Tuesday’s Market Recap: Stocks Give Up Gains

The markets had a bad day, as the Dow Jones (^DJI: 8471.50 +60.85 +0.72%) closed down -0.19% to 8,410.65.  The NASDAQ (^IXIC: 1761.24 +7.12 +0.41%) was down -0.54% closing at 1754.12, while the S&P (^GSPC) was down -0.38% closing at 903.80.  Oil and gold were both down settling at $53.84 and $904.30 respectively.  The price of the 10-year was down, as yields closed at 3.163%.

According to many unnamed sources, American International Group (AIG: 1.73 0.00 0.00%) will not be one of the supposed ten to nineteen financial institutions that the U.S. government will announce need to raise capital levels.  AIG is expected to report a loss of $0.06 a share on revenue of $26.17 billion this coming Thursday.  In addition to AIG, it is believed that Goldman Sachs (GS) and JP Morgan (JPM: 34.82 0.00 0.00%) also have enough capital to weather a worsening economic situation.  The government stress tests, which are supposed to single out companies that do not have sufficient capital to handle potential worsening economic times, have reportedly identified Wells Fargo (WFC: 23.27 0.00 0.00%), Citi (C: 3.31 0.00 0.00%), and Bank of America (BAC: 10.84 0.00 0.00%) as companies that will have to raise additional capital.  The report that was supposed to include a list of fourteen days has been reduced in recent days, as the government believes that more companies then expected had sound balance sheets.  The government is hoping that the release of the stress test will reduce the fear that investors have of the financial sector.

In earnings news, Chesapeake Energy (CHK: 20.40 0.00 0.00%) announced a loss of $5.75 billion according to GAAP non-cash accounting, or $9.63 per share, an increase from a loss of $142 million in the same period from a year prior, afterhours yesterday.  Earnings based on continued operations were $0.46 a share, missing analyst estimates of $0.48. Revenues rose in the quarter from $1.61 billion to $2 billion, as production of natural gas increased 5% this quarter.  The loss reflects a sharp decline in the value of its oil and natural gas assets, as natural gas makes up 92% of Chesapeake’s output.  With energy demand decreasing, Chesapeake decreased its production of natural gas in March by 200 million cubic feet a day and 400 million cubic feet a day in April, and it plans on keeping these rates of production into the second half of 2009.  Chesapeake also announced plans to sell half of its Barnett Shale and Mid-Continent natural-gas gathering and processing segment for $550 million by the end of the third quarter in 2009 to provide more cash for the Oklahoma City energy company.  The energy company is hoping that the second half of 2009 will produce better earnings results, with energy demand picking up on hopes that the economy will turn around.

Disney (DIS: 23.15 0.00 0.00%) reported earnings today, excluding extraordinary items the company earned $0.43 per share compared to $0.40 per share estimates from analysts, sending Disney up over 2% after hours.  Revenue fell 7% to $8.1 billion, missing expectations of $8.21 billion.  Profits for the multimedia company fell 46% to $613 million, or $0.33 per share, due to a decrease in advertising revenue, restructuring charges, and a decline in DVD sales.  CEO Bob Iger said that he sees that a decline in ad revenue does not just reflect the poor state of the economy, but also shows a change in consumer behavior, where consumers watch television online or on-demand and not necessarily at the time it is first aired on television.

Wild Ride For UK Bank Shares

It has been a few weeks since we last looked at the UK banks. Last time we saw them, they were on their knees begging Gordon Brown for help and the Labour MP’s in parliament were salivating at nationalising the core of UK capitalism.

Yet the recent stock market recovery has been a wild one for bank shares since March:

Barclays (BARC.L: 289.00 -9.00 -3.02%) - 58p to 300p
RBS (RBS.L: 47.90 -0.10 -0.21%) - 10p to 50p
LLoyds (LLOY.L: 119.90 -1.20 -0.99%) - 38p to 121p
HSBC (HSBA.L: 545.00 +27.50 +5.31%) - 350p to 517p

Long-term investors have still seen massive value loss - but have recovered quite a lot in the case of Barclays and HSBC in particular.

The UK Government is now in the money on its Lloyds investment and only 30% away from being in the money on its RBS investment. All this on the back of some spring optimism and a duff set of stress testing in the UK. Not long until Brown will start boasting about this is my reckoning.

On a personal note my investments in RBS and then Lloyds have me smiling a little more as I near break-even from last years 40% loss on my portfolio. But I have been selling down my shares, this bank rally seems to be built on sand. A case of making hay whilst the sun shines…

Stock Picks For Wednesday - Fossil, Yahoo

Chart courtesy of stockcharts ( click to enlarge )

Yahoo (YHOO: 14.74 0.00 0.00%) - The stock broke and closed above its 200-day moving average on Tuesday (14. 44) for the first time since June of last year. The stock has been trading in a range of $8.94-$28.33 in the past 52 weeks. Looking at the technical daily chart above it shows a new rally is about to begin as K line has just crossed on top over D line as the stock is again back above 200 day moving average. During the month of February, a golden-cross occurred with the convergence of the 13 day moving average back above the 50 day moving average. A more significant golden-cross between the 50 day moving average and the 200 day moving average looks likely in the coming days. Finally, the MACD is in a nice uptrend. All other indicators still point to a bull market. P.S. - There are a lot of people buying calls, betting on Microsoft-Yahoo Merger.

Chart courtesy of stockcharts ( click to enlarge )

Fossil (FOSL: 20.14 0.00 0.00%) - The stock reversed direction at 20.32 on Tuesday for the fourth time this month. This level is proving to be a strong resistance zone. A strong trend would not be in place unless the stock closes above this resistance. Fresh exposures may be considered on price weakness, with a stop-loss at 18.96 ( 200-day moving average ). A close above 20.32 would be an early indication that the stock is on a new upward move. Watch for high volume and relative strength/weakness before you jump on board.

Forex Trading: Maintaining A Bullish Outlook On EUR/USD

The EUR/USD’s rally topped out yesterday (Tuesday) as we expected, with the S&P futures hesitating at 900 while investors await Thursday’s flood of stress test news and economic data.  Yesterday’s decline came on minimal volume, showing there is presently insufficient conviction behind the pullback to send the currency pair tumbling.  The EUR/USD is stabilizing above Monday’s lows, and could bounce back a bit and trade sideways between now and the ECB’s meeting on Thursday.  We maintain our bullish outlook on the EUR/USD since no key fundamentals were broken and the momentum remains to the upside with the currency pair trading comfortably above our uptrend lines.

The two key barriers to a large ascent in the EUR/USD are the psychological 1.35 level and our 3^rd tier downtrend line.  If the currency pair can brave above our 3^rd tier downtrend line in particular, there will be little downtrend pressure left to hold back large gains.  The EU will release Retail Sales data today, which should receive limited reaction in the FX markets.  However, America’s ADP Non-Farm Employment change number could be a market move if it comes in far above/below analyst expectations.  Therefore, we expect the EUR/USD to move in lock-step with the S&P futures over the next 24 hours, exercising its positive correlation.

Thursday’s ECB meeting will be critical since the ECB governors have offered various opinions as to the direction of the central bank’s monetary policy.  The ECB has maintained its benchmark rate at a respectable level while avoiding liquidity measures such as quantitative easing.  The uncertainty among investors could keep any uptrend in check as investors eagerly await results from the meeting.  The ECB’s announcement will come on the same day as America’s stress test results, meaning we expect to see a large spike in volatility on Thursday.

Fundamentally, we find resistances of 1.3329, 1.3359, 1.3389, 1.3420, and 1.3442.  To the downside, we see supports of 1.3283, 1.3241, 1.3211, 1.3179, and 1.3143.  The 1.30 area serves as a psychological cushion with 1.35 acting as a psychological barrier.  The EUR/USD is currently exchanging at 1.3280.

JPMorgan’s Jamie Dimon Goes Out On A Limb

Jamie Dimon really went out on a limb when he made the following statement:

It’s possible that we’re on the bottom and eventually will come out of it.

Yeah sure. It’s also possible that investors will recoup all their 401k savings this year. It’s also possible that the USA will pay off the Federal Deficit this year. It’s possible that gold will be back under $200/oz in three weeks. Anything is possible Jamie!

Now I know we’re just coming out of a period in which banks took “excessive” risk, so why would Dimon want to really go out on a limb and make such a wild economic prediction? I’m certain that he needed some government prodding to suggest that he even considered making such a statement.

Citing regulatory rules, he declined to comment on the stress tests that the government is administering to banks, but said he expects banks to report their results to shareholders on Friday.

Seeing that this entire rally has been manufactured by the government and the banking industry, I guess that we could expect the economic numbers on Friday to be positive. If the results of the stress test are perceived negatively, then it would make sense that there should be some good economic numbers released to coax the markets higher.

The unemployment picture will become clearer…..or….less clear on Friday.

Wholesale inventories are also expected to improve slightly.

This data will all follow the ADP report on Thursday, which will describe the employment situation, excluding Farm and GOVT workers.

FAZ - Divergence In On Balance Volume

It looks like Direxion Financial Bear 3X Shares ETF (FAZ: 6.537 0.00 0.00%) is setting up some nice divergence in the OBV - On Balance Value indicator. I provided a description of the indicator below. Essentially when the price closes up on strong volume, the OBV moves higher and vice versa.

With financial issues rallying to make higher highs, it appears that there could be an accumulation of FAZ going on at these levels for an eventual push lower with financials.

The OBV indicator - On Balance Volume :

As stated above, OBV is calculated by adding the day’s volume to a running cumulative total when the security’s price closes up, and subtracts the volume when it closes down. The idea behind the OBV indicator is that changes in the OBV will precede price changes. A rising volume can indicate the presence of smart money flowing into a security. Then once the public follows suit, the security’s price will likewise rise.

For example, if today the closing price is greater than yesterday’s closing price:

OBV = Yesterday’s OBV + Today’s Volume ;

If today the closing price is less than yesterday’s closing price:

OBV = Yesterday’s OBV - Today’s Volume

If today the closing price is equal to yesterday’s closing price:

OBV = Yesterday’s OBV

What China Is Doing To Stabilize Foreign Trade And ETFs

Trade teams from China are visiting Europe and the Chinese investments may help rekindle the region’s economies and exchange traded funds (ETFs).

An official from the Chinese Ministry of Commerce stated that the government will send investment and procurement delegations to Europe, reports Diao Ying for China Daily.

These outward investment ventures are seen to help stabilize foreign trade and industry structure. It is also an opportune time to start looking for overseas assets since they are now dramatically cheaper as a result of the economic downturn.

The Chinese government has sent delegations to Germany, Spain, Switzerland and Britain. They will also be visiting France later on. The trade mission already signed contracts worth more than $13 billion. Another team is also in the United States negotiating $10.6 billion in trade and investment contracts.

• Vanguard European ETF (VGK: 37.73 0.00 0.00%): down 0.8% year-to-date

• PowerShares FTSE RAFI Europe Portfolio (PEF: 26.98 0.00 0.00%): up 5.6% year-to-date

• BLDRs Europe 100 ADR Index Fund (ADRU: 16.325 0.00 0.00%): down 2.9% year-to-date

 

Obama Wants New Law To Tax Overseas Profits And Nail Tax Dodgers

U.S. President Barack Obama Yesterday (Monday) announced a proposal for new legislation to pursue American tax evaders by closing loopholes and clamping down on overseas tax breaks for American businesses and individuals.

Under provisions of the plan, companies would no longer be able to write off domestic expenses for generating profits abroad, a loophole that Obama says encourages U.S. companies to move jobs overseas. The plan would drastically reduce incentives for U.S. companies to base all or part of their operations in other countries.

Additionally, Obama is pushing for a $60.1 billion plan to restrict deductions for American companies that defer taxes on foreign profits and a $43 billion crackdown on abusive foreign tax credits. Combined, these measures would amount to the biggest tax increase on U.S. corporations since 1986, according to Bloomberg News.

Companies with significant overseas operations could lose billions if the president’s plan passes. Under existing laws, companies are taxed only on profits they bring home.  By stashing the profits in international subsidiaries they can defer paying taxes indefinitely.

While it debates the bill, Congress will remain under pressure from a significant lobbying campaign to scuttle significant portions of Obama’s plan.

Over 200 firms, including Pfizer Inc. (PFE: 14.11 -0.01 -0.07%), Oracle Corp. (ORCL: 19.16 +0.15 +0.79%), Microsoft Corp. (MSFT: 19.79 0.00 0.00%), Johnson & Johnson (JNJ: 54.26 -0.10 -0.18%) and General Electric Co. (GE: 13.569 +0.469 +3.58%) signed a letter to congressional leaders in March opposing changes to the “deferral” provision.

The letter, also signed by the U.S. Chamber of Commerce, said the firms would not be on a level playing field with international rivals, many of which are not required to pay taxes at home on overseas units.

“This is bad stuff,” Kenneth Kies, a tax lobbyist at the Washington firm Federal Policy Group, told Bloomberg. “This is going to be the biggest fight for the corporate community in the next two years.”

The biggest squabble is likely to be over the repeal of so-called “check-the-box” rules, which took effect in 1997. They were designed to reduce paperwork by allowing companies to classify units within their corporate umbrella in the most tax-efficient manner without generating a tax challenge from the IRS.

The rules make it easy for multinationals to shift profits to entities in low-tax countries.   Once the assets are transferred, the parent company borrows from the subsidiary, making the interest payments deductible in the U.S. and tax-free in the haven. More than 80% of the nation’s 100 biggest companies have subsidiaries in tax havens, according to a Government Accountability Office report.

The rules were intended to help U.S. companies minimize their foreign tax liability, not to dodge the Internal Revenue Service (IRS), according to Drew Lyon, a former Treasury Department tax official who is now a principal at PricewaterhouseCoopers LLP’s Washington office.

The changes to the “deferral” provision would hit some of the nation’s biggest companies hard since half of multinationals firms’ income is earned abroad, Lyon told Reuters.

Another part of the package would shift the burden of proof to individuals when the IRS alleges assets are being hidden in bank accounts in offshore tax havens like the Cayman Islands and Switzerland.

The U.S. government has essentially declared war on U.S. citizens who make use of offshore accounts to stash money in overseas accounts and avoid taxation.

Swiss banking giant UBS AG (UBS: 14.33 0.00 0.00%) agreed in February to pay a $780 million fine and identified about 320 of its American clients as it acknowledged that it helped U.S. customers hide assets from their government.

The U.S. is now suing UBS in a civil case to force it to divulge the identities of 52,000 Americans with accounts at the bank that it suspects are hiding about $14.8 billion in assets.

Obama also announced plans to hire nearly 800 new IRS agents to bolster enforcement of overseas tax evasion and wants to see stiffer penalties for those who fail to meet reporting requirements.

ECB Hang-Ups Pressure Euro

The Euro was under pressure all day as traders were reluctant to hold on to long positions ahead of this week’s central bank meeting. Much of the selling pressure was related to concerns over the Euro Zone economy and the upcoming actions by the European Central Bank later this week.

On May 7th the European Central Bank meets to decide the future direction of interest rates for the European Union. With the European Union just this past weekend issuing a forecast of a severe decline in the economy, there is no question that the ECB will slash rates to 1.0%.

The difficult part is figuring out if the ECB is going to implement an asset buyback program. Even if you guess right, you still have to get the amount and the duration of the plan correct. This uncertainty is leading to selling pressure on the Euro this morning.

The ECB may pull some tricks following the meeting very similar to what the Bank of Canada did several weeks ago when it decided to refrain from applying any quantitative easing to its economy. At this time EUR USD traders are pricing in a rate cut and quantitative easing. After the interest rate announcement the ECB may announce a plan to buy back assets but there is no one to force the ECB to apply it right away. Remember it has a consistent record of being behind the curve.

U.K. traders came back from holiday and were able to hold the British Pound higher. Investors are still looking for reasons to buy the Pound other than just a weaker U.S. Dollar. I don’t know why the Pound would be appreciating other than speculation that the U.K. economy was going to rebound or that the activity was just spread adjustments because of the holiday.

Although the current trend is up, gains appear to be labored as investors are still looking for valid reasons to be long the Pound. Longer-term traders still don’t believe that this market will be able to sustain recent gains given the current economic conditions in the U.K.. The major concerns are centering on the ongoing contraction in the economy and a widening budget deficit.

The Canadian Dollar took its cues from the equity markets today. A weak stock market kept downside pressure on the Canadian Dollar most of the day by giving long traders an excuse to take profits.

Commodity markets were also under pressure today. This scenario provided additional selling pressure on the Canadian Dollar. Weak copper and crude oil markets in particular fueled the selling pressure while a higher gold market limited some of the losses.

Trading was choppy all day in the Japanese Yen. Traders can’t seem to make up their minds because of the two-sided trade in the stock market and optimistic testimony by Fed Chairman Bernanke. The lack of fresh economic news today is also giving the USD/JPY a reason to trade in a tight range.

Unfortunately this type of trading could be the theme until Friday when the U.S. releases the results of the latest Non-Farm Payrolls Report. Pre-report estimates are for job losses for April to total close to 640,000. Any significant figure above this guess will be the catalyst to drive this market lower.

Technically the USD/JPY is caught in a range between a pair of retracement numbers at 98.53 and 99.22. Don’t be surprised if the market stays in this zone until Friday. If it doesn’t, the best advice is to go the way of the move.

The stronger U.S. Dollar kept pressure on the Swiss Franc throughout the day. News that Swiss bank UBS posted a loss had little effect on this market because traders are now looking forward to better times instead of to the past.

Technically, the USD/CHF is locked inside a retracement zone at 1.3350 to 1.1565. This is very similar to the formation in the USD/JPY. This pair is likely to stay within this range until it is acted upon by an outside force like Friday’s Unemployment report.

Bank Stress Tests Turn Up 10 Banks That Need More Capital

The U.S. Federal Reserve today (Tuesday) delivered the results of its bank stress tests to the 19 participating financial institutions. The government will tell 10 of the banks to raise more capital, according to media reports.

The results of the tests won’t be released until Thursday, but Bank of America Corp. (BAC: 10.84 0.00 0.00%), Citigroup Inc. (C: 3.31 0.00 0.00%), and Wells Fargo & Co. (WFC: 23.27 0.00 0.00%) are among the institutions expected to be facing capital shortfalls.

Money Morning last month reported that Bank of America and Citigroup were told by federal regulators to raise more capital after the government’s stress tests revealed that the banks were not adequately protected against additional deterioration in the economy.

The number of institutions requiring more capital rose from six to eight when regulators boosted their target reserve requirement a week ago, according to Bloomberg. Since then people familiar with the matter, have said 10 of the 19 banks will be directed to raise capital, Bloomberg and the Wall Street Journal both reported.

Fed officials have reportedly raised the required amount of tangible common equity to about 4% of a bank’s assets, up from the 3% mark established early in the process.

Banks that fail to meet government standards will have six months to raise the required capital. They will be able to do so by selling assets, drumming up private capital, or by converting the government’s existing preferred shares into common stock.

Converting preferred shares into common equity would diliute the value of common shares, but that would be preferable to seeking more funds from the Troubled Asset Relief Program (TARP), which would almost certainly come under the condition of more executive firings and pay restrictions.

The Treasury has about $110 billion in TARP funding left to offer, Bloomberg reported.

Banks were given preliminary results of the stress tests last month, and the final results were originally scheduled for release Monday, but the Fed postponed their release after several banks objected to the findings.

Citigroup, for instance, argued that regulators hadn’t given the bank enough credit for its efforts to offload several of its smaller units, including Smith Barney and Nikko Cordial Securities, its Japanese brokerage arm.

On Friday, Citigroup agreed to sell Nikko Cordial Securities to Sumitomo Mitsui Financial Group (SMFJY.PK: 3.72 0.00 0.00%) for about $5.5 billion. The deal, which is to be completed by Oct. 1, also includes a transfer of about $2 billion in excess cash from Nikko Cordial to Citigroup.

The deal will boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Citi also has expressed frustration with the investigation into its finances.

Executives who met with regulators at the New York Federal Reserve headquarters when the banks were first made aware that they would be asked to raise more capital, say they still don’t understand the government’s methodology.

Why This Is Still A Bear Market Rally

Since the equity markets bottomed on March 9, I have always been very careful to point out that the current rally is a bear market rally.  In other words, when all is said and done, I believe that the current intermediate uptrend will be viewed as counter trend rally within an ongoing bear market.  It has been my expectation that the current intermediate up trend has a high likelihood of rolling over in the next couple of weeks.

With the market’s recent lift, I have received several emails asking me: when will I throw in the towel and call this a new bull market?

Traditionally, many define bull and bear markets as a percentage gain or loss from a certain point.  For example, a 20% gain from the bottom would be a new bull market.  By this measure over the past 12 months, we have had 2 bear markets and 2 bull markets when considering the price action in the S&P500 (^GSPC: 912.32 +8.52 +0.94%).  This is kind of silly, and for my purpose, this is not a particularly useful metric.  Then again embracing the “traditions” of Wall Street is not the way to make money.

So how will I define a new bull market?  In other words, when will I give up on this bear market rally nonsense, declare the bear is dead and start embracing the “bull” and this rally?

Let me take you through my process of how I would define a new bull market.  From a technical perspective, I like to see the market get into a “position” that has the potential to launch a new bull market.  In other words, the “next big thing” indicator has to cycle into position or the price action has to consolidate into a narrow trading range.

Why do I want this to happen? Because from 1927 to the present, every major move but one in the Dow Jones Industrial Index (^DJI: 8471.50 +60.85 +0.72%) has seen 1 of 2 things occur from a price perspective: 1) the “next big thing” indicator cycles into the alert zone where there is a high likelihood of new secular trend occurring; or 2) prices went through a prolong consolidation period before heading higher.

This can be seen in the next series of figures, which show every major market bottom in the $DJIA going back to 1927.  The “next big thing” indicator is in the middle panel, and the indicator in the lower panel looks for statistically relevant consolidation in prices.  These are the launching pads to a new bull market.  There has been only exception and this was the 1963 bottom.

Figure 1. DJIA/ monthly

Figure 2. DJIA/ monthly

Figure 3. DJIA/ monthly

Figure 4. DJIA/ monthly

Figure 5. DJIA/ monthly

Figure 6. DJIA/ monthly

Figure 7. DJIA/ monthly

Don’t like the Dow?  So let’s look at the S&P500 going back to 1970.

Figure 8. S&P500/ monthly

Figure 9. S&P500/ monthly

Figure 10. S&P500/ monthly

This is pretty consistent stuff across multiple asset classes (although I have only shown equities here), and all I am trying to do is identify the potential for a secular trend change in an asset.  These indicators don’t identify market bottoms.  They identify the possibility for secular trend change, and being with the longer term trend is very, very important to success in the markets.

So once I identify an asset about to undergo a secular trend change, then I look for technical patterns to enter into that market, and these could be as simple as a monthly close over the simple 10 month moving average.  I did allude to several “set ups” in these two articles: 1) “4 Sectors That Could Be The Next Bull Market Leaders” ; and 2)  “Add These 2 Sectors To Your Watchlist”.

So Why No Bull Market?

Neither the Dow Industrials, S&P500, NASDAQ (^IXIC: 1761.24 +7.12 +0.41%), or NASDAQ 100 (^NDX: 1429.12 +5.31 +0.37%) is in a position to undergo a secular trend change. They are close but still it is no cigar.  On the other hand, the Russell 2000 has entered that potential zone last month, and this can be seen in figure 11.

Figure 11. $RUT.X/ monthly

So this is my first concern about the current rally.  The markets just aren’t ready for a new up trend. This is not the launching pad for a new bull market.

My second reason for not making the bull market call has to do with the structure of the price action itself.  In most instances of a market bottom, I can find a prior pivot point that has acted as resistance, and prices will trade below and then above this key level thus confirming the turn in the market from bear to bull.  Or there is a close above a down trend line formed by two prior pivot points.  The monthly chart of the AMEX Airline Index (figure 12, symbol: $XAL.X), which I highlighted several times this past month,  is an example of a close above a prior pivot low point and above a down sloping trend line.

Figure 12. $XAL.X/ monthly

Since the market top in October, 2007, the price action has been more of unraveling than a stair step down. Essentially, there are no pivot points from which I can gauge the current price action.  See figure 13 a monthly chart of the S&P500.  All I can say about the last three months is that it is looking very “V” like.

Figure 13. S&P500/ monthly

Summary: I have provided you with two criteria that I would like to see before I make “the call” that we are in a new bull market.  Presently, these conditions have not been met, so in my book, this is still a bear market rally.

Yet I know that Mr. Market doesn’t usually consult with me, and I am well aware that a bull market can start without my criteria being met.  The market seems to have a way of spoiling the best of plans.  So I still must be prepared for the possibility that my indicators and tools just aren’t sensitive enough to detect a new bull market.

If this turns out to be the case, then I would “throw in the towel” if the S&P500 closed about its simple 10 month moving average on an end of month closing basis.  Mebane Faber, from the World Beta Blog, has presented a very simple (yet effective) timing system that utilizes the simple 10 month moving average.  If the S&P500 were to keep rising and print a monthly close above its simple 10 month moving average, then I would call this a new bull market.  I will also point out that no major index has yet to end the month above its simple 10 month moving average.

Until then, I still believe we are in a bear market.  Until my indicators give the signal, I still don’t believe the potential for a new bull market exists.  The possibililty of a new bull market is always present, but the probality at this point in time seems rather remote.

 

UBS Reports Pre-Announced Loss

As pre-announced, UBS AG (UBS: 14.33 0.00 0.00%) reported a net loss from continuing operations attributable to UBS shareholders of CHF1.98 billion, driven by trading losses of CHF630 million at the Investment Bank as it continues to shed risky assets. This compares to a loss of CHF11.69 billion in last year’s first quarter, hurt by exceptionally large trading losses of CHF11.63 billion.

Net fee and commission income also experienced declines due to weaker capital markets: brokerage fees fell 27%, investment fund fees were off 36%, and portfolio management and advisory fees slumped 31%. This performance also reflected net new money outflows of CHF23.4 billion at Wealth Management & Swiss Bank and CHF7.7 billion at Global Asset Management. Positively, Wealth Management Americas had net new money inflows of CHF16.2 billion.

Operating expenses dropped 17% year over year to CHF6.53 billion, largely reflecting a 27% decrease in administrative expenses and a 25% decline in compensation costs as the company continues to cut costs. UBS intends to shave CHF3.5-4.0 billion in costs by 2010, including staff reductions of 10,000 people, or about 13% of the work force at the end of 2008.

Credit quality deteriorated during the quarter, and UBS posted a 265% increase in the credit loss provision to CHF1.14 billion from CHF311 million a year ago, principally due to losses related to illiquid loan syndications. Impaired loans increased CHF1.03 billion, or 20%, sequentially to CHF6.25 billion. As a percentage of total loans, impaired loans increased to 3.3% at March 31, 2009 from 2.2% at December 31, 2008.

The company continues to exit higher risk or low-critical-mass businesses and shrunk its balance sheet by CHF153 billion and its risk-weighted assets by CHF25 billion during the quarter. In fact, UBS is selling UBS Pactual, its Brazilian financial services business, for US$667 million, expected to close by mid-2009. This sale will help capital adequacy as the Tier 1 capital ratio increases 50 basis points from the 10.5% actually reported at March 31, 2009 to 11.0% pro forma, flat with December 31, 2008.

We currently have a Hold on UBS and note that the Zacks rank is 3, indicating no clear near-term directional pressure on the share price.

Stress Tests And GM Bankruptcy Hang Over GMAC As It Reports $675 Million Loss

Auto and mortgage lender GMAC LLC (GKM: 12.51 0.00 0.00%) reported a first-quarter loss of $675 million and now faces further pressure from bank “stress tests” and freefalling sales volumes that may push its former parent General Motors Corp. (GM: 1.85 0.00 0.00%) into bankruptcy.

GMAC is one of the 19 lenders waiting for results of the government’s “stress test,” designed to determine which firms need additional capital to weather a deep recession. Results are due Thursday, and some analysts believe GMAC will be one of the banks ordered to find more capital within six months.

Despite receiving a $6 billion government bailout in December, GMAC reported net losses increased to $675 million from $589 million a year earlier, as the Detroit-based company set aside 78% more for loan losses than a year earlier.

“The effects of a soft economy and weaker credit performance on legacy assets continued to put pressure on GMAC’s financial performance,” Chief Executive Officer Alvaro de Molina said in a statement.

GMAC’s auto finance business notched a profit of $225 million, while the mortgage division, which includes Residential Capital LLC (ResCap), lost $125 million. An earlier gain of $900 million was wiped off the books after the company eliminated mortgage debt and revalued some assets.

The first-quarter loss makes six losses out of the last seven quarters for GMAC. The company had reported five straight losses before breaking the string in the fourth quarter of 2008 on gains from a debt swap.

When GMAC became a bank holding company in December in order to tap federal bailout funds, Cerberus Capital Management LP was forced to relinquish most of its 51% controlling interest. GM, which owned 49% of the lender before the bailout, is also giving up its stake and putting it in a trust.

GMAC agreed to provide financing for Chrysler customers and dealers after the automaker filed for bankruptcy protection last week. GMAC is the main provider of financing to buyers of GM vehicles. Cerberus led a buyout of Chrysler in 2007.

In a press briefing on the day of the Chrysler bankruptcy filing, a White House official said GMAC would receive the “financial support necessary” to expand after agreeing to handle Chrysler’s new loans.

Nevertheless, GMAC “faces challenges if GM files for bankruptcy,” Gimme Credit LLC analyst Kathleen Shanley wrote in a May 1 report to investors, according to Bloomberg News. And while the Chrysler deal presents few risks for GMAC, she recommends selling the company’s bonds.

The company’s bonds rallied this year after the government said GMAC’s auto financing arm is critical to the survival of GM and Chrysler. GMAC said today (Tuesday) in a presentation on its Web site that a GM bankruptcy wouldn’t trigger its own filing.

But Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tenn., told Bloomberg that a potential GM filing is a concern because it would have a “depressing effect on revenues.”

“The end markets are still troubled and the economy is still tough,” Hastings said.

GMAC said in April it would resume making car and truck loans to subprime borrowers to boost sales at GM, and that ResCap was hiring 1,000 people to handle a surge in refinancings and jumbo loans.

But GMAC has also said substantial doubt remains about ResCap’s ability to continue operating, citing deteriorating credit and mortgage markets, liquidity and capital.

Banco Santander Target Price: $7

We are continuing our Sell rating on Banco Santander Central Hispano SA (STD: 9.38 0.00 0.00%) as well as our $7 target price.

Santander reported 2009 first quarter net earnings of 2.1 billion, down 4% year over year but above our estimate, as net revenues were higher than anticipated. Net interest income (NII) rose 22% year over year to 6.2 billion on a higher volume of loans and better lending spreads. In addition, NII benefited from the acquisitions of Sovereign, Alliance & Leicester, and GE.

Negatively, loss provisions increased 73% year over year on a deterioration in asset quality. Nonperforming loans to total loans worsened, rising to 2.49% from 1.34% a year ago. Total noninterest expense was well controlled and fell 4%, below the rate of net revenue growth, with the result that the efficiency ratio improved 140 basis points. Per-share results were affected by the November 2008 issuance of 1.599 billion new shares through a rights offering at a price of 4.50 per share for a total capital increase of 7.2 billion.

We are lowering our 2009 EPADS estimates to $1.33 from $1.36 due to expectations for higher loan losses. Santander has a large exposure to the property market, both in Spain and the UK, where it is now the second largest bank as measured by share of the mortgage market. The 2008 full-year dividend maintained at 0.65 (US$0.83) per share.

Are Chartreuse Shoots Bullish For The Euro?

Risk is back and no longer a four letter word, we shall now call it risqué. In fact, those still wearing a turtleneck are terribly out of date since today’s fashionable trader has begun to wear the two piece bathing suit once again. It did not take much to convince investors that green shoots have indeed sprouted and bathing suit weather is just around the corner.

Pending Home Sales

For the second month in a row pending home sales jumped and looking deeper into the numbers rewards us with the insight that the so called epicenters of the housing crisis are actually seeing a rebound. Pending home sales in the south were up 8.5% vs. February 2009 and 7.7% vs. March 2008. Moreover, pending sales in the west were up 3.9% for the month and 1.7% vs. March 2008. Green shoots indeed!

We certainly can parse the data and come up with some reason to stay fully clothed, but frankly the market sentiment is so strongly bullish that it would foolish to be the only traders on the street wearing a turtleneck.

European Green Shoots

The European palate is a bit more refined and thus they tend to prefer their shoots chartreuse. In light of their more subtle preferences, the data was mixed out of Europe; both the Swiss and the Euro-zone PMI were a positive surprise while German retail sales fell.

The most important event of the week on the European calendar is the ECB meeting Thursday. The market is trying to determine if the ECB will cut rates and enact quantitative easing. The most bullish scenario for the Euro would be a small rate cut, an announcement of QE but no action. This would set the tone that the ECB is prepared to act, but is using prudence. The mixed data gives Jean Claude Trichet and the ECB an excuse to do exactly that.

This scenario received a boost with the release of Euro-zone PPI and German new car registrations. The Euro-zone PPI dropped 3.1% yoy, the largest drop in over 20 years. The ECB is one of the only central banks to specifically target an inflation figure. The drop in PPI certainly gives a reason to cut interest rates and at the very least have some QE dry powder.

Fearmongering Hits Mexican Economy And Pork Prices Hard

It has been entertaining (kind of) to watch the amount of fear based generated by the supposed, alleged, sort of a pandemic caused by the swine flu. Unfortunately, today Reuters has burst the bubble:

Its global spread has kept alive fears of a possible pandemic, although scientists say this strain does not appear more deadly than seasonal flu. via WRAPUP 2-Chinese, Mexicans return home as flu fears ease | Markets | Markets News | Reuters.

The bad news is that Mexican citizens have been held in quaranteen all over the world. The Mexican tourism industry has taken a huge hit and pork producers are seeing the prices for pork fall as the great unwashed start to believe they can catch the flu from their pork chop.

The good news is that UN and WHO officials have gotten huge amounts of media air time and they all can have a big meeting in Geneva in a few weeks, drink excellent cocktails and enjoy gourmet dinners.

According to the article above the number of confirmed death by swine flu has reached the staggering total of 26. By comparison, in the U.S. (pop. 300+ million) approximately 7,000 people die every day from various causes. Think about it.

Obama And Pragmatism: Thinking Through Values

I keep hearing the White House staff describe the President as a pragmatist. David Axelrod, one of his chief advisors whom I admire enormously, recently called him a “ruthless pragmatist.” Soon, I expect, he’ll be called a “take-no-prisoners pragmatist,” or perhaps a “remorseless, merciless, and unrelenting pragmatist.”

I’m relieved the President is a pragmatist, but that doesn’t let him or anyone around him off the hook for describing what he wants to achieve and why. Being a pragmatist is a statement about means, not ends. It describes someone who chooses the most practical way of achieving a certain goal but it does not explain why he chooses one goal over another.

The President seems to me especially thoughtful and passionate about one of the great moral questions of domestic policy today: widening inequality of income and wealth, and therefore of opportunity and political power. As I’ve noted before, as recently as 1980, the richest 1 percent of Americans took home about 9 percent of total national income. But since then, income has concentrated in fewer and fewer hands. By 2007, the richest 1 percent took home 22 percent of total national income.

This trend cannot be sustained, either morally, economically, or politically. That’s why, I believe, the President in recent weeks has criticized the heads of Wall Street banks who continue to take home seven figure incomes even as taxpayers bail them out; giant companies that shelter their income in places like Bermuda or the British Virgin Islands; the rich who say they need huge tax deductions in order to continue to make charitable contributions; and other forms of unwarranted privilege in our society, especially at a time when millions of Americans are losing their jobs, their savings, and their homes.

To call his stance “pragmatic” is to rob it of its moral authority.

To be sure, all Presidents want to be seen as political centrists. They dare not proclaim themselves “Right” or “Left,” or even “conservative” or “liberal,” on an ideological spectrum that’s become ever more highly polarized. It is politically safer - yes, even pragmatic - to describe one’s values as “commonsensical” or “middle of the road.” But even this description minimizes and distorts a president’s capacity for leadership. A true leader does not take the public to where the public happens to be, because the public is already there. A leader takes the public to where the public should be, according to that leader’s view of the society’s highest ideals - ideals that the public shares but which have not yet been realized.

Obama did this several times during the presidential campaign, most notably in his courageous speech on race. He took America to a higher place by explaining what we all knew and felt but giving it a larger and nobler frame. He educated us in the best sense of the word. Doing so may have been politically pragmatic but his goal was not solely to get elected. Nor was it simply to demonstrate to us the leadership of which he is capable, although the speech did that. His goal was also to make us more aware about how race is used divisively. In doing so he drew on what in retrospect seem “commonsensical” positions and “middle of the road” values. But that’s not how the speech struck most of us then. We were transformed by the power of his thinking and the values that underlay it - values that we share but had not thought through.

President Obama can afford to do the same with regard to the overriding issue of widening inequality in American society. He can connect the dots for us, allowing us to understand why inequality is widening without deriding the rich or castigating the fortunate. Doing so would allow us to understand what he is seeking to do and why, and empower us to seek and do the same.