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| Leeb's Market Forecast | |
| April 17, 2008 | |
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| Dear Investor, Leeb ETF Trader Update Market Recap: For the next two weeks, stock prices are likely to be driven by earnings reports. Of course the market will reward good numbers -- just look at today's rally caused by decent reports from J.P. Morgan, Wells Fargo and Intel. And we had a taste of how disappointments are punished last Friday after GE, which has a long history of managing expectations, missed their numbers. There is still a lot of gloom and doom out there and a contrarian perspective one should expect disproportionately positive reaction from major market averages if overall profits come in better than expected. Estimates are for a 10-14% decline in earnings; but the real question is if that is already baked into the cake. Take today's news of worse-than-expected housing numbers from Bloomberg: "Housing starts in the U.S. dropped more than twice as much as forecast in March to a 17-year low, signaling that declining construction will keep eroding economic growth this year. Work began on 947,000 homes (at an annual rate), down 11.9 percent from February and the fewest since March 1991, the Commerce Department said today in Foreclosures are pushing down property values by adding to the glut of unsold homes, prompting buyers to hold out for better bargains and undermining new construction. The Federal Reserve will probably lower the benchmark rate again at its meeting this month to cushion the economy against the housing- led slowdown." Now, let's look at how the homebuilders' stocks are reacting. Pulte Homes is up more than 5 percent, ditto for Toll Brothers. Looks to us like all of the bad news are already priced in. Someone asked us if it's irrational for homebuilders to be rallying in the face of continued weakness in housing. The answer is that historically, the homebuilders usually rally in times of aggressive Fed rate cuts, and likewise ahead of a housing bottom. The ongoing strength in homebuilders suggests that the bottom in housing will be hit in 2008, contrary to most expectations. Another indicator that suggests that the rally in the major averages might finally have legs is the "fear gauge" itself -- the S&P 500 Volatility Index (VIX). As we write this, the VIX is at its lowest levels of 2008, just above 21. In our experience, large declines in the VIX, such as we have seen recently, usually precede intermediate-term rallies. There's lot of money temporarily parked in Treasury bonds; commodity prices are rapidly rising and the inflation numbers are disturbing - but the Federal Reserve is still aggressively cutting interest rates. If the economy avoids recession (which is our opinion), a lot of that money is likely to leave bonds for stocks. The consensus expects that there will be a notable economic rebound in the third and forth quarters driven by the large fiscal stimulus in the form of tax rebates that will find its way into consumers pockets in May and June. If no large financial sector problems emerge in the next month or two, the "Bear Stearns lows" may turn out to be the lows for the year. Until Next Time,
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Stephen Leeb, Ph.D. Research Chairman Leeb's ETF Trader ------------------------------------- Leeb Aggressive Trader Update Market Recap: First-quarter earning reports are starting to roll in. And while the early tally has been fairly decent, there have been a couple of headline-grabbing negative surprises. The biggest of these was General Electric's rare miss and lower full-year guidance. GE has a long history of coming in on target or just a penny or two ahead of expectations. But this quarter the company was hobbled by weakness at its financial services arm and delayed sales at its health care unit which were also tied to the credit crunch. While the results were disappointing we're encouraged by the strong numbers from its other divisions, which tell a decidedly more upbeat tale about GE's and, indeed, the overall economy's prospects
GE's miss prompted traders to dump the stock in a flash, creating a decline in the stock that shaved $47 billion off of its capitalization. And because it's one of the world's largest publicly traded stocks, GE's decline shook the stock market. But the underlying tenor of the market was far less than you might expect, given the headline number. For instance, small cap stocks, as measured by the unweighted average of all stocks traded on the New York Stock Exchange, outdistanced the blue chips by a wide margin last week. The NYSE 's Advance/Decline Line was likewise negative, but not exceedingly so. Moreover, coming on the heels of the prior week's big gains weren't the least bit surprising.
The stock market is likely to continue to lurch forward in staggered-step fashion. Although the 1400 level on the S&P 500 may prove to be a formidable barrier, we've so far seen the market put in a series of higher highs, despite plenty of bad news in the financial sector. That strongly suggests we've seen the lows for the time being, and it opens up the possibility of a further gains.
Keep in mind that we're not looking for a runaway bull market. Instead, the rally will likely run out of steam some 5 to 7 percent above where we are now. Of course we're constantly reevaluating the situation, so we're talking about a moving target. Numerous factors are at work that could affect the ultimate outcome. On the plus side is the aggressive rate cutting that Ben Bernanke and Company are engaged in to stem the credit crunch. Tops on the list in the negative column are soaring energy prices which have crossed the $114 mark for the first time.
The Federal Reserve's Open Market Committee is slated to get together again in two weeks. Another quarter point rate cut is virtually baked into share prices, and a modest number of traders are betting on a half point cut. We won't venture a guess on the size of the next cut, but we can say with certainty that the central bankers are determined to not let the economic situation to deteriorate into a deep and prolonged recession. Instead, they will resign themselves to dealing with greater inflation down the road as a result of their rate cuts.
Crude oil prices, on the other hand, show no sign of abating and have moved once again into record territory. As we've said in the past, the economy can absorb slowly rising crude oil prices, but rapidly rising prices can cause trouble. And we're close to the danger zone right now, with crude prices up more than 80 percent over the past year. The strength in oil prices, incidentally, is another sign the U.S. economy is in better shape than many believe. Until Next Time,
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You'll be amazed how easy it is. ---------------------------------- If you cannot view this mailing click here. This email was sent to LEMMETRY@GMAIL.COM. You are receiving this email because you have requested a free subscription to Dr. Stephen Leeb's Market Forecast. Click here to be removed from this mailing list. Click here to be removed from all of our promotional offers. TCI Enterprises, LLC 500 5th Ave., 57th Floor New York, NY 10110 Disclaimer TCI Enterprises LLC, The Complete Investor, Emerging Investments, Leeb ETF Trader, Leeb IPO Insight, Leeb's Aggressive Trader and their affiliated companies and publications ("TCI" or "Letters" or "Publications") are not registered as a broker dealer or investment advisers with the U.S. Securities and Exchange Commission or any state securities authority. Letters and their information and content providers make no representations or warranties of any kind in connection with the subject matter, performance or the suitability of the information contained in publications for any purpose and are not liable for the timeliness, accuracy, or completeness of the information contained herein. The information contained in publications is provided for general informational purposes, and is not a substitute for obtaining professional advice from a qualified person, firm or corporation familiar with your personal circumstances. Please seek the advice of professionals, as appropriate, regarding the evaluations of any specific security, report, opinion, advice or other content. TCI is not responsible for any trades placed by the recipients of TCI based on the information included therein. There can be no assurance that your portfolio or positions can achieve the indicated performance and therefore, the sample performance information should not be relied upon. Investment recommendations are not intended to be construed to be personalized advice, or recommendations to buy, hold, or sell mentioned securities and readers should consider their personal situation before making any investment. All opinions expressed and information and data provided therein are subject to change without notice. TCI, its officers, directors, employees, and/or associated entities may have positions in and from time to time make purchases, or sales of the securities discussed or mentioned in TCI. TCI shall have no liability for any e-newsletter that is lost, intercepted or not received by you in a timely manner, or at all, for any reason.  |
