Thursday, January 31, 2008

Market Summary: Thurs. Jan. 31, 2008

Do you buy this rally? I’m not so sure. We had a 450 point swing in the Dow today, while bonds were up all day (usually, bonds move inversely to stocks as they are a “flight to quality” investment). Remember, bonds have been leading the markets lately. Was a 450 point rally the day before a HUGE unemployment number warranted? I don’t think so. This employment number will give the market direction for the next few weeks and people have been a little too bullish lately.

Yesterday, we saw stocks fall fast when one bond insurer got downgraded. One of the main reasons for the huge decline in stock prices in December and January has been because of uncertainty regarding bond and mortgage insurers. We opened lower this morning because of two pieces of information: 1) MBIA posted a huge loss in Q4 and there was speculation that they would lose their AAA credit rating, and 2) a weaker than expected initial jobless claims number (however, this number always gets revised). MBIA was the main focus today because of their 4 hour conference call (that’s ridiculously long). The market turned around when MBIA CEO said the company would be able to maintain its AAA credit rating and that it will have enough capital to stay in business. This statement soothed investors’ concerns and sparked a broad-market rally, led by the financials, home builders, and retailers.

Take a look at some ETF (exchange-traded funds) that track these three industries – banks (XLF), homebuilders (HGX), and retailers (XRT). These groups have been up huge since the emergency Fed rate cut last Tuesday. I think they are overextended and I would not be a buyer at this time. These industries (the so-called “early cycle” industries) are leading the markets higher mainly because of the aggressive easing action of the Fed.

Just before the market closed at 2:53 pm, Reuters reported that S&P (another credit rating agency) might still cut MBIA’s credit rating. Here is the Reuters article describing the bond insurers’ current situation. When this report came public, the Dow immediately shed 100 points in a matter of two minutes. For the most part, whatever MBIA does (news-worthy), the stock market will follow because the ripple effects of a MBIA/Ambac downgrade will cause chaos in the credit markets.

After the close, Google reported earnings that were below analysts’ expectations and the stock was down about $40 in after-hours trading. Just a few months ago, GOOG was trading at $747! It’s definitely a buying opportunity tomorrow morning. Proctor & Gamble, CVS, and Amazon.com beat estimates. Starbucks announced they will close 100 stores and open 400 less new stores.

What to watch for tomorrow? The unemployment number is key! A poor number will mean the Fed might be forced to cut again. A strong number will definitely cause the markets to rally. Also, Chevron and Exxon Mobile report earnings tomorrow. They have a combined market capitalization of $650B! Their reports will definitely move the market.

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