Traders,
Friday was relatively quite in market action after some fairly heavy volatility. It seems we have a slight pause as the investment community digests the events in the EU and sovereign debt. We also continue to see fairly decent earnings, but the forward guidance - for the most part is fairly conservative and that is still the underlying concern among investors.
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| Lowe's profit
navigating the recession. |
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Lowe's had come down hard in cost cutting and store closures and limiting new operations in the last few quarters. The expectations for the 4th quarter had been previously lowered, so the bar was not very high for them - but their profit saw a better than expected rise (27%). The good news is that revenue was up, while modestly. The bulk of the profit was through cost cutting and inventory management, rather than revenue.
The CEO talked positively about the future and that the economic down turn is "likely" behind us. However, as he painted a rosy picture of the broad future - the company's forecast earnings for the spring quarter (their biggest quarter) was below analyst expectations (again setting the bar lower). This is NOT what investors want to hear, especially if you are telling them the worst is behind them - but then you lower estimates. It seems more about managing the story for lack-lust revenue growth (spin), which is unfortunate. Analyst had expected 1st quarter earnings in the 33 cents per share range, the company's forecast is in the 27-29 cents per share range. It is expecting sales to rise 1 to 3%, that is the real key - even to some extent- more important than the actual earnings. Growth in sales and revenue is the long term important story. However at a 4 to 6% annual growth rate - it is going to take a long time to get back to where they had been prior to the credit crisis.
Lowe's saw a good move up last week from the 22 area up to the mid 23. The stock is slightly up in the pre-market - but keep an eye on this. The excess inventory problem is what is stalling the growth model. Home Depot had focused on DIY projects to pump sales during the slow-down - it helped - but didn't keep the revenue from contracting.
I think the builders have a little more time to start seeing some solid fundamentals - it is still a rather murky growth story. They are showing confidence in the their longer-term future - with a $5 billion share buyback program (with no expiration date - but expected over the next 3 years). That is vague, but also sells the confidence story.
Expect a slight boost in the builders this morning.
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| Euro Future?
Expect volatility. |
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Soros is a little concern about the future of the Euro and an article in the Economist also reflects stability concern (as it had revisited the birth of the Euro). Germans at the time disapproved the Euro replacing their currency by 55%, their concern was their nation would assume liabilities of weaker nations. Now it seems their concerns are warranted. German is in a difficult situation, both dominate political parties in Germany are opposed to bailing out Greece (as in the Charter of the EU). Who's next - Spain, Portugal, Italy, etc. The problem is that the EU has no control over how each member's manages their debt/deficit. Accounting also varies as to what are and are not funded vs. unfunded liabilities. There are some rumors about bail-outs - but so far neither Germany or the ECB are confirming anything.
Other's suspect this could eventually be the beginning of the end of the Euro as a full-collective as some nations may be forced out of the club. There is also a power play. Germany could start setting the rules, which would trump the EU and ECB. That also makes other members uncomfortable - having in one nation calling the shots.
Expect volatility to continue to the FOREX market and that can trickle into treasuries and equity markets.
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| Futures Pre-market
Where's the action! |
| The futures are up in the pre-market, expect a higher opening. |
| Support / Resistance
Going higher or lower? |
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INDU 10,000 / 10,500 (We are seeing a slight increase in the futures - expect a higher opening. A run towards 10,500 - which is a big resistance area is in the cards. Treat the 10,250 area as a straddle strike.)
NDX 1800 (We are above the 1800 line and that could be a good support area in the short-term, but treat it as a straddle strike.)
SPX 1100 (We are slightly above the 1100 - we are in a resistance band - so we will need a strong push to move higher.)
RUT 600 /625-635 (This is a resistance area - a break out means that 650 is the next be resistance area.)
I think we could get a run up to resistance, but expect the unexpected - meaning any day could inject some volatility. The swing in the VIX (volatility of volatility) is high enough to be concerned that the uncertainty in some of the bigger news stories could bring some rather alarming moves. If you are leaning long, do it at a ratio to your long gamma position.
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| Conclusion
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It seems like we continue to get moments of catching our breath, the Euro situation is interesting as it unfolds. Regardless of the results in Greece - there will be a shift of power in the EU as Germany will no longer be an idle participant if it has to shell out 10s of billions to rescue other countries. The longer-term question, will it be enough to give Greece enough time to sort out it's issues. Many think it is just delaying the inevitable.
Earnings continues to reflect lack luster future growth as forecasts are lowered. The good news is that it seems that the cost cutting and inventory management is keeping many in the light red (rather than dark red) and in many cases the black. However - companies need to see growth and not just bottoming - if job creation is going to be in the cards.
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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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