient company is determined by its stock price. Thus weak profits signal lower stock prices. When a company's profits are relatively strong, even during an economic downturn, it usually means that the organization is well-managed. The higher value for this type of company is reflected in a higher stock price.

GDP (final)
8:30 ET

Real GDP concensus 1% and GDP price index 2.6%

Definition

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Why Do Investors Care?

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Jobless Claims
8:30 ET

Consensus 380K

Definition

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.

Why Do Investors Care?

Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

Existing Home Sales
10:00 ET

Consensus 5.0M

Definition

Existing home sales tally the number of previously constructed homes, condominium and co-ops in which a sale closed during the month. Existing homes (also known as home resales) account for a larger share of the market than new homes and indicate housing market trends. (National Association of Realtors)

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as home resales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Even though home resales don't always create new output, once the home is sold, it generates revenues for the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, home resales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the existing home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

Friday

Personal Income and Outlays
8:30 ET

Consensus : Personal income 0.4% and Consumer spending change 0.7

Definition

Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and nondurable goods, and services.

Why Do Investors Care?

The income and outlays data are another handy way to gauge the strength of the consumer sector in this economy and where it is headed. Income gives households the power to spend and/or save. Spending greases the wheels of the economy and keeps it growing. Savings are often invested in the financial markets and can drive up the prices of stocks and bonds. Even if savings simply go into a bank account, part of those funds are typically used by the bank for lending and therefore contribute to economic activity. In the past twenty years, personal savings have diminished rapidly as consumers have spent a greater and greater share of their income.

The consumption (outlays) part of this report is even more directly tied to the economy, which we know usually dictates how the markets perform. Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Investors can see how consumers are directing their spending, whether they are buying durable goods, nondurable goods or services. Needless to say, that's a big advantage for investors who determine which companies' shares they will buy..

Consumer Sentiment
10:00 ET

Consensus : 56.9

Definition

The University of Michigan's Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is directly related to the strength of consumer spending. Consumer confidence and consumer sentiment are two ways of talking about consumer attitudes. Among economic reports, consumer sentiment refers to the Michigan survey while consumer confidence refers to The Conference Board's survey.

Why Do Investors Care?

Here’s a snapshot of it all:

That’s it for the economic calendar this week. ( if that’s not enough excitement for you, you are either dead already or your dayjob is as a stuntman…)

Have a great week!

Yours truly,

Eric LeRiche

www.trading-and-investing-for-beginners.com

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