A Little Nosebleed for the Dow at 14,000Ted Olshansky
Publish Date: October 30, 2007
Just as the month started off by extending its advances, it ran into some well deserved and overdue profit taking. This took the form of a 2.6% dive on Friday, October 19th which was preceded by four down days and finished the week down 570 points or approximately 4%.
The market had been in an overbought stage going into mid-October. When Caterpillar, 3M and Honeywell did not produce the earnings the market was looking for, and when new home construction slid to a 14 year low, these were enough to bring in the sellers. To exacerbate the slide, Caterpillar appeared to pour salt on the wound by lowering guidance and saying that they don’t believe the rate cuts will help the economy.
This caused the bulls to pull back and re-examine their bullish stand. Maybe their theory contained some holes as “Top Gun Trading” points out in their market letter of October 20th, the bull believed: “1) We had seen the worst of the subprime mess, 2) The Fed was on the case and would continue to cut rates, 3) The global growth story remained intact, 4)……..no recession.”
So far, many companies have reported earnings for the third quarter. Some have been poor as shown above but also some have been terrific such as Intel, Microsoft, Google and Yahoo.
Although the market has struggled back to within 3% of it’s all time high, we know there are major negatives in the horizon. Oil prices over $90 a barrel, weakness in the housing market and the economy deteriorating are just a few of investors’ concerns. Oil, if it were to go much higher could bring in inflation worries which would make it more unlikely that the Fed would lower rates. The Fed has this problem. Should it hold interest rates where they are and risk having the economy stall or should they lower rates and risk a rise in inflation. I think they are more concerned with the economy.
In spite of all the negatives, there are some strong positives. For starters, when the fed is lowering interest rates, it is usually a good time for stocks. Also, with the market selling at roughly 15x 2007 earnings for the S & P, this is not an overly rich multiple. Granted, third quarter earnings could be flat or even negative (this would be the first time in five years) but 2008 earnings are estimated to be up around 12% to 13%.
So let’s stay with our bullish outlook. We have to see the forest from the trees. A lot has been thrown against the market but it has survived. Let’s not forget Merrill’s $8 billion loss. I’m sure next year will produce favorable earnings comparisons. We have to occasionally pepper our letter with humor.
To sell something you have to someone who wants it – that is not business. But to sell something you don’t have to someone who doesn’t want it – that is business. “Our crowd” Stephen Birmingham, Harper & Rowe, p. 52, quote of James Seligman of J & W Seligman, circa 1840.
We are reducing our market barometer to 68. This is because the writer feels that there is a possibility of bad news out there which could cause a drop in the market. This would be a buying opportunity.
Q: How do you know when to sell? C.W. Grambsh, Wisconsin
A: The standard answer would be if the fundamentals of the company have changed. But a more realistic answer would be to always lighten up when everyone else is buying. Two rules to follow: Always enter a long (buying) position when the market is falling and a short (selling) position when the market is rising.
Editors Note: We are all aware of the sub-prime crisis. The banks and the brokerage firms, in their effort to rake in more money indulged in high risk trades willy nilly. While the president of Merrill Lynch walks off with 160 million, his firm loses eight billion and not to mention the losses of the shareholders. This writer wants to know, Where were the regulators?!! Where were the bank examiners?!!
These issues I have yet to see the press discuss. And furthermore, how is it possible that these banks and brokerage houses are able to carry these questionable loans and trades on their books with values that far exceed their worth? Shouldn’t they be forced to liquidate them? Isn’t a margin account forced to liquidate (or come up with more money) when the account falls below a minimum maintenance?
How about treating individuals and the “big boys” equally?