Stocks Up Strong

Once again, early strength for stocks yesterday quickly turned to weakness. There is a battle going on between the bears and the bulls. Despite all time lows for consumer sentiment, there is a growing number of analysts and market strategists who believe a rally is at hand. 
We’ve been seeing signs of a rally for a couple weeks now. That’s why I recommended taking a few positions in select stocks.

Upside for Stocks?

The late rally Friday left stocks up for the day and provided some evidence that we may have seen a short term low. It would be good to see some follow through today, though it will be something of a victory if the lows for the S&P 500 hold at 666. 

SXC Health Solutions Crushes Earnings

Stocks didn’t exactly finish higher yesterday. In fact, they gave back all of Wednesday’s gains, and then some. But now, in a particularly ironic move, stocks appear to be ready to move back to the upside after the unemployment rate is reported to have risen to 8.1%. 
Of course, we know why stocks would rally under these seemingly negative circumstances….
Investors know unemployment is rising. Fed Chief Bernanke has called for the unemployment rate to peak somewhere in the 9% range during this recession. At 8.1%, we’re almost there.

USO, X, NUE, SXCI and China Stimulus

Finally. A positive start for stocks finally finished that way. We’ve seen several rally attempts fizzle over the last couple of weeks. Once the S&P 500 hit 700, a lot of traders were looking for some upside. Let’s hope it sticks. 
Wednesday’s rally could have been stronger, though you can’t really be surprised that investors aren’t jumping head first back in the stock market. Volume appears to have been solid, but not outstanding. 
The most encouraging aspect to Wednesday’s rally was leadership. We got leadership from technology and oil. If investors are buying in anticipation of an economic recovery, then oil necessarily must trade higher. Because any uptick in economic activity means increased demand for oil.  
And with OPEC production cuts taking hold and recent reserve draw-downs, the oil market has to be tight. 

Obama the Stock Analyst

As much time as Fed Chief Bernanke spends before Congress, it’s amazing he gets any work done.   I have to say, I’m starting to like Bernanke. His forthright talk is certainly a refreshing change from Greenspan’s garbled speech. Yesterday, he expressed his feelings about all the bailouts.

Nationalization = Communism?

It is a strange sight to see the Dow Industrials trading at 6,700. That’s still a level from 1997. And it still indicates that people don’t want to own stocks. At this point, it seems to be as much about available capital for investment as a willingness to invest. 
Valuations are low, the Dow is trading with a p/e of around 20. But that’s still not as low as it’s been during past recessions.

A Caveman Could do It

Warren Buffett’s annual report for Berkshire Hathaway was released over the weekend. His letter to his shareholders is one of the most widely read investment documents there is. Buffett’s down home charm, inviting sense of humor and investment savvy are always a great read. 
Perhaps the biggest surprise was that the net asset value of Berkshire Hathaway dropped by $11.5 billion. Buffett was not immune to the market’s drop. Despite well-publicized investments in General Electric (NYSE:GE) and Goldman Sachs (NYSE:GS) that are down considerably, the lion’s share of balance sheet loss has come from derivatives, what Buffett has called “financial weapons of mass destruction.” 

GDP Surprise? C’mon!

Last month, Q4 2008 GDP was expected to show a 3.8% annualized drop. Economists were expecting the actual number to be -5.4%. But GDP came in worse than that this morning. The U.S. economy shrink at a 6.2% annualized rate between October and December, 2008. That’s the worst performance in 25 years. 
Stocks fell sharply on the opening, partly in response to the news. But should it be that big of a surprise?
After all, we’ve known that the fourth quarter was bad – that’s why the S&P 500 is trading at 1997 levels. Is there any reason to have been hopeful that maybe it wasn’t so bad? 
Don’t be surprised if buyers step in during today’s decline.

Anecdotal Evidence

Stocks finished lower yesterday after Obama’s speech. The lows were hit early in the day and stocks managed rally to positive territory before finishing slightly in the red. 
What to make of this? Not much, unfortunately. Ultimately, I think it was a reaction to Tuesday’s overzealous rally. Tuesday seemed to be about short-covering after the S&P 500 held above its November lows at 741. 
While Bernanke’s testimony before Congress on Monday was far more significant than any specifics Obama mentioned Wednesday night, neither event seems to be affecting stocks much. Except for HMO stocks. They’ve been killed this week as Obama is making a push for healthcare reform.

Bottarelli on LEAPS

In a minute, we’ll get to the interview with options trader Bryan Bottarelli. But first, I want to address Obama’s speech from last night. 
It seems pretty clear to me that Obama is proposing a re-structuring of the U.S. economy. Healthcare, education, and energy were specifically mentioned as areas where change is necessary. And I don’t think you can look at any of these areas and say that the current course is going to lead us where we want to be.
With healthcare, I have no problem with a doctor who is motivated by profits. I do have a problem paying exorbitant fees to HMOs to distribute care. With energy, I have no problem with OPEC countries getting as much per barrel of oil as they can. If we don’t like it, we can get moving on alternatives. 
Healthcare costs, gasoline and energy prices, even the housing bubble and the subsequent crash, act as silent taxes on Americans incomes. Much of our resources are wasted or not efficiently used. I’m all for changing that. But the ultimate questions are: Can it be done? And Can Obama do it? 
Thanks, and here’s Bryan Bottarelli…