Posted by Ray on July 19, 2010 under Main, Markets | 
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)
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Tags: bears, bonds, double dip, downside, earnings, earnings season, economic recovery, Economy, ecri, IBM, quantitative easing, recession, sds, seasonal adjustment, sh, TI, tza, unemployment, ZION
Posted by Ray on July 5, 2010 under Economy, Markets |
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.
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Posted by Ray on July 1, 2010 under Economy, Markets |
Everyone is expecting a bad employment report, especially after the ADP report on Wednesday and the initial claims data this morning, but I think it will be worse than most people believe. Estimates are for modest private payroll growth, meaning poor of course, but given the weak data that came in waves this month it is bound to be less robust than we think. I am one of the few who believe there is a very strong possibility of private payroll losses tomorrow, not merely a weak report, but a disastrous report. I am not referring to the census workers being laid off either.
I expect huge losses in construction jobs which will offset any manufacturing gains we have. The housing, initial claims and extended jobless benefit data points are what lead me to believe that we will see a train wreck tomorrow. It is clear that the economic indicators are rolling over, from the ISM to the ECRI all the way to housing, which should not shock anyone. What most people fail to realize, but not economists, is that housing represents some 20% of GDP and the data we saw is telling us that the construction industry must have been shedding jobs, in the residential market, like crazy. This is also why the home buyer tax credit is going to get extended as well, of, and it is also an election year.
Overall, I do not believe a bad employment report is priced into the market and that is certainly not good news for the bulls. I am also curious to see what the birth/death model adjustment is going to add to the mix, while many in bobble head says the B/D adjustment is not a big deal, well, they are wrong. As I have said many times, the B/D model underestimated unemployment by 880,000 jobs last year, that is a big deal so these adjustments do matter, sorry Mr. Liesman. I also believe we will see wages stagnate with the work week getting slightly longer, why hire more people when you can have existing employees work more hours? It is unclear whether or not the unemployment rate will increase, I suspect it will, because the unemployment benefits were not extended by the Senate leaving 1.7M unemployed without a check. In other words, 1.7M people might have all of a sudden decided to look for a job, any job, which will increase the unemployment rate. The rest of the report will reflect what we know, it will merely confirm it for us.
The $60,000 question is whether a really bad employment report is priced into the market or not. I am inclined to believe that nothing is really ever priced in especially if the report is worse than expected. The market is due for a bounce and I actually thought we would get it today, it looked like we were at some points throughout the afternoon, but it did not happen. The market is definitely oversold, but markets can remain oversold or overbought for long periods of time, heck we were overbought for how long and no one complained. The market is in bad shape from a technical perspective and there are enormous headwinds in front of us from a weakening economy to the troubles in Europe. The one thing I am confident about is my 900 price target for the S&P is intact and we are well on the way to that level or lower. One hedge fund manager I spoke to has a Dow target of 3,800 and thinks we will reach new lows on the S&P 500 so next to him I am a raging bull.
If the report is bad it is possible we will trade higher to retest that 1040 – 1048 level which would be an ideal level to consider looking at short positions, depending on conditions at that point and your investment objectives, there are never any sure things. The other unknown about tomorrow is the 3 day weekend that is in front of us. I am fairly confident few will want to be short into the long weekend, but I am equally as confident that few will want to be long either. Many traders may not be around which could mean a low volume indecisive day altogether. However, if I am right and it the report is a negative number I am fairly confident we trade lower, but this market is full of surprises, both up and down.
There is one item that makes me a bit more bearish than usual and that is the way AAPL has been trading. I realize it has been plagued with some rumors or truths, I do not own Apple products, happily, so I do not know what is true or not true, but it certainly has not been able to catch a break lately. This was supposed to be the ‘safe’ stock with $50 per share in cash and THE product to own and it has fallen sharply off of its highs. Everyone loves AAPL and everyone owns AAPL, I am using AAPL as most used GS at the beginning of the year, as the canary in the coal mine. What AAPL is saying is there is a gas leak as the stock has fallen 30 points from its all-time high and it cannot shake off bad news. The weakness in stocks like AAPL are telling me that investors are treading lightly in risk assets, not to mention that they were overvalued, oh the emails I will get for that comment.
The bottom line is that even if I am wrong and the employment report is ‘good’ with a +150K private employment print, unlikely in my opinion, it really isn’t good news, just less bad. With unemployment officially at about 10% and underemployment pushing 16% we have a real structural employment problem in America. It is so bad that Vice President Biden admitted that many of the 8M jobs lost will never come back, this is the same guy who said we would be swimming in hundreds of thousands of jobs every month ‘very soon’ a couple of months ago. This is deflationary and the fact that wages are basically stagnant is deflationary. The credit markets are telling us that deflation is the immediate risk at this point. Retail sales show that there is no end demand, running at a mere 1%, all of this mixed with high unemployment is if not actual deflation disinflation which is very bearish for stocks. We will continue to have a P/E multiple compressions because of this disinflationary force and earnings estimates will come down, a lot. In short, even if we have a good day tomorrow, unless we see some real inflation equity prices are heading lower.
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Tags: bulls, census workers, economic indicators, economists, ecri, election year, employment report, gdp, initial claims, ISM, payroll, residential market, tax credit, unemployment rate
