5/18/09 (Well's Fargo, LIBOR?, Lowe's survives!)

Traders,

Last week the market saw the first stumble in its 10 week rally. Mostly the news showing that the economic contraction is slowing down – has been seeming to slow – coupled with the banks not needing as much as one had thought – has all come all. Last week seem to be digesting the news time and see where we are to go from here.

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Wells Fargo gets a boost…

Berkshire Hathaway already had a large holding in Wells Fargo, after the “stress test” and recent news, Buffet is now increasing his holdings – which is given a huge vote of confidence into the banking sector. Berkshire will be one of the largest shareholders of Wells Fargo.

Expect to see some positive momentum in the banking and financial sector – as this is a clear vote of confidence by the billionaire.

WFC is up .75 in the pre-market

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LIBOR – show me the money

The London InterBank Offered Rate (LIBOR) the cost of borrowing dollars between banks contracted again. Showing that credit lines of the larger banks is improving. While this is a good sign that credit is easing – there remains two problems. First, there is a liquidity question. On Bloomberg an analyst mentioned that it was good to see it contract – showing that credit is available – the problem is the liquidity is far less than in the past. We need to see it continue to contract and more banks lending to each other. Second, the money (credit) is not getting down to the consumer level. Consumers – the core of GDP and consumption – is still not seeing credit lines or available liquidity increase. Where is the money going? The analyst indicated that it is still being used to maintain or expand existing holdings and used to off-set write downs. If there is anything left – the banks are holding on to it tightly.

Again – the news is good and a step in the right direction – we just need to see more volume, continued contraction in the spread, and credit available on the consumer level.

The news is helping to boost the financial / banking sector in the pre-market, coupled with Wells Fargo news – we could see a good boost at the opening.

GS, MS, JPM, BAC, etc – are all up in the pre-market.

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Lowe’s beat estimates…

Certainly, like others (especially in the construction / home sector) – have significantly lowered their forecast in 2008 going forward. However, maybe they lowered it too much.

Lowe’s first quarter profit fell less than expected – profit dropped over 22% year-over-year, to $476 million (32 cents a share). Even though revenue contracted significantly, Lowe’s cost cutting measures and inventory management help increase margins almost 1% year-over-year.

Lowe’s has been seriously reinventing itself – focusing on the smaller home projects, repair, and needs – rather than the bigger ticket item or renovation. Cutting costs, jobs, and inventory – keeps them running lean. They raised their annual forecast to as must as 1.25 (from their previous 1.20 – what was significantly cut). It is a boost, certainly not back to where they were, but any boost in this economy means that the company would seem to have a handle on revenue, costs, and margin expectations.

The question is how does their big brother Home Depot do, which reports tomorrow?

Lowe’s is seeing a slight pop in the pre-market.

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Futures Pre-market

The futures had been flat-to-down until the news of Berkshire and the reports of the LIBOR spread which seems to have boost the confidence in the banking / financial sector. Lowe’s is also helping. The spreads are in – expect ARB traders to short futures and buy the cash – giving a boost the market at the opening.

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Support / Resistance

INDU 8000 (8250) 8500 (We came off from 8500 to the 8250 level – which seems to be a pivot point. The futures are showing a good 100 point boost in the pre-market. Do we hold – it will depend on how solid the investment community feels about the news this morning.)

NDX 1300 (1350) 1400 (Like with the INDU – we seem to have had some profit taking and a little digesting of the recent run and economic news. The futures are showing a boost in the pre-market.)

SPX 880 / 900 (We are getting a boost in the futures to 890 in the pre-market. 880 is that 20 day moving average – that I keep hearing that has hold by the tech analyst. While NDX and RUT have not – there seems to be eyes on that level. Take it for what it is worth.)

RUT 475 (We we looking at a 480 opening, but it is that 475ish level that the broader market needs to hold to see some level of support.)

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Gold 900+ (We have moved into the 930 range – the question is do we break through 950?)

Silver 13+ (We keep bouncing up against 14 – we could break if we could also see gold get through 950)

OIL 55+ (We made a good run to 60, pulled back off, but now are heading back up. There is volatility in here – as the dollar value vs. oil demand is a push-me / pull-you.)

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Conclusion

We had a slight pull back – it was controlled and volatility did not spike – which clearly reflected there was no fear and that brought in some perceived buying opportunities. The news this morning is certainly confidence building in the financial sector – but it still doesn’t address the economic concern in the big picture. Lowe’s news was good as it seems the management is getting to grips with the slow-down and trimming the fat – however a 22% drop in profit is still a shocker, no matter how you cut it. The realization is that the past growth is probably not a realistic goal over the next couple of years and any growth is a good sign.

We are seeing a good pop in the futures at the pre-market, the question is – does the news maintain that optimism? That is the question – the economic vs. market still shows a disconnect as consumers struggle and we see contraction in the revenue. It is now about managing margins and coming to realization that revenue will continue to be down.