Recap of the 2009’s Final Week of Trading 

The concluding week of the trading year for 2009 acted in a methodology similar to what it has undertaken in the past several trading weeks for the end of the year.  The major indices held to the notion of minor movements, which have been characteristic during the final weeks of 2009, as noted in my previous reports.  Using the figures from the beginning of last week’s trading session until its close, the S&P 500 virtually remained flat losing only an inconsequential 12.43 points.  The DJIA and the NASDAQ did provide a notable move to the backside, each posting roughly a 1% loss.  

However, for the two five day trading sessions proceeding the prior week, movements within the U.S. stock markets are worth acknowledgement.  Due to the holiday season, PFG’s marketplace outlooks for 2010, and comprehensive roundtable discourses with other analysts surrounding the possible movements within the various commodity sectors, I was unable to provide insight on the progressions/regressions of the U.S. indices.  

Hence, I will briefly recap these moves using December 11^th’s closing prices to the beginning of the trading week for the 28^th of December as the developments within two of the indices should be made light of.  The DJIA was the only of the three indices that stalled at making any type of noticeable advancement barely picking up just under a half of a percent.  However, prominent gains were incurred by the other two major indices where the S&P picked up a fine 2% increase while the explosive NASDAQ gained a significant upward thrust of nearly 5%.  Many would attribute the expansions of the two latter indices to the year-end “Santa Claus Effect.”

Banks Continue to Keep Credit Tight, While Airlines Further Increase Already Taut Security Measures 

As a result of the credit crisis our nation is still current tackling, the majority of companies and individuals that are able to obtain loans are those with the most upstanding of credit.  The fear of default is still lingering in the minds and reserves of the banks that provided loans to those entities and citizens that had less than superb credit ratings.  With the lending markets being as tight as they still are, it is still my opinion that a true economic recovery for our nation will not occur until the banking system begins to provide the necessary financing to spur the growth and development of the U.S.  

Unemployment will remain relatively high until the financial institutions of our country begin to lend funds to the small business of our nation so they may expand while new ones can become a reality.  As mentioned in one of my previous writings, the small firms of the U.S. account for approximately two thirds of the American workforce under normal economic conditions.  Until the U.S. can get the necessary funds to the minor organizations of the nation, it will be extremely difficult for America to sustain a true recovery from our current recession. 

As depicted in the preceding section, a holiday rally for the S&P and NASDAQ helped propel these two major U.S. markets to the upside in a two week period.  However, the “Santa Claus Effect” was accompanied with a serious repercussion as on Christmas day our nation was confronted with the threat of a second victorious terrorist attack presumably linked to the notorious al-Qaeda.  As most Americans are aware a young 23 year old, Umar Farouk Abdulmutallab, successfully got through airport security in Amsterdam and boarded a flight to Detroit, Michigan with a bomb containing the explosive pentaerythritol.  His attempt to detonate the device was thwarted by both the passengers and crew on the flight as the aircraft neared Detroit’s airport. 

The terroristic plight undertaken by Abdulmutallab, on his flight to Michigan, heightened the fear of another terror assault via al-Qaeda.  This terror has been permeating throughout America since the tragically historic event on September 11, 2001.  Although airport security was drastically amplified due to the event universally known in the U.S. as 9/11, the recent scare of a bomb getting by tight security measures and reaching a point where the explosive was nearly detonated has led to a call of action which would already stiffen a relatively stringent protective strategy.

How Does This Near Terroristic Attack Impact the Airline Industry and the Indices? 

As investors would surmise, the failed terror attempt on December 25 had a harmful effect on the airline industry in general.  Among the victims within the business was Delta, the target of the plot, which dropped from the date of the incident until the 30^th of December by 5.3%.  Additionally, American Airlines’ parent company, United Air, and Southwest each incurred loses of 5.7%, 4.7%, and 2.3%, respectively, within the same time period.  The foiled assault and subsequent downturn of the airline sector halted the industry which was on a current uptrend that was finely outperforming the returns of the indices. 

Now the airline business is seeking even more rigorous safeguards to prevent a near assault like this from becoming an issue once again.  Apparently, one of the key figures to spearhead this initiative is President Obama.  Obama addressed the nation stating that “this was a serious reminder of the dangers we face and of the nature of those who threaten our homeland.”  He continued on to clarify that “those who would slaughter innocent men, women and children must know that the U.S. will do more than to simply strengthen our defenses.”  One of the Obama Administrations immediate responses to the threat was to add federal air marshals to flights both leaving and arriving in the United States. 

Increased safety measures for the airline field may provide needed protection to those who fly via commercial airlines, but the added security may in fact hurt the profitability of the carriers.  Just as with any industry, any adverse effects brought upon it are likely to diminish revenues in some manner.  It has been less than a decade since the unforgettable day on September 11 that brought our nation to its knees as terror brought down two of the pinnacles of Wall Street, yet unified our country for the better against the potential risks of further foreign terror strikes.  The effects of that day still radiate through the souls of the citizens of the U.S. making the Christmas day bomb peril even a greater concern for our nation. 

Executives of airlines fear that the failed attempt, instigated supposedly by al-Qaeda, will not deter individuals from taking flight with their respective firms out of fear of another possible attempted attack.  Past terroristic events have proven that they have an insignificant force regarding domestic air plans.  Instead, officials in the industry seem more concerned that flight goers will bypass airline travel, especially at the international level, due to the intense and long measures that passengers will have to endure to merely board an aircraft.  This effect, which is a chief concern for the airlines, can only harm the numbers that would partake in air voyages in cases where flight is not an absolute necessity. 

It is indeed unfortunate that airline industry had a potential danger such as this at a time when the recession could possibly be plateauing and more individuals are willing to pay the higher price to fly.  For a prolonged period of time, high fuel prices coupled with the deep recession kept air travel at minimal levels in comparison to more stable economic environments.  

In fact, an increase in air travel was expected by many industry analysts. This brought about conclusions among many experts that the airlines of the U.S. could return to profitability in 2010.  Air carriers have faced massive loses of over $55 billion over the course of the past seven years.  Thus, their yearning to return to the positive side of the balance sheet is very great.  

The airlines were optimistic 2009 could possibly return them to profitability due to factors such as an increasing amount of air travel coupled with higher ticket prices.  Now with the effects that are permeating form the suppressed December 25 bomb incident, net profits for the top 10 airlines could fall as much as 10 to 20 percent according to the chief analyst of the research firm Airline Forecasts, Vaughn Cordle.  Unfortunately, now the revival of positive returns will likely be stalled for a longer period of time. 

As effects the unsuccessful terrorist attack will have on the markets, it should only be deemed as an isolated event that will inevitably hurt the airline industry, which in turn, propels the markets down.  I believe the effects of this incident will not have enough impact on the markets to cause any longstanding negative implications as the plot was thwarted, yet is still a topic of conversation to this day and will likely to be so for some time to come.  

If the assault should have had its desired effect, the impact on the U.S. indices would have been far greater.  9/11 is as a comparative event, yet rooted in a far grander scale.  Although the tragedy of 9/11 was far greater than what could have resulted from the spoiled bomb strategy, it is one of the closest occurrences of the impact a bombing of the Detroit bound flight could have had on the markets and, furthermore, 9/11 is extremely well known and renowned throughout the U.S.  

Although the magnitude of disaster caused by 9/11would have inevitably had a far greater impact than the success of the recent bomb threat, the impact that occurred on September 11, 2001 displaced the American marketplace for nearly a three year period.  Although the Detroit occurrence would not have the impact caused brought forth by al-Qaeda in 2001, it would likely cause a great tumble within the indices, especially given the current fragility of the U.S. economy.

Fundamental Reports & Discourses 

The calendar below denotes the pertinent reports and speeches that should have potential impacts on the movement of the indices for next week’s five day trading session.

Week of January 11 to January 15, 2010

(Source: Econoday.com)

Sentiment Analysis 

The final report from the CME Group for January 4, 2010 provides a put/call ratio of 1 (.999 to be exact.)  This is based upon the figures contained in the report that states there are currently 10,224 January puts open compared to 10,257 January calls.  This is purely a neutral standpoint in reference to market movement according to contrarian theory.  Although I have had several readings within many recent reports that were very near to being a neutral sentiment indication, this is the first time since providing contrarian analysis to traders and investors where a point of complete unbiased market direction has been attained by this widely recognized sentiment interpretation. 

The reading I calculated using December 14^th’s numbers was extremely close to being completely impartial coming in at .98.  Yet this number still had an extremely slight bullish stance to it.  I calculate sentiment analysis using the S&P 500 E-Mini since this derivative of the index is the most comprehensive gauge of the overall economy of the U.S.  

This indicator of investor sentiment has, thus far, proven to be very accurate in predicting the overall directional movement of the index.  The ratio has remained in a fairly neutral position for far more than a month now supporting its merit as a viable indicator of the direction the S&P 500 as it has tended to remain relatively stagnant in the long-term over the past several weeks.    

PFG*BEST Research Outlook 2010 

The market analysts of PFG*BEST distributed the annual PFG*BEST Research Outlook 2010 for the firm’s clientele this week.  Each analyst within PFG’s Research Division provides a commentary for the upcoming year on the market that he/she covers within the report.  If you would like to receive a complimentary copy of Outlook 2010, which provides a synopsis of what to expect within the various commodities markets, contact me and I will be glad to send you our comprehensive research outlook report for 2010.

Daily Trade Recommendations & A PFG*BEST Account 

Additionally, if you do not already have a full service account here at PFG and would like to use me as your strategist and/or broker, call or e-mail me via my information listed below.  There are no minimum requirements to open an account.  Furthermore, for trade recommendations on any of the indices & other commodities or to provide feedback regarding this report, please feel free to get in touch with me. 

James M. Gangloff, MBA
Senior Research Analyst / Stock Market Indices
Trading & Managed Futures Strategist
PFG*BEST
Toll Free:  800-275-8844
Direct:  312-563-8162
Fax:  312-563-8526
E-mail:  jgangloff@pfgbest.com