You heard it here first

Posted by Ray on October 20, 2010 under Main | Be the First to Comment

John Carney at CNBC just put up a piece http://www.cnbc.com/id/39754650 which states: “This is a serious threat to financial stability. There’s no way Tim and Ben let this play out,” a senior banker told me, referring to Treasury Secretary Tim Geithner and Federal Reserve chair Ben Bernanke.

In short, Wall Street is betting that the bureaucrats will bail them out again.

I said this yesterday and these executives are right, banks will get bailed out again probably through QE. It is wrong and these banks have earned the right to fail, but the problem is that politicians do not have the will to help them this time. However, the Fed, which is proving itself so independent nowadays, will bail them out. As Zero Hedge reported PIMCO levered up on MBS and they know something, like $500B in QE coming directly to the MBS market, rumor has it. Again, QE will do nothing and while $500B is in the cards for MBS there is no word yet what the Fed will do with long dated treasuries… but they will buy them.

It finally happened

Posted by Ray on July 19, 2010 under Main | Be the First to Comment

Jim Cramer finally officially eliminated himself from any serious discussion about any economic issue, forever. I know, to many he eliminated himself a long time ago with his ludicrous housing is bottoming call a year ago, but for some reason he is still being hailed as some type of guru on CNBC. It is easy to do a hit piece on Cramer, I know, but this time he has gone a bit too far.

First, he claims he told people to sell last week before the big selloff on Friday, he did not on his Mad Money program. Second, he ran a piece tonight HERE, claiming he is giving you tomorrows headlines today, at 6 PM, what good is that, about the housing data tomorrow. Guess what he said? It is going to be bad. Really, no one had any idea since the data has been horrible for how long now? Not to mention everyone is expecting the data to be bad so even I am not convinced it will be the catalyst it should be. Regardless, the insanity doesn’t end there, it gets better.

He claims he gets his information from the home builders who sell thousands of homes and have been extremely negative on housing versus economists who own only one home. He goes on to say how overly optimistic economists are and so forth which is not shocking to anyone since they have all overestimated the economic data we have seen recently and, frankly, he had also overestimated the data as well. Basically, he is jumping on the bandwagon which means the data is probably going to be better than we all think to begin with because Cramer is the freaking kiss of death for everything, seriously, he is. But it gets even better!

Cramer goes on to say that the poor housing data doesn’t mean anything because it is such a small part of GDP. He said; “Housing, he added, is not a big percentage of the economy and said executives who have appeared on Mad Money have moved “well past” housing as the drivers of their earnings.” WHAT!? OK, housing is not a big part of the economy, sure, I guess that depends on exactly how you define housing. Sales or residential investment account for about 5% of GDP, but I would hardly call that inconsequential. However, it is the services that go into housing that is the driver of GDP growth, like appliances, materials, jobs, etc. which account for about 12-13% of total GDP. That is a combined total of 17 to 18% of GDP that is impacted by the housing market being in the tank, conservatively, according to the NAHB. That is not inconsequential to the economy and that is something that companies cannot just “move past” in their earnings cycle.

The reason housing is such a big deal is because it touches so many parts of the economy and when housing falters so does the broader economy, obviously. To discount weak housing data from the overall economy or to not know how big housing is within the overall economy is incredulous. This matters because this impacts people’s lives, especially when construction workers are one of the largest segment of the workforce unemployed right now, and shows that this person has no business talking about broader economic issues. I respect the fund manager and he has one hell of a track record, but as a macro guy or a guy putting the pieces together to figure out what the economy looks like he is officially, totally, disqualified now. His horrible housing call a year ago combined with not knowing how important or big housing is today proves it.

Forget the ‘dark cross’

Posted by Ray on July 18, 2010 under Economy, Markets | Be the First to Comment

Much has been made about the death cross of late, the 50 day moving average crossing through the 200 day moving average, although I think and know it is a significant event it is nothing compared to something else I have noticed. We are all aware of the primary reason of the bull run over the past 12 months, massively oversold markets, combined with marginally better economic data and, most importantly, a weakening dollar. Why the dollar weakened is important to note, quantitative easing via the Federal Reserve’s asset purchases or the printing of money. Although we will not know the long-term implications of QE for some time to come it is safe to assume it accomplished its goal, weaken the dollar and boost the economic data through negative interest rates, essentially.

We all know the market action of late, a horrendous selloff which was only a surprise to the parade of bulls on CNBC and those who kept their heads buried in the sand, but those out in the real world knew it was coming. What was unexpected was the 4^th of July rally that took us back up some 7% on the backdrop of pretty bad economic data. Some of the bounce was because of a technical bounce and some of it was because of the expectations of stronger earnings which started last week. I fully expected 2Q10 earnings to be good, but I expected to see more top line misses and the outlook from CEO’s to be downgraded as well. So far, it is a mixed bag, but the outlook or guidance remains very bullish for many firms, however, a look back through prior earning announcements, particularly 2000 releases, as Mark forwarded to me, shows that Intel did not foresee a slowdown there either, so trust the economic data rather than CEO guidance going forward.

Back to what is going on in the equities market and why the dark cross is less important than the other ‘grey swan’ that is going on. First, everyone and their grandmother knows or knew about the dark cross, not that it takes away from its importance, but when everyone knows about it very rarely does the market deliver the results we are looking for. Except the market kind of did deliver, but stopped short and rallied all the way back to some important moving averages where it failed to break through, very bearish from my lens. At the same time we saw the selloff begin the dollar was moving towards the 89 mark on the DXY, but it stalled after a dramatic breakout and reversed course. Not only did the DXY reverse course, but it got crushed moving down from 89ish to about 82.5, not an insignificant move.

Exhibit 1-1 2 Month DXY Chart

Why is this a big deal? It is a big deal because stocks went up on a weak dollar trend which meant a better environment for U.S. companies to sell products abroad. Basically, a weaker dollar is better for U.S. exports and sales as we become more competitive in the world. It made sense for the markets to not like the move of the DXY from the low 70’s to 89, but to not like the move from 89 to 82.5, well, I am perplexed. The market should love this and we should be flying to at least 1,100 on the S&P 500, but we are not. This is a huge warning sign that stocks cannot rally on a weak dollar and it means more than the dark cross.

Exhibit 1-2 1 Year S&P 500 and DXY

The charts show the trends pretty clearly, lower dollar higher equity prices, higher dollar, lower equity prices, but over the past couple of months things have been out of whack. What else is going on during this time period? Treasury yields are collapsing to historic lows. We have the 2 year treasury under .60%, the 10 year under 3% and the 30 year under 4% which is a sign of 2 things, risk aversion and fear of deflation. My belief is deflation is the clear danger as of right now, it is fairly evident from my lens and the market is pricing it in as we speak. The credit markets have been pricing it in for some time and will continue to, I am bullish on debt securities, have been for some time now, but the equities markets, well, it has not priced in any real deflationary pressure at all.

Exhibit 1-3 Yield Curve

Granted, we have not seen total deflation yet, just the beginning sign of it, but the evidence is pointing towards it. Here is the rub, everyone says the Fed will do QE2, but they won’t do it. See my other posts as to why they will not do it, but from my lens they would be insane to even attempt QE2 at this point. The problems in the U.S. economy has nothing to do with what is happening in Europe, a little I suppose, but not directly related. My past posts about Europe relate directly to actual defaults by countries and to corporate earnings. I think anyone will find it hard to believe that the Jones’s are not buying that new car because they are worried about Hungary being kicked out of the IMF-EU rescue package. They are not buying a car because they are worried about their job and do not want to take on much debt or because their credit score is so lousy they cannot get financing, 25% of Americans have a credit score below 600 now. Instead the Jones’s are paying off debt and buying what they need, not what they want which is deflationary.

This trend will continue and so far only the credit markets are pricing this in, the equity markets are in La-La Land, still. The DXY – S&P cross is very bearish if the trend continues and will mean a big correction in the near future especially if commodities head lower as well. Commodities are not performing well and that is reflected in the Baltic Dry Index and combine that in with the above information and it is putting the explanation point on the whole theory. So far the only strategist I know for sure who is putting all of these pieces together, and has been ridiculed relentlessly by the bulls on CNBC and such, is David Rosenberg. All of the rest of the strategists are telling you to buy the dips even when they see everything I presented to you, they know what it means and, to top it off, they know the ECRI is rolling over and housing is going down the tubes. It is incredible to say the least. Be ready for some fireworks soon unless this trend breaks.

What works in a deflationary environment? Income and dividends, pure and simple. I like (and own) the following: CTL, MO, PM, WM, PFE, MRK, LLY, BPT, RYU, PEY, INB, DNH, CGO, VZ, high quality corporate bonds, strategic income bond funds, emerging market debt funds (PCY has been good to me), short and intermediate term treasury funds. Many of the above mentioned stocks have underperformed, which I like, and pay very nice dividend yields, which I love, but may not do well in an inflationary environment. This is why one has to hedge with precious metals or, at the very least, TIPS.

Bizzaro land continues

Posted by Ray on July 15, 2010 under Main | Be the First to Comment

Mark Haines: “Higher taxes creates more jobs.” No, I am not making this up, he really said this and he is basing this on 18 years of history from the Clinton years to the Bush years. I am not exactly sure when Mark went off his rocker, but he definitely hit his head, hard, when he landed. I have never heard such stuff in my entire life and it makes no sense. Let me explain.

Did Clinton raise taxes? Yes, he did. Did jobs increase? Yes they did. However, when did jobs increase? Not until after 1994, the Republican Revolution and some of Clinton’s tax policies were reversed, like his huge tax hike on the retired, the largest in history I might add. It is also important to note that this is when the internet came into everyday life and altered the business model of U.S. corporations and created a “new economy” which turned out to be horse poop, there is never a new or old economy, and there is merely an economy. However, the internet did improve efficiency, pricing and competition which create growth. All of this combined with dirt cheap oil led to the greatest economic expansion we have ever had, there is no question about that.

However, comparing the 1990’s to the 2000’s is crazy. It is the same thing as comparing the roaring 1920’s to the 1930’s, there is just no way you can make the comparison in an honest fashion and say there is any correlation. In fact, taxes were low in the 1920’s and we had a similar expansion as the 1990’s and taxes were higher in the 1930’s and unemployment was through the roof, so according to Haines the opposite should have happened. Also, according to Haines, the 1970’s should have been boom years as well as taxes were way up, but if memory serves me correctly the 1970’s, besides the Bee Gee’s, ABBA and Marvin Gay, sucked.

I guess the mandate from corporate, GE, to make the current administration look awesome and push their policies, no matter what, really went to Mark Haines’s head and he took it literally. I guess if we can prove Stalin had economic growth through killing 20M of his fellow citizens that too would be a good enough policy to enact here as well? I am just wondering how far he would go with his whacky correlations since he is clearly left of center. Higher taxes means people will spend less in order to save for the future tax bill, I save more when I know I have taxes coming up, I mean, this is economics 101. Hell, this might be business law high school style it is so basic, but not in bizzaro world. In fact, I am wondering if the market would not shoot up 1,000 points, with no circuit breakers of course because it is an up day, on the news of a VAT and a marginal income tax rate of 95%.

I get it, everyone hates Bush, I don’t blame them, and everyone wants to blame a policy for our problems, but making stuff up isn’t the answer. Pulling correlations from two uncorrelated periods is not the answer. Personal ideology being interjected into what is supposed to be unbiased reporting is not the answer. Is there any wonder why NBC as a whole is in decline? Businesses will not higher if they do not know if their effective tax rate is going to be 15% or 50% next year or how much health care per employee will cost them. They will not hire if they think end demand will not be there because people, like me, are saving to pay those higher tax bills that are coming. This is basic business sense which is clearly lost on the, what is their motto, “The #1 Business Network?”

Retail sales figures, initial claims

Posted by Ray on July 8, 2010 under cnbc, Economy, Markets | Be the First to Comment

It is official, bad news is now permanently good news. I am not sure how this happened or why this happened, but this is the case as CNBC just confirmed that 454,000 initial claims were below expectations and continuing claims declined by 224,000. This sounds like great news until you realize that, well, continuing claims fell off because Congress did not reauthorize extended unemployment benefits, which has happened before I might add, and initial claims came in light because of the holiday week, just as I thought. Nevertheless, how we can be 3 years into this thing and think a print of -454,000 on initial claims with over $1T in stimulus spending is a good thing is disingenuous and, in all honesty idiotic. However, this is what we are being told by the talking heads, 454,000 initial claims are a good thing in the new normal.

One must trade the market that is in front of them regardless of what the data says, even though one knows the data smacks of a double dip or at least a massive slowdown at the least. Retail sales figures came in as well and if you were paying attention only the nice figures were making headlines, like JW Nordstrom +14.1% vs. 9% est. and Abercrombie +9% vs. 2.8% est., but these numbers were not encouraging as total expectations were for retail sales to come in at 3.2% and they came in at 2.8%. The really sad news is that these numbers were reduced in recent weeks because analysts knew the figures would be weak and the stores had pretty good sales as well. Consumers just are not buying the way they were used to and I know the argument is going to be, well this is June and the numbers are always weak in June. Sure, I will give you that, but the analysts know this and adjust accordingly and, more importantly, the chains know this and run deeper discounts to drive traffic. Look what happened, not very encouraging.

The discounters were even a mixed bag, Target missed estimates by 1% to the downside, Kohl’s missed by .5% to the downside, TJX missed by 1.2% to the downside, BJ’s Wholesale was off by 1.2%, the Gap was off by 3.4% and Costco was off 2.6%. I guess the bright spot was the high end retailer who had some solid numbers, Macy’s beat by .4%, Saks beat by .5%, Nordstrom’s beat by 4.5%, the Limited beat by 2.8% and Dillard’s, not really high end, but throwing it in, beat by 3%. This is a pretty big disparity between the discounters and the higher end retailers which raises the question of why the difference is so large.

The answer is pretty simple, first the wealthy shoppers are still wealthy and are more than likely taking advantage of deeper discounts at the high end stores. Don’t kid yourself, the high end retailers are cutting prices to drive traffic, everyone is including Walmart. Second, the discounters customers who were relying on their unemployment benefits had the rug pulled out from under them in some cases or knew it was coming so they cut back even more. The wealthy shopper can spend more and the less wealthy are still tightening their belts and this trend will continue for the foreseeable future.

Overall, this was one month of data, but the trend is on track, frugality. Same store sales did disappoint and I am a little surprised, actually I am not, that no one is mentioning the overall miss of .4% (overall expectations of 3.2% versus actual of 2.8%). Instead expect to hear about Nordstrom’s all day long today as the beacon of light in the retail world as the consumer comes flooding back to the stores as if they don’t have a care in the world. Even though some 454,000 just got their pink slip last week before our nations fabled birthday, for the record, last week’s claims were revised UP to 475K and the 2 week total for Americans receiving their pink slips were 929,000. So, congratulations all you lucky people, the world is turning around because apparently you being fired is great news for the economy, or just Wall Street. We officially live in Bizarro World now.