Today's Sneak Peak for September 02, 2008 - Excerpt from the Bedford's
Tradecraft Newsletter
I ended this
section Thursday by suggesting that I would not chase the rally under any
circumstances. It was not a huge deal. I have been unwilling to
chase any rally because I do not believe that the tape can continue higher
without a real push in financial issues. It's true, we have had that in
recent sessions. Indeed, those stocks managed to move higher Friday
despite the ongoing selling for the rest of the market. It is widely
believed that these stocks have been able to move higher due in large part because
a Korean sovereign wealth fund is said to be in the latter stages of an
investment in Lehman Brothers (LEH) that will see control of the investment bank
move to the Far East. I have suggested on several occasions that we need
to keep in mind that Bear Stearns was also the subject of a takeover bid.
The problem for common equity holders is that bid was about 80-percent below the
market price the day before. The truth is Lehman Brothers still has
negative equity and it's value to a Far East sovereign wealth fund is likely
more about name recognition and executive talent. There is no reason to
expect that any such firm will be willing to pay a substantial premium over the
current market price; indeed, we can expect just the opposite. All of that
said, Friday we did see a considerable decline in stock prices. Some will
suggest the weakness was all about the fact that hurricane Gustav was headed
toward the Gulf of Mexico and the many offshore oil rigs there and refiners on
the mainland. While there was probably some of that in the tape, I believe
it is fair to assume a more likely cause for the weakness was reality that
earnings are at risk as seemingly one firm after another makes note of the
weaker consumer demand. The latest in this line was Dell Computer
(DELL). Friday the firm missed the Wall Street consensus estimate by a
full five cents and had some rather dire words for the state of the current
economy and the upcoming quarter. We are likely to get much more of this in the
coming weeks as higher energy costs and falling home prices put a crimp in
consumer spending. Of course, there could be an initial rally Tuesday as traders
react favorably to the fact that hurricane Gustav did not do any major damage to
oil infrastructure but the trend for stock is lower. Eventually, that trend
will reassert. I'm still looking to sell strength and I expect that the
next major leg lower will be the result of weakness for investment and
commercial banks.
