Wednesday, January 7, 2009

Market Summary: Wed. Jan. 7, 2009

Another set of bad news sent the markets lower and took some of the euphoria out of the bulls’ sails. It was about time we saw a significant pull back after a 27% rally from the November 21st bottom.

Why did the market sell-off 3%?

1) Intel led tech stocks lower after it warned revenues will come up short of expectations. The company said fourth quarter sales declined 23% which was more than predicted (and more than in 2001 when the tech bubble burst). This is the second time Intel has cut its fourth quarter revenue estimate. Intel is absolutely dominant (80% market share) in the chip space and this warning does not bode well for the tech sector.

2) The ADP employment report showed that 693,000 private sector jobs were eliminated in December which was far worse than expectations. The government will report non-farm payrolls on Friday (private sector plus government jobs) and I have heard one “expert” on CNBC say that this number could be 1 million!

3) Crude oil fell 12% after an extremely bearish inventory report. The estimate was for a supply increase of 800,000 barrels, but the actual increase was 6.68 million barrels. Simple supply and demand here – more supply equals lower prices.

4) Meredith Whitney, an influential analyst who covers financial stocks, said banks will need to raise more capital because she estimates $40 billion of write-downs due to downgrades of mortgage-backed securities last quarter. JPMorgan and Wells Fargo were once again the laggards in the sector. Financials (XLF) were off about 5% on the day.

5) Time Warner announced it will have an annual loss due to a $25 billion write-down. In November the company anticipated a profit of $1.07 per share. How quickly things can change! The company also noted that the slowing economy hurt advertising revenue more than expected.

How about some good news? Monsanto surged almost 18% after reporting earnings that beat analysts’ expectations and raising its full-year guidance. Profit increased to $556 million ($1 per share) last quarter. This compares with $256 million in profit the same period a year earlier. Estimates called for earnings of 60 cents per share.

Even though money came out of the stock market, there was no flight-to-safety bid in the Treasury market. This action is a bearish sign for Treasuries. Here’s the catch 22 for the government: As the Treasury Dept. continues to issue more debt (increase supply) to pay for all its bailout and stimulus packages, Treasury prices will decline (yields increase). However, as yields increase so do the interest payments that must be paid to the bond holders. This increase in interest payments is very unfavorable for the government and will result in more debt issuance to pay for the higher interest payments. Quite the vicious cycle! The budget deficit will exceed $1 trillion sooner than people think.

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