by Jack Lee with excerpts from the WSJ 4/1/08
Another case of irrational exuberance?
The market surges ahead today on the start of a new quarter, up over 300 points on the DOW by midday. Oddly, there is no significant news; in fact the economic news has been a little gloomy ,except for Lehman. “It looks like a financial-led rally, some of it based on Lehman raising capital — the thought being if you can raise the capital and take care of things, it takes off the table the collapse worries,” said Bill Stone, chief investment strategist at PNC Wealth Management. This is not enough to justify what is taking place today.. Stone noted, “You’ll probably continue to see weak economic data, but that doesn’t necessarily doom you to poor stock-market returns.”
Separately, the Commerce Department reported U.S. construction spending fell 0.3% in February, less than the 1% drop predicted by economists.
Ford sales in Europe are down. UBS Warburg was just down graded.. Chairman Marcel Ospel will step down as the bank expects more write-downs and a $15 billion rights offering to raise capital. Truckers are staging a slow down due to high fuel costs. US oil monopoly vowed to fight any new taxes despite record earnings that have pump prices up almost a dollar over last year. Crude oil has rebounded above $102 a barrel. GM’s sales dropped 13.0% versus the expected 5.5% decline, and Ford’s sales fell 14.0% in March. Mercedes Benz in US saw a 3.7% drop in sales. However, there was a glimmer of hope because homes sales have perked up, but only modestly and due to unsustainable low interest rates. The ripple effect on financial institutions hasn’t been fully felt yet from sub-prime loans, so what is driving this market is hard to identify.
The question now is, are we pulling out of the recession?
WSJ – Merrill Lynch chief economist David Rosenberg sighed last week about this recession, Like parents taking their kids on a RV trip from L.A. to Boston, we are fielding the same question, oh, about every half hour or so from clients, both internal and external, as to are we there yet? Where? The bottom, of course. And the answer is the same every time we havent even made it to Kansas yet, Toto.
According to Rosenberg, things already are pretty ugly in the financing markets; last week, Citigroup led a syndicate of banks that sold $1.45 billion of Harrahs Entertainments debt at only 84 cents on the dollar. Right now, the spread between corporate high yield and comparable Treasury notes is around 8.50 points; Rosenberg said it would have to come down to 6.20 points before he gets optimistic about the markets chances.
The three-month TED spread:
The TED spread is a way to measure the liquidity coming into and flowing out of the U.S., and it measures the difference between the T-bill interest rate and the London interbank offer rate, or Libor. Right now, the spread between three-month T-bills and three-month LIBOR is high at 2.00 points. Merrill Lynch’s Rosenberg says,To signal a return to a stable financial market backdrop, and an improvement in economic fundamentals, we would need to see the spread narrow all the way back to 0.35 point.
For those of you who follow my stock plays, here’s my plan as of 12:07 PST. I’m going to go short on UBS, GM, CX, SBUX, SNCR, ONNN, Spiders (SPY) and the QQQQ’s probably near the end of today’s trading or early tomorrow. Most of the time I like to trade at the end of the day, this is also when the big boys trade and then you really see what they think. This is not a signal for you to follow in kind. You should due your own due dilligence on all stock purchases. Well, that being said, let’s see how well my idea works out in a month or two.
FYI….I think this is a safer play than going long. Stocks, in my opinion, are “overbought” and the upcoming financial data and the traditional summer slump do not favor this rally to extend much beyond it’s current level. Could see some modest upticks tomorrow, but by Friday I believe we will see a lot of profit taking and the market will give up much of what it has gained today.