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Kirk By Email

Many people ask me how best to stay on top of what I write here and there are several convenient ways: 1) you can bookmark the website, 2) you can subscribe to my RSS feed, and 3) you can sign up to receive my free weekly newsletter. I'll be sending out this week's edition tonight!

Pollyannaish

The dictionary defines pollyannaish as "irrepressible optimism" and a "tendency to find good in everything." It is also a perfect description of the market's collective mood.

For weeks now the bulls had been counting on two things: 1) very good earnings reports and, 2) the end of the Fed's campaign to raise interest rates. Both were delivered last week. Or at least it appears that way.

First, earnings have been coming in well above expectations. As of Friday, almost 70% of companies have reported better than expected reports. In addition, earnings in total have showed better than expected growth leading everyone to think the economy hasn't slowed down nearly as previously believed. While the outlooks of the companies I follow were tilting toward more conservative guidance, it seems like investors are assuming that corporate America is still playing the "under promise & over deliver" earnings game.

Second, the combination of dovish Fedspeak along with the release of the minutes from the March 10 FOMC policy committee was interpreted as a clear sign that the Fed is prepared to end it's tightening cycle. While the "data dependent" language remained, the market clearly wants to "find the good" in what the Fed has said. Those few of us who actually took time to read the FOMC minutes may have noticed chatter from the Fed about a possible housing market decline and concern over consumer spending. I suppose we shouldn't worry about those things yet, but it is once again a classic sign that investors care about only the headlines and only if they confirm their bullish bias.

For the week, we had nice gains across the board. The Russell 2000 was +2.8%, Dow +1.9%, S&P +1.7%, and Nasdaq +0.7%. These gains further built upon the very respectable returns across the board. Year-to-date the Russell 2000 is up +14.7%, Nasdaq +6.2%, Dow +5.9%, and the S&P 500 +5.0%.

From my perspective, it is clear that the majority believes the economy will stay strong, if not get stronger in the second half of 2006. Yet, escalating oil prices, higher interest rates, and in turn slower consumer spending do threaten that outlook. For now, I think there would be more concern over oil prices, but frankly in Wall Street's perspective, I think there is growing doubt of the sustainability of those prices. Based on what I'm reading and hearing, there is optimism that the recent surge in energy prices won't be sustained and that when they fall back the equity market will begin it's next move higher. At least that is the hope.

In addition, investors continue to gravitate toward the same sectors for their investment capital believing that no matter what happens on the economic front that they'll be able to benefit from the massive bull markets still residing there. Nevertheless, quick profit-taking in precious metals on Thursday should be seen as a fire across the bow that some turbulent times are ahead for these overbought sectors. As the saying goes, if everyone is thinking the same thing (i.e. buy precious metals, energy & tech stocks), then everyone is not thinking.

Bull markets can certainly last for much longer than everyone thinks is possible and there's absolutely no requirement for the market to be rational at all times. Oil prices and geopolitical concerns should be weighing more heavily on the market's mood, but they simply aren't. The bulls feel like were in a can't lose environment and frankly until that changes, they remain in complete control.

The most healthy thing the market can do now is to broaden itself out, for the over heated areas of the market to see pullbacks, and for the lagging sectors of the market to see much more interest from investors. We saw small signs of that rotation last week, and I think we're going to hopefully see much more of that in the weeks to come. No matter what, it should be very interesting to watch and to hopefully profit from in the days to come. (Copied from my free weekly newsletter.)

A Boiled Frog

Given the amount of feedback I've received about last weekend's free newsletter, I thought I'd republish it again here in case you missed it. Enjoy!

Earnings season began last week and, while investors were mostly pleased with the reports, continued fears over higher interest rates, energy prices and heightened geopolitical concerns surrounding Iran still stole the spotlight.

Even in the face of these concerns, the bulls weren't ready to completely close up shop. After all, hope is alive and well that we're about to see another strong earnings season and that stock prices will follow.

The bulls' confidence is easy to understand. No matter what bad news seems to come in focus, it is easily and quickly ignored. The game plan, as it has been for awhile now, is to stick with the safety sectors (i.e. precious metals, energy, tech, materials, commodities) and you'll be just fine. In fact, given the returns investors have seen in these groups, they've been able to manage more than just "fine" returns year-to-date.

The problem is that the best laid plans often go awry.

Just when everyone is convinced that these same sectors don't have any downside risk is usually when the market proves otherwise. Usually a healthy market will find a way to force strong rotation from hot and overvalued areas of the market to more undervalued areas, but we've seen little evidence of that kind of movement. For now, everyone is shooting at the same ducks, which certainly raises the bar of risk when conditions and perceptions about those same stocks and sectors will inevitably change.

As for earnings season, I personally have little doubt that we're going to see some very good earnings reports ahead. After all, with energy and precious metal prices soaring, how could you not make money in either of those two sectors? Any company that doesn't produce big profits in these areas should be looked at closely for short sell opportunities.

Needless to say, Mr. Market has always been and will always be a forward looking animal. It really doesn't matter how good earnings have been, but how they're going to be in the next few quarters. I think investors know that economic growth is slowing, but they still have hope that the Fed is almost done and that we're currently in and will remain in a so-called goldilocks economy. The problem is that the combination of energy prices, inflation, and higher interest rates has created a boiled frog situation.

They say that if you put a frog into a pot of boiling water, it will leap out right away to escape the danger. But, if you put a frog in a kettle that is filled with water that is cool and pleasant, and then you gradually heat the kettle until it starts boiling, the frog will not become aware of the threat until it is too late.

Higher interest rates, energy prices, and inflationary foes have started to boil the water that figuratively surrounds our economy. And, like the frog, because we've not seen any major change in our current economic surroundings, the vast majority of us don't think there is any present danger. Even worse, many are absolutely convinced that they can not only survive the proverbial "boil" but profit from it as long as they own the right stocks.

I know that it has been a while since we've seen a large scale correction, but that shouldn't allow us to let our guard down so easily. Although I still think there are opportunities to be found out there, please remember the lessons of the past. The market's uncanny ability to find a way to frustrate and surprise the majority should be respected at all times. Particularly when everyone is so focused on all of the same stocks in the same sectors.

Vacation Time for Wall Street

The big boys and girls on Wall Street were on vacation last week. Trading volumes that came in at the lowest of the year clearly indicate that the majority of power brokers remain absent from the stock market. Nevertheless, the bulls apparently don't need any of their help.

At the end of the week, the market managed to produce another gain. For the week just passed, the Dow was up 0.8%, the S&P 500 gained 0.9%, the Nasdaq climbed 1.3%, and the Russell 2000 improved 0.7%.

The combination of continued short covering as well as the falling price of oil helped equities stay firmly in the green. Sentiment surveys now show that investors are currently the most bearish they've been all year long. How ironic is it that as these surveys come out that the market finds a way to move higher? Leave it to Mr. Market to again find a way to disappoint the herd of investors.

With no terrorism at the Olympics, the price of oil in a swift decline, and end of the month portfolio dressing in play, the market has been in an easy position for stocks to climb. In addition, with the Republican convention coming next week, Wall Street will have another reason to feel good again when Bush looks like a winner, as all candidates usually do during their political conventions.

While there will always be fear over terrorism, especially since so many on Wall Street will be personally affected by convention, I believe if the week can move by successfully it will provide yet another reason for portfolio managers to put money to work with that big bad event behind them. Wall Street currently fears the worst from the week ahead and if the trend continues with the Olympics, having it behind us will be a good thing for the market.

That being said, there are some fairly important roadblocks just ahead. We have to be on the lookout for the same-store sales for August, Intel's mid-quarter update, and the August employment report next week. Along with falling oil prices, we need some positive economic data which has been clearly absent of late. All of these will be market moving data points, so we'll have to keep them at the top of the trading radar.

Have a profitable week!

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Happy Easter

The major market indices ended the holiday-shortened week lower despite generally good news on both the earnings and economic front. The Dow closed down -0.3%, both the Nasdaq and S&P 500 fell -0.2%, and the hardest hit was the Russell 2000 which fell -0.9%.

Despite a very strong start last Monday and the week before, the market was not able to build on those gains last week for a variety of reasons. The primary factors that helped put the market in a defensive mode include being severely overbought, growing problems in Iraq which are seen as a negative for Bush, rising oil prices, and fear over interest rate increases. In addition, sentiment surveys show that despite the correction that began in late January, investor optimism for stocks and the market have returned quickly back to their all-time highs.

To be sure, it is easy to see why so many are bullish given the good news on the economic and earnings front. Despite negative surprises from Nokia (NOK) and Alcoa (AA), the Q1 earnings season was off to a very good start. Not only did Yahoo! (YHOO) report a great first quarter, quite a few firms excited investors with their reports. Most notably, General Electric (GE), Genentech (DNA), and Research In Motion (RIMM) all surpassed their respective consensus estimates. In addition, Dell (DELL), Black & Decker (BDK), Cummins (CMI), and Cigna (CI) raised their revenue and/or earnings guidance.

Another positive catalyst last week were additional confirmations that the U.S. consumer remains alive and well and continues to spend cash at a furious pace. Same-store sales updates from national retail chains Wal-Mart (WMT) and others show that sales are good and that consumers are spending their tax refunds, as the market anticipated. However, the preliminary reaction to these reports are still being met with some skepticism. While retail has been hot lately, there is a growing consensus that much of the good news has already been priced in and that comparisons will be more difficult in the latter half of the year. We shall see if that view is correct in time.

On the economic front, both the ISM Services Index and the weekly initial claims report were both better than expected. The ISM indicated further expansion on the services side of the economy while the initial claims report provided additional confirmation that the employment situation is improving. In addition, The Conference Board’s business confidence survey of more than 100 CEOs from a variety of industries indicated that more than half of the chief executives anticipate an increase in hiring for the rest of 2004. As further confirmation of those expectations, office vacancies declined in the first quarter for the first time in three years as companies added to their payrolls.

In response to this good economic news, many economists continue to bump up the date in which they believe interest rates will increase. At the current time the market believes an increase is coming in August. Nevertheless, if these economic reports continue the latest trend, an interest rate increase could easily come when the Fed meets again in April.

Next week will be all about international news concerning Iraq, earnings reports, Friday's option expiration, and of course, taxes which are due this Thursday. In addition, traders will closely watch the CPI which is due out Wednesday. Most currently expect to see another month of moderate increases in the consumer prices, but a spike here will force the Fed to act sooner rather than later. A benign number will do a lot of good for the market, so expect this one to be a major market mover.

Generally speaking, we should see more of the same as we saw last week in the week ahead. I expect we'll continue to see a hit or miss market as investors reward those companies which blow out expectations and trash those which do not. Earnings will continue to be the primary focus of everyone's attention and as long as the news is positive, the market should be able to move modestly higher. The key to success in the short-term is to own shares of those companies which will reward investors once earnings are released (i.e. Yahoo) and to avoid those which will not (i.e. Nokia). This is much easier said than done, so a bit of caution is duly warranted unless you're confident in the stocks you currently own.

As always, I'm here to help you succeed. Make sure you visit The Kirk Report daily for my latest thoughts and analysis. And, if you enjoy my efforts, please take time to tell someone about The Kirk Report. Have a very happy Easter!

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Are More Stock Market Gains Ahead?

Both the weather and the stock market are starting to show signs of a glorious Spring and the bulls reasserted their control over the market. The Dow and the S&P 500 ended the week up 2.5% and 3.0%, respectively. The Nasdaq was up an amazing 5.0% and posted its best week since May 2003. It was also the best overall week for the three indices since last fall.

So, what were the catalysts? In sum, the combination of strong money inflows, intense covering by short sellers, strong economic and earnings preannouncements, a reshuffling of the Dow, and end-of-the-quarter window dressing by portfolio managers. In addition, Congress agreed on a pension measure that would save employers billions of dollars in payments for the next two years while lawmakers alter the pension system. And if that wasn't enough, the Senate also passed a long-delayed bill to strengthen oversight of Fannie Mae.

Still, the focus of last week was all about jobs. As I said in last week's newsletter, there is was a high expectation that we would see a strong jobs report on Friday. Even though I didn't share that opinion, the bulls still acted on the expectation throughout the week and especially on Friday once the good news was delivered. To be sure, the jobs data is good news if you blindly look at the number and believe the data used to create the report. As many of you already know, I have zero confidence in government-produced economic reports. That is true especially in election years as the data seems to hold more interest in the voting public. And, if you think the jobs report suggests big stock market gains to come, you may want to look at some history. Although few people noted this last Friday, the very last time we saw such a big jobs
number was back in April 2000.

In my view, the jobs report did overshadow some important headlines that should not be quickly ignored. For example, the Financial Accounting Standards Board issued a long-awaited proposal to require all companies to deduct the cost of stock options from profits, starting next year. While a bill in Congress promises to defeat the proposal, if it were to be passed, many tech companies would have severe earnings shortfalls in the future. Also, the OPEC cartel said it will cut oil production by one million barrels a day, or 4%, in April. While the market was not pleased, it mostly ignored the issue after Saudi Arabia said it wouldn't allow oil shortages that would "harm world economic growth." If you believe OPEC is telling the truth, then you're probably in the same camp that believes every economic report produced by the government is not self-serving but entirely reliable and trustworthy.

So, with the strong start of April underway and the bulls back in charge, can we expect more gains in the near-term? My view is that it is certainly quite possible, but I wouldn't bet the farm or moved back 100% long. Even though the sheer demand versus supply dynamics are such that the bulls have control, most of the good news is already overly anticipated by market participants. If the market really believes that jobs are improving, as I said last Friday, then higher interest rates cannot be far behind. That alone creates a significant challenge for the market and despite arguments to the contrary, investors have not yet priced in that possibility. That is why I continue to be very cautious and will remain so, despite the fact that we may continue to rally on.

To profit in the short-term, traders must be acutely aware of the market rotations that will likely continue in the wake of last week's jobs report. We should continue to see significant rotation out of the homebuilders, utilities, drugs, financials, and also retail. On the other hand, commodity plays, employment services, and tech stocks should stay strong. The very fact the Nasdaq was up 5% last week despite a severe blowup by Qlogic (QLGC) shows where the money is going in a big way.

Turning to the week ahead, next week is basically very quiet on the economics front. The focus will be the beginning of earnings season as we have a number of notable companies that will start the ball rolling which include Research in Motion (RIMM), Yahoo (YHOO), Abbott Labs (ABT), Alcoa (AA), Genentech (DNA), General Electric (GE), and Rite Aid (RAD). Still, most of the action will be from the preannouncements and companies will be quick to disclose any good news ahead of the earnings releases.

As always, I'm here to help you succeed. Make sure you visit The Kirk Report daily for my latest thoughts and analysis. And, if you enjoy my efforts, please take time to tell someone about The Kirk Report.

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