Monday, August 16, 2010

Morning Note...

Futures are ~25bps lower this morning after a relatively quiet weekend.  In earnings news, retailers Lowe’s (LOW; +4%) reported better than expected earnings.  WalMart earnings are due tomorrow, and Target reports Wednesday.  Education stocks are lower this morning on the Department of Education’s loan data release.  In economic news, this morning’s Empire State Manufacturing release was weaker than expected at 7.10 vs. the 8.0 estimate.  However, this is higher than last month’s 5.08 reading. In Asia news, apparently China has now overtaken Japan as the world’s #2 economy.  There is also a Bloomberg story describing China’s PBOC as bullish on Europe (and thus buying more and more of Euro debt) at the expense of the U.S.  Credit card companies will release July delinquencies and charge-offs today.  In other news, today is the deadline for end-of-quarter 13F filings, and some stocks may move as a result of what fund bought or sold shares in the prior quarter. 

Looking ahead, here is the line-up for the week in U.S. markets:

Earnings expected include:

(8/17/10): ADI, ANF, HD, SKS, TJX, VIT, WMT
(8/20/10): ANN, SJM

            Economic indicators:

(8/16/10): Empire Manufacturing, TIC Flows, NAHB Housing Index
(8/17/10): PPI, Housing Starts, Building Permits, Industrial Production, Capacity Utilization, ABC Confidence
(8/18/10): MBA Mortgage Apps
(8/19/10): Initial and Continuing Jobless Claims, Phila Fed, Leading Indicators

In the anecdote department, there was a feature on debit card and overdraft protection regulation on the radio this morning.  This is not new news and overdraft regulation has been widely anticipated for some time.  To summarize, banks automatically enroll you in overdraft protection but ding you $40 or so every time you are overdrawn and you tap into it…so people’s $3.50 Starbucks latte ends up costing $43.50 when you overdraw by a penny or two.  The new regulation will allow people to opt out.  Again, none of this is new…but here’s the tidbit from this morning’s story:  last year, banks earned $40 billion in fees from this type of overdraft protection.  To keep the math simple, isn’t that 1 billion overdrawn occurrences?  So – as always – the read through is to the American consumer, who represents ~70% of our economy.  And my question is this… first, if you are near zero in your checking account, why are you drinking a $4 latte?  But second, and more importantly, Americans were either unaware of their balances or unable to balance their checkbooks to the tune of 1 billion transactions worth of overdrawn errors?!  I don’t know about you, but once again – that scares me.  Maybe I am the exception, but I am pretty sure I am regularly aware of my balance, even with all the direct deposit and auto-deduct movements… Maybe I am making too much of this, and it’s obviously old news, but it’s still foood for thought…it’s one of those little behavioral consumer quirks that makes me think – once again – of a house of cards…

And finally, in the “really scary” department, here’s a blurb from this weekend’s Wall Street Journal regarding a technical stock market crash predictor known as the Hindenburg Omen:

'Hindenburg Omen' Flashes
Technical Gauge and Its Creator Sense Stock Gloom; 'Good Conspiracy Theories'?  By STEVEN RUSSOLILLO And TOMI KILGORE

Forget about Friday the 13th. Many on Wall Street took to whispering about an even scarier phenomenon—the "Hindenburg Omen."

The Omen, named after the famous German airship in 1937 that crashed in Lakehurst, N.J., is a technical indicator that foreshadows not just a bear market but a stock-market crash. Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.

Wall Street has been abuzz about whether the Hindenburg Omen will come to bear, with some traders cautioning clients about the indicator and blogs pondering all the doom and gloom. But Andrew Brenner, managing director at Guggenheim Securities, told his clients: "Personally, it sounds like [people] are starting their weekend drinking early."

Technical indicators, with names like "The Death Cross" and "The Bearish Abandoned Baby" have been attracting mainstream attention in recent months. Amid an increasingly volatile market, investors have been searching for any clues about stocks' direction, especially this past week where major indexes fell more than 3%.

"We always love good conspiracy theories," said Joseph Battipaglia, chief market strategist of the private-client group at Stifel Nicolaus. But he noted that market watchers sometimes make too much of what could be mere coincidences. "I for one dismiss all these things because they usually erupt most numerously during bear markets."

Mr. Miekka came up with the Omen in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week stock levels and the moving averages of the New York Stock Exchange. He said the Hindenburg Omen's name was coined by a fellow market technician, Kennedy Gammage, when they found out the name "Titanic" already had been taken.

The confluence of data used by the Omen was officially tripped this week. There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total. Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.

Other criteria include a rising 10-week moving average for NYSE and a negative McClellan Oscillator, a technical indicator that measures market fluctuations. Mr. Miekka said the appearance of one signal is usually an indication of a market top, but the Omen becomes more accurate when there are two or more close together.

The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock-market declines that can be considered crashes.

"The Hindenburg Omen does show some deteriorating internals, which signals some major concerns," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "But it isn't a reason to move to 100% in cash. We're taking a wait-and-see approach, but considering its recent history, we're considering it more than other indicators."

Mr. Miekka, who writes a Wall Street newsletter called "Sudbury Bull & Bear Report" out of his homes in Maine and Florida, wasn't even aware that his own Hindenburg Omen indicator was activated. The 50-year-old former physics teacher, who is an avid target shooter, said he was "taken by surprise" after he plugged the data into his model.

He didn't say whether it is a good time to bail out of the market, but he isn't exactly in a bullish mood when it comes to stocks. "I'll be dancing close to the door," he said.

Barron’s positive JCI, CSTR.  COCO cut at DBAB.  BCAP cuts COCO, ESI, LINC.  JKS higher on earnings.  ATML cut at FBRC.  DBAB raises DNDN, GILD.  CLSA raises NWSA. 

Asian markets mixed overnight.  Europe roughly 60bps lower this morning.  Oil +40bps.  USD -80bps.  EUR/USD 1.2867.  Gold +90bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia: According to the Mental Floss website, Sesame Street character Snuffleupagus actually has a first name.  Any guesses?

Yesterday’s Question:  To build on yesterday’s question, what book is #1 on the all-time children’s book sales list?
Yesterday's Answer:  The Pokey Little Puppy is #1 on the all-time English language children’s book sales list. 

Best Quotes:  Quiet Riot…Thanks to the Federal Reserve, the equity market had a rough time last week and the bond market’s momentum continued.  The S&P 500’s 3.7% loss was the worst since the week ended July 2nd, and the 5th worst weekly tally of 2010.  The interesting technical divergence is that the week included the two slowest trading sessions of the year.  Historically, downward moves occur on 15%-20% heavier volume than upward moves.  Non-holiday related weekly volume has not been slower since the end of November last year.  Before that, it was August 2008.  Comparing the past week’s action to that of the 4 largest downward weekly moves for 2010, one can see the underwhelming characteristics in the level of turnover.  During the 5% loss for the week ended July 2nd, volume was 34% heavier than this past week, and that was a week preceding a holiday.  For the 4.2% loss for the week ended May 21st, the volume was 80% heavier than the past week.  For the 6.4% loss for the week ended May 7th, the volume was double that of the past week.  For the 3.9% loss for the week ended January 22nd, the volume was 40% heavier than the past week.  The catalyst for the sell off was an FOMC meeting where the proposed course of action was telegraphed and helped fuel that rally the prior week.  Markets judge the strength of a move based upon the volume behind it, and while rallies have had similarly weak volume, this divergence is noteworthy.  In the world of financial markets, August is synonymous with the word slow, and it is highly likely that the upcoming week will be equally slow, or slower.  Nonetheless, it will be interesting to see how the market digests a sell off lacking volume momentum such as the past week’s.  –Mike O’Rourke, BTIG