Markets meander, awaiting stress tests results

Dow spent most of the day in the red, but only slightly. It closed down 16, decliners were 20% ahead of advancers & NAZ dropped 9. Bank stocks needed a day of rest (maybe 2 when tomorrow is included) after the big day on Mon.

S&P 500 FINANCIALS INDEX

Value 155.52

Change -1.92

% Change -1.2%

The S&P 500 has been getting a lot of attention after breaking into the black for 2009. Today it slipped, but is still up a couple of pennies YTD. Below is a chart for SPDR S&P 500 ETF (SPY) which is purchased by those wanting to tie an investment directly to the S&P 500. Recovering money lost in 2009 is helpful but for those who bought during the last 10 years hoping to make money, they may still have a long way to go just to reach break even.

• Investors face long road ahead to break even- MarketWatch

S&P 500 (SPY) ---- 1 decade





The Alerian MLP Index fell change after reaching almost a 6 month high yesterday. REITs were hit harder, dropping 5 to 132 while junk bond funds were generally weak. Oil continued soft, down about 50¢.

Chrysler bankruptcy is beginning by droning on for a second day. If this is any indication, emerging from bankruptcy may be a drawn out affair in which nobody wins. This may also serve as a warm up for GM next month.

• Chrysler lender group opposes sale process- Reuters

The last 5 months have been good to MLPs. Kinder Morgan, the KMR stock equivalent is shown below, had been tracking the index until Apr. The index (line) had has been doing quite well, even better than the stock market averages. KMR, however, has been stuck in the mud staying near the 41s during the last 6 weeks. Today KMR fell 52¢ to 40.57. Kinder Morgan is the largest MLP with an excellent long term record (13 years is a long run for this group) of growth.

TheStreet.com raised their rating for KMP (the units) from hold to buy last month after reviewing the Q1 report. Their reasoning was, "We've upgraded energy transportation and storage company Kinder Morgan Energy Partners (KMP) from hold to buy, driven by its expanding profit margins over time. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself." But I'm nervous about their weak performance in Q1 & worry that it may be signal more problems for them (& the industry) going forward.

• TSC Rating's Updates: Kinder Morganat TheStreet.com(Fri, Apr 17)
• Kinder Morgan Misses Earnings Estimatesat TheStreet.com(Thu, Apr 16)

Kinder Morgan (KMR) --- 6 months




Markets are growing nervous about the outcome of the bank stress tests, it looks like most of the 19 banks will need more capital. More nervousness should dominate trading tonight in Asia & in tomorrow's markets.

Markets pause

Stocks are taking a breather after gains in the last few days. The 2 week chart shows Dow going from the low end of its trading range to a new high, about 600 points :


Dow Jones Industrials --- 2 weeks





Today, Dow is down 38, decliners over advancers 2-1 & NAZ dropped a bigger 24. The S&P 500 slipped below 900, bringing it back into the red YTD. High yielders (with their bigger risks) also slipped. The Alerian MLP Index is down 1½, the REIT index is down 4 & junk bond funds are weak. Oil, in sympathy, pulled back from its 5 month recent highs by 50¢.

Yesterday banks had their biggest one day gain in the last month, but nervousness about the stress tests brought profit taking today. The thinking behind yesterday's rally was that the need for more capital will be less painful than prior expectations.

S&P 500 FINANCIALS INDEX

Value 155.10

Change -2.34

% Change -1.5%

Federal Reserve Chairman Ben Bernanke told Congress that the economy should start growing again later in 2009. He also warned that even after a recovery gets under way, economic activity is likely to be subpar. Businesses will remain cautious about hiring, driving up the nation's unemployment rate, causing "further sizable job losses." The recession, which began 17 months ago, already has cost the economy 5.1M jobs. But he added, "We continue to expect economic activity to bottom out, then to turn up later this year."

Recent data suggests the recession is loosening its firm grip on the economy, as the pace of contraction may be slowing. The housing market has shown signs of bottoming. He added that the FED does not intend to retreat from its policy of keeping the main interest rate close to zero & boosting credit through emergency-loan programs & asset purchases.

•Bernanke Warns `Relapse' in Banking System Would Stall Economic Recovery


More thoughts about stress tests. It is expected that Citigroup (C) & Bank of America (BAC), both Dow stocks, are among 10 banks which may be told they need more capital.

•Fed Stress Test Results May Show 10 Banks Need Capital to Withstand Slump


There have been enormous gains from the market lows just 2 months ago. I selected 2 for comparison. 3M (MMM) is a Dow stock & Dividend Aristocrat which has moved up about 40%. Not bad. Masco (MAS), a former Dividend Aristocrat which had a 50 year streak of higher divs come to an end this year, is up 150%. Regular stocks did well while risky stocks had phenomenal gains. The disparity between the 2 highlights an increased appetite for risk. That's worrisome in the face of more months with dreary economic data.


3M ---- 3 months




Masco ---- 3 months

Risk averse markets take off

Markets started strong & held those gains for the rest of the day. Dow gained 214, advancers over decliners 5-1 & NAS climbed 44. S&P 500's almost 30 point gain put it in the black for the year.

The FINANCIALS INDEX had an exceptional day, closing above the Apr 13 interim high of 150.18. The previous time it was this high was in early Jan 09. Typical big name banks were up 10-20%. However, Citi remains a $3 stock.

S&P 500 FINANCIALS INDEX

Value 157.44

Change 14.48

% Change 10.1%

Helped by a strong oil market, the Alerian MLP Index rose 2.92 to 215½ (highest since early Nov). Dow Jones REIT Index was up 11 to its best level since Jan. Junk bond funds were generally strong. Their yields have fallen to around 15% or around 1200 basis points above the yield (3.16%) on the 10 year Treasury. The concept of safe haven investing is withering, at least for the time being as the VIX, volatility index, closed down .77 to 34.53 (low for 2009).


Oil gained, traders were encouraged by strong stock markets & signs that big fuel customers, China & India, showed growth in their manufacturing sectors in April, reversing months of declines.

CLM09.NYM

..Crude Oil Jun 09

..54.37

.. 1.17 ......(2.2%)

Citigroup (C) is trying to wriggle out of having the gov convert preferred stock into common which could take their stock ownership over 50% (Citi doesn't want to work for Barney Frank). Citi is hoping to attract capital from private investors to meet stress test standards. This drama plays on.

Citigroup May Seek Capital That Averts US Control

JPMorgan (JPM) may be tapped to buy more distressed banks. They already bought Washington Mutual & the remains of Bear Stearns. Jamie Dimon, CEO, said, "There are still too many banks in the United States." Wells Fargo (WFC) is being told that it will have to raise more capital.

JPMorgan CEO sees more bank consolidation ahead- Reuters

• Wells Fargo asked to raise money after stress test- AP

Chrysler's fate is plodding along. Lenders are arguing about what assets can be sold. The gov loans are viewed as a lost cause, the only question is how much money can be retrieved. Chrysler was hoping to emerge from bankruptcy in 1-2 months so the new company could resume as a going concern. Bickering will not help matters. Chrysler is forecasting losing almost $5B this year plus another $1+B in the next 2 years. Their suppliers are also sweating out Chrysler's (or whatever the new company is called) future.

• Judge delays decision on Chrysler asset transfer- AP
• Chrysler forecasts loss of $4.7 billion in 2009

The closely watched S&P 500 started the year at 903.25. Today it closed at 907. That is called a "new yearly high." Dow needs another 350 points to return to its starting point for 2009. Averages are reaching new highs because risky investments are no longer considered unwanted.


S&P 500 ---- YTD

Stocks rise on strong economic news

Markets are not phased by the looming negative findings on stress tests for banks or Chrysler (& possible GM) bankruptcy. Dow is up 168, advancers 4-1 ahead of decliners & NAZ is 27 higher. The FINANCIALS INDEX is up today but has been flat, trading in the 140s since Apr 9.

S&P 500 FINANCIALS INDEX

Value 148.31

Change 5.35

% Change 3.7%

The high yield sector is strong along with the rest of the market. The Alerian MLP Index is up 2.05, pushing to reach 215 (another 2009 high). REITs & junk bond funds are up while the VIX slipped pennies, staying near 35 (the low for 2009).


Alerian MLP Index --- YTD





Oil rose to a 5 week high on the bullish sentiment in the stock markets.

CLM09.NYM

...Crude Oil Jun 09

...53.73

... 0.53 .......(1.0%)

Construction had a good month in Mar after 5 consecutive down months. Construction spending rose 0.5% vs a drop of 1.5% forecasted by economists. Lower mortgage rates helped, but there is a question about how long increases will last given the state of the economy.

•U.S. Construction Spending Unexpectedly Rises for First Time in Six Months


The index of pending home sales gained 3.2% to 84.6 in Mar, beating analysts' flat expectations. In addition they were 1.1% higher than last year, the first time that has happened since Dec. Homebuyers are taking advantage of bargain prices, low interest rates & a tax credit for first-time buyers. However, home prices are expected to keep falling for at least another year. Many homes are tied up in the foreclosure process, not yet ready for sale. Mounting job losses may also keep buyers from signing contracts. Realtors estimate about half of existing home sales are now foreclosures & other must-sell transactions. But they are counting on the $8K tax credit for first-time homebuyers as their best hope for boosting sagging sales.

Pending US Home Sales Up 3.2 Percent in March- AP


Obama wants to tax multi nationals viewed for using their overseas subsidiaries to "hide" overseas profits. The legislation will affect major companies such as Procter & Gamble & Caterpillar. Individuals will also be challenged more by the IRS about hiding assets in offshore accounts. This is part of the administration strategy to meddle more in business affairs. So far, the markets are ignoring or deferring judgement on this philosophy.

•Obama Seeks to End Tax-Haven Strategies That Save Companies $190 Billion


Dow reached 8.4K as it is trying to establish 8K as a floor once again. For the time being, bulls are in charge! The link below gives one assessment of how the stress tests may play out:

• Stress test 101: How will the banks do?- CNNMoney.com

Markets may be facing tougher times

Never a dull moment with the car makers, Fiat Group is looking at acquiring General Motor's (GM) European business to be combined with what's left of Chrysler & their car businesses. We send our best wishes & hope they can come up with a profitable new car company which will be good for the global economy.

Fiat eyes new company with GM Europe, Chrysler- AP


Let's take another look at Dow, but from a 1 year perspective. After Dow took its plunge in the fall, it was able to live with 8K as the floor for a fair amount of time, Oct - Feb 09. Then it took its 09 plunge, reversing 8K from a floor to a ceiling. For a month, it has been hammering away at the 8K ceiling making only modest dents. Bulls will say this a base building period. In contrast, the Alerian MLP Index chart shows the plunges it took last year & this year. But it has come back strongly in 2009. The 3rd chart compares the difference between the flattish Dow vs MLP Index reaching new interim highs in the last month. My feelings are that reality from negative economic news will hurt both the Dow & high yield securities (i.e. MLPs, REITs, junk bond funds, etc.) which have been very strong in the last 2 months.


Dow Jones Industrials --- 1 year




Alerian MLP Index --- 1 year




MLP Index vs Dow --- 1 month




Banks have been leading the way up from the recent lows & should continue as leaders. But stress test worries may dominate investor thinking this week. From early signals, it looks like many of the 19 banks will be unhappy with conclusions about weak assets along with advice to raise more capital.

Warren Buffett's thoughts on bank stress tests

At Berkshire Hathaway's (BRK.A) annual meeting, Warren Buffett told his stockholders that he didn't think much of the stress tests for the 19 major banks. Instead he said, “I think I know their future, frankly, better than somebody that comes in to take a look, (who) may be using more of a checklist-type approach.” BRK has substantial investments in banks such as Wells Fargo (WFC) & US Bancorp (USB). BRK has felt selling pressure in the stock market like most other financial issues.

However, a former bank examiner, said regulators will require banks to maintain tangible common equity (a conservative measure of capital) equal to 4% of their risk-weighted assets over the next 2 years, to withstand losses if the recession worsens. There is a lot of talk that Bank of America (BAC) & Citigroup (C), among others in the group, could each need $60+B of added capital, with the potential of diluting existing shares substantially. Bank stocks can be expected to be under a lot of pressure until stress test results are announced on Thurs.


•Buffett Dismisses Value of Government Stress Tests in Making Investments
•Fed's Stress Test May Compel 14 Banks to Raise Capital, FBR's Miller Says


Berkshire Hathaway --- 2 years

Stocks start May quietly

Dow gained 44, advancers over decliners 3-2 but NAZ was essentially even. Banks were typically down 1-2%, the index suffered:

S&P 500 FINANCIALS INDEX

Value 142.96

Change -2.44

% Change -1.7%

The Alerian MLP Index was up 2.48 to 212 but the Dow Jones REIT Index fell 5 to the 126s, holding up well on the div cut discussed below. Junk bond funds are up again, the Barclays Capital High Yield Bond ETF (JNK) was up 30¢ to 33.

Oil had a good day folowing stock markets gains:

CLM09.NYM

..Crude Oil Jun 09

..52.74

.. 1.62 ......(3.17%)

After report better than expected FFO (funds from operations), Simon Property (SPG), the largest REIT, lowered guidance for 2009 from around 6.40-6.60 per share to 6.05-6.20. Accordingly, they are reducing the quarterly div from 90¢ to 60¢ for the remainder of the year. When conditions improve, they will restore the old rate. The stock was down 4.14 to 47.46 but has almost doubled from the severely depressed price of 25 in Mar. This news follows the bankruptcy of General Growth Properties last month. Tough times for REITs are starting to bite hard.

• Simon Property 1Q FFO improves, dividend is cutAP(Fri 11:42am)

Simon Property ---- YTD




Dow has been rising in the last 4 weeks, but only modestly. It closed Apr 3 at 8017, had a few modest weekly gains bringing it to today's close of 8212. Next week, the results form the stress tests for the top 19 banks will be released on Thurs. There will be a lot of nail biting trying to guess which banks will really be under stress. Chrysler started is 1-2 month journey (if all goes well) before it can emerge from bankruptcy. The markets have plenty of challenges after their recent sharp rise. Maybe the the winner at the Kentucky Derby tomorrow will give clues about market direction.


Dow Jones Industrials --- 2 weeks

Slow start for May

Stocks are having a tough time deciding whether to go up or down. Dow is up 10, advancers 3-2 over decliners & NAZ is down 2. Banks are off, but only slightly:

S&P 500 FINANCIALS INDEX

Value 144.63

Change -0.77

% Change -0.5%

High yield stocks are a little lower today. However, the Alerian MLP Index was up 1.72, at about 212. Eagle Rock Energy (EROC) slashed it's quarterly distribution from 41¢ to 2½¢. They said it was done to enhance its liquidity position, requiring the EROC to institute a "voluntary, temporary reduction in its quarterly distribution." The units dropped in half to the 3s. MLPs have been having an outstanding year at a time when other securities are still fighting back from severely depressed lows. I have a feeling that they have gotten ahead of themselves. Kinder Morgan's graph (for the stock equivalent KMR) is shown below. They've missed out of the bull market for MLPs in 2009. Their distribution should be $4.20, as per guidance & another record. However their Q1 report suggests that they are feeling the effects of the economic slowdown. Other MLPs may also be getting pinched in less obvious ways than reported.

• Kinder Morgan 1Q profit falls 24 pctAP(Thu, Apr 16)

Kinder Morgan (KMR) --- YTD




U.S. consumers felt more confident about the economy in Apr than at any time since the Sep failure of Lehman. The Reuters/University of Michigan Surveys of Consumers index of confidence climbed to 65.1 in Apr from 57.3 in Mar, the highest since Sep 2008 & the biggest one-month increase in over 2 years. The index of current economic conditions rose to 68.3 in Apr from 63.3 in Mar, the best reading in 4 months. The index of consumer expectations climbed to 63.1 from 53.5, another highest level since last Sept. Much of the gain can be tied to consumers' favorable assessment of U.S. President Barack Obama's stimulus spending, 65% of consumers thought the stimulus would improve the economy.

•Consumer Confidence in U.S. Advances to Highest Level Since September 2008


MasterCard (MA) said Q1 profits fell 18% from last year which included a special gain of $173M from the sale of a portion of MasterCard's investment in Redecard SA, a Brazilian credit & debit card provider. But earnings still topped analysts' expectations as revenue fell 2%. The decline was primarily due to foreign currency translation. The stock dropped 13+ (7%). This is one of the businesses that is at the heart of global consumer spending.

•MasterCard Falls Most in More Than Year After Reporting 18% Profit Decline


Stress test results are being delayed a couple of days to May 7. Banks are already quibbling about the findings (after leading one of the market's biggest 2 month rallies in history). I have a feeling markets may be less kind to stocks, banks in particular, in May.

•Stress-Tests Results Said to Be Delayed to May 7 as Banks Debate Findings