Well, I am not sure if I should feel bad or not. I actually had this conversation on Friday with a reader as we watched the market plummet and break through the 50 day moving average. Frankly, I was a bit concerned with the GDP print on Thursday and the rally that followed. However, I stuck to my guns and held on to my shorts, actually added a bit more to them on a reversal bet that did not pan out. My whole premise is valuation, I place fair value of the S&P 500 at 875, but given how irrational the markets are I am not sure where I will cover.
I have been extremely vocal and honest about where and what I have been doing in the markets, especially when it bounced at the 1100 area. I also look for confirmation in the people I talk to and the articles I read, the more bullish people were the more skeptical I became. Especially with the lack of conviction we saw on the way up, there was no volume. Perhaps the lack of volume is part of the new normal, but that does not explain the crushing volume n the downside, as we saw Wednesday and Friday. Regardless, a long position in this market, in my opinion only, is dangerous.
There will be a bounce, I have no doubt about that, but no matter what news that went out on Friday, jobs or whatever, it did not save the market at all. I would have liked to see a close on the lows, but actually the close off of the lows tells me there is more to go. There are a couple of things that worry me, being short of course, that is a stronger than expected ISM number, but given the mixed Beige book reports I will be shocked to see a number above consensus. Frankly, I am in the camp of David Rosenberg and think we have seen the highs of the ISM for the year and a number lower than 52 will be devastating to equities, perhaps 300 points on the Dow, but who knows for sure. However an upside surprise may provide a bounce in equities.
If we do get that upside surprise I do not think it will be a very strong move or last very long and would be a very good time to close long positions, in my opinion. I do not think earnings are sustainable, I do not see how 500K a week initial claims are good news nor do I see how creating more debt to encourage more spending is going to get us out of this problem we have. I think some of the more sobering news that was a big deal on Friday was the Citi rumor where they are said to have more write downs against earnings, if they have any, and Citi never outright denied the rumor. If this is true, we are talking about 10% of the company’s capital requirements, that’s a major problem. Furthermore, if Citi has this problem, does BoA or Wells?
Regardless, this is a sobering reminder that these problems are still with us and have not gone anywhere. Not only that, but all of these banks must start moving their offshore accounts onto their balance sheets, that is a huge issue. As I have said many times before, it is a year later and nothing has really changed except for trillions in liquidity and government spending, big deal. The underlying problems are alive and well and may rear their ugly head at anytime.
I believe last week’s move was the beginning of something larger and the volume confirms that. A further move next week, especially below 1020 of the S&P 500 will fully confirm that this is a correction. Then the question will be, was the last 6 months a bull trap? Is there an actual recovery happening at all? Since we use the market as a barometer, which is ridiculous, this mean we are going into another recession? It will be extremely interesting to see all the bulls on CNBC and the other networks explain their way out of this one. Especially of I am right and all of my price targets are hit, man where is Dennis when I need him? He owes me an apology.
Well, last week was the breaking point in the equity markets and there is no denying that. The GDP figures were cooked to say the least and shows that the economy, unfortunately, cannot survive on its own without massive government intervention. It also proves, to me at least, that there will be, I place a 70% probability on it, that there will be another stimulus plan by the end of 1Q10. In the upcoming week we have massive data coming out, but there are a few data points I am waiting for, the ISM report on Monday and the employment reports, ADP on Wednesday, the initial claims on Thursday and the employment report Friday. However, there are tons of other data points also being released that you should pay attention to and look beyond the headline numbers on.
On the absurd side of the reports last week was the Whitehouse’s attempt to tell us that is wasteful $787B stimulus package was working and “saved or created” 650K or 1M jobs. First, there is no way to quantify a saved job and any economist worth their salt will verify that as a factual statement. Second, they said the $283B or so tax benefit, the most painful joke of the stimulus bill, helped create more jobs because it lessened the tax burden of working Americans. How an additional $20, and I am being generous with the $20 figure, a week tax savings is saving or creating jobs is beyond me, but hey the government has its own mathematical formulas to suit its own purposes. What is so painful about that portion of the stimulus is that you need to have a job to reap the benefits of that tax savings or wait until you file, unless I do not understand the language of the bill and I am not a CPA.
I can see how bailing out GM and Chrysler would have quantifiable results in the “saving” jobs category, but outside of that there is simply no way to tell. Then we have reports coming in from the Associated Press, not FOX News mind you, that the creation of jobs figures is double counted or just false figures. Considering the last report released just a couple of weeks ago showed such different results I find it way to convenient that this report shows such stellar results, not that our government would ever be aggressive with their math figures. The other reality is that if 1M jobs were saved or created how in the world can we be shedding 530K jobs a week still?
That means we are in far worse shape than we are being told, which sounds about right to me. Not only that, but look at all the consumer sentiment numbers coming in that all show jobs are tough to find and getting harder to find. The picture is not improving and considering a 3.5% GDP print and all the rosy talk from Biden, Obama and their economists this thing, whatever we are calling it now, is over. However, if it is over and things are better, why are the people saying I can’t get work? Because it is not over and, in fact, it is getting worse at least on the jobs side of the picture which does not bode well for the economy itself.
There is so much uncertainty out there that personal spending decreased, according to the report of Friday, and disposable income is way down, according to the GDP report. Those are two key pieces of data that were completely ignored by the media, except for the spending report of Friday. All you heard about in the GDP report was how great it was and that if you subtract government stimulus we still had growth. Well, wait a minute, if you look at the consumer side of the equation and how incomes and disposable incomes are down that is very forward looking and not good. In fact, GDP is review mirror looking, but the consumer income portion is forward looking, that is why CNBC and the rest of the media ignored it. It is because there is trouble ahead, big trouble.
Corporate earnings were a factor of international growth, which may continue, but it was also a factor of a weaker currency as well. Now we are seeing a stronger dollar, so what does that mean for Intel’s earnings next quarter? I am willing to bet they will meet their EPS, but miss on their revenue if the dollar steams ahead in value, which it will if I get my continued correction I see coming. I am not picking on Intel, I love their product, but I am using them as an example as they grew their international business and their US sales dropped last quarter and they had favorable FX results, like many other firms. This could be a problem moving forward in the tech area, especially if our products get more expensive overseas.
Looking ahead to next week, Thursday’s employment report is going to be interesting, to say the least. We have had another month of straight 500K a week initial claims, but estimates say that last month only 190K will actually be unemployed, which is a joke of course and Breifing.com estimates 235k for this figure. What is important to look at is the revised figure for last month, the U-6 number and what games the BLS has played with the birth/death model, which is a guesstimate that a certain percentage of terminated workers will start their own businesses. That birth/death model has been busy this year and last year adding hundreds of thousands of phantom jobs to the report, so many in fact that the BLS quietly will add an additional 825K to all of the 2009 unemployment numbers in February of 2010, nice right? Be sure to come back here to see what they add in after the number is given and I will be more than happy to share how many phantom jobs are added to this month’s report.
My point is that with 500K+ a week filing for initial claims, that’s 2M a people a month, and over 50% of consumers saying that finding a job is very hard and the average time to find a job is 6 months how can we only have 200K a month actually be unemployed? It is not possible and unrealistic. If this was the case we would have no need for extended unemployment benefits or emergency claims along with, there is a pending bill now in the Senate, another measure to extend benefits to about 2 years for unemployment benefits. There is no conspiracy or anything of that nature happening, they are doing it right in front of you, but they just burry the numbers in the reports which is why you need to look at the U-6 report on Thursday because that will show you what the real unemployment number is. It is definitely not 9.8 or 10%, it is a lot higher.
So, if you want to believe that 1M jobs were saved or created, believe it, hey my kids believe Santa and the tooth fairy still so there is nothing wrong with a little belief in magically creation. However, we all have to grow up and unfortunately we all learn that there is no Santa or fairy that leaves money under our pillow, we would all be toothless, and reality sets in. I know that we all have hope that President Obama will live up to his Hope and Change campaign promises, but it has been a year and guess what? There has been no change and my hope for change was killed the day he brought Larry Summers back into the Whitehouse. I saw this movie before and it did not end well the first time and I am sure the sequel will end even worse.
Tonight was a special night with a large bank holding company failing which caused 9 banks to fail across various states. Essentially it counts as a total of 9 individual failures bringing the total US bank failures up to 115. It is insane to believe that the FDIC’s additional $45B in emergency banking fee levies, which we will ultimately pay for, will be enough to cover all the failures this year and into 2010.
US Bank acquired the failed institutions, unfortunately only the grand totals were given as the assets were not broken out by the bank itself, here is tonight’s list:
Bank
State
Deposits
Assets
North Houston Bank
TX
N/A
N/A
Madisonville State Bank
TX
N/A
N/A
Citizens National Bank
TX
N/A
N/A
Park National Bank
IL
N/A
N/A
Pacific National Bank
CA
N/A
N/A
California National Bank
CA
N/A
N/A
San Diego National Bank
CA
N/A
N/A
Community Bank of Lemont
IL
N/A
N/A
Total
9 Closures
$19.4B
$15.4B
FDIC estimated losses:
Estimated Immediate Losses
$2.5B
Loss-share Agreement
$14.4B
Total Estimated Losses
$16.9B
With anymore Friday’s like this I would expect to see more special levies in the very near future. I am surprised there was not another special YouTube video from Sheila tonight telling us everything is just fine in the banking industry.
You must think I got killed today with my short positions? Yes, but not really. Most of my puts were bought at much higher levels and I have a lot of time on my side. I did, however, get clobbered on an intraday bet on a turn around. I know, it was a 3.5% GDP print, am I nuts? Nope, because I looked at the numbers and did not like what I saw, did you look at the report or wait for Steve Leisman to read the selected items for you?
Yes, it is a very boring read, most important documents are, but that means you should really read it. The vast majority of the “growth” was government spending or incentive that is not good. Consider this, Cash for clunkers, the $4,500 credit, costs us $23,000 by the time we actually pay for it, nice. How about the $8,000 tax credit? That costs us $40,000 by the time we pay for it. By the way, when I say “we” pay for it I mean the taxpayer, you and I, because the government is broke and issuing debt to pay for all of this junk. Better yet, most of the mortgages written are FHA so it is a double whammy when those mortgages default, fantastic!
I know, don’t let the facts get in the way of a great story. How about that initial jobless claims report this AM? Wait, you did not hear about that because of the 3.5% GDP print? Funny, because the number was another 530K, that is not the sign of a healthy economy and the whole employment is a lagging indicator is a bunch of bull. Let me ask you this, what got us here, mortgage defaults right? They defaulted because they couldn’t afford the payments on the house, regardless of why, but now that problem is worse because folks are unemployed. This was a credit collapse, not an inventory recession, that is a huge difference, I know Michelle on CNBC doesn’t get it, I expect that from her, but not from you, you know better.
Dig deeper in the report, near the bottom and you will see data that is not friendly to the bull’s case. Did you here this at any point today:
“Disposable personal income decreased $20.4 billion (0.7 percent)in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent)in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.”
I did not think so, but that is bad, bad news. If disposable income is declining how will people buy their iPods and iPhones let alone buy those expensive Christmas gifts. Disposable income means excess spending which drives growth and if that is gone then the companies that will do well are those that sell toothpaste and toilet paper. The economy is turning to a needs based economy instead of a wants based economy, which is fine and where we should have been 8 years ago.
Then we have things like this that are in the final parts of the report:
“Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second.
Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second. The quarterly pattern of taxes reflected a much smaller decrease in federal
withheld income taxes in the third quarter, based on the quarterly pattern of wages and salaries and a leveling off of the effects on withholding rates from the Making Work Pay Credit provision of the American Recovery and Reinvestment Act of 2009.”
Personally, I do not see much of anything good here, do you? Income decreased which shows layoffs and people making less money, that’s great, I guess because stocks went up 200 points today. As a sign of a strong labor market, which will surely show monthly job losses of 200+ next Thursday, taxes increased a tiny little bit. This is the bulls signal for a recovery, right here, a $4.5B tax withholding increase in the 3Q09 preliminary GDP report. Let us not forget that GM and Chrysler brought back tons of workers, just in time for cash for clunkers, which probably is why this number went up.
Now, I also hear a lot about software and things of that nature were all positive and that had nothing to do with stimulus, wanna bet? My daughter, in 4th grade, has 6, count them, 6 new laptops in her class, in every class in her school. My kindergartner has 4 computers in her class, 4. All brand new IBM’s, sorry, Lenovo’s and all complements of President Obama. So, do you really want to tell me that all those numbers were not government induced because I am pretty sure they were.
I will not even comment on the Goldman last minute revision of their GDP estimate yesterday, but wow, I would love to see their long positions at the close yesterday. We also need to remember a couple of things. First, this is a preliminary number and will be revised, probably down. Second, the 4Q09 number will not be as good as you think because all the Beige Books so far look pretty bad, but the ISM on Monday, I think its Monday at least, will confirm this. Finally, valuation, the market is in the nose bleed section and it doesn’t matter if you believe me or not, but for the love of Pete do your homework before committing money to this thing.
This stunning statement came across the close of CNBC from Tyler Methison who apparently quickly polled strategists after the close today for confirmation. How this is not the beginning of a correction is beyond me as this week’s trading has been nothing but negative, unless you are short the market of course, however this is the stance CNBC is taking. I am afraid much like 2007 and early 2008 it will take much more for the bulls to believe that the market is overheated and ready to come back to reality.
What is causing the pullback? Pick your poison. The technical’s, today the S&P smashed through its 50 day moving average, compliments of Mark, and the transports have been signaling trouble for about a week now. There is the weak consumer confidence which suddenly sank yesterday and, frankly, should have sent the market far into the red. Then there is the weak top line earnings which I have been warning about since the second quarter as the consumer is dead broke and credit is contracting at a 15% annual rate, you cannot have an economic expansion without credit creation. Finally, there is the dollar, my personal favorite indicator lately, which has gained some strength lately which is drawing money out of equities.
Goldman Sachs was also no help today as they announced they are trimming their 3Q09 GDP estimates from 3% to 2.7%, which is really not surprising given a weak consumer. This may have been the ultimate trigger considering stocks have priced in a V shaped recovery with a strong GDP number built in. As a matter of fact, not only did the market price in a +3% GDP for the third quarter, but I have a feeling it priced in a much stronger 4Q09 and 1Q10 GDP figure as well, which is kind of crazy since may retailers are starting to warn about weaker holiday sales. Wal-Mart now has some 100 toys priced at $10 or less compared to last year at only 10 or so toys prices at $10 or less, that is Wal-Mart entering a price war, but with who exactly, The Dollar Store?
Under Armour also, in a roundabout way, warned its 4Q numbers were going to be weaker than expected. This is the shopping season and these are popular products warning that sales are going to be weak during the holidays. If this doesn’t tip you off that the recession is not over I don’t know what will. I realize that employed economists who do not leave their ivory towers much and place way too much emphasis on government transfers think the recession is over, but if they talk to real people perhaps they would realize that data points are more than just data points, they are people and they are hurting.
Some 500K a week initial jobless claims is not good news, it is horrible news and bad for the economy. Cost cutting means nothing if you are firing the very people who you depend on to buy the products you sell. That is exactly what is going on and why unemployment is a leading indicator of our problems. As long as economists are unwilling to listen to that basic fact and try to get you to believe in a jobless recovery, which is a myth I might add, then nothing will get solved.
The markets could get much, much worse in the near future, especially if unemployment or GDP numbers are slightly worse than expected. If the numbers are better than expected we will have a bounce, but I would not expect it to last very long. Traders are getting tougher to please as they are expecting more because they were told everything is better and as they see things progress in the opposite direction they will take the market lower. Yes, I am a bear and I am short, but you already knew that or should have known that as I made no secret about it and I tried to give everyone fair warning.
Disclaimer: I currently hold SPY Jan 2010 100 puts, SPY March 2010 90 puts, SPY June 2010 89 puts, SDS, SKF
Be the First to Comment 
Subscribe to Annuity IQ's Feed
