Profit taking day for stocks

Markets have gone into a pause mode. Dow dropped 25, decliners over advancers 2-1 & NAZ was down a big 23 related to Microsoft (MSFT) earnings reported last night. MSFT was off 2½ on its earnings decline from lower PC sales. Profit taking is also taking banks lower. However the index is still in the upper reaches of its 3 month trading range.

S&P 500 FINANCIALS INDEX

Value 165.78

Change -2.24

% Change -1.3%

MLPs remain hot. The Alerian MLP Index shot ahead another 1½ to the 244s, a new 2009 high. So far, MLPs have gotten thru the earnings season with no damage from earnings reports. The Dow Jones REIT Index dropped 2, muddling along in its sideways trading pattern. Junk bonds were mixed & Treasuries rose, the yield on the 10 year Treasury bond dropped 4 basis points to 3.67%. Oil was down pennies on this quiet day of trading.

Alerian MLP Index --- 2 weeks




Dow Jones REIT Index --- 2 weeks




California is still standing because they passed legislation late last night (at least most of what was necessary) to close the huge budget deficit. Now we'll have to see how this mess plays in the real world.

•California Senate Approves $26 Billion Deficit Plan; Assembly Still Voting


CIT is under extreme pressure as it struggles to stay alive. Their tender offer for the $1B in notes due next month has been revised, creating an incentive for bondholders to redeem their bonds sooner (by the end of July). If they don't get 90% acceptance, CIT may have to file for Chapter 11.

•CIT Reworks Its Tender Bid for Notes to Punish Late Exchange by Investors


The chart below is as pretty a one as they come. Investors have been eager to accept risk to pursue future profits. On the margin, their appetite for high yield securities seems unlimited. MLPs & junk bond funds are having their best year in history while REITs (a similar kind of security) have been lumbering along during the big rally in recent months. The lagging REITs are related to all those "for rent" signs I see, not to mention div cuts this year.

Dow Jones Industrials --- 2 weeks

Greater worries about the economic recovery

A mixed IMF economic forecast & falling oil prices weighed on stocks. Dow eaked out a gain of 14 thanks to buying in the last hour, decliners over advancers 2-1 & NAZ was down 1. Financials sold off badly, but again late day buying reduced losses. The Financial Index is back to the level of May 1, the next major low was 132 on Apr 20. Speculative Citigroup (C) dropped 7¢ taking it down to 2.62 (down more than 40% from its interim high a couple of months ago).

S&P 500 FINANCIALS INDEX

Value 149.24

Change -2.56

% Change -1.7%

Upward momentum has been lost in the high yield sectors. The MLP Index was up .55 after buying in the last hour & the REIT index cut its loss to 1+. Junk bond funds were mixed, helped by strength in Treasuries. The VIX, volatility index, gained a fraction into the 31s, a 1 month high. Treasuries were strong with the yield on the 10 year Treasury bond dropping a very large 17 basis points today to 3.29% (and after touching 4% last month).

Alerian MLPIndex --- YTD




Dow Jones REIT Index --- YTD




VIX --- 1 month




10-year treasury Yield Index - 2 weeks




Oil keeps sinking. In a little over a week, oil fell 18%! That's good on the inflation front, but worrisome when it's based on weaker global demand for oil.

CLQ09.NYM

..Crude Oil Aug 09

..60.14

.. 2.79 ......(4.4%)

The Treasury sold $19B in 10 year notes at a rate of 3.365% as the flight to quality is picking up steam. The bid to cover ratio was 3.28X, the highest on record! Indirect bidders (i.e including foreign central banks) bought 44%, up from 28% at the prior 10 auctions. The fear of a prolonged recession is stimulating the flight to quality.

Treasuries Rise as Refuge Demand Bolsters 10-Year Note Auction


California's financial problems keep growing while it tries to deal with a $26B deficit. They will pay 3.75% interest on its IOUs issued. Major banks are honoring them although that will expire on the 10th (Fri). Some smaller banks & credit unions may accept them thru the end of Jul. Creative people are selling theirs on EBay. The problem is less serious today, but will grow in importance next week.

California IOUs Will Pay 3.75%, State Panel Decides


A longer term chart shows better where the Dow has come from & maybe it's helpful indicating where it's going. Dow should be testing the 8K floor & soon. Fear is creeping back into stock markets. The talk of more gov spending plans is another negative for markets to deal with.

Dow Jones Industrials --- 2 years




Aloca (AA) reported a mushy loss, its 3rd consecutive quarterly loss. The stock was up 5¢ during the day & is selling off 4¢ on the gut reaction to its loss. Below is the fresh AP report.

PITTSBURGH (AP) -- Aluminum producer Alcoa says it lost $454 million during the second quarter as the global recession continued to dampen demand and prices for the lightweight metal. Alcoa's loss of 47 cents per share is fresh evidence of slumping orders from key buyers in the aerospace, automotive and construction industries. Pittsburgh-based Alcoa Inc. says it earned $546 million, or 66 cents per share, in the year-earlier period. Excluding restructuring charges, Alcoa's loss would be 26 cents per share. Analysts predicted a loss of 38 cents per share.
Aluminum demand tumbled with the global economy last year, driving up stockpiles and eroding prices. Producers have since slashed production.

Dow closes at 2 month low

Dow tumbled 161, closing near the lows for the day, decliners over advancers more than 3-1 & NAZ was off 41. Dreary economic thoughts are getting the best of investors.

The bank index is trading at the bottom of its trading range for the last 2 months. Citigroup (C) is a representative speculative bank. This year, it ran from a low of 1 to a high over 4 in a couple of months. Now it's back to 2.69. More problems lie ahead for the banks.

S&P 500 FINANCIALS INDEX

Value 151.80

Change -2.97

% Change -1.9%

High yield sectors are getting dragged down with regular stocks. The MLP index dropped 2 to 220 & REIT index fell 5+. On the MLP Index chart, 211 is an interim low & it looks like it wants to be tested it soon. Junk bond funds were weak as Treasuries strengthened. The yield on the 10 year Treasury dropped 5 basis points to 3.46%. The VIX rose 1.85 to 30.85.


Alerian MLP Index --- 2 weeks




Dow Jones REIT Index --- 2 weeks




As oil sinks, there is more talk about whether it can hold at 60. Regulators want to hold hearings for trying to regulate speculator trading. Since the price has already declined more than 10 from the high last month, any new rules look to be a little too late to do much good.

CLQ09.NYM

..Crude Oil Aug 09

..62.43

.. 1.62 ......(2.5%)

The sale of the 3 year Treasury notes went well, but there will be 2 more days this week with gov debt sales (the first week ever with 4 days devoted to selling new gov debt). The notes had a yield of 1.519%, the lowest in 2 months. Foreigners bought 54% of the notes, a good & bad sign. The bid to cover ratio was 2.62X, slightly above the average for the last 8 auctions with similar notes. Demand for notes was helped by the perception that the recession will drag on, pushing the "flight to safety" concept. There is also talk in the air (by Laura Tyson) of a 2nd stimulus package while other voices from the administration are talking about problems with assessments in Jan over the first stimulus package (WHICH HAD TO BE RUSHED THRU CONGRESS BECAUSE IT WAS SOOOO URGENT).

•Treasuries Pare Gains After $35 Billion Auction of Three-Year U.S. Notes
•Second Stimulus Package Should Now Be Considered, Obama Adviser Tyson Says


Speaking of borrowing more money, California's problems keep growing. Fitch cut its rating on California's long-term bonds to "BBB" or two notches above speculative grade. This follows California issuing "IOU" promissory notes for some bills to conserve cash for priority payments (i.e to investors holding the state's debt). Fitch also kept the debt on watch for additional downgrades. California ranks as the lowest-rated state general obligation credit by Fitch. Standard & Poor's & Moody's could soon follow Fitch. Meanwhile the state is trying to plug a $26B budget deficit for the fiscal year that began on July 1.

California Credit Rating Cut Close to Junk After IOUs


Dow is down more than 600 from its high last month, approaching a 10% correction. Reality of a slow recovery is registering with more investors. More gov spending programs which will add to the deficit may not warm the hearts of investors.

Dow Jones Industrials --- 1 month

Holiday kind of day

Witching effects were minimal. Stocks tried for gains, but Dow didn't want to cooperate. Dow fell 16, advancers over decliners 3-2 & NAZ rose 19.

Banks had a pretty good day:

S&P 500 FINANCIALS INDEX

Value 162.42

Change 2.71

% Change 1.7%

MLPs are getting to experience sell-offs like the rest of the stock market, today down a fraction but still in the 219s. REITs & junk bond funds were firm. The Treasury bond rose, taking the yield down 5 basis points to 3.79%.

Alerian MLP Index --- 2 weeks





Healthy gas supplies caused a decline in crude oil but gas at the pump is high at 2.69 (as of yesterday).

CLN09.NYM..

Crude Oil Jul 09

..69.58

.. 1.79 ......(2.5%)

Bad unemployment news keeps droning on. 13 states have unemployment rates in double digits (including the biggest, California). In May, 8 states (including California, Florida & Georgia) reached their highest level of unemployment since records began over 30 years ago. When the national unemployment rate ticks up further, the number of states in double digits will grow.

•Unemployment Exceeds 10% in Quarter of U.S. States, Threatening Recovery


California's problems go from bad to worse. Moody's is preparing to reduce their credit rating "several levels" from A2 because of their inability to close the $24B budget gap. So far, the Feds say they will not get involved. The way to reduce the deficit is higher taxes & budgets cuts, both are ugly.

•California's Credit Rating May Be Lowered by Moody's Amid Financial Crisis


Dow Jones keeps near the break even line for 2009, but can't break thru. Dow is up about 1000 in Q2, but 60% came with the big gains in Apr. S&P 500 has been able to hang there better, up 2% YTD. With problems like housing, autos, more gov spending programs, California, etc., the future remains murky.

Dow Jones Industrials --- YTD

Stocks stuck in sideways rut

Dow slipped 7, decliners were 20% ahead of advancers but NAZ had a good day, up 11. Increased regulation for banks & bank kind of companies dominated tading today. Banks also felt selling pressure from downgrading of several banks by S&P

S&P 500 FINANCIALS INDEX

Value 155.84

Change -4.1

% Chang -2.6%

The Alerian MLP Index is coming off an outstanding run this year, but is paying the price for those gains n the last few days. It dropped 4 to 218, bringing it back near a one month low. The supply of all those new units sold are weighing on the market. The REIT index fell 2 while junk bond funds also sold off.


Alerian MLP Index --- 2 weeks





Oil has been hanging in pretty well while commodities have been under pressure. The confusing situation in Iran keeps buyers nearby.

CLN09.NYM

..Crude Oil Jul 09

..70.96

.. 0.49 ......(0.7%)

Treasuries are completing a 5 day rally, longest since the start of this year. The 10-year Treasury bond advance reduced its yield by 3 basis points to 3.65% (again, down from a high of 4% one week ago). The fears of inflation are receding combined with no additional supply (offerings) from the Treasury this week.

•Treasuries Post Longest Rally Since January as Inflation Concern Lessens


The President proposed a major overhaul of the U.S. financial system, unveiling measures to restore confidence & prevent a repeat of the worst crisis to hit Wall Street since the Depression. The plan would give new powers to the Federal Reserve to oversee the entire financial system & create a new consumer protection agency to guard against the types of abuses that played a big role in the current crisis. One key provision is the FED would have regularity powers over banks & other institutions that essentially look like banks. The classic example from last year was GMAC, but this broad definition could even include Wal-Mart (WMT) with its huge credit card business. This announcement, which had been largely leaked, did not cause any major move in the markets.

Obama Lays Out `Sweeping Overhaul' of Financial Oversight Following Crisis


Stronger banks are repaying TARP, including JPMorgan (JPM), American Express (AXP), Goldman Sachs (GS), Morgan Stanley (MS), BB&T (BBT) & U.S. Bancorp (USB). Obviously they are trying to get the fed off their backs. Most fell in today's weak market for bank stocks.

• 10 large US banks to repay $68B in TARP funds- AP

Under the radar screen with all their problems is California, equivalent to the 8th largest economy in the world. It has less than 2 months to get its house in order. That will mean an ugly combination of tax hikes (such as on tobacco & energy companies) & spending cuts which generally hurt the weakest the hardest. Spending cuts also will bleed thru to companies, many states, not to mention countries such as China & Japan. Keep up on announcements from Cal.


Markets keep looking for direction. More gov regulation (meddling) is not the kind of news they like to hear.

Dow Jones Industrials --- YTD