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By Ian Wyatt, Daily Profit |
C | Nov 20, 2008 |
*****Dow Below Support
*****Citigroup’s Mess
*****The Fed’s Outlook
*****The Dow closed below 8,000 today. That’s significantly below the 8,175 support level we’ve been watching. At the same time, the fact that the Dow Industrials has closed below a somewhat significant support level.
In Wednesday’s Daily Profit, I told you that repeated tests of support levels tend to weaken them. And we saw that today - 8,175 held up in early afternoon trading. It finally failed at 3:17 PM, when the Dow gapped down from 8,183 to 8,166. That was the death knell for today’s trading.
Today’s close is the lowest since March of 2003. But it shouldn’t come as too great a shock to Daily Profit readers. I discussed the likelihood that we’d see lower levels, possibly even the October 10 lows, for the Dow before we saw a rally.
The October 10 low at 7,773 look pretty likely at this point.
*****It’s important to remember that the Dow Industrials is made up of just 30 stocks. That means individual stocks can have a big influence on how much the Dow moves.
And today, it would be tempting to credit much of the move to Citigroup’s (NYSE:C) brutal 23% drop. Unfortunately, there were several double-digit losers on the Dow. Alcoa (NYSE:AA), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM) and GE (NYSE:GE) all posted declines above 10%.
Citigroup finished today at $6.40. The stock hasn’t traded this low since 1995. That was after Primerica merged with Traveler’s Insurance Group. The addition of Solomon in 1997 and merger with Citicorp in 1998 catapulted the company to all-time highs around $57 in 2000.
Now it’s all coming unglued. 53,000 layoffs were just announced. Citi currently trades at around 40% of book value, which is assets minus its liabilities. Sounds cheap. But it could get cheaper.
The ungluing started in December of 2007 when new Citi CEO Vikram Pandit had to put $49 billion of off-balance sheet structured investment vehicles (SIVs) back in its balance sheet. Today, Citi put the last $17 billion of these SIVs back on the balance sheet.
Citi will treat these assets as "available for sale" which is an accounting status that means Citi won’t have to write-down these assets value every quarter. Funny these SIVs are still called assets. They’ve pretty much destroyed Citigroup.
*****Apparently Citigroup still has $820 billion in "off-balance sheet arrangements" as the Wall Street Journal puts it. $667 billion of that is in mortgage-backed securities.
That can’t be good.
Some are saying that Citi is too big to fail. But it sounds to me like its problems are too big to save. We’ll see.
*****The Federal Open Market Committee (FOMC) lowered its forecasts for U.S. economic growth across the board. No surprise there. Everyone knew this was coming.
But the FOMC also released the minutes from the last meeting where they lowered interest rates by 50 bps. Here’s an interesting excerpt:
"Some saw a risk that over time inflation could fall below low levels consistent with the Federal Reserve’s dual mandate of price stability and maximum employment..."
That’s the technical phrase for deflation, our main topic from yesterday’s Daily Profit. While interest rates are one of the Fed’s tools to control pricing, there’s not a lot of room to cut left. But I think the Fed’s awareness of the potential for deflation means that we’ll see lower rates in the near future.
We’ll also see the Fed continue to buy corporate bonds to keep cash flowing. And if the deflation problem persists, Federal government policy will need to address it. Deficit spending will be needed.
*****My favorite Fed governor is Richard Fisher from the Dallas Fed. He’s always among the most extreme. Back in the summer, he was the one voice calling for higher interest rates to combat inflation.
Now, even though most economists and the FOMC see slight growth for the U.S. economy, Fisher dissents again. He says:
"We are navigating the mother of all financial storms…I don’t see any economic growth in 2009. None."
You have to like the candor. And right now, investors don’t need rosy outlooks for the economy. That only leads to downward revisions of expectations and disappointment. The chance for upside surprises is only possible when expectations are low.
*****Expectations certainly appear low when you look at stock prices. Better than 100 stocks on the S&P 500 trade below $10. That hasn’t happened in 28 years. But then, that’s as far back as the data goes. The senior index analyst at S&P says you probably have to go back to the 1940s to find a similar situation.
The total market cap for the S&P 500 stands at a little over $7 trillion, its lowest in 11 years. There are definitely values to be found for long-term investors. But for the short-term, a trader’s mentality is appropriate: take profits when they’re available and have cash on hand for opportunity.
On Friday, I told you about one of my stock selection system’s top picks. Questcor Pharmaceuticals (Nasdaq:QCOR) has been ranking very high in TRIGR’s daily analysis. It could have been had between $8.20 and $8.40 a share on Friday. And even after the carnage this week, QCOR still trades above $8.40.
If we can get some upside for stocks, QCOR should take its 52-week high at $8.99.
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Why are their not a lot of people going to jail over this mess?