Traders,
Friday (the last trading day before the holiday) was a little mixed, we saw the INDU under pressure - but the RUT saw strength above the 600 level. It was also pleasant to have the Winter Olympics steal the thunder from the European sovereign debt problems and the U.S. political/monetary road of uncertainty. We have had a fairly decent earnings season, the only clouds seems to be the more domestic dependent companies and some banking/financial institutions forecasting rather conservative growth going forward. The job numbers seem to still be struggling, but that should be expected. We probably will not see job growth if productivity continues to move higher.
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| Merck Strong!
merger brings in more revenue. |
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Merck is seeing some strength in the pre-market (+.70 to +1). They reported a quarterly numbers ahead of some estimates. There was some short-term concern with their recent merger with Schering-Plough, which was a slight drag on its capital reserves. They had set some growth goal in the middle of the economic crisis and the rivalry in the pharmaceuticals heated up with Pfizer's massive take-over of Wyeth.
Merck saw a 4th quarter income of $6.5 billion, or $2.35 per share (which included 2 months of results from Schering - a $41 billion merger closed in November). It's the revenue numbers that analyst latch onto, especially in a difficult economy. Before you can figure out costs and margins, you need to know how much money you are bringing in the door and Merck is bringing in a lot. Prior to the merger with Schering they were reporting 1.6 billion in net income, now at 6.5 billion in net income the merger doesn't seem that hard of a pill to swallow.
Merck is planning on additional cost cutting, by slash about 15% of jobs from the combined companies. Usually mergers are a yearlong (sometimes longer) drag on a company - however this time it seems that Merck is well ahead of the curve. Pfizer may be having more difficulty with their merger.
Stock is looking strong in the pre-market.
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| Consumer under pressure
credit defaults rising |
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We saw an increase in debit spending vs. credit card spending during the holidays as many consumers are tapped out of credit and forced to spend what they earn. The recent slight increases in retail sales and consumer spending is questionable since they are all with-in the range of error of revisions and not showing strong growth yet.
This morning Capital One reports defaults are rising and sees even higher levels ahead. Capital One said the annualized net charge-off rate (debt the company never expects to collect) increased in January to 10.41%, up from 10.14% in December (that's a 30% annualized rise if the pace continues) and this has some economist alarmed about the health of the recovery for consumers. Late accounts were also up at a 4% annual rise.
Capital One is the 3rd largest U.S. issuer of Visa and eyes will be on other debt issuers as they report charge offs.
The good news is that auto-loan charge offs were down and Canadian and British consumer charge-offs were also down. It seems the consumer debt/credit issue is still one of the largest strains on the economic growth in the U.S. Another reason to focus on sectors/companies with greater international revenue.
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| Futures Pre-market
Where's the action! |
| The futures are showing some strength this morning, Merck is helping with their positive news. |
| Support / Resistance
Going higher or lower? |
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INDU 10,000 / 10,250 (We came off a little on Friday, but still well above the 10,000 mark.)
NDX 1750 / 1800 (We are seeing some strength in the pre-market, 1800 is an area to flatten deltas with gamma.)
SPX 1050 / 1100 (1100 was a key area - but now it could be more resistance - flatten deltas if we get a run to that area.)
RUT 600 (This is key, we had a good run to get above the 600 area and stayed above it on Friday with more strength. This is the basis for a key support for the broader market and we could see a continued run in this relief rally.)
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| Conclusion
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Last week saw the market fight to get off the bottom, but not in an effort because fundamentals changed - rather a relief that another large shoe hasn't dropped. There remains political wrangling as well as uncertainty as to when the Fed will change their monetary policy. Tomorrow the FOMC minutes are released and we may get a glimpse of what is planned going forward. For now it is a pause and slight rally - the problem is that Main Street is still under stress - while this doesn't affect those sectors with broader international appeal it will affect both domestically focused companies and also inject some more political uncertainty as to taxes, regulations, stimulus, etc.
Politics will probably continue to play a greater role in market volatility, also keep an eye on Europe (Greece , Spain, Italy, and Ireland). For now it is calm, but the sovereign debt concern could quickly surface at any time - putting broader pressure on risk based assets as they look for safer shores. | |
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| Author |
| Michael Williams has 20 years experience as a institututional floor broker and options market maker. He is a partner in both Silexx Financial Systems (a trading software company) and Kinetic Strategic Group (a private investment firm). He co-authored the book "Fundamentals of the Options Market" a McGraw-Hill text and has lectured throughout the country on Options, Risk Management, and Volatility. | |
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