We Got One! - Complacency Over

By Duru

March 15, 2005


We got one! Bernie Ebbers, the former CEO and notorious bandit of WorldCom, the CEO folks like me love to hate, was actually convicted today on all nine counts levied against him including conspiracy, securities fraud, and "causing the company to make false filings with securities regulators" (Wall Street Journal, "Major Executive Trials", Jan, 14, 2005). His defense that he knew nothing about accounting, not to mention how to do it poorly and fraudulently, did not work with a jury who apparently saw instead a crafty and wily coyote who knew his business inside-out. I think there is no finer moment to declare an end to the "between earnings complacency" than an Ides of March where the public shows it can be serious about cleaning up the excesses of the bubble era. Since the bulk of the earnings season ended around the finish of January, the S&P 500 floated to new 52-week highs and a 3.4% return, the Dow Industrials darted to new 52-week highs and a 4.8% return, and the droopy NASDAQ drifted twice to the stubborn 2100 level for a 3.7% gain but is now right back near the lows for the year…for the third time.

To make this call even simpler, I provide to you a nearly year-long view of the 10-year Treasury bond:

Note carefully how the bond has gapped up above the resistance at 44 (4.40%). Note carefully how strong this chart is looking again. Remember carefully that increasing bond yields provide competition to stocks and go up as "bond ghouls" begin to fear inflation. Until this bad boy closes that gap and continues lower, we can pretty much forget about much more upside in the stock market. The energy and commodities sectors should continue to motor along strong in this backdrop. But if they continue to stumble, correct, and crumble, look out stagflation. Stay tuned on this one.

Regardless, it is clear the season of complacency has essentially ended, and it is time yet again to ponder what this quarter's earnings hold for us. I currently see little to get excited about outside of a few select sectors and stocks.

And now that complacency is over, let's take one more quick look at some stock-bottom calls I have made recently (Click here to read my standard disclaimer when it comes to talking shop about stocks). EBAY has now fallen BELOW the bottom I pointed out around $38. Nimble folks knew to get out after the stock failed to breach the gap in mid to late February. PLAY is hanging in there and actually looks poised to make another big move up. Finally, SBUX is clinging desperately to its declining 50-day moving average. When this stock finally decides to make a move away from this resistance, the move should be swift and big.

As usual, be careful out there!


© DrDuru, 2005