OTCPicks Penny Stock Blog

November 12, 2008

"Hold on, we're in for a bumpy ride!" is the familiar saying that comes to mind right now in the markets. More bad news keeps coming despite all the government interventions and eye-popping money being thrown at the worst financial crisis our country has faced in the last 80 years.

Stocks fell to their lowest levels since late October today after bad news from Best Buy (BBY) and Macy's (M) and many negative reactions to changes in the government's financial rescue program.

The Dow Jones Industrial Average closed down 410 points, 4.7%, to 8,284. The Standard & Poor's 500 Index was down 47 points, or 5.2%, to 852. The Dow and S&P 500 closes were their worst since Oct. 27. The Nasdaq Composite Index shed 82 points, 5.2%, to 1,499 -- its lowest close of the year, dropping below the old low of 1,505.90 on Oct. 27.

Since the presidential election on Nov. 4, the Dow has given up 1,343 points, or 14%. The S&P 500 has dropped 149 points, or 15.3%, and the Nasdaq has lost 272 points, or 15.8%.

Big Three Auto Manufacturers in Serious Trouble

Next up is what to do about our auto industry which appears to be teetering on the edge of bankruptcy. GM has said they may run out of cash by the end of the year, and yesterday GM's stock dropped below $3 for the first time ever. G.M. has been burning through an estimated $1 billion in cash each month since the middle of the year, although some analysts believe that figure has grown substantially with the drastic drop in demand for new vehicles. GM and Chrysler have been discussing merger possibilities but that does not seem to be going anywhere in recent days.

Last week automakers announced their October sales numbers and they were not good at all. Sales of new cars and trucks in the U.S. plummeted in October to levels not seen in 25 years. Shaky consumer confidence and the credit crunch resulted in the inability of shoppers to get loans. Overall the tight credit situation resulted in driving sales down 31.9% for October compared to one year ago. General Motor's sales dropped by a whopping 45% during October and Ford's dropped 30%. Other declines included a 23% drop at Toyota and a 25% decline for Honda. These over-the-cliff plunges have raised concerns about the chances of survival of Detroit's Big Three here in the U.S.

Senate Democrats have met with Ford, GM and Chrysler this past week and discussions are ongoing on how the U.S. government might step in to help out the ailing U.S. auto companies. Obama is urging help for these automakers and it is unlikely that congress will let the automakers tumble into bankruptcy and face the loss of tens of thousands of additional U.S. jobs. It would ultimately mean the abdication of our place in the world auto manufacturing market and I don't think congress will silently let that happen. Also, GM and Chrysler going into bankruptcy would seriously endanger pension funding for tens or hundreds of thousands of retired autoworkers.

A buddy of mine's father worked for GM for 40+ years and the vast majority of his pension was based on GM stock. That family's future has been largely flushed down the toilet in the last year as GM's stock has slid from a high 12 months ago of just under $42 to a stock price that is currently hovering around the $3 mark. One might be tempted to think that this is as low as GM's stock could go and now would be a good buying opportunity. I'd urge those parties to have patience and see how the automaker's fate fares with congress. If congress does not decide to pony up $30 to $40 billion dollars to bail out the automakers then GM's stock could fall down to the penny stock range as investors will likely pushish the stock if a support program is not implemented. I'd hate to see that happen and I don't think congress and the Treasury will let that happen, but I'd wait till more shoes drop before gambling on "long" position in GM shares right now.

Oil Slides Further as Demand Drops

Oil fell 4 percent to below $57 a barrel on Wednesday as the U.S. government slashed its global demand growth forecast as the world slides into recession. OPEC is pondering further cuts as oil has slid $90 ppb from $147 in early July to $57 today and will decide by the end of the month to cut production again to help support oil prices.

U.S. crude fell $2.51 to $56.82 a barrel at 13:15 p.m. EST, after touching $56.35, the lowest since March 20, 2007. London Brent crude traded down $2.50 to $53.21 a barrel.

The U.S. Energy Information Administration dropped its 2009 output outlook by 740,000 bpd, with total demand expected to average 85.93 million bpd next year compared with estimates of 85.89 million bpd for this year.

Oil and Gasoline prices are the one thing that we can be thankful for in this gloomy economy right now. National gasoline prices have dropped below $2 per gallon again which bodes well for inflation. $4 gas back in July and August were weighing heavily on businesses and consumers and inflation was spiralining upward very quickly with high oil prices. Since oil has come back down so have inflationary trends. Lower interest rates, lower gas costs will help consumers in the long run.

Chip Manufacturers on Defensive as Intel Cuts Forecast

Intel Corp.(INTC), the largest computer- chip maker, lowered its fourth-quarter sales forecast by about $1 billion amid ``significantly weaker'' demand across its entire product line. The shares dropped 6.8 percent in late trading.

Revenue will be $9 billion, plus or minus $300 million, and profit margins will be short of projections, Intel said today in a statement. The Santa Clara, California-based company originally predicted sales of between $10.1 billion and $10.9 billion.

Intel, whose chips run more than three-quarters of the world's computers, said customers worldwide are ``aggressively'' chopping orders as they cope with falling sales. That signals that the U.S. economic slump, which Chief Executive Officer Paul Otellini already expects to be the worst of his lifetime, is spreading overseas.

The stock has a 52-week low of $13.51 and a period high of $27.99. Apple (AAPL), HP (HPQ), RIM (RIMM), Dell (DELL), and AMD (AMD) are likely to be caught in the vortex tomorrow. Micron Technology Inc.(MU), the largest U.S. producer of computer memory, dropped 20 cents, or 6.5 percent, to $2.90, while AMD declined 3 cents to $2.54.

Toshiba (6502: JT ) slumped 4.8 percent to 337 yen in Tokyo. Sony Corp.(SNE), the world’s second-largest consumer electronics maker, dropped 7.3 percent to 2,030 yen. Samsung Electronics Co. (KS) lost 2.8 percent to 467,000 won.

Paulson Shift Focus from Buying Up Bad Assets to Rescuing Consumer Lending

U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

"Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. "This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

Paulson might have some "splaining" to do to Congress on why he sold them one thing and is now going in a different direction. Might be a little tougher to get his hands on the second half of the 700 billion in bailout funds.

November 6, 2008 -

After the euphoria and history of the election of Barack Obama, the United State's first African American president, markets were quick to get back to the business at hand, ie. pricing in the negative effects of a prolonged recession into the market. There are probably lots of great things in store for the U.S. and world as we usher in a new president 2+ months from now, but the markets are looking at "now" and trying to see a glimmer of a light at the end of the long dark tunnel we are in at the moment.

After a pre-election multi-day "Rally-of-Hope" starting on October 27th culminating with the presidential election on Tuesday, the last two days have seen more blood in the water as the major indexes dropped precipitously for two consecutive days in a row resulting in the biggest two day slump since 1987. The market drop reflects the markets coming back to reality land in digesting mounting disappointment in corporate earnings and projections, and bleak sales data coming from major retailers fueling fear of a worsening economic downturn.

The Standard & Poor's 500 Index fell 5 percent to 904.9, extending its two-day loss to 10 percent. The Dow Jones Industrial Average retreated 443.48 points, or 4.9 percent, to 8,695.79. The Russell 2000 Index of small U.S. companies declined 3.6 percent to 495.92. The MSCI World Index of 23 developed markets lost 6.2 percent to 921.87 highlighting what is going on in global markets.

The two-day tumble wiped out more than half of the S&P 500's rebound from a five-year low on Oct. 27. The S&P 500 is down 38 percent this year, the steepest annual retreat since 1937. The benchmark for U.S. equities has plunged 42 percent since its record in October 2007 as the U.S. economy shrunk in two of the last four quarters.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 17 percent to 63.88. The measure tracks the cost of using options as insurance against declines in the S&P 500.

About 481,000 workers filed initial jobless claims last week, the Labor Department said today in Washington, exceeding the 477,000 projected by economists surveyed by Bloomberg News. The number of people staying on benefit rolls was the most since February 1983.

Investors began to look ahead to Friday's jobs payroll data, which is expected to further underscore the weakening economy after weekly jobless claims fell but still showed serious labor market softness.

The Russell 2000 index of small caps actually outperformed most of the market today "only" shedding 3.64% closing at 495.93.

The European Central Bank and the Bank of England both reduced their key interest rates Thursday. The ECB dropped its target rate 50 basis points to 3.25%, and the Bank of England slashed its rate 1.5% to 3% underscoring the increasing concern in foreign markets.

Crude oil lost more ground and ended down $4.51 to settle at $60.77 a barrel. Gold dropped $10.20 to close at $732.20 an ounce.

Longer-dated U.S. Treasury securities were mixed. The 10-year note was higher by 2/32, yielding 3.7%, and the 30-year was declining 11/32 to yield 4.2%. The dollar was gaining on the euro and pound but falling vs. the yen.

What the Chart Says

Below is a chart of the Dow Jones Industrial Averages. As you can see, the recent rally went through a resistance level around 9400 and continued to the upper edge of the Bollinger Bands just below the 50 day moving average. There it bounced off that resistance and we began the current two day downturn. You can see in the chart that while stocks rallied during the last run, trading volume was declining indicating a weakness to the rally. From here we could see the market test the lower side of the bollinger band and the recent low resistance level at around 8175. The way the last two days have gone we might get there tomorrow. Below the most recent market lows the next major resistance level is the 2002 low at around 7600.

The oscillators used in the graph below all pretty closely caught the overbought tipping point on Tuesday before this two day slide and it looks like it still has some more sliding left to do at this point based on these indicators.

You can see that at the top of this latest rally the RSI bounced off the 50 mark, another sign of continuing market weakness. From our vantage there is not a lot of positive signs peeking up their heads from around the corner. We are likely in for a muted end to the trading year. It is likely that stocks will fall into a trading range for a period of time while consolidation takes place, volitility slowly subsides, and the government actions have time to work their way into the system and begin to have an effect. We are definately not calling a bottom to the market at this time as that may well not occur for some weeks or months down the road as the U.S. and global markets continue the process of deleveraging.

November 3, 2008 -

At the end of the day on Friday I walked outside as the closing bell rang and I swear I could hear the universe exhaling with a collective sigh of relief ending one of the most volitile months ever in the U.S. and global markets.

October saw some of the biggest single-day point drops and single-day point gains ever seen in the market, and overall one of the worst months since the 1987 meltdown. Then in the last week of October we saw one of the best weeks in almost 34 years. The huge gains of the final week were reminiscent of the sharp recoveries from bear market lows in 1974 and 1982. Both of those moves came while the economy was mired in recession, as it almost certainly is now. Last week, the Dow and the Nasdaq each rose 11%, while the S&P 500 gained 10.5%.

An Upside Breakout from Here?

So, October is finally over! What's next now for U.S. and global markets? Did we see the market bottom out in October, or is there more of a downside lurking in the shadows out there? Here is a chart showing the DOW daily close line chart with some oscilators shown. It appears that the DOW is right now at a top side resistance level around 9400. If the DOW breaks out to the upside from here it might indicate a confirmation of a bottom formation and maybe we head up from here. If it does not breakout on the upside from this level we might be looking at more downside or a period of time trading within the low side range while consolidation takes place and while the market figures out how the recession will play out.

Downside Risks Still a Good Possibility

I still think there are downside risks hanging out there depending on how long and how deep investors believe this recession will take us. The markets are obviously trying to price in what they are seeing, but no one knows what the next few months will bring in terms of the slowdown and earnings reports, market data and numbers, rebound in housing, etc. Exports are slowing down dramatically as the dollar rises and as global markets follow the U.S. into their own economic slowdowns.

U.S. Factory Output Falls in October

U.S. factory activity contracted sharply in October, falling to its lowest in 26 years as the financial crisis ravaged the world's largest economy and its trading partners around the globe.

The one bright spot in the report was that its main gauge of inflation, the prices paid measure, recorded its biggest one-month drop ever. This should allow the Federal Reserve to keep interest rates low to fight off what many fear will be a deep recession.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 38.9 in October from 43.5 in September. That was well below the 50 level separating contraction from expansion, and a reading below 40 is exceptionally weak.

The global slowdown is bad news for the United States, where manufacturing had been kept afloat until August by buoyant exports helped to a great extent by a weak dollar making U.S. products financially attractive in global markets. October's report showed new export orders contracted, ending 70 consecutive months of growth, the ISM said.

In fact, the report was uniformly weak, and employment in the sector was dismal. The ISM's gauge of employment suffered its biggest one-month drop in 20 years and fell to its lowest since March 1991. The data highlighted an already crappy outlook, with the index of new orders hitting its lowest since 1980. Most analysts are saying that it will take a while for the correction to take place and for the government's economic efforts to gain traction and have a reversing effect.

Election Watch

Election history indicates that U.S. stocks may have a better chance in the first year of an Barack Obama presidency than a John McCain administration.

Since 1900, the Dow average rose 9.8 percent in the 12 months after the Democratic Party captured the White House, based on the median change following the election of seven Democrats from Woodrow Wilson to Bill Clinton. Only twice did the index drop, after Wilson's victory in 1912 and Jimmy Carter's in 1976.

Polls show Democrat Obama ahead of Republican McCain as the economy looms as the main concern among voters. Obama, 47, widened his lead to 8 percentage points over McCain, 72, in an average of polls released in the last week, according to RealClearPolitics.com.

Dollar Libor Falls to Lowest Since Lehman Failure on Rate Cuts

The London interbank offered rate, or Libor, that banks charge one another for three-month loans in U.S. currency slid 17 basis points to 2.86 percent today. It was the 16th day of consecutive declines and has not been this low since the failure of Lehman Brothers Holdings Inc. on Sept. 15. The overnight rate dropped 2 basis points to 0.39 percent. Asian rates declined.

Interest rates on commercial paper and short-term debt companies sell to cover expenses such as payroll and rent, fell to the lowest level since Aug. 8. This is a confirmation that the nearly $3 trillion of emergency funds provided by global governments have extended to financial institutuions to battle the credit crisis may be working. The drop in three-month dollar Libor last week capped the first monthly slide since May.

Looking for November Calm

Stocks will be volatile but should be a little calmer in November after the crazy days of October. The presidential election should give the market a bounce this week, but once that is over the markets will shift their focus back to the economy when jobs data is released Friday.

Traders say the election Tuesday is the key to the week ahead. But they will also be watching to see if credit markets continue to improve. The market generally rallies because the headwind of an election is over and now you have greater certainty. The market has priced in some of a potential Democratic victory, as Sen. Barack Obama leads in the polls, but not entirely. Look for moves in sectors that would be affected by Obama's policies if he wins on Tuesday. Sectoral plays like construction and engineering that might benefit in an Obama Administration are currently beaten down. Health care stocks have been used as a defensive play, but they could see some selling pressure if Obama wins. Alternative energy stocks might see a post-election boost if Obama wins as well. In the week and day after the 2006 election, the stock market went up fairly significantly.

There is also a heavy calendar of economic data, and quarterly earnings from some big names, like Cisco Systems (CSCO), Walt Disney (DIS) and Berkshire Hathaway (BRK).

GM's U.S. Sales Tank in October

General Motors Corp (GM.N) on Monday reported a whopping 45 percent slide in U.S. sales, blaming the steep decline on low consumer confidence stemming from the uncertainty over a deepening credit crisis. GM said it sold 170,585 vehicles in October, down from 310,008 a year earlier. GM truck sales were down 51 percent while car sales were off 34 percent. GM reaffirmed its fourth-quarter production target at 875,000 vehicles, including 407,000 cars and 468,000 trucks. The targeted production is 16 percent lower than a year ago.

Oil Continues Slide Despite Improving Stock Market

Light, sweet crude for December delivery that had crested above $69 in early trading, tumbled $3.31 to $64.50 a barrel on the New York Mercantile Exchange and gasoline futures prices dropped more than 7 percent in early trading.

Declining gasoline futures have led to sharp drops in the price of gasoline. The price for a regular gallon of gasoline dropped to $2.41 nationally on Monday, down more than 30 percent from last month, according to auto club AAA, the Oil Price Information Service and Wright Express. In a report Monday, Credit Suisse forecast the sharpest drop in global oil demand since 1982. Most analysts expect oil to trade wtihin the $60 to $70 range for the near term.

Airlines and Telecommunications Sectors Lead Advancers Today

The Amex Airlines Index was up 5.28% today, the Amex North American Telecommunications Index was up 4.93% and the Morgan-Stanley Health Care Payor Index advanced 4%. Sector losers today were Oil & Gas and Housing Sectors.

What's Does the Rest of 2008 Hold in Store for Investors?

Looking back at 1987 and 1929, years with similar market profiles, we might extrapolate what we might expect for the rest of 2008 and beyond. In these prior market years, the market (Dow) was higher from the October crash lows by year-end. In 1987, the market came back 39% by year-end; in 1929 the Dow managed a 25% recovery from the lows seen during the October free fall. So sitting with a 19% gain from the October lows leaves probable upside room going into the last two months of the year.

Investors should look for opportunities that will lead the market out of recession, that have been over sold and which could benefit from the policies of the next U.S. administration.