The Fuss Fizzles on the Jobs Report? - also, Brokers and CFC

By Dr. Duru written for One-Twenty

September 17, 2007

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One week after the jobs report that seemed to seal the Fed's fate for rate cuts, we find ourselves with the S&P 500 fully recovered from that one-day trauma. The NASDAQ has essentially recovered through very choppy trading, but it remains a few points below the close prior to the last jobs report. See the charts below...

S&P 500 and NASDAQ recover from jobs report

In my last missive, I noted that the market's readiness to sell off on bad news that should translate into the good news of rate cuts, suggested that a monster fade awaits any quick-trigger rally from a Fed rate cut. Now, the market looks poised for a nice blow-off of buying BEFORE the Fed announces its decision Tuesday afternoon. If this happens, a fade could happen right after the Fed announces its decision.

Regardless of the outcome, do not neglect to pay attention to several other important data points this week. Four investment banks, Lehman Brothers (LEH), Goldman Sachs (GS), Morgan Stanley (MS), and Bear Stearns (BSC), all report earnings this week. Collectively, I suspect the news from these conference calls will outweigh whatever the Fed says. Why? Well, these financial powerhouses sit right at the epicenter of the on-going credit crunch. The market eagerly awaits word on whether sub-prime is destroying profits and awaits word on the latest dirt on the health of a wide array of other credit markets and maybe even some hedge funds. In an interesting twist, I have heard some pundits wonder aloud whether Goldman actually increased profits by banking on the increased volatility in the markets. Such speculation could certainly explain why GS has risen almost 20% from August's ugly bottom. Only MS has bounced as well as GS of the 4 investment banks reporting. But before we get too excited, all 4 also remain below important resistance levels formed by declining 50 and 200 DMAs. See the charts below.

Investment banks report earnings this week

Best Buy (BBY) and Nike (NKE) report earnings this week. We should get a feel for how the consumer is doing from these two companies. BBY is the king of discretionary spending, and NKE is the king of discretionary spending amongst the younger set. Finally, FedEx (FDX) reports earnings as well - the growth in shipping should be a tell for commercial activity. All of these events are happening during options expiration week. This means we should expect the market to move swiftly and sharply to every change in the wind. Maybe the dust will settle down next week, and we can then catch our breath and take stock of where we are.

I will finish with a look at Countrywide Financial (CFC), now ground zero for America's mortgage mess. On the evening of August 22, we received news that Bank of America (BAC) made a move to shore up CFC's finances and keep the books liquid. The stock opened the next day up 10%, and was up as much as 21% in after-hours trading the night before, only to close essentially flat with the previous day. Not even an interview with CEO Mozillo on CNBC was enough to keep the stock aloft. That action was all you needed to see to know that CFC must be in some serious trouble! Since then, CFC finalized its purchase of mortgages from bankrupt HomeBanc. On August 31st, President Bush "announce[d] steps to help American families keep thier homes and reform the mortgage finance system." More fade action for CFC as it went from a 6% pop in the pre-market to end the end the day only up 1%. No surprise here since Bush's initiatives stopped short of actually taking definitive, direct, and immediate action. On September 7th, CFC announced it will lay-off up to 20% of its workforce, and the stock came down another 5.5%. The stock finally stopped short of testing its August lows when it announced on Sept 11th that it "has already taken decisive steps to address the challenges arising in this environment and thereby enable Countrywide to meet its funding needs." On high-volume trading, the stock finally seemed to steady itself over two days, including through news that CFC snatched another $12B in funding from its supporting banks. Has the worst finally drifted behind CFC? Certainly, the recent gap up on high-volume buying puts the odds in favor of a bottom, but it may only be worth a trade and not an investment. After all, the active buying and selling season for homes is coming to a close, and if Spring 2008 is every bit as bad as folks are fearing, CFC's business has not yet hit bottom. Certainly, the constant fades in the stock reveal the market's lack of confidence in CFC. Time will soon tell CFC's fate...

Countrywide bottom?

Be careful out there!

DR. DURU®, 2007