Low Quality Names Provide a Weak Foundation for a Continuing Rally

The fact that low quality financials are dominating the volume on the NYSE is not a good sign.  On Monday and Tuesday of this week four financial companies generated 40% of the volume on the NYSE.  They were Citigroup, Bank of America, Fannie Mae and Freddie Mac.  The rationale for the doubling of the prices for all four of these financials off of their 2009 lows and the high volume is that these are entities, which are heavily supported by the U.S. government. 

Comment:  Government support and involvement is an absurd reason for making an investment.  That three of the four volume leaders on the NYSE are trading at under $10.00 per share speaks volumes for fact that the current stock market and the major indices is being driven by speculators and not investors.  Given such a weak foundation the major indices are ripe for a significant sell off.

Williams Sonoma (WSM) surprised Wall Street by reporting lower than expected losses.  Shares were up 10% yesterday even though revenue was down 18%. 

WSM is a member of the Home Furnishing Industry.  The industry currently consists of nine companies.  WSM and Bed Bath and Beyond (BBBY) are the two biggest by market cap, revenue and profits.  The industry and its two blue chips were born during the Super Bull, which began in 1982 and ended in 2007.  WSM went public in 1983 and BBBY went public in 1992.  The industry benefited greatly from the housing bubble as consumers flocked to industry stores to outfit the new homes.  The industry’s revenue numbers have been abysmal over the last two plus years.  The rate of decline of the industry’s annualized revenue has increased for the last nine consecutive quarters and hit an all time low with a decline of over 11% in the most recent quarter.  Seven of the industry’s nine members had declining revenue over their latest 12 months.  BBBY, the industry’s leader only grew its revenue at a 1.5% clip over its latest 12 months.  

Comment: The odds of Home Furnishing Industry and its two blue chips of getting back to their glory days are very low.  Its an industry that is likely to be severely effected by the deflationary pressures which the U.S. and global economies are facing.  Retiring baby boomers, who are now saving with a vengeance, are very unlikely to replace home furnishings.

The bottom line is that both WSM and BBBY are products of the long 20+ year bull market and the housing bubble.  I fully expect that shares of both companies will lag the rest of the market and that these two companies have had their last hurrah.  I predict that the shares of both will not be able to exceed their all time highs of $46.99 and $45.14 respectively for a number of years if ever.  Avoid the shares of both.

For more information on the bear market and why certain industries and companies will emerge that will lead the next bull market go to www.bearmarketnavigator.com