How crazy is crazy?

Posted by Ray on June 2, 2010 under Economy | Be the First to Comment

A few things have been out there that just blew me away over the past couple of days. The first was when I saw a video of Jim Cramer advocating for the Treasury to issue $2T in 30 year paper to solve our debt issues. The second is that some talking heads believe that we will get a 700K print for the NFP, non-farm payroll (employment report), on Friday. It leads me to believe that most people in the world have just lost their mind or at least lost touch with reality. There is some logic to the aforementioned items, but reality just does not work like that and when one throws out an idea make sure it is feasible first or make sure it is a clean number, as in the 700K NFP on Friday.

First, Jim Cramer, the man I love to hate, but I respect the hedge fund manager as a take no prisoner SOB who got the job done, but this “I am going to make you mad money” thing, well, I think not. He has been giving out some decent advice lately, too little too late, but nevertheless, he has advocated high dividend stocks for sometime which is a good strategy as I see deflation. However, he said yesterday that the Treasury should issue $2T in 30 year paper while rates are low because we have too much short-term debt, he is right, and we will eventually have funding issues, he is right again. The issue I have is that the U.S. has $13T in total debt with much more coming so $2T does nothing to “solve our debt problems” and the bond market would reject $2T in 30 year paper. I mean come on, the market would demand a higher yield than 4.23% for that size paper. This is also the same guy who said, no more than 8 months ago, that Treasury should issue a 5% 30 year Retirement Bond as well, yeah right.

If one has been paying attention to the bond auctions they would notice that there is a reason Treasury is issuing shorter maturities, no one wants long-term paper from the U.S. government. Investors would just assume buy 10 year TIPS instead which offer some protection from the inevitable inflation risk that exists. Why would Treasury want to steepen the yield curve even more than it already is? If Geithner has half a brain he will try to move our maturities out to the 10 year mark and if Treasury swamped the 30 year they would move the yield up on the 10 year. It is just a bad idea and it impresses no one, period. I am surprised that Cramer would even say such a thing as he did run a ton of money, but, well, I guess I am not surprised.

The other hot issue of the day is the employment report due out at 8:30 AM EST Friday morning, it is THE report on the first Friday of each month. This month we are due for some really interesting data I suspect, especially given the smooth work last month in the Birth/Death model, I know I talk about that a lot, but it is important that you look at that figure and understand it. I see some estimates that we will see a print of 700K on Friday and, frankly, I would not be surprised, it won’t be real, but I would not be surprised at all.

The NY Post ran a story on how some Census workers were hired for a few hours, paid, fired and rehired which will boost the NFP figure on Friday. Are those accusations true? I don’t know, but it would not surprise me if they were. All I know is that it would be awfully tough to pull off a huge private sector growth figure with 460K+ weekly initial claims and with many blue chip companies announcing more layoffs, H-P is laying off 9K, seriously. There are still almost 6 people available for every open position which is not good news or bullish for new hiring. I am not saying it is getting worse, but I am saying it is not getting better.

There are specific area’s to watch and the first one is the actual unemployment rate, I think we will see it uptick to 10.2%, remember we now have an oil spill which impacted a very large area. Another area is the BLS Birth/Death model, obviously, which may add another hefty 200K to this month’s report. I also believe you must subtract all government jobs out of the report since they are temporary and we need private sector jobs to pay for government jobs to begin with. The U-6 report is also very important as it will show the under employed, which is a huge, and growing, problem in America that everyone turns a blind eye towards. Finally, temporary jobs are no longer a bullish indicator. Perhaps a year ago they were, but if they are not converting to fulltime employment by now they never will, sorry, but subtract them out.

The other painful part of the report is the time it takes to find a job, this is the heart breaking, in my opinion, part. The vast majority of unemployed are taking far longer than 6 months to find work, in many cases more than a year, this is the worst since the DOL has ever recorded, it started keeping records in 1948. Basically, those are Depression era numbers there are just no other times in our history where it took so long to find work and I can assure you people are not voluntarily staying unemployed to collect that whopping $400 a week unemployment benefit check. This is a major problem and it is not getting better, sadly, and you need to look beyond whatever the headline number is to see what the real situation is like. I am sure Joe Biden and President Obama will be patting themselves on their backs on Friday, but I can assure you that whatever the number is it will be the equivalent of Enron accounting.

The BP Selloff

Posted by Ray on June 1, 2010 under Main | Be the First to Comment

The media is blaming BP for just about everything nowadays including today’s selloff which is absurd to say the least. There is little doubt that BP has had an impact on the oil service sector and sent those shares lower as the government is about to unleash the proverbial Hell on the sector for what amounts to a horrible accident. A word on the spill, it is terrible, awful and I hope it gets taken care of as soon as possible, but BP is doing everything it is supposed to be doing. Even the President admitted that the company cannot make a move without his direct approval, so let’s make sure we spread blame to all who deserve it. However, the leak is not the cause of the market selloff, but only part of the problem.

What I found extremely interesting in Tuesday’s trading was that the Euro made a fresh 4 year low and someone decided to step in and buy the Euro like no tomorrow. It had to have been a central bank because I know of no investor that would be anxious to buy anything that just made a fresh 4 year low on speculation of a rebound, but that is rumor and my own speculation and it does not matter who did it because it happened. The Euro is leading the trading and that is what is important to realize and that in itself is what is interesting because that trend is on again and off again day by day so do not depend on the Euro to always be the guide. To be sure if the Euro is leading the way check the EURO/USD and EURO/JPY pairs and id they are both heading in the same direction with the market the trend is valid, if they are mixed take your own chances trusting the Euro to lead.

What else was extremely interesting today is the fact that the Russell 2000 and the transports had diverged from the Dow 30, S&P 500 and the NASDAQ all day today. It is also important to note that I have mostly thrown my charts away as I feel they are more or less useless at this point, but I do look at them from time to time. Regardless, I always use the RUT, Russell 2000, to gauge the overall movement of the market and where we are ultimately heading for the day, it is fairly accurate as it is a broad based index, and if you are a Dow Theorist you watch the transports anyhow to see where the Dow will go for the day. I guess I am a bit of everything because I watch a lot of things all throughout the day. Of interest was the RUT was down a good 1.7% most of the day as the Dow was positive and the S&P crossed throughout the day and the transports were also down about 1% throughout the day as well.

Having a divergence in itself is not a big deal, it kind of happens all the time and the markets tend to even out at the end of the day, but not today. The RUT and the transports ended down pretty hard, almost 3% and over 2%, respectively, while the Dow ended down 112 and the S&P ended down 18. Typically, when the RUT and transports are down that much the Dow is down about 200+ and the S&P is down about 30 so it was strange trading all day long. It is safe to assume that I merely held my shorts today as I think there is something to this divergence and there is more downside to this market. However, the real catalyst for the selloff was not BP, oh no, it was the EU.

About 10 PM EST last night the ECB released a statement saying that EU banks may write down about $290B in debt, that is a problem. When that news hit it drove futures down 50 ticks and they just stayed there all night long. Considering that it was a holiday that is a pretty big move so I was not surprised this morning when I saw the open, but I was surprised on the turn at 10 AM when the markets went positive and I saw the divergence in the different indices. I kept waiting for the reversal to happen again, but it did not come through until 3:30 which is a bit odd, kind of, but it also shows that this market is not a bull market at all anymore, it is a bear market. A bull market would not be trading like this and we would not get such bearish signals at 3:30 PM, sorry to be the bearer of bad news.

I do expect a rally in the short-term, but nothing to write home about, previously I thought a run to 1,200 on the S&P was possible, but not any longer. I believe we may see 1,120 or so, but that is about it unless the news really turns, which I do not see happening. I believe the ISM data we saw today is the beginning of the official rollover in the data series, leading indicators already rolled, and I am not expecting much more strong economic data as the stimulus money is gone, that was a quick trillion, eh.

Everyone is watching for the employment report on Friday, but no one looks beyond the headline number so why bother? With initial claims in at 460K, 2.5 years into this thing(!), we are in negative job growth territory. I expect to see the unemployment rate climb to 10%+ as people get back into the workforce as extended unemployment benefits are running out and people reenter the workforce. I expect a high number of government employment which needs to be discounted and one needs to remove the Birth/Death model tinkering that occurs because those jobs are simply made up, that is why 880K jobs had to be added to the unemployment roles in February as this model underestimates the unemployment rate. If the private sector is adding only temporary workers at this stage we are in big, big trouble and that is NOT a bullish item, it is very bearish. Overall, I expect a number that is going to be in the 300 – 350K area, I hear of some shenanigans in the numbers, more on that is I can confirm, but until then it is rumor only.

I do not believe there is much upside to this market and the risks run very high with the exception of cash and gold. At this point even high paying income stocks are getting hit hard and bonds are, in my opinion, overvalued at this point and I got very lucky with my exit on high yield. I like short treasuries, 2 year durations, but cash is better at this point. I believe deflation is here and it is going to get very tough going forward which means stocks are way overvalued by 20 – 30%, think 10-12 P/E on $75 earnings on the S&P plus much lower growth. Be very nimble or start looking for entry points for a short position, but you should have been doing that 3 weeks ago so don’t go jumping on the bandwagon now without doing your research.

At this point I am holding high yielding stocks, short duration treasuries, country specific ETF’s, equity income ETF’s, 3x bear ETF’s, put options, gold, silver and platinum group metals. Clearly I am thinking much lower equity prices, deflation followed by inflation at some point. Everyone is a genius when the market is going up, but we are about to hit a very rough market and I expect volatility to remain elevated for some time and the VIX might offer some excitement for you, but you must understand it before you do anything with it. In the meantime my price target is 900 on the S&P 500 which has been my target since the beginning of the year, I think it could go much lower if conditions worsen. Good luck.

Risk off, Risk On

Posted by Ray on May 10, 2010 under Main | Be the First to Comment

As I watch the pre-market activity and commentary from the airheads on CNBC it just boggles the mind. Last week these same people said the world is coming to an end, which meant buy to me, but today the “market is soaring.” Investors must get confused when they watch this porno for the mind as they flip-flop every day. Cramer says do not buy until Dow 9,000, but tonight he will say I told you to buy on Friday! He did not, he was a bear, which is why I thought I should buy. This market is bipolar and, to me, and the commentary you hear is insane. I am bearish on the market, but like individual companies.

We went from market crashing last week to the market is the place to be, today at least. I think this is a strong bounce rally before it declines more, I would not commit new money today or yet unless you are renting this market. The only reason we are getting a bounce today is because of a $1T bailout of Europe, ouch! I do not believe this is a real bounce and volume will be pitifully light, as all up days are, and this market is really just responding to short-term oversold conditions. This will be a good time to de-risk ones portfolio, IMHO.

The problem in Europe is not resolved, anyone who thinks it is needs to check their meds, as the funding package is merely treating the symptoms of the crisis not the source of the problem. Essentially, the bad behavior of the PIIGS is being rewarded, but they should be punished, and all the ECB is doing is taking the risk off of the speculators, rewarding their behavior as well, and giving that risk to the central bank. On top of that, the number should be shocking to the markets, $1T is a very large number and above where most people saw it. Not to mention, a good chunk of that is coming from the IMF, a.k.a. the U.S. which is the top funder of the IMF.

The U.S. is broke and borrows all of our capital, like most countries nowadays, so we are simply bailing out debt by issuing more debt. Who does that make sense? It does not. This bailout will not fix the problem long-term and merely kicks the can down the road for a little while. It will blow up at some point and now the bond vigilantes will look at other countries, i.e. the UK, U.S. or Japan, IMHO. They should have left the situation alone and let the PIIGS default to introduce a mechanism to kick them out of the EMU, but no, we are going down the bailout route, again! Not only that, but they are spreading the risk around to other countries now, unreal.

But the fundamentals of the U.S. economy are strong, say the bulls, which is why the market will scream today. Well, I will say things are much better, but not enough to justify the markets run-up and not strong enough to send the market up whatever percent today, this is a technical rally based on some, IMHO, troubling news. I look at the NFP figures from Friday, which I called a fraud and I stand by that comment since 188K were “made up estimates” from the BLS. When one subtracts out the 188K birth/death model figures, which NO commenter on the TV is talking about, except Rick Santelli, we have a figure of +102K. That is a great number right? Not really. Consider this, if we back out the 188K make believe BLS numbers, remember the birth/death model is responsible for the BLS revising unemployment up by 800K in February. We have a baseline number of 102K. If we subtract out government jobs, which are most temporary as well, think Census, we are down to about +48K. You could subtract out temporary hiring as well, but they are jobs, just not permanent, IMHO. No matter how one looks at it, except for CNBC, the ADP figure was accurate and the employment report was less robust than most think, but hey, let’s not let the facts get in the way of buy, buy, buy.

Overall, I fail to see how many classify this as a strong recovery after we spent trillions and 2 years later we are still at 10% unemployment and we have an anemic recovery at best. I am not saying things are not getting better, rather I am saying we have stabilized for really bad to just less bad. I believe a double dip is coming and this market is so not priced for a double dip. If we add in the Europe craziness the market is much less attractive, IMHO. The $1T, which should scare you in the U.S. as you are on the hook for a large portion of that because we are the top funders of the IMF, is a huge number and underscores how bad of shape the EU is really in. We have merely are fighting a debt crisis with more debt, sure there are austerity measures, but they are not going to fix the problem and the Greeks are apparently great at hiding assets.

Yet again, we are socializing the profits of speculators which were lambasted in the European media via the governments over the weekend, unreal. Instead of bailing out the PIIGS they should have instituted an ejection mechanism instead, that would save the Euro, but now they kicked the can down the road and are making other countries issue debt to fix the debt crisis, no sovereign country has cash on hand so they borrow it, see the problem? Austerity measures or not, it is a problem that will be with us for a long time. This is a reflexive rally built on a news event which was actually bad news. How does one support its currency by issuing a slush fund for bailouts? You can only defend a currency through higher rates or taxation, that really is not the case here as Greece will still have debt-to-GDP ratio of 150% by 2014, or there about.

This rally is somewhat justified, but I would be extremely careful with buying into this. Tonight Cramer will revise his call from Friday and Kudlow will continue with his “V” shaped recovery nonsense, but the problems are still there lurking in the background waiting to reappear. Buy gold because this is not over and what the EU did was inflationary, when that inflation will hit, I do not know, but it will in the EU and in the U.S. The other issue is, where will the vigilantes go next? The UK, U.S., Japan or will they stay in the EU? At the end of the day it was probably best to let the PIIGS default so the market can clear the bad debt, but let’s not have the market solve the problem, let’s tinker with it so another bomb can blow up somewhere else.

Oh, let’s not forget one of our GSE’s, which are “sound,” requested another $10B from the government. Yup, a sure sign of how strong things are.

The Employment Report is a Fraud

Posted by Ray on May 7, 2010 under Main | Be the First to Comment

Initial read is +290K with adding in 800K into the work force. I call BS since the BLS Birth/Death model added +188K in April. That is a large majority of the +290K and, in my opinion, is fraudulent and the bearded guy on CNBC is a complete moron. Will post a professional post later, but these people are clueless.

A good employment report

Posted by Ray on April 4, 2010 under Main | Be the First to Comment

I am back from a much deserved break and am beginning to catch-up on the economic data that has bulls all geared up for a push to 11,000 and 1,200, for the Dow and S&P respectively. I actually have little doubt that the markets will push higher as investors like watching their stocks go up while they do nothing, which is one reason why up volume is so much lower than down volume because investors will sell fast if stocks head south. Do not get me wrong, I am bearish on the markets, but one has to trade the tape in front of them.

I was just combing through the employment report and it is not too bad, but I see this data as less bullish as the talking heads will on Monday. Why? Well, I did not like the BLS Birth/Death model adding 81K, the government adding 48K and temporary workers brining in another 40K. Those who read follow my writing know that I hate the Birth/Death model because, frankly, they make up these numbers based on some very optimistic assumptions and as you know the B/D model underestimated job losses for 2009 by about 1M. If I had a model that underestimated employment by some 17% I would probably change the methodology or just get rid of it, but not the government because this model postpones the bad news until a later date, like we saw in February with that huge adjustment.

I do not see temporary employment as a bullish signal at all, keep in mind that since September 2009 temporary employment has added 313K jobs. If temporary employment was truly a leading indicator we would see this number coming down as these temporary workers move to permanent, but this is not happening. I admit, I could be wrong about this, but I really do not believe these people will become permanent employees anytime soon. This is kind of confirmed by the hours worked data and the inventory data from the ISM report which shows hours are increasing and the inventory build is still in full force. End demand just is not there and there is still wage deflation.

There is also an uptick in disability claims as well, which is what many apply for when their benefits either run out or they cannot find work because disability pays much more than unemployment. If one looks at the duration of time unemployed they will see that 44% of those seeking a job is on the dole for 27+ weeks, not good for a “V” shaped recovery. Furthermore, 60% of those unemployed are on the dole for 15 weeks or longer, again, not good. On the bright side the participation rate is increasing, but at the same time marginally attached workers has also increased.

Essentially, I view this report as flat, excluding government jobs and the B/D model, which is good news. While this one report is good initial claims are still out of whack at well over 430K a week, that is about 2M people a month, and I believe last week’s downtick was temporary, employers hate to fire people near holidays which is why claims plummeted in December, but resumed afterwards. This will either be confirmed or disproved over the next few weeks. I firmly believe, at best, the labor markets have merely stabilized for now, but the real question is what happens when inventories are completed? We will find out, but I am sure it is not news we actually want.

The fact that we also have so many part-time workers out of necessity pointed to an extremely weak employment situation. I heard a story about a dog kennel owner who placed an ad on Craigslist.org for an “assistant” who would be in charge, this was clearly stated, dog fecal matter. This was an $8.50 an hour job, in Washington State, and he had 218 resume responses from teachers, construction workers, hospitality, and other professionals, the same sectors the BLS’s B/D model says is creating thousands of jobs. I think that story speaks for itself.

We also need some 140K new jobs a month just to keep up with the population growth, that is scary considering there are 15M people unemployed right now. This means we need, keeping the numbers realistic, 300K+ every month for about 6 years, these are back of the envelope figures, to come back up to full employment. Forget all the optimism and look at that figure realistically and you make the conclusion of whether we will reach anywhere even close to that figure in the near future, excluding government jobs as well. In short, we have serious employment problems that will not cure itself and will take a long time to correct itself.

What is going to be odd is the fact that this may cause the market to rally in the short-term, but the markets are very overvalued for anyone using a realistic earnings estimates. The parabolic move has been cheered by the media, but I believe this move is creating undue optimism about future equity prices. Yes, the data is getting better, but not Dow 11,000 better. Of course, I am bearish, but I do have longs in the biotech area, dividend stocks, precious metals, high yield and international holdings, but at the end of the day an 8% rise in frontier markets, 4%+ in high yield and is a bit crazy considering current valuations. Yes, I am making money and complaining about it, go figure, but I also have shorts and VIX calls as well. Let’s hope for better economic news, but I am less optimistic than most that we will get it.