10/16/08 Market Recap-Extremely Volatile Trading Day(Update 1)

The Dow Jones industrials ended up 400 points, after falling 380 early in the session. It is clear that investors are reacting in the extreme to any negative economic news, including disappointing numbers Thursday on industrial production that sent stocks skidding. But traders are also responding to the market's own dynamics, and when there was no late-session plunge, as there was on Wednesday, buyers piled in before the close.

The US industrial production numbers came out at 9:15ET this morning and they were very weak. Manufacturing output dropped by 2.6%, the largest monthly decline seen since May 1980. Mining output fell by 7.8%, the largest drop since September 2005. Output at utilities managed to rise 2.2% after two prior months of declines. Industrial production is 4.5% lower than its level a year earlier, and capacity use is 4.6% lower than its average level from 1972 to 2007.

Chart Courtesy of Econompic Data

However, it should be noted that the numbers were very distorted by lost production due to two hurricanes. Nevertheless, industrial production data -- along with recently released jobless claims and retail sales numbers -- represent further evidence of a recession in the United States.

Economist David H. Wang told on Thursday the Philly Fed statistic does not bode well for the U.S. economy. "This is a horrible number. Manufacturing is weakening, the recession is worsening, and lay-offs are likely to continue at a steady pace, as a result" Wang said. "We're seeing a weakening of both domestic and international demand, which suggests at least a two-quarter recession. Given this level of manufacturing decline, we will be quite fortunate to have just a two-quarter recession."

According to Credit writedowns blog, he has crunched the numbers and provided some graphs below. The numbers to look at are the raw (non-seasonally adjusted) ones to compare them on a year-on-year basis. The trend in production in the US that you see below is down. Irrespective of the one-month aberration due to the hurricanes, industrial production has been trending down since January 2008.

Chart Courtesy of Credit writedowns

He also tried to strip out month-to-month volatility by presenting average data for the last 12-months and compared it to the average one year back. And while this line is smoother, you can clearly see that production in the United States is trending down. In fact, if you were a business manager or an investor looking to make decisions about the future, this chart makes the trend much clearer. In predicting a slowing in the U.S. economy, the industrial production numbers show that you would have started to make your move by early 2006. The average change in industrial production peaked in Aug-Nov of 2005.

Chart Courtesy of Credit writedowns

The market fears are also driven by some bad news amid banks' writedowns. Citigroup Inc.(C) swung to a third-quarter net loss was US$2.8 bln, as much as $4.4 bln in securities and banking and blamed weak revenues across all businesses on "the impact of a difficult economic environment and weak capital markets." Citi reported a fourth consecutive quarterly loss after at least US$13.2 bln of credit losses, reserves for bad loans and writedowns for mortgage-related securities. Merrill Lynch (MER) also revealed at least $9.5 bln in write-downs, handily surpassing Fox-Pitt Kelton analyst David Trone's estimate of $8.5 bln.

Table Courtesy of ClusterStock
The market rebound nearly on the mid-day after investors initially appeared cheered by a better-than-expected reading from the Labor Department on consumer prices. The flat reading on September's Consumer Price Index compares with August's 0.1 percent decline, which was the first in nearly two years. The core index, which eliminates often volatile food and energy prices, rose 0.1 percent. Economists had been expecting CPI would rise to 0.1 percent and that core CPI would increase 0.2 percent.

Meanwhile, a weekly snapshot of the job market showed that first-time claims for unemployment benefits declined last week. The Labor Department said new claims fell 16,000 to a seasonally adjusted level of 461,000 - below the 475,000 that had been anticipated. Still, total unemployment remains above the level that economists often associate with recession. Sweet crude fell $4.69 to settle at $69.85 a barrel on the New York Mercantile Exchange, the lowest settlement price since Aug. 23, 2007. Investors are hoping lower energy prices will leave more money in consumers' wallets.

There are two more reasons that provide some ammo for the bulls. The market needed a rally and that’s just what it got bouncing big time off it’s lows of the day which could be good enough for a retest. The positive divergence isn’t perfect below, but it’s there indicating the selling could be coming to an end and people are starting to buy this bottom, even if it is just a trading bottom.

Chart Courtesy of Zentrader.ca

The Vix is finally starting to show signs of stalling as it was outside it’s daily Bollinger band today and snapped back under selling off hard closing well off it’s highs. Tomorrow’s close will be very telling if buyers are willing to bid up the market and hold positions over the weekend knowing full well that there is always a chance of a "market huddle" from governments around the world poking their noses where they shouldn’t be. We are tired of hearing all this doom and gloom. Rage’s "Bulls on Parade".

Chart Courtesy of Zentrader.ca

The SPY Short-term Trading Signals below shows that technically today is a Bullish Reversal Day, and the last Friday low was successfully tested. But a follow-through tomorrow is still needed.

Chart Courtesy of Cobra's Market View

Related Posts :

1. The Market Has Almost Wiped Out the Gains From Monday's Historic Rally(Update 2)
2. Energy Funds and Stocks Will Move in the Opposite Direction Against Swinging Oil Prices
3. Commodities Will Pull Back Due to LoC Frozen

Sources :

1. Zentrader.ca: Bull Parade Coming?, October 16, 2008
2. Credit writedowns: US industrial production is very weak, October 16, 2008
3. BloggingStocks: Philly Fed manufacturing index plunges to lowest level in almost 20 years, October 16, 2008
4. Econompic Data: Industrial Production Non-Existent in September, October 16, 2008
5. Cobra's Market View: 10/16/2008 Market Recap: Bullish Reversal Day, October 16, 2008
   

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Energy Funds and Stocks Will Move in the Opposite Direction Against Swinging Oil Prices

From ETF Trends - ETF Alternatives That Respond to Energy Needs, October 15, 2008 at 1:00 am :

The need for change is in the air, and exchange traded funds (ETFs) are reflecting this as alternative energy creeps into the consciousness of the mainstream.

Many investors are betting on which alternative energy funds and stocks are going to get pushed around by the swings in oil prices, says Jeff Tjornehoj, a Lipper analyst. The ETF is gaining popularity because it is granular, giving options such as solar, nuclear power, biofuels or wind, in an isolated manner, reports J. Alex Tarquino for The New York Times. Mutual funds have not given these choices to investors yet.

It will be a long time before nay of thees industries actually displace the oil industry, but they could be the next big trend. Many alternative energy companies are small-scale, and the industry is a “fledgling” industry.

Oil prices will have an influence over this industry, as oil that is over $100 a barrel is sure to spark interest more than oil prices perched at $10 per barrel. There are many alternative energy sources to consider and which one will gain the most traction is still up in the air.

Could alternative energy become a driving force toward an economic recovery? Sen. Barack Obama has pledged to create new jobs, in part, through an investment in alternative energy technologies, reports Michael Mccord for Seacoast Online. If any such plan does come through, perhaps we’ll see the unemployment rate sink lower.


• Claymore/MAC Global Solar Energy (TAN), down 46.9% since April 15 inception (black line)
• PowerShares Global Wind Energy (PWND), down 43.4% since July 8 inception (green line)
  
  

Related Posts :

Commodities Will Pull Back Due to LoC Frozen

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Commodities Will Pull Back Due to LoC Frozen

Just as the business world is dependent upon commercial paper as its life blood, the world of global trade depends on letters of credit (LOC). Without LOCs, the world of trade quickly freezes up. The lack of letters of credit, in which banks guarantee payment for merchandise, could become a "big issue" for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin. Tighter credit has contributed to this year's 80 percent drop in the Baltic Dry Index, a measure of commodity-shipping costs, and further dropped 8.5 percent to 1,809 points yesterday, the lowest level since August 2005. Pacific Basin dropped 6.5 percent to HK$4.75 in Hong Kong and Precious Shipping declined 5.5 percent to 12.1 baht in Bangkok. About 90 percent of world trade moves by sea.

Chart Courtesy of The Financial Ninja
Entirely Banks in the world have curbed lending because of increased concerns about getting their money back. Shipowners are already struggling to obtain funding for new vessels. Precious Shipping took as long as 15 months to secure financing for 18 vessels it has on order.

From The Financial Post of Canada - Grain piles up in ports, October 8, 2008 :

There are all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit,' said Bill Gary, president of Commodity Information Systems in Oklahoma City. 'The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy.'

So far the problem is mostly being felt in U.S. and South American ports, but observers say it is only a matter of time before it hits Canada. 'We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse,' said Anthony Temple, a grain marketing expert based in Vancouver.

Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship. "The credit crisis has made banks nervous and the last thing on their minds is making fresh loans," Omar Nokta

From Naked Capitalism - International Trade Seizing Up Due to Banking Crisis (Updated), October 10, 2008 12:12 am:

"At the end of the day, if every counterparty is bad then you don't have a market and you don't have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM."

As result of Letter of Credit Frozen is shipping for coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads. Accordingly, prices for most commodities will be elevated. Moreover, there is a very real risk that various economies will start to face stresses in this time of "Just In Time Delivery" as very small stock piles vital commodities quickly get vacuumed up by normal industrial demand. The iShares S&P GSCI Commodity-Indexed Trust (GSG) is recommended to buy as hedging to being elevated commodity prices.

But the pulling back in commodity prices might be just for a short live as global governments act intensively to ease credit frozen.

Sources :

1. The Financial Ninja:Credit Crunch: Baltic Dry, October 15, 2008 07:51 am
2. ETF Trends: Commodity ETFs Go for a Ride, October 15, 2008 at 12:00 pm
3. Safe Haven: Baltic Dry Shipping Collapses, October 15, 2008

Related Posts :

1. The Market Has Almost Wiped Out the Gains From Monday's Historic Rally(Update 2)
2. The Full Nouriel Roubini Horror Speech

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.