If you just got worried…

Posted by Ray on July 21, 2010 under Main | Be the First to Comment

If you are just getting worried now about the economy over what Ben Bernanke said about the economy in today’s testimony I have to ask, where have you been? Did you not read the Fed minutes when they came out? Have you not read any of the economic indicators that have been showing we are heading for a slowdown? How about IBM’s cautious warning or other firms who are being cautious about the immediate future?

My point is simple, the data is fairly clear, a slowdown is coming, period. Double dip? Probably, but we will not know for some time now. However, it is likely we are facing severe challenges moving forward and Ben is scared, he is out of ammo and he knows it. Everyone is speculating and asking what he is going to do to spur the economy ‘if’ it weakens which is an absurd question because it is weakening and what is Ben doing? Nothing, why? Because he can’t.

Sure, he can stop paying interest on bank reserves, but banks will not lend because they are impaired still, he admitted that today. Plus, banks will just turn around and buy treasuries because lending is just too risky right now which is why banks are not lending, on top of their balance sheets being loaded with debts marked to make believe. Everyone also believes quantitative easing is on the way, but it is not. I have said this many times before and will say it again, QE accomplished its goal, lowered mortgage rates, treasury rates and the dollar. I ask, what direction are mortgage rates, treasuries and the dollar headed? We are out of the “liquidity” crisis part of our issues and are into the nobody wants to buy anything part of the problem, QE will not solve that problem.

Earnings season is a dud, period. I know, Apple, Apple, big deal they have the hottest products out right now and you expected them to fail or something? The question you have to ask yourself id this, what can Apple do next? They clearly had to push the iPhone 4 out and the iPad is something they really did not want to do, they were forced into it because they were told to by the geek squads. What product do they have next up their sleeve? Nothing so you better hope a whole lot of people want to keep buying an iPhone that doesn’t really work as the title implies. Outside of Apple we had a couple of other standouts in the earnings department, but more misses than anyone wants to admit. There were lots of revenue misses which means cost cutting worked, but poor sales are still poor sales. The Fed cannot stop that people.

If you were not nervous before you should be nervous now, but I have no idea why you were not nervous before. All the speeches or all the rigged stress tests in the world will not change the facts, the economy on a global scale, is slowing down. Even China says that Europe’s problems are creating big problems, like I forecasted previously, for their exports. How much do you want to bet that the Yuan strengthens further? I do not believe China is slowing down as much on purpose as much as China is just slowing down, but time will tell there. The real question is, if China does slow significantly more than forecasted what happens to the rest of the world? Answer, it isn’t good.

Too late to go short?

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

The market has had a spectacular run lately, both up and down, which has been fantastic if you are a trader, but not if you are a long-term investor. Odds are that if you are a long-term investor you should be in bonds or cash anyhow at this stage of the game as the data clearly shows that equities are about to, or should be at least, take a rather large decline. The bulls have no data to stand on, zero, and the bears have all the evidence in the world including the Federal Reserve telling us that there is little to be excited about and what meager recovery we do have will take years to play out. How that could be interpreted as bullish is beyond me, but I am sure someone will read it that way. As for those waiting for quantitative easing part 2, keep waiting because it is not going to happen unless something different happens, like higher rates or a much stronger dollar.

What data am I pointing to? Pick a data series. The ECRI has been my favorite lately since it has never thrown off a head fake in the -10 range, we are at -9.8 now. Unemployment is also a favorite of mine, where is it getting better? Initial claims are stuck at 450,000+ per week, last week was a gift of seasonal adjustment, that will work itself out in the next couple of weeks. The employment reports are terrible and even the JOLT report was bad. I will say employment has stabilized kind of like how the Titanic stabilized when it finally hit the bottom of the ocean, but I fear there is a ravine close by and we are sitting very close to that edge, look for downside surprises in the employment reports. Housing is DOA and that is certainly not going to change, as I write this the Home Builder Confidence came in at a disheartening 14, need I remind you above 50 is considered positive? Tomorrow we are facing more housing data that is more than likely going to be worse than expected. Face it, there is little data in the bull’s camp except the data can’t get much worse or can it?

On the earnings front, well, we certainly had some great numbers last week, but what about this week? IBM missed on the revenue component and guided down by a couple of cents, no big deal, but big enough to emphasis a slowing in the second half. Texas Instruments met expectations, revenues were mildly light, but considering it is usually easy to beat estimates by a penny or two they couldn’t. Zions Bank, the fabled regional banks that were going to go gang busters this quarter, came in way below estimates, ($.84) vs. est. ($.54) and were light on the revenue side as well. Worse, on the top they said credit was improving, but they are setting aside more for credit losses and their charge offs increased between 1Q and 2Q10, how that is an improvement is beyond me, and we are talking about banks that get to carry loans at make believe values. Even Tupperware missed when people are spending less and eating leftovers! As I write many of these companies are trading lower off between 3 and 6%, not good news for the S&P futures.

Of course, we have a whole slew of earnings this week, a couple hundred companies, so why make big deal over these few firms. Oh, wait, they are IBM, Texas Instruments and Zions Bank, pretty big and respected companies that are leaders in their respective fields. Could earnings improve? Yes. Will they? I honestly do not know because, frankly and like it or not, earnings have been a mixed bag this quarter, but I also think earnings do not matter right now. The macro data is overwhelmingly bad and considering CEO’s do not want to repeat 2009 with negative warnings it is unlikely they will give negative guidance. I do not blame the CEO’s since they were punished relentlessly by the likes of Cramer in 2009 for not being positive enough and even today you only see CEO’s that give the most optimistic forecasts given air time on the TV. It is also or should be widely known that CEO’s are terrible at giving accurate forecasts, look at 2000 earnings releases and see what kind of guidance CEO’s gave back then. Clearly they did not see the slowdown coming when people like myself saw it a mile away, the same may hold true today.

So, is it too late to get short this market? Maybe, it depends on what happens tomorrow. My forecast is for the S&P 500 to initially drop to the 960-980 area where it will rebound, I obviously have no idea when it will happen or how long it will take. After it rebounds I believe it will drop to 860 so there is plenty of time to get short, depending how you plan on shorting it. If you are using options you have to be careful and trade them. If you are using leveraged ETF’s I think there is a lot of danger in holding them, but unleveraged ETF’s, like SH (I own SH), is safer to hold. I believe the best time to get short was 100 points ago, obviously, but last week was a great opportunity as well. Tomorrow, Tuesday, everyone is going to be looking to get short so you will pay a premium to jump on the bandwagon and will be assuming more risk than reward in the short-term.

What is interesting is that the rally, the whippy 7% gain, was a 61.8% retracement from the lowest closing low, 101ish on the SPY. It goes to show that the rally in itself was nothing more than a technical bounce and was rejected when it tried to go higher. That, to me, confirms that there is much more room on the downside than there is on the upside right now. Yes, stocks can move higher depending if ‘something’ happens like a stress test that was designed to not fail actually impresses people, but I actually believe that is irrelevant at this point. Europe is not the cause of our problems, we are as the data is all U.S. data that shows we are if not in another recession/depression certainly going to slow down significantly. I am short so I do not have to worry about working in new positions, I hope you were short as well. (I own various SPY put options, SDS, SH, TZA, BGZ, TYP)

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.

I was wrong on the employment report, but right

Posted by Ray on July 5, 2010 under Economy, Markets | Be the First to Comment

I was wrong on the numbers on the employment report, kind of, take out the temporary hires and birth/death adjustments and I was very much right. Contrary to popular belief, the birth/death adjustments do matter as those adjustments are responsible for underestimating unemployment by 880,000 people last year and, in my opinion, that rate is probably way underestimated at that. Even Dave Rosenberg lambasted the birth/death adjustment as “fantasy” which means I am not alone in my thinking. Regardless, that employment report was clearly not priced into the market and was very bad news.

We had wages drop and the work week shrink which is very deflationary to say the least. I also believe that the full impact of the Gulf oil leak has not made the rolls either yet which means more bad news ahead. There is also the ban on offshore drilling making its way through the court system which could have some profound implications in the Gulf region adding thousands to the if not temporary unemployed at least the medium term unemployed area of the report. The icing on the cake was the initial claims report of Thursday which came in much higher than anticipated at 472,000 which is not good at all.

Mix that in with the ECRI slipping further and I am comfortable with the double dip scenario, if we were ever really out of the recession to begin with. I am hard pressed to believe any of this is priced into the market even after this massive slide we have seen in equity prices. From my point of view the equity markets had some 4% GDP priced in and flawless earnings with endless positive guidance. So far we have seen some firms pre-warn about a slowdown in the economy and their earnings. This means some of this is priced into equities, but not a 1% GDP print or a negative print which is possible at this rate. Housing is telling us that we have serious problems and the slide in all the housing data means that a full fifth of the economy is in negative territory. We also see that hiring in the manufacturing area, which was giving economists a sense of comfort, is slowing down dramatically. Can we all say this together please, inventory rebuild, but that is now over.

There is simply no end demand for products at this point which is not good. I had called this a depression last fall and received tremendous heat for using that term, but make no mistake about it, this is a depression. Unemployment is telling us that it is a depression and we are, as history seems to be repeating itself, looking at acts that mimic what we did pre-1929 crash, Smoot-Hawley, now called Schumer-Graham for the currency manipulator tariff act. None of this is priced into the equity markets which mean we will have much to worry about on the downside. Be sure, there will be sharp rallies, but you should not buy the dips on this one. I sold everything except for biotech, high yielding stocks with strong balance sheets, high grade bonds, treasuries and I own a tiny position in high yield bonds, I sold 80% at the end of 1Q after the stellar performance. I hold large short positions, which is relatively unchanged from the end of 1Q except I rolled put options out until September and began building a position in some leveraged and unleveraged short ETF’s, TZA, SH, SDS, BGZ to name a few, some I will hold and some I trade.

I expect a rally up to the 104-105 area in the SPY which should prove to be a nice entry point into a short position, if you are aggressive and believe growth will be weak as I do. However, I believe tomorrow we open lower since we could not hold $102.50 on Friday in the SPY, but we should reverse up since everyone is so negative. Depending on what happens, everything always depends, I will more than likely cover my shorts tomorrow and play the long side for that rally and reenter my short positions at higher levels. Volatility is your friend, but we are dominated by certain carry trades, news events and other macro items that one needs to monitor so be careful and don’t just trust the charts, look at everything to make your decisions. My target for the S&P is still at least 900, but it can go as low as 860 and retest the March 2009 lows without any problem whatsoever. I am not even sure quantitative easing can fix this problem since treasury yields are heading lower already. We are in a very bad position and there are no more bullets left from the government. This could get very, very bad.

Well, what do you know?

Posted by Ray on June 30, 2010 under Economy, Markets | Be the First to Comment

Apparently it is now fashionable to be bearish since the S&P’s smashing, as in breaking below the 1040 level and 1035 for that matter, performance over the past few days. I hate to break it to everyone, but the time to be bearish was at 1120 and when the VIX was at 15, now, well, be bearish, but be careful. Those looking to jump on the short wagon might find themselves over paying for their positions and they might get squeezed out in the next few days. Don’t get me wrong, my S&P 500 target price is still 900, but I fully expect a retest of the 1040 mark in the very near term.

How bad is the economy?

Anyone even questioning how bad the economy is has their eyes closed and their head stuck in the sand. All the data is rolling over, look at the Chicago PMI today which came in at 59.1, sure, it met expectations, but it is down from where it was and is establishing a declining trend. The leading indicators are down and probably going to look horrible in the near future. I am sure initial claims will still be well over 450K tomorrow, oh, the ADP data stank to high heaven today as well so forget about an upside surprise on Friday. There is some housing data out tomorrow morning and I am sure it will not be good, it is May contract data, but never fear because Congress is attaching an extension of the home buyers tax credit to the unemployment extension, fantastic!

In short, things are much better than, say, September 2008, but things are not good and we are heading for either a double dip or very slow growth in the second half of this year. Treasury yields are telling us we got serious problems ahead and deflation, sound familiar yet, is an immediate threat. However, remember that inflation will come on very fast at some point in the future, you will never see it coming. The good news was that the ECB lending news was not as bad as I was expecting, but let’s face it, the news is still not good in Europe and the risks are very high. Spain may be downgraded, it will be very soon, which I am sure is surprising and people are wondering why such a fiscally sound country be downgraded?

The only thing I am surprised about is the U.S. and the U.K. still have the ‘AAA’ ratings after their drunken stupor of a spending spree, with much more to come before the majority is kicked out in November. After all, once your vote is cast and they lose their jobs what do they care if you dislike them or not? Expect another stimulus which is sure to extend our pain well into 2011. In the end all we will have found is that we have spent a lot of money with very poor results, just like the 1930’s. Let’s just hope this time it does not end like it did in 1941, there seems to be a correlation between poor economic stretches and wars.

What should give bulls some fuel is that everyone is so bearish it is bound to be a contrarian indicator. Am I going to bet on that? No, not yet at least. I spent the majority of this morning dumping everything I absolutely did not love to own building cash and some short positions, the markets were up this AM. While I am sure we will get a bounce in equities I am not so sure we will get it this week, a notable bounce at least. There will be short covering before the 3 day weekend, but at the same time I do not believe any one wants to be long either. What does that mean? We go lower, in my opinion at this very moment, but we could very well get a sharp bounce tomorrow before we go lower. If we break above 1040 we might go higher, but we are certainly not going to make new highs again this year, from what I see right here and now. Things are much worse than they appear unless you are 100% treasuries, suddenly that call I made back in April doesn’t look so crazy anymore either.