Joe-Duarte.com - Market Intelligence, Daily Market Winners

Dallas, TX
March 31, 2009, 08:00 EST

Dr. Joe Duarte's Market I.Q.

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Intelligence, Market Timing, And Trading Strategy For Traders and Investors

Wine Futures: The Latest Derivative Crash

What's Hot Today:

U.S. stock futures were pointing to a higher opening. Overnight markets were mixed. Oil and gold were lower.

Today's Economic Calendar:

7:45 a.m. ICSC Chain Store Sales Index For Mar 28: Previous: -0.4%.
8:55 a.m. Redbook Retail Sales Index For Mar 28: Previous: -0.2%.
9:00 a.m. Jan S&P/Case-Shiller Home Price Index: Previous: -19.2%.
9:45 a.m. Mar Chicago PMI: Expected: 34.5. Previous: 34.2.
10:00 a.m. Mar Conference Board Consumer Confidence: Expected: 27.7. Previous: 25.
4:30 p.m. API Oil Industry Report For Mar 27
5:00 p.m. ABC/Wash Post Consumer Conf For Mar 28: Previous: -49.

News For Thought

Detroit: Hard feelings on assembly line. The Obama decision with regard to GM got a bit of a thumbs down on Monday. According to AP: "Many assembly line autoworkers reacted with skepticism and anger Monday to the Obama administration's tough tactics, which stoked long-simmering feelings that the people who put the country on wheels get treated differently than the wizards of Wall Street." According to the report: 'Many workers -- not generally known for their affection toward executives -- even sympathized with Rick Wagoner, who was forced to step down as chief executive of General Motors Corp. He was by turns called a "sacrificial lamb," "scapegoat" and "fall guy."'

Health care turbulence lies ahead for elderly. The Obama administration has unveiled a new list of rules aimed at cutting costs in the government's Medicare spending. The measures are targeting the Medicare Advantage program established by president Bush.

According to The Wall Street Journal: "The changes, announced Monday by the Centers for Medicare and Medicaid Services, the federal agency that manages Medicare, are part of conditions that insurance companies must meet if they want to bid on Medicare insurance business this year." According to admiistration officials, the changes "are intended to weed out certain out-of-pocket costs charged by Medicare Advantage, the private version of the federal health-insurance program for the elderly. Medicare Advantage plans, they said, will face more government scrutiny if they don't cap a patient's annual out-of-pocket costs at $3,400 or less, or if they charge patients more than traditional Medicare does for dialysis, home health care and other services. If the government deems the charges too high, insurers will be asked to scale them back."

To be sure, health care costs, especially for the elderly are out of control. And the poor do take a large part of the punishment associated with the costs.

Yet, if history serves as a predictor of the future, what is likely to happen is that insurance plans will begin to cut coverage to patients and reimbursement to physicians, hospitals, and other service providers.

This, in turn, will lead to fewer physicians and providers to participate in Medicare or other health plans that will cover care for the elderly.

Already, one health insurer, Aetna, has sent out a new fee schedule effective in July that will cut reimbursement significantly. This is likely to be a significant issue by the summer.

Wine Futures: The Latest Derivative Crash

Little Left in Which To Drown Sorrows

Some investors had been thumbing their noses at the stock market by investing in wine futures. But even that derivative market has collapsed, leaving yet another group of inexperienced investors holding the bag, but also potentially causing problems for yet another sensitive sector of the economy in parts of Europe and elsewhere.

A good friend, a few months ago, was bragging to us about how much money he was making by trading wine futures. But, the last time we mentioned the topic, he quickly changed the subject. And he's not alone. According to The New York Times, the annual wine tasters and wine futures trading party in Bordeaux, France could be a sobering affair this year as "connoisseurs have gathered every spring since the early 1970s for the tastings, known as the “campagne primeur,” or futures campaign. But never have they done it in the midst of so deep a recession, after so frothy a market."

Yes, it's time to worry if your portfolio has hinged on the vagaries of the pallate, at least as it applies to wines as the wine bubble is set to burst. According to The Times: "The “en primeur,” or wine futures, system works to the advantage of the wine-producing chateaus, providing them with cash for part of their product while it is still in the barrel; investors and consumers have the chance to buy wine at prices that have the potential to rise substantially."

For one thing, this market is set to return to fundamentals, which means that as it once did, good wine will actually cost more than not so good wine, something "that seemed to change after an exceptional 2005 sent prices spiraling upward. The vintages of 2006 and 2007 were merely average, but prices did not fall, kept aloft by a surplus of nouveaux riches big spenders." You bet, the excesses that preceded the bursting of the housing bubble had spread to the wine market, and now are deflating it just as well.

In fact, the wine market is now a microcosm of the rest of the investment world as "many of the speculators who drove prices to extraordinary levels have disappeared, or turned from buyers to sellers as they try to raise cash to cover their overleveraged bets. And the bankers and traders who thought nothing of spending hundreds of dollars on a bottle are now worrying about losing their bonuses, if not their jobs."

So, a stark reality has set in for a community that may not have been expecting such drastic changes as "some overseas buyers have decided to skip the tastings this year, complaining that top chateaus will not accept that in a market this weak, prices must fall. Some of the smaller merchants whose livelihoods depend on selling the wine, including some of the Bordeaux middlemen known as négociants, are said to be at risk of failing."

But the chateaus don't seem to understand market forces. According to one expert, quoted in The Times, "the gap between the pricing expectations of wine merchants and the chateaus over what was expected to be a decent, though not great, vintage was the biggest he had seen in two decades," so he's not sending a team to the annual gathering. Another expert, echoed the sentiment noting "he did not expect to be able to sell the new wine at a profit without substantial price cuts."

Here's a fact to get your arms around as you sip some Ripple or Boone's Farm: "Prices for the best wines from around the world rose in tandem with the financial bubble, with both institutional fund managers and home-based Internet traders getting into the act. The London International Vintners Exchange’s 100 index, which tracks trading in 100 fine wines, mostly red Bordeaux, nearly tripled in dollar terms from February 2005 to August 2008. The index has lost about 43 percent of its value since then."

Conclusion

We can be a bit tongue in cheek about this story. But one fact is clear. All markets will correct toward their means once excesses reach the tipping point. And the wine futures market is no different.

Yet, the parallels to housing are both stark as well as indicative of how bubbles develop and eventually burst.

Once a niche market, real estate became the province of the masses, with home flippers being egged on by television shows which touted the potential riches available in the marketplace.

Now, reality has set in for the wine market, once the stomping ground of the elite. The real question, though, is what's next?

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Technical Summary:

Chart Courtesy of StockCharts.com

Time To Reset

The S & P 500 closed below 800 but remained above 780 on a closing basis. That means that the up trend has not been totally broken yet. Of course that still leaves anyone who has to trade with nothing to do but wait for things to settle down.

Still is looking tired, and it's best to stand aside until the current situation resolves.

Also remember this, despite the recent rally, by strict definition, we are still in a bear market, and our primary trend remains down.

780-800 is still important support. We are long on our SPY model and our small cap model.

Keep positions small. Keep an eye on your sell stops. Otherwise, as we have noted multiple times of late, there is still no reason to be aggressive in this market. Lots of cash on hand remains the best strategy. Aggressive traders could short the market, but should be ready to cover quickly.

Chart Courtesy of StockCharts.com

Market Moves - Stock Of The Day

One Way To Change The Dow Jones Industrial Average (DJI) Is To Remove General Motors (NYSE: GM)

What would happen if the Dow Jones Industrial Average (DJI) replaced General Motors (NYSE: GM)?

Chart Courtesy of StockCharts.com

It's hard to predict, of course, as much depends on what company replaced the once venerable name. Lots of names get thrown around, such as Apple, Cisco, and even Pepsico. But, one thing is clear, it's something that has to be on the minds of the Dow Jones guys that put together the indices.

But, there is a lot to consider before making the choice. After all, you want a company that is big enough to fit in with the rest of the giants. And you also want a stock that is not so volatile that by itself can influence the entire index when events that affect it lead to big moves.

Some have talked about Google as a replacement. But, it's volatility and the fact that it's always in the news make it an unlikely candidate. Some oil and oil service companies, such as Schlumberger and Conoco Phillips have also been thrown around as possible replacements, according to some sources.

At this point, no one really knows which company it will be. But as talk of bankruptcy for GM rises, it's fairly clear that at some point the stock will be gone from the Dow Jones Industrial Average.

So, returning to our original question. What would happen if GM gets removed from the Dow? Psychology would likely change, certainly at GM, one of the most American of companies, which would essentially cease to formally exist as a blue chip. Beyond that, it's anyone's guess, as more dominoes would likely fall.

These are interesting times indeed.

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