Dow 2006

[Racer]

Historically the market declines badly at the end of a Fed tightening cycle. And almost everyone expects the Fed to stop tightening sometime this year."

But it's different this time they keep saying

 

[kriesau]

Fed set to raise rates as Greenspan bows out
Sunday January 29, 11:30 am
By Chris Flood


The latest decisions on US interest rates provide the focus this week. The US meeting will be Alan Greenspan's last as chairman of the Federal Reserve, a historic occasion but, amid the plaudits, it will be business as usual. The Fed is expected to raise rates by 25 basis points to 4.5 per cent on Tuesday but the accompanying statement will be examined in detail for any hints on whether an end to monetary tightening is in sight.

The Fed needs to retain room for manoeuvre as the latest rise in oil prices poses a threat to both growth and inflation. The core personal consumption expenditure deflator, the Fed's preferred measure of inflation, registered a big jump to 2.2 per cent in the fourth quarter, while the headline measure of growth proved disappointing. Although fourth quarter gross domestic product data showed a sharp slowdown in consumer spending in the fourth quarter, there are reasons to believe it will rebound in the first half of this year.

US consumer confidence is expected to rise to about 105 when January's data are released on Tuesday, helped by an improvement in the labour market. There is a close relationship between consumer confidence and employment growth. The trend in US jobless claims has sunk to its lowest for more than five years and a robust increase of 250,000 is expected for January's US non-farm payrolls on Friday.

The Institute of Supply Management surveys on the manufacturing (Wednesday) and service sector (Friday) are expected to confirm strong momentum in activity continued in January. The prices-paid measures in both surveys are pointing to further increases in costs and there is a likelihood these will translate into higher core inflation in 2006.

 

[Bigbusiness]

Hi again,
Thanks for the feedback. I think you misunderstand me though. I don't mean trade from the Friday close to literally the next weeks open ( ie market open, and the gap up problem you mention above ). I mean that the data shows a low below the Friday close is possible most of the time somewhere during that first day of the week. So it may be 9.30am, or it may be 3pm. I guess this means a risky approach without any kind of stop loss - so probably not really tradable. But there's no denying that in most cases ( 43 out of the last 51 anyway ) an average difference of at least 30 pips is possible between Friday close and "some point during the following weeks first trading day". Hope that clarifies what I'm suggesting. I just find data anomolies like this intriguing...

If an 'expert back tester' is willing to help, that'd be great... I suppose minute by minute DOW historic data would enable proper stop and exit strategy to be set. Perhaps there is a time element required, eg the low must occur by midday or such like. I'll keep digging into it anyway!

Cheers,
EGO2

A trader on this thread uses "T-day theory" http://www.elitetrader.com/vb/showthread.php?s=&threadid=54281

The theory is that on Monday, Wednesday and Friday, the Dow futures are likely to pull back towards the opening price, if they are positive. The opposite applies to Tuesdays and Thursdays, when down moves are more likely to retrace. I am not convinced but thought you might be interested.

 

[TheBramble]

Lots of interesting stuff from the fundamental to semi-fundamental side.

From a technical perspective, the close on Friday was not strong enough to 100% confirm bullish intent. Lack of steam.

Although this week may see an overall uptrend (not too convinced), it wouldn't be totally amazing to see a dip, possibly tomorrow, to 10759 or thereabouts.

If it bust down through that then we need to recalculate, fairly rapidly, potential downside.

 

[Racer]

Consumer spending rises 0.9%
Core inflation increases tame 0.1% in December

With spending rising faster than disposable incomes, the personal savings rate fell to a negative 0.7% of disposable income. It's the seventh straight month of negative savings. For the year, savings were a negative 0.5%, the first year of dissavings since 1933.

In December, income from labor compensation increased 0.3%. Wages increased 0.3%. Income from ownership of assets rose 1.1%, while rental income fell 4.1%.

http://www.marketwatch.com/news/story.asp?guid={1D5CD701-7333-40A3-9218-A8E8EBA72113}&siteid=mktw

 

[macbonzo]

Seems as dead as a dodo at the moment. Little desire to take positions at all. In fact, it could be a bit like this until the FOMC statement comes out at 7.15 tomorrow.

Looking on the macro front, as Racer points out, the savings rate turned out to be negative. Combining that with friday's GDP figures, there must be a hell of a lot of people hoping that their house value does not decline.

 

[macbonzo]

I'm already feeling sorry for this Bernankke character. I just feel that he's about to get a hospital pass from Greenspan. You can just see the scenario: Bush (advised by Dick "one foot in the grave the other on a bar of soap" Cheney and Rumsfeld) decide that, as 57% of Americans back military action in Iran, they should do some of that "shock and awe" stuff. Meanwhile, at about the same time Israel elects Netanyahu, who in his infinite wisdom joins in and expands settlements in the West Bank. NYMEX crude, hits $95, US consumers won't spend any money, the US housing market drops 10% in a quarter and bang we have a recession.

 

[mark twain uk]

macb,

the scenario you painted is quite plausible, the only problem I have is that the market usually predicts the arrival of a recession some three months before, so unless we have the mother of all drops the market still points to brighter times ahead

 

[kriesau]

macb,

the scenario you painted is quite plausible, the only problem I have is that the market usually predicts the arrival of a recession some three months before, so unless we have the mother of all drops the market still points to brighter times ahead

Well, many of the indicators are already there.

Inflation adjusted hourly wages are down
Mortgage refinancing cashouts are down (this underpinned consumer spending last year)
GDP growth is declining
Interest rates are rising
Consumer spending is falling (both Walmart and Home Depot shares are 10% below last summer)

Isn't it primarily a question about timimg !

 

[macbonzo]

Retrospectively you are right. The difference, this time round is the composition of the market. In previous recessions the market was really mutual funds and pension funds. This time round the market is driven not by these long only, value and income funds, but by hedge and arb fund. The point is, that these guys are never neutral. They all want to be on the "right" side of the market so you would get quite a different result than you would have got before.

When the first shots were fired in the last Iraq war, the market went up in anticipation of a swift victory. This time round we must remember that we have had a bull market for nearly 4 years and once housing falls, spending falls, oil starts getting above $70 who knows where the bottom will be.

 

[kriesau]

Retrospectively you are right. The difference, this time round is the composition of the market. In previous recessions the market was really mutual funds and pension funds. This time round the market is driven not by these long only, value and income funds, but by hedge and arb fund. The point is, that these guys are never neutral. They all want to be on the "right" side of the market so you would get quite a different result than you would have got before.

When the first shots were fired in the last Iraq war, the market went up in anticipation of a swift victory. This time round we must remember that we have had a bull market for nearly 4 years and once housing falls, spending falls, oil starts getting above $70 who knows where the bottom will be.

Thats right - the Hedge Funds in particular have made markets more volatile than in the past and then there is also the PPT who clearly have been active during the past 6 months. We can only try and interpret the various indicators and the second guess the psychology of various categories of investor in terms of how they might react to different scenarios.

You also have to try and distinguish between fake market moves and the real thing. Bottom line is that by the time you realise that a recession is on hand we're already in it !

 

[macbonzo]

This really does take the biscuit, Treasury's Warshawsky says US economy on "firm footing", and negative savings "no reason to be pessimistic". After friday's GDP figures, they must just line these guys up. I wonder if my dog could get a job?

 

[Racer]

Do you think any of them are going to come out with..

....the economy is very rocky at the moment, negative savings are a big threat and there are valid reasons to be worried

 

[kriesau]

This really does take the biscuit, Treasury's Warshawsky says US economy on "firm footing", and negative savings "no reason to be pessimistic". After friday's GDP figures, they must just line these guys up. I wonder if my dog could get a job?

The Worst News Wasn't Even in the GDP Report:
Caroline Baum
Jan. 30 (Bloomberg) Even the pessimists were too optimistic on fourth-quarter growth, which slowed to 1.1 percent, less than half the consensus forecast and about one-fourth the third quarter's 4.1 percent pace. Not only was the increase in real gross domestic product the smallest in three years, but the composition wasn't so hot either. Inventories added 1.5 percentage points to GDP growth, which means that final demand (GDP minus inventories) fell for the first time since the first quarter of 2002. When one considers that the worst news wasn't included in Friday's GDP report - it was implied - the rally in the stock market and small decline in the interest-rate futures markets is surprising.

The Bureau of Economic Analysis won't publish its estimate of fourth-quarter corporate profits until late March, but if Joe Carson, director of Global Economic Research at Alliance Bernstein, is correct, corporate profits (adjusted for hurricane effects) showed the first sequential decline since the recovery began in the fourth quarter of 2001. That's not the conclusion Carson gets from backing profits out of gross domestic income (GDP equals GDI with a ``statistical discrepancy'' to reconcile the two measures). To the contrary, the GDP report implied no change in sequential profits. Intuition tells him profits fell.

`Low growth in GDP and a decline in productivity -- hours worked rose more than GDP -- implies margin compression and a sequential decline in operating profits,'' Carson says. Most economists pooh-poohed Friday's GDP report as quirky or flaky (read: man, did I miss that one by a mile) and raised their first-quarter growth forecasts accordingly. To be sure, there's no reason to think that economic growth downshifted from 4 percent to 1 percent in the space of three months. The fourth quarter's weakness was probably as overstated as the third quarter's strength.

The question is how significantly the economy is slowing and whether it changes the outlook for Federal Reserve policy. (Based on the decline in interest-rate futures contracts that reflect expectations of Fed policy, the answer to the second question is no.) Using year-over-year growth to smooth the quarterly variations, real GDP decelerated from an expansion high of 4.7 percent in the first quarter of 2004 to 3.1 percent in the fourth quarter of 2005.

Trend Clear

There's no debate over the trend in growth; the only question is the magnitude of the slowdown. Many analysts have been expecting capital spending to take up the slack as consumer spending slows. But fourth-quarter investment in equipment and software underperformed expectations, rising 3.5 percent, the smallest increase since the first quarter of 2003. These folks are looking for capital spending to be revised up to reflect the strong durable goods shipments in the fourth quarter. (Economists use capital goods shipments as a proxy for investment in equipment and software.)

Maybe. Maybe not. Carson says the correlation between shipments and capital spending isn't point for point. What's more, because investment isn't measured directly -- the BEA calculates capital goods produced domestically minus those that are shipped abroad plus capital goods imports -- the stronger shipments don't necessarily translate into stronger investment if the shipments went overseas. Capital spending has consistently underperformed the fundamentals, including strong corporate cash flow and tax incentives, during the current expansion. It's not apt to overcome those obstacles now, according to economists at Citigroup Inc.

``The sweet spot for robust business investment growth this cycle has passed,'' the economists write in the Jan. 6 edition of ``Comments on Credit.'' ``With the exception of periods of accelerating trend productivity growth, capital spending responds very powerfully (with a lag) to aggregate demand trends, especially consumer demand.'' And consumer demand has started to show signs of fatigue, now that the housing ATM is shutting down. Consumers have capitalized on soaring house prices by extracting equity from their homes, enabling them to spend more than they earn.

The fourth quarter's 1.1 percent rise in consumer spending was held back by a 17.5 percent plunge in durable goods purchases, the biggest drop in almost two decades. The dive in automobile purchases alone subtracted more than 2 percentage points from GDP growth. Still, the trend in consumer spending is evident from the year-over-year comparisons. Like GDP, annual consumer spending peaked at 4.2 percent in the first quarter of 2004, ebbing to 3 percent in the most recent quarter. ``All of the major demand categories showed a sharp break in growth momentum'' in the fourth quarter, Carson says. ``Historically, when there's been a sharp break -- up or down -- in the GDP growth and it's broad-based, it indicates that a trend shift in the economy's underlying growth rate is under way.''

The shift isn't as dramatic or sudden as the variation in third- and fourth-quarter growth suggests. It is, however, happening.

``The fundamental and policy backdrop still suggest that both the growth cycle and the tightening cycle are in their very late stages,'' Citigroup economists write in their Jan. 27 weekly. The interest-rate futures markets are still challenging that assumption. If history is any guide, they should come around to that way of thinking before the Fed.

 

[frugi]

Last year's Fed days ... I'm hoping for a repeat of May.

http://www.deltat1.com/Education/articles/fed_days/fdc_2005.htm

 

[mark twain uk]

I am currently short on both dow and sp, though not at full strength, keeping some of the powder dry for any spike up or any failed rally. I believe that we will see lower prices in the next two-three weeks, but am also prepared to cut losses and jump ship if there are any signs of a sustained rally

 

[macbonzo]

Mark,

Your timing could be very good. I am watching NYMEX crude up at $68.48. However, you do need to be flexible and stick to your trading framework. Friday was a fairly strong day despite what I thought at the time (and still think) was dire data.

Today will probably be a non event until 7.15, when the word "measured" will be lifted and we will have our usual "bananas" 45 mins.

 

[leovirgo]

What's in there for us?

1. Analysts/ observers say 0.25% rate hike is a certainty. They said it months ago.
2. Now some reports suggest Bernanke will raise rates.

However,..

1. Earnings are not that good particularly in blue chips.
2. People start to worry interest rates effect on housing bubble.

So.. why is the market so hesitant and can't be like 'business as usual'?

Is it expecting an unexpected lifting of the rate or 'at least the intention to do so' in a near future?

Will the markets ...

..... go up 100-200 points on the last day of the fed chairman? OR.

..... fall 100-200 points as a warning to the newcomer OR

..... show no respect at all except a temporary spike...???

 

[Racer]

a list of missed/disappoints and beat earnings for Dow components so far (from what I gather, would appreciate comments if incorrect)

missed
AA
DD
C
GE
GM
MO
JNJ
AXP
MMM
VZ

beat
PFE
MCD
UTX
CAT
HON
PG
XOM
MRK

 

[Racer]

MO, interesting comments from Altria's results

The Philip Morris International business has driven growth for Altria, while the Philip Morris USA business has been pressured by slowing demand, and its Kraft Foods unit has been hurt by higher energy, packaging and commodity costs.