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October 30, 2006

Lack of Conviction

One would think... or perhaps from the standpoint of a bear, the correct word is "hope"... that after Friday's high-volume selling, the bears would be able to string together two consecutive down days in equities. Not so. It has now been a month since that feat was last witnessed... quite a testament to the strength of whatever is powering this market. The only modicum of encouragement that bears can squeeze from today's action was that equities weakened in the last hour of the session rather than zoom higher as has been the norm of more recent activity.

Perhaps stocks benefited from the 3% bashing suffered by oil. Taken in the context of linear thought, I can see how this would be beneficial to the master plan touted by bulls. However, some of them have to start to wonder if oil's pullback is not related to slowing demand as we enter a recession. Ever hear of lower earnings? If not, pick up your local electronic journal and read what happened to Wal-Mart today. The company missed what were already-lowered sales projections for October, and the shares got bashed for 2.5%. Back in July, WMT disappointed on earnings and blamed the shortfall on high gas prices. Now that gas prices are down 30%, they are blaming the shortfall on issues related to remodeling of their stores. I wonder... if Wal-Mart came out and that its shortfalls were due to slowing consumer demand, would the news still be company-specific?

Speaking of lower earnings, I encourage anyone with a continuing interest in home builder shares to have a read of an article published today on which describes how land writedowns will depress homebuilder earnings. Some well-respected fund managers were touting the homeys early this year because of their single-digit PE ratios. They were obviously ignoring the lessons of history which show that cyclical business tend to sell at their lowest PEs at the tops of cycles, not the bottoms. How attractive those shares would appear when earnings were cut in half or even fell below zero was a question posed here several times. I guess we're finding out.

With October wrapping up tomorrow, I don't expect any dramatic action. The tape painters will probably be putting the finishing touches on their latest work. If we were to see some weakness tomorrow, it would certainly be a red flag for bulls and an encouraging sign for bears.

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