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Thursday, January 13, 2005
Market Recap
The bears took back control of the markets today after what was nothing more than a dead cat bounce rally yesterday. All three major indices spent almost the entire day in the red, but it was not until the final hour that most of the damage occurred when the sellers could not hit the sell button fast enough. The Nasdaq finished the day down –21 points, the Dow was lower by –111 points, and the S&P finished down –10 points. All three indexes closed near the lows of the day, and when that happens we should not be surprised if there is follow through selling right out of the gate tomorrow. Today's lack of follow through from yesterday puts us back in capital protection mode as we now are 95% cash again.
Oil was back in the news today as it hit a 6-week high and closed over $48/barrel. Oil does seem to be playing a lesser role in the markets but you can certainly count on it affecting the short-term psychology as it moves back up near $50/barrel. I mentioned that a big portion of the selling came in the last hour and that is never a good thing, because we know that professionals close the markets. In yesterday's commentary I wrote, “If these two tech bellwethers cannot get the NASDAQ going with record revenues, then I do not know what will”. I was speaking of course about Intel and Apple. Well folks, this certainly came true today as Intel retreated and Apple, although managing to close green, finished well off its highs. It seems that no matter how good the news is all the strength from that news is being sold with conviction.
Today the Dow closed below its 50MA and that means that all three major indexes are now below their respective 50MA. The next levels of support that we can expect as possible bounces are 2050 on the Nasdaq and 10400 on the Dow. The Dow and S&P are sitting right at support, but those levels will more than likely be taken out at the open tomorrow. After today's action it should be very clear to everyone that cash is the best position to have right now. We are 95% cash after closing out the stocks that failed to bounce today. GNLB was a diamond in the rough that gave us nice little 10% gain. If the markets were in better shape I probably would have held but when the gains are tough to come by I prefer to lock them in whenever I can.
Looking Ahead
Cash will continue to be king until there is an indication that the markets will change direction for more than one day. I will continue to look for pullback plays, but each day that a bounce does not occur the charts get more damaged. I do not have any new stocks to add to the bulletin as today's action has further damaged charts that were already weak. Solid looking charts are few and far between right now and even the ones that look good are difficult to play.
As I mentioned the other night, it is a difficult situation that we are in. The markets and stocks are oversold and a bounce could come at any time. But as we have seen this entire year, any strength that looks like a bounce is occurring has been sold off. There are better days ahead, I can promise you that. I look forward to when the markets do finally recover and we can all sit back and tell everyone that we did not lose a dime during this downturn in the markets.
Lower Priced Autos = Lower Priced Auto Stocks
Looks like carmakers are driving down their own bottom lines. We talked about this a month or so back. How the deep discounting by auto manufacturers would hurt them in the end. Consumers are accustomed to seeing massive discounts. So much so, that they will not buy a car unless they see the sticker price being slashed by $5,000 to $10,000. Auto manufacturers actually have very thin margins on most of their vehicles. If you look closely enough at the numbers, you will see just how thin they are. Just like the airline stocks, when one auto manufacturer lowers the costs through incentives, every auto manufacturer must rush in to do the same. There are some rare exceptions out there, but in general we see discounting across the board.
Well, the lower prices have taken its first victim today. GM has scaled back their forecasts for 2005. They are citing health care costs as one of the major reasons. I will admit that health care costs have been rising over the last few years, but I can not see this as an extremely valid reason for lowering their estimates by such large numbers. The truth lies in their discounting. They cannot come out and tell the public and their investors, “We can't sell cars unless we discount them”. The writing is on the wall, but no one in the automotive industry wants to point to it.
Another hit to GM is a report from the National Transportation and Safety Board. They have cited GM for failing to act quickly when it comes to safety issues. This points to underlying money trouble within GM. If a company knows of a defect, they should come out and fix it right away, particularly if there is an issue of safety at risk. But recalls cost millions of dollars, and that is money straight off the bottom line. It is unfortunate that companies are willing to put lives at risk, but they attach a dollar figure to everything. If the costs of a lawsuit are less than the costs for a recall, chances are they will be slow to react. Let cars get beyond their warranty and then have the dealer claim that there is something wrong which needs to be fixed.
Don't forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
http://www.fulldisclosure.com/earning.asp?date=200...
Note: No Bulletin on Monday
The markets are closed on Monday January 17th in observance of Martin Lurther King Jr's birthday. The bulletin normally published on Sunday will be published on Monday morning.
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