RSSDon't Forget the Fundamentals!
By Jim Farrish | October 14, 2008 | 5:39 PM | 0 Comments
The uncertainty and unwinding are still at play in the broad markets. The uncertainty of how all this plays out is normal, the unwinding of the leverage is still going to take time. The plan that was laid out by Paulson, Bernanke and Bair was received with open arms by Wall Street. By the end of the day some were running with the profit from yesterday or else hedge funds were still selling into the rallies. Either way no one said this was going to be an easy task. It didn't take a day to create this mess and it certainly won't be solved in one.
The bucket is out and the bailing has begun. The $700 billion is in the process of being deployed. $250 billion to banks and the balance to buy assets off the balance sheets of banks. This led to a rally in the bank sector as many expected. KBE (NYSE: KBE) was up 10.2% on the day breaking through resistance at the $30 level. Holding above this mark tomorrow will be important to the move higher. The target here is the $36.80 mark. The regional banks were up as well as KRE (NYSE: KRE) gained 3.2%. The question marks on how they stand to benefit or be helped through this process is still uncertain. The Fannie Mae Preferred are still an issue on the balance sheet of these banks that didn't get addressed yet. Watch this sector as we move forward and more of the plans are laid out on how these assets will be dealt with short and long term.
Three sectors were addressed fundamentally today worth noting. The first of which was healthcare. Johnson and Johnson announced earnings prior to the open today. They exceeded expectations and the stock moved up 2% in trading today. As an indicator for the drug sector this is a positive sign from my view. ARCX: IHE (NYSE: IHE) was up 1.8% as well today. The ETF closed at $43.34. Genentech beat earnings after hours helping the sector as well.
Second, Pepsi announced earnings today as well. The company missed earnings stating that soft drink sales were weak in the US. This led to more input that the consumer is pulling back on spending. The consumer staples sector is expected in economic periods like this to hold up better than the consumer discretionary stocks. This is not a good sign for the sector as the index dropped 3% on the day. XLP (NYSE: XLP) closed at $24.45, above the $23.49 low last week. This could set up as a short, but for now I would watch from the sidelines.
Third, Intel announced earnings after the close and came in slightly ahead of expectations. The revenue was basically in line with expectations. The stock gained nearly 4% in afterhours trading. The semiconductors were down 5% on the day. This could give a boost to the technology sector overall tomorrow. IYW (NYSE: IYW) is the ETF for technology and on my watch list near term for a bounce. The follow through today didn't materialize as the sector fell 4%. IGW (NYSE: IGW) is the ETF for the semiconductors to watch.
Earnings in those sectors are showing some of what to expect looking forward. Fundamentals are an important part of any recovery and setback in the broad markets will need them to improve. There are rumors of the recovery happening quickly. I am not buying into it just yet. A one day rally does not address all that has happened. Don't confuse a bounce with a bottom. The health of the underlying markets still have a lot of work to do. Deleveraging the capital markets that were estimated to be leveraged 30 to 1 takes time. We are on our way, but there is still plenty of work to do.
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