There is an interesting article in the WSJ regarding recessions and productivity numbers. As seen in the figure below, the last six recessions have occurred at a time when productivity numbers were decreasing (although the numbers were still positive for the last two recessions, and productivity was relatively strong during the most recent recession in 2001).

There is an interesting article at the International Herald Tribune about how forecasting on Wall Street is getting "too wild," and how forecasts are getting less accurate. Data from Thomson Reuters finds that analysts correctly predict earnings only a fifth of the time. Approximately two-thirds of quarterly earnings beating estimates, with the remaining estimates being too low. This is not surprising since many companies attempt to managing earnings by reducing expectations and then delivering better-than-expected results. This year, only about 10% of companies matched expectations. Again, probably a combination of poor forecasting and earnings management by companies.

As mentioned in the article,

"Even the collective wisdom of the marketplace has been wrong time and again. The stock market, that weathervane for corporate profits and the economy, keeps swinging from fear to greed and back. A glance at the major stock indexes over the past year reveals a host of false bottoms and fools' rallies."

In fact, just looking at a Citigroup (NYSE: C), General Motors (NYSE: GM), Ford (NYSE: F), JPMorgan (NYSE: JPM) and other similar companies gives a picture of stocks that are relatively flat over the last month or so, even though price action during this time has made some significant moves up and down.

Of interest is that just as the markets become almost too difficult to forecast, due to market conditions and headwinds that reduce clarity going forward and prevent past trends from being trusted, is the exact time investors are looking for guidance, hanging on every forecast - and, in some instances, trading on that guidance as well. The recent moves also have the feel of the late 1990s in which new yearly price forecasts were meet in a day to two as retail investors piled in and bid up prices in an attempt to board the train before it left the station. Things have not gotten that extreme yet in the opposite direction, and the circumstances are certainly different, but the faith and need for guidance from Wall Street, or anyone for that matter, is reaching interesting levels. Whether this signals a reversal, as it did in early 2000 (but in the opposite direction), is difficult to tell. Furthermore, even if it does, it may take a while to see the effects. After all, Greenspan gave his "irrational exuberance" speech in December 1996, over three years before the market finally corrected and came to its senses.

bullbeartrader.com

Natural gas fell more than 7% yesterday on the continued decline in oil prices. As we discussed on Wednesday’s blog this leave the ETF (AMEX: UNG) at support near the $50 mark. The next support level is $45. I would continue to watch for opportunities at both of these levels for a bounce on this aggressive selling.    

I've read and heard countless investors who have been thinking the banks were a "good deal" since the first big market sell off in January 2008. Since then many are down another 50%, some more. Every month I see new investors looking to pick up a "bargain" in the financials without realizing the only bargains have been short positions. Most investors have been programmed by the financial media to always buy stocks when they go down because "in the long-term they are a great value." Well I don’t know about you, but long-term to me means at least 20 years. And anyone who considers long-term any shorter than that needs to consider these sobering facts:

  •  Since making its highs in March 2008, the Nasdaq is still down by over 55%; that’s going on 8 years folks. In the best of scenarios I cannot see those highs being tested for at least another 8 years.

  •  Since making its highs in 1990, the Nikkei is still more than 65% down. Next year will mark 20 years since the Nikkei approached 40,000.

  •  Finally, since making its highs in 1999, the Dow is now by about 3% after 9 years. Most likely the Dow will go considerably lower.

Those are things to consider when buying stocks in general. But when we are talking about the biggest banking crisis ever, things look much worse. The financials continue to write down assets and take losses. And they still have no idea how large the total losses will be. Finally, they continue to sell off assets and raise capital using debt and more so by issuing new equity.

Now, what do you think is going to happen to say, Citigroup (NYSE: C) once it realizes all its losses. Next, consider how the future of its ability to deliver earnings after selling off assets. Finally, consider what the shareholder dilution will do to per share earnings. Yet, Citigroup is in much better shape than most of the other banks. Before it’s all said and done you should expect to see most of the financials trading in the teens, some the single digits (as we already see). As for Goldman Sachs (NYSE: GS), I’m betting it will break down well below $100 before it’s all said and done.

When you take huge losses, you can recover as long as you have strong assets to deliver earnings. But when you are selling off a good portion of these assets your ability to deliver earnings will be diluted. These dilutions are even more severe after you have issued more shares.

“Bottom-fishing” as they call it isn’t an activity amateur investors need to be involved with. Some bottom-fishers have already been fooled many times in the past 6 months and if they have any cash remaining, they are likely to be fooled again. But if you do plan to take a stab at catching a bottom, you need to stay away from distressed securities; in this case, distressed industries such as the financials, autos, airlines, and soon to be retailers.

But if you are determined to bottom-fish, you need to contend with the high possibility that things are going lower. And the trip back up is going to be slow and nerve-racking. Those of you who are looking for a bottom need to stick with stocks that are not distressed and have already declined due to other issues, such as the drug makers. Medicare Part D combined with the retirement of up to 80 million boomers will position these stocks for at least a decent recovery. And in the meantime you can collect the huge dividends. My top pick for this strategy is Pfizer (NYSE: PFE). While a large market sell off could take it down another 2 points, the current dividend yield of over 7% is quite a deal. And note that in its 41-year history of being listed on public exchanges, it has always increased the dividend.

In conclusion, with rare exception, I do not envision any point in time when I will buy the financials hoping for a long-term recovery. In the best of scenarios, the only way they will be able to mount a reasonable earnings rebound will be through share buybacks or reverse splits. But that is unlikely to happen anytime soon if ever. Consider that Citigroup still has not realized the need to eliminate its dividend completely. It would rather sell off revenue-generating assets to raise cash like the one announced today in order to appease nervous shareholders.

Chicago Tribune: "Citi sells German retail banking for $7.7 billion"

But with 5.25 billion shares outstanding and an annual dividend of $1.28, this $7 billion ($4 billion post-tax) asset sale only allows them to continue dividend payments for one year. In contrast, they have lost a powerful retail presence in France, and all of the future earnings it would have brought. These banks need to wake up and start managing their business in crisis mode rather than the irresponsible mindset that got them where they are today. So if you think the banks will be a great buy when they do bottom, you should reconsider. You money can be invested elsewhere with much lower risk and higher returns. And while inflation is sure to eat away at any cash, at least you don’t risk losing it all.

I'm not going to bang the "Classic Monday Fade" drum as I have in previous writings, but today was another low-volume fade, coupled with the fact that the major indices are all back below key support levels, most notably, the 50-day moving averages. That being said, trading this market in the short-term is tricky and definitely a test of one's courage.  Making it more challenging is a strong news week and the bulk of Q1 earnings on the horizon.  The overall markets seem to be in some sort of funk for the last week and a half. The major indices have been rising well enough, however it has come with paltry volume. There is an overwhelming hope that the bottoms in prices for 2008 have been set, but the market is stuck in a trading range with a top of 12,800 on the Dow Jones Industrial Average's and 1,400 on the S&P 500. Why are investors and Wall Street surprised by the earnings announcements from banks? Did everyone think the Fed wiped out all of the bad news from the credit crisis and the subprime lending issues? Banks have had their first earnings report since this mess started in July and we are surprised at the result?

Pfizer (NYSE: PFE) reported 2Q08 revenues of $12.1 billion [B] and adjusted earnings-per-share of $0.55, which were both ahead of consensus analyst estimates for the quarter. The Company also affirmed its full-year revenue ($47B - $49B), earnings ($2.35 - $2.45 per share, adjusted), and cost-savings ($1.5B - $2B) guidance for 2008. Pfizer posted strong results in its animal health segment and brand drug sales for Lyrica, Celebrex, and Sutent. Animal health sales for 2Q08 were $715 million [M], representing an increase of 13% from the year-ago period. Total pharmaceutical sales increased 9% from the year-ago period to $11.1B, including a significant 7% benefit from currency exchange rates due to international sales and a weak US dollar. The Company also reached an agreement with Indian generic drug maker Ranbaxy to delay a copycat version of the world's best-selling drug Lipitor in the United States until December 2011. During 2Q08, Pfizer repurchased $500M of its own stock or about 26.4M shares.

 Lipitor revenues in 2Q08 were $3B, an increase of 9% compared with the year-ago period and largely due to a 6% currency exchange benefit. Lyrica revenues for the quarter were $614M, posting a robust increase of 52% from the year-ago period and due to growth in managing nerve pain associated with diabetes, nerve pain after shingles, and fibormyalgia. Celebrex revenues for the quarter were $589M, representing an increase of 23% compared with the year-ago period. Sutent revenues for 2Q08 grew by 45% to $211M thanks to strong performance in the treatment of advanced renal cell carcinoma (RCC) and gastrointestinal stromal tumor. The anti-smoking pill Chantix posted sluggish sales growth of just 3% to a level of $207M in the face of recent safety concerns including suicidal/erratic behavior and sleep/dream disturbances, which prompted the Federal Aviation Agency to ban the drug among its pilots.

As I have written previously on Pfizer, I continue to recommend shares of the Company as a turnaround play at or below the $18 per share level, which equates to a dividend yield over 7%. Despite significant patent challenges to Lipitor and other products in Pfizer's portfolio over the next few years, the Company's strong balance sheet, marketing muscle, and ability to bolster its pipeline through targeted acquisitions should provide investors with positive returns from current trading levels at multi-year lows.

http://mikehav.blogspot.com

What's $6 Billion among friends?  Apparently not much as Wachovia Corp. (NYSE: WB) and many other banks continue to announce staggering write downs due to mortgage losses.  Recently, Bank of America (NYSE: BAC) had excellent news when they announced their earnings had dropped 42% or $3.4 billion from the prior year!  Their stock is up 57% in the last five days - not a bad return given that in addition to less profit they had to increase their net charge off and nonperforming asset expenses to $5.8 billion. 

I am obviously stating this tongue in cheek, but it is one of Wall Street's favorite games to talk down earnings so much in advance of the actual announcement, that a stock rallies in the face of bad news.  The reality is that banks are not out of the woods yet.  It has been four quarters in a row of mortgage meltdown mode.  And it is not contained to just the subprime market.  Alt -A and prime loans are now having difficulties as well.  The problem will continue to spread until the housing market finds a bottom.  It is that simple. Turning a blind eye to this reality may be good for traders and those covering their naked short positions, but as far as long term value seekers are concerned, these snap back moves do not signal new buying opportunities - yet. 

A quick lesson on how the market works is in order.  Many believe the market works off of information in the real world (like announced earnings).  It does not.  Analysts from around the world form a consensus of expectations of the future and move the price of a stock to that perceived value.  When earnings are finally announced (Reality) the market moves plus or minus depending on the difference from the previous perception.   So there's three parts: Perception, Reality, and the Difference between those two. 

Now the journalists and pundits get caught up in this all the time and headlines extol the virtues of huge write offs and major declines in earnings as good news, because it's not as bad as perceived.  That's great for a trade, but direction counts!  The current direction for financials and the major markets is still down.  While things may not be as bad as perceived two weeks ago - the reality is things are not so great either. 

The two major problems in today's economy that are adversely affecting the markets are the high price of oil and the falling value of real estate. While I have said much in the past about how I think oil is due for a correction down in price, the peak of resets on adjustable rate mortgages does not occur until October of this year.  Until we at least get through that - the buildup of unsold inventory of houses for sale will continue to grow and home values will drop. 

The good news for investors in the stock market is that it looks ahead six months to year.  Eventually the economy will get stronger, and the market will discount that in advance.  I think this recent rally in the market has more to do with overcoming the oversold condition we were in and not the start of a new bull run.

Fannie Mae (NYSE: FNM) and Freddie Mac's (NYSE: FRE) developments continue to drive the price action for the currency market. Despite Paulson's announcement yesterday that he will be seeking Congressional Approval for the authorization to buy stock in Fannie and Freddie and a higher credit line, currency and stock traders are still not convinced that this is enough. On Friday, Fed Chairman Bernanke announced that Fannie and Freddie could tap into the discount window.

As the Wall Street Journal muses in this morning's paper "Are the Hunters Low on Magic Bullets?"

There are 5 major event risks that will affect the US dollar this week:

1. Fannie Mae and Freddie Mac will continue to dominate headlines. Watch out for more comments by the US government

2. Earnings! JP Morgan, Merrill Lynch and Citigroup are all reporting earnings this week. With the failure of IndyMac, more trouble could be in store for the financial sector

3. Bernanke delivers his semiannual testimony on the Economy and Monetary Policy Tuesday and Wednesday. Although he will remain hawkish on inflation, he will receive serious criticism for more action during the question and answer session about the continual strains in the financial markets and the slide in US equities.

4. Retail Sales will be released on Tuesday. The level of consumer spending will play a big role in the outlook for the US economy

5. Inflation, inflation, inflation. Producer and consumer prices are due for release this week - softer inflation pressures could reduce the chance of a rate hike by the Federal Reserve.

It will be a very busy trading week in the foreign exchange market!

www.kathylien.com