by Sam Collins 10/02/08
Stocks bounced around a bit Wednesday, however, it was nothing like the gyrations of Monday and Tuesday. But the seemingly calmer approach was only because of a conviction that the more senior branch of Congress, the Senate, would vote on the emergency financial relief plan, pass it and send to the House.
But the markets opened lower and were heading south until Warren Buffett announced another major investment in an American industrial giant. This time it was General Electric (GE) and again the 'Oracle of Omaha' made a sweet deal by purchasing $3 billion of a special GE's preferred stock at a guaranteed 10% dividend callable in 2011. And once more the deal was sweetened with warrants -- this time to buy another $3 billion at a strike price of $22.25 exercisable through 2013.
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In economic news, manufacturing contracted in September. The Institute for Supply Management (ISM) Manufacturing Index fell to 43.5 from 49.9, its lowest level since October 2001. It was much lower than the expected 49.5.
According to American Data Processing (ADP), employment fell by 8,000 (non-farm) in September, but economists had projected a drop of 50,000, so this was very good news. And another piece of good news followed: August construction spending was unchanged versus an expected decline of 0.5%.
At the close, the Dow Jones Industrial Average (DJI) was off 20 points at 10,831, the S&P 500 (SPX) was off five points at 1,161 and the Nasdaq (NASD) fell 22 points to close at 2,069.
The New York Stock Exchange traded just 1.1 billion shares, with decliners ahead by 8-to-7. The Nasdaq traded 718 million shares and there decliners were ahead of advancers by 17-to-10.
Crude oil (November contract) fell $1.78 to $98.89 a barrel and the Amex Energy SPDR (XLE) closed at $62.26, down $1.04.
The December gold contract gained $6.50, closing at $887.30 per troy ounce. The PHLX Gold/Silver Index (XAU) closed at $131.37, up 16 cents.
What the Markets Are Saying
With the near-, intermediate- and long-term trends all down, and new lows made by the Dow Industrials (DJI), the S&P 500 (SPX) and the NYSE Composite (NYA) just this week and a new low for the Nasdaq (NASD) on Friday, the outlook is still bleak.
But Argus Research pointed out Wednesday morning that equity dividend yields were now 4% higher than bonds -- an advantage for stocks. However, with the nation and the globe facing an almost unimaginable credit crunch, who's looking at stocks when the overwhelming concern is, as Mark Twain once said, "The return of my money not the return on my money."
The answer to that question of who's looking is easy. One of the most savvy of all investors with a reputation of having a sensitive nose for value -- none other than Berkshire Hathaway's Oracle Warren Buffett -- has sniffed and pounced.
For the second time in as many weeks, Mr. Buffett has made an investment -- and not just an investment but a commitment of billions of dollars to two American icons, Goldman Sachs (GS) and General Electric (GE). You have seen both of those stocks as a Trade of the Day within the last two weeks. (Click here to review my thoughts for GS and GE.)
Argus also said that we are within 5% of the market's final low. That would take us to the bottom of the next support zone at around SPX 1,050 with a Fibonacci number at 1,078.
It is time, I think, to consider the very best -- the very highest quality -- stocks as candidates for the cornerstones for your new portfolio of the future. But be patient. You may not have Buffett's billions but you do have time and price on your side. That's an advantage that could get you even better values than Buffett's.
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Today's Trading Landscape
Earnings to be reported include: AngioDynamics (ANGO), Constellation Brands (STZ), Demandtec (DMAN), Global Payments (GPN), Lawson Software (LWSN), Marriott Int'l (MAR) and Matrix Service (MTRX).
In terms of economic reports, we expect the following: initial jobless claims for the week of Sept. 27 (the consensus expects a loss of 15,000), August factory orders (the consensus expects negative 3.0%), and the DJ-BTMU Business Barometer for Sept. 20.
Last night, the Senate passed the bailout bill by a vote of 74-to-25. The bill to be presented to the House contains an increase in FDIC insurance, easing of the alternative minimum tax, R&D tax credits for high-tech companies and drug makers, energy tax credits, and a host of other add-ons.
Marriott (MAR) has reported Q3 earnings of 26 cents versus an expected 32 cents.
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Sam Collins can be reached directly at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
