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July 6, 2010, 08:00 EST [img]http://www.joe-duarte.com/images/line_main_top_03.gif[/img] Dr. Joe Duarte's Market I.Q. [img]http://www.joe-duarte.com/images/line_main_top_05.gif[/img] [img]http://www.joe-duarte.com/images/line_main_top_07.gif[/img] [img]http://www.joe-duarte.com/images/000.gif[/img]
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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The "New Normal" Is Just Normal
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[img]http://www.joe-duarte.com/images/pic_04.gif[/img] What's Hot Today:
U.S. stock index futures significantly higher on Tuesday. The market is way oversold and due for some kind of bounce. This could be it.
Today's Economic Calendar
- ISM Non-Mfg Index 10:00 AM ET
- 4-Week Bill Announcement 11:00 AM ET
- 3-Month Bill Auction 11:30 AM ET
- 6-Month Bill Auction 11:30 AM ET
News For Thought
Detroit citizens take over city maintenance. Detroit is in such a bad financial situation that ordinary citizens are now, in many cases, taking over the duties traditionally saved for the city, such as keeping empty lots mowed and streets clean. According to The Wall Street Journal: "Across Detroit, do-it-yourselfers - are rolling up their sleeves and opening up their wallets to provide basic services that the financially strapped city can no longer manage on its own, from boarding up vacant homes to mowing lawns to maintaining parks. In some areas, residents also partner with city agencies or look to philanthropies for help."
According to the Journal: "Southwest Detroit is home to some of the most active residential groups in the city. On one block, residents received a grant earlier this year to begin boarding up vacant homes. A nonprofit has pledged to demolish one vacant home on their own and turn another into a multipurpose space with public art. The 30-acre Clark Park on the Southwest Side is mainly kept up by a nonprofit, community group that partners with the city. As a result, Clark Park has play grounds, fencing, baseball and softball fields, an ice hockey rink and a recreation center." On the one hand, this is a sad state of affairs, yet on the other it shows what people can do if they set their mind to it.
Sarah Palin for RNC chair? The Republican party is having its troubles with its current national committee chairman, Michael Steele. Now, National Review magazine is suggesting that the RNC "dump" Steele and hire Palin. It's an interesting way to shake up the election season further and with one fell swoop put the Tea Party in a much fatter position. The real question is whether Palin can pull it off. She probably can, which would make 2010 an even crazier year. Thursday, the institute announced that Perelman, known equally for his brilliance and his eccentricities, formally and finally turned down the award and the money. He didn't deserve it, he told a Russian news service, because he was following a mathematical path set by another. "
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[img]http://www.joe-duarte.com/images/pic_04.gif[/img] The "New Normal" Is Just Normal
From Big Hair, To Big Bubbles, To The Big Hangover
At first blush the picture is improving for credit card companies as fewer delinquencies and lower levels of capital being set aside for losses are propping up credit card company finances. But the real picture is much darker as the reason for the improvement is that fewer people are now qualified to use credit cards.
According to The Wall Street Journal: "for months now, some U.S. card issuers, such as American Express Co., Capital One Financial Corp., J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Discover Financial Services, are reporting improving credit trends despite stubbornly high unemployment rates. Issuers of plastic are also seeing a bump in earnings from whittling down their loss reserves, a trend that's expected to continue this year. The reason for the divergence is grim: Some people have been unemployed so long they have simply been washed out of the credit system and no longer have any effect on the numbers." In fact, the situation is now mirroring the statistics highlighted in last week's employment data, where 652,000 have given up looking for work.
That means that credit is improving for the wrong reasons, fewer people now have access to credit, a fact that is likely to keep the recovery from increasing in intensity for some time. So, how bad is the situation? According to data based on last week's employment report "46% of unemployed Americans were out of work for more than six months in June," while "the quality of credit-card loans has been broadly improving this year. Discover wrote off an annualized 7.97% of its card balances in its fiscal second quarter ended May 31, lower than the 8.51% rate in the first quarter."
Meanwhile "AmEx's uncollectible U.S. card balances totaled an annual rate of 6.3% in May, down from 6.7% in April, and J.P. Morgan Chase wrote off 8.95% of card loans, down from 9.03%, during the same period. In a sign of things to come, the rate of borrowers behind on their card payments—a key gauge for future loan losses—is also falling across the board."
In fact, there are two major concepts unfolding:
1. "As Americans stay unemployed for long stretches, they fall behind on card payments, get written off—and have no access to new credit. While their continued unemployment keeps the jobless rate high, they no longer have any influence on the statistics of delinquencies or write-offs on cards. Meanwhile, card lenders have tightened standards, and new borrowers are less likely to get into trouble." and
2. "Card companies, burned by credit losses and sweeping credit-card legislation passed last year, have scaled back on credit lines, becoming more selective on borrowers. New rules limiting fees, such as those hitting card users exceeding their credit limit or paying late, and curbs on rate increases, make it less lucrative for card issuers to lend to the less creditworthy."
One of our favorite indexes, the Monster Employment Index was more bullish, rising to 141 from 134, a 21% year over year climb. Yet, this index measures online job demand, not actual jobs created. So in that sense it shows that there is demand for work, but helps us little with predicting whether the employment report will be bullish or bearish for stocks.
Conclusion
Are we looking at a new normal or are we just going back to the old normal, where people who had jobs, and prospects of actually making enough money to pay for their expenses are likely to make it?
We're not being crass. This is an important point. The economic blastoff of the dot-com bubble in the 1990s was followed by a second blastoff from the housing bubble. During that period of time the rules that had applied in past economic cycles got thrown out the door and irrational exuberance was the norm. In fact the big hair era of the 1980s gave way to the big bubble era of the next 20 years, which is why we are now in the era of the big hangover.
During the dot-com bubble it became acceptable to buy the stock of companies who had no real products and no real earnings. They had a concept and that was good enough to make the price of the stock go higher. If you held on to the stock long enough for the price to rise significantly and cashed out in time, you were rich, or at least better off than you were before.
Some of that wealth moved into real estate during the housing bubble. During that period it became "normal" to lend money to people based on their home equity, or on the number of houses that they owned, as eventually those homes would be sold for a profit. The expectation was that home prices would never fall, thus, even those people with no jobs, and no prospects of ever actually earning enough to pay their outragous mortgages were "fair" credit risks for banks and other lenders.
The same logic extended to credit cards, as home equity would foot the bill for the entire party.
In other words, what became normal during the last twenty years was not normal at all. It was ridiculous. And institutions and individuals paid the price for living in a world of fantasy where companies with good concepts fetched larger multiples in their stock price than companies with a century of products behind them and where a lawyer who quit his job to flip houses could command seven figures worth of credit lines from any bank.
Our contention is that aside from the pain and suffering that is being felt by thousands without jobs, part of the current retrenchment is a return to the old normal, where if you could pay your loan back you were more likely to actually get a loan.
To us, it looks as if it's unreasonable to expect that 20 years of madness is going to return to "good times" any time soon.
We'll be on Twitter some time today before the market closes with some updated comments.
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[img]http://www.joe-duarte.com/images/pic_05.gif[/img] Market Moves Is Apple (Nasdaq: AAPL) Giving Swing Traders An Opportunity?
Shares of Is Apple (Nasdaq: AAPL) are near the bottom of their recent trading range, a place where swing traders often start nibbling.
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Chart Courtesy of StockCharts.com
Swing trading comes in handy during wishy-washy markets. But in order to be successful you have to pick liquid stocks that have proven to be tradeable using the strategy. Apple fits the description.
First, the chart shows that the stock has trades roughly between 225 and 280 since May. That gives you plenty of room to get in and out of the position, with the potential for some good gains, both on the short and the long side.
Second, the RSI and MACD oscillators have given excellent overbougth and oversold readings in this stock. That means that you have the two major components of a good swing trade, a good, well defined and broad trading range, and reliable technical oscillators to aid in your timing.
That means that as Apple is near the bottom of its recent trading range, and the RSI and MACD are oversold, this is a good opportunity to consider a swing trade in this stock.
