This weeks post will be short and sweet lest I become too redundant. Biggest 5 day rally since the 30's, even though the news continued atrocious. New homes sales lower as well as prices, durable goods down 6.2%, personal spending -1% and it's not going to get much better. But the market was deeply oversold and more importantly the mother of all fiscal stimulus packages is coming. The bad news is in the rear view mirror and being ignored as consensus over the stimulus package grows. If you recall, the last stimulus package gave us a quarterly growth rate of almost 3%. This one is going to be much bigger. It will buy us a temporary respite. Is it the right thing to do? That is a different question. The market will probably meander in a range of 800-1000 in the S&P. Bad news will be absorbed as good news is coming. Volatility will decrease. The next big leg will not come until we see if the next administration's policies turn things around or otherwise.
Good trading -till next week.
Sunday, November 30, 2008
Sunday, November 23, 2008
We keep making new lows. Maybe Thursday was the washout. We finally broke the 10/10 lows and the 2002 lows. I don't think it is the final bottom. It might be a short term bottom perhaps even a intermediate bottom but not the final bottom. My reasoning is simple. This is much much worse than 2002 in every metric you want to measure, so I think the stock market low will be lower. How much lower? If we go into a depression which I don't believe we will, I don't think we will fall the 86% we fell in the thirties. We have an active Fed and government that we didn't have then. We are a much less manufacturing economy now. We have FDIC insurance and a wide range of social safety net programs we didn't have then. So I think the low will be somewhere between the 50% we are down now and the 86% we were down then. For lack of a better crystal ball, lets take the middle, which is roughly 68% and translate to an S&P of 500. Yikes! Seems improbable but consider we hit a high of 1007 on election day and Thursdays low was 746. That occurred in less than 3 weeks!
The problem in trading is how to turn prognostications into profit. That depends a lot on not on how right you are but on figuring out how the market will get there, what will all the twists and turns be. You can't be too early, you can't be too late, you can't get whipsawed. You have to be right within all the proper risk controls with a meaningful position. The speed of the move lower from 1255 on Sep22 to a low of 750 last Thursday Nov20, less than 2 months 43 trading sessions 500 S&P points certainly caught me off guard. Took profits too early. That's the problem going forward. Will we just continue to fall or bounce or trade sideways until the final low has been made. It is certainly difficult to commit new funds to the short side at these levels. The only confidence I have is to sell any rallies that get back to the 1000 level and to sell out of the money calls in the stocks of your choice as deflationary recessions do not end quickly. When and at what price we do hit bottom at, I think we will languish there for quite some time as the market goes through a period of apathy.
The problem in trading is how to turn prognostications into profit. That depends a lot on not on how right you are but on figuring out how the market will get there, what will all the twists and turns be. You can't be too early, you can't be too late, you can't get whipsawed. You have to be right within all the proper risk controls with a meaningful position. The speed of the move lower from 1255 on Sep22 to a low of 750 last Thursday Nov20, less than 2 months 43 trading sessions 500 S&P points certainly caught me off guard. Took profits too early. That's the problem going forward. Will we just continue to fall or bounce or trade sideways until the final low has been made. It is certainly difficult to commit new funds to the short side at these levels. The only confidence I have is to sell any rallies that get back to the 1000 level and to sell out of the money calls in the stocks of your choice as deflationary recessions do not end quickly. When and at what price we do hit bottom at, I think we will languish there for quite some time as the market goes through a period of apathy.
Saturday, November 08, 2008
WHAT NOW
Well. we have a new president and hope springs eternal. We have a bunch of problems and the hope is Barack has the solutions. Now the auto companies and insurance companies have their hand out. Pelosi wants to pass another stimulus bill even though its pretty much agreed that the first one did not work. Jobs and consumer spending are falling off a cliff and everywhere, everyone feels the need to take some kind of action. Infrastructure spending is the new cry. Eventually, most will come to the realization that there is no quick fix that will return us to the prosperity we just so recently enjoyed. Has everyone forgotten? Governments cannot legislate prosperity. They can only foster conditions for it at best. That does not stop them from trying. They have to get re-elected after all.
We need to step back a moment and consider how we got here to evaluate possible solutions. I believe three major secular trends contributed to where we are today and are not being discussed in terms of finding solutions to our current crises.
The first major trend of the last 15yrs, discussed often and in depth by Stephen Roach of Morgan Stanley has been the migration of jobs to the emerging economies as a result of labor arbitrage, as Roach calls it. This has led to the hollowing out of our industrial base, our huge trade deficit, and our stagnant wages. So first and foremost we have to protect any jobs we still have left while we try and create new ones. If that means bailing out the automakers so be it. Look, just like energy, where we are engaging in an enormous transfer of wealth that is unsustainable, if we lose our domestic auto industry , we will have another major transfer of wealth, mainly to Asian countries getting or auto money while the middle east gets our oil money. The point is. we can not buy everything we need from someone else. We have to pay for it. We earn it or we borrow it, and we're already in hock up to our eyeballs.
I think Obama has got this figured out. He seems to want to accommodate the automakers and he describes himself as a fair trader not only a free trader. So I think he will try to hang on to some jobs that would otherwise go overseas.
The second major trend has been the inexorable decline in the savings rate, year after year after year. Savings became passe over the past quarter of a century as first stocks and then our homes values marched inexorably higher. Why do you need savings when your getting 500 credit card offers a year. There are many reasons that have caused the age of thrift to vanish, down payments to become a thing of the past. Saving up for something-how quaint. But here, let it suffice to say we are at zero.
Third and most important, has been the rise of debt. In 1981, total credit market debt was about 5 trillion with GDP of about 3 trillion, by 2002 debt had grown to 31 trillion while GDP had only grown to 10 1/2 trillion. Debt was 3 times greater than GDP. As a comparison, in 1930 debt was about 2 1/2 times GDP the all time high until 2002. Since 2002, it has only increased with all the war spending adding billions to the debt and the recent bailout spending will cause this to accelerate and explode. It was of course the final folly of extending credit without any due diligence to those who couldn't repay that was the spark that lit the fuse of the sub-prime crises that has spiraled into what we have today.
To recap, the housing market starts to crumble as teaser rates are reset and the first defaults occur. Housing prices stop rising, inventory increases, adjustable rates are reset, the spiral continues. When prices continue to fall that undermines all the securities and derivatives associated with mortgage securities, causing catastrophic losses for holders of those instruments. The consumer whose real wages have been stagnant for a decade and whose net worth is mainly held in his home which has declined by 20% is also hit with stock market losses of 40%. As a result the economy weakens, job losses rise and without any savings to fall back on it becomes harder for Joe consumer to pay his bills. Mortgage, auto loan, and credit card delinquencies increase creating a negative feedback loop. Pretty scary stuff.
Many people compare us to Japan. At least the public had savings to ride it out. When unemployment benefits run out, what will happen then. As far as infrastructure spending goes, I remember Japan approving one supplementary budget after another building roads to nowhere. All it got them was the highest government debt to GDP ratio in the developed world.
At which point they had to stop.
As I said before, the government cannot legislate prosperity. It also cannot make the ramifications of living beyond our means for decades go away. Look at all the programs FDR put into place during the depression and unemployment was still 20% in the mid thirties. The public needs to fix its balance sheet. Debt can only be repaid or not. To help repay debt we have to keep and create as many jobs as possible. We have to buy time for people to pay their bills by extending unemployment insurance and enacting some type of mortgage help. Some one will have to break the bad news that sacrifice and belt tightening will be necessary, a message not heard since the war. Debt reduction and saving will become the watchwords. As far as not paying debt, some kind of liberalization of the bankruptcy laws might be in order to help people get a fresh start. Debt deflation's and deleveraging take so long because it is so hard to reduce debt service with diminished revenues and low asset prices. Finally, government Manhattan projects, that lead to innovations that create new industries and new jobs in which we can lead.
We need to step back a moment and consider how we got here to evaluate possible solutions. I believe three major secular trends contributed to where we are today and are not being discussed in terms of finding solutions to our current crises.
The first major trend of the last 15yrs, discussed often and in depth by Stephen Roach of Morgan Stanley has been the migration of jobs to the emerging economies as a result of labor arbitrage, as Roach calls it. This has led to the hollowing out of our industrial base, our huge trade deficit, and our stagnant wages. So first and foremost we have to protect any jobs we still have left while we try and create new ones. If that means bailing out the automakers so be it. Look, just like energy, where we are engaging in an enormous transfer of wealth that is unsustainable, if we lose our domestic auto industry , we will have another major transfer of wealth, mainly to Asian countries getting or auto money while the middle east gets our oil money. The point is. we can not buy everything we need from someone else. We have to pay for it. We earn it or we borrow it, and we're already in hock up to our eyeballs.
I think Obama has got this figured out. He seems to want to accommodate the automakers and he describes himself as a fair trader not only a free trader. So I think he will try to hang on to some jobs that would otherwise go overseas.
The second major trend has been the inexorable decline in the savings rate, year after year after year. Savings became passe over the past quarter of a century as first stocks and then our homes values marched inexorably higher. Why do you need savings when your getting 500 credit card offers a year. There are many reasons that have caused the age of thrift to vanish, down payments to become a thing of the past. Saving up for something-how quaint. But here, let it suffice to say we are at zero.
Third and most important, has been the rise of debt. In 1981, total credit market debt was about 5 trillion with GDP of about 3 trillion, by 2002 debt had grown to 31 trillion while GDP had only grown to 10 1/2 trillion. Debt was 3 times greater than GDP. As a comparison, in 1930 debt was about 2 1/2 times GDP the all time high until 2002. Since 2002, it has only increased with all the war spending adding billions to the debt and the recent bailout spending will cause this to accelerate and explode. It was of course the final folly of extending credit without any due diligence to those who couldn't repay that was the spark that lit the fuse of the sub-prime crises that has spiraled into what we have today.
To recap, the housing market starts to crumble as teaser rates are reset and the first defaults occur. Housing prices stop rising, inventory increases, adjustable rates are reset, the spiral continues. When prices continue to fall that undermines all the securities and derivatives associated with mortgage securities, causing catastrophic losses for holders of those instruments. The consumer whose real wages have been stagnant for a decade and whose net worth is mainly held in his home which has declined by 20% is also hit with stock market losses of 40%. As a result the economy weakens, job losses rise and without any savings to fall back on it becomes harder for Joe consumer to pay his bills. Mortgage, auto loan, and credit card delinquencies increase creating a negative feedback loop. Pretty scary stuff.
Many people compare us to Japan. At least the public had savings to ride it out. When unemployment benefits run out, what will happen then. As far as infrastructure spending goes, I remember Japan approving one supplementary budget after another building roads to nowhere. All it got them was the highest government debt to GDP ratio in the developed world.
At which point they had to stop.
As I said before, the government cannot legislate prosperity. It also cannot make the ramifications of living beyond our means for decades go away. Look at all the programs FDR put into place during the depression and unemployment was still 20% in the mid thirties. The public needs to fix its balance sheet. Debt can only be repaid or not. To help repay debt we have to keep and create as many jobs as possible. We have to buy time for people to pay their bills by extending unemployment insurance and enacting some type of mortgage help. Some one will have to break the bad news that sacrifice and belt tightening will be necessary, a message not heard since the war. Debt reduction and saving will become the watchwords. As far as not paying debt, some kind of liberalization of the bankruptcy laws might be in order to help people get a fresh start. Debt deflation's and deleveraging take so long because it is so hard to reduce debt service with diminished revenues and low asset prices. Finally, government Manhattan projects, that lead to innovations that create new industries and new jobs in which we can lead.
Sunday, March 16, 2008
FREE TRADE
I have been a free trader for most of my career, and I still believe free trade works in the long run. By the long run I mean a generation. In the short run there are clearly big winners and losers. This administration and this country has been oblivious to the para dime shift that has been occurring.
Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We've all heard them to the point where people can't distinguish between the forest and the trees.
To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one's expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it's no wonder we are going broke.
What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.
Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We've all heard them to the point where people can't distinguish between the forest and the trees.
To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one's expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it's no wonder we are going broke.
What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.
Wednesday, April 04, 2007
IN DENIAL
It seems to becoming clear that the economy is slip slidin away. Factory orders, just released were soft, up 1% when a 2.5% bounce was expected. The non-manufacturing ISM came in at 52.4 much lower than the 55.5 expected, mortgage applications were lower again. Yesterday we heard the big three had what can only be described as lousy auto sales. Overall sales are slowing as well. I'll be financing is getting harder to find. The day before, manufacturing ISM came in at 50.9, lower than expected and below last months reading. we've got $64 oil which translates into gas at 2.70 a gallon nationwide.Earlier this week we had an earnings warning from a bank that the sub=prime is spreading into alt-A mortgage sector. Through a tightening of credit standards, availability is being reduced. The S&P is only about 2% off its high. Either we are going to see some better numbers soon or one of them will be the straw that breaks the camels back and down we go again. HAPPY EASTER
Thursday, February 22, 2007
STILL RUNNING ON FUMES
We are up 4% since I said that on my last post 11/16. Its even more true today. The fumes are, the statement the Fed issued at its last meeting, which were deemed to be less hawkish and paving the way to a move to a neutral stance. Secondly, the testimony of Bernanke, again more soothing words interpreted to be bullish, and finally the release of the Fed minutes, which even though superseded by Bernanke's testimony still helped provide a good tone to the markets. I guess the lesson is never underestimate the ability of the market to continue rallying on the same old news., very much like the Fed is done rallies we had earlier in the year.
The hard news has been anything but bullish. The sub prime mortgage market continues to deteriorate. Earnings are indeed slowing down. Retail sales were flat. Net foreign purchases of our securities were weak. Industrial production fell. Microsoft warned we are overestimating demand for Vista. Housing starts fell 14%. The BOJ raised rates, Bank of England said there is one more increase to come, and the ECB is signaling a rate increase for next month. Back on 11/16 71% of NYSE stocks were over their 200 day ma. Today 78.6% are over their 200 day ma.Almost everything is participating. Margin debt is at an all time record.
I didn't mention that the CPI came in a little hot yesterday, because the bond market really didn't react to it. There is the rub. All the negative news I mentioned is being tempered by the bond market backing down to a 4.7% 10 yr yield from 4.9% and the last GDP number coming in at 3.5% after we saw such weak numbers in December. The market has seen this movie before and is not going buy the economic weakness story so easily especially when a little weakness is good for softer bond yields.So we may have to wait for the GDP to be revised down to 2-2.5% and first qtr estimates to come in below that before that story gains traction. So even though we are long in the tooth, the catalyst is not yet upon us, but we may be running out of fumes.
The hard news has been anything but bullish. The sub prime mortgage market continues to deteriorate. Earnings are indeed slowing down. Retail sales were flat. Net foreign purchases of our securities were weak. Industrial production fell. Microsoft warned we are overestimating demand for Vista. Housing starts fell 14%. The BOJ raised rates, Bank of England said there is one more increase to come, and the ECB is signaling a rate increase for next month. Back on 11/16 71% of NYSE stocks were over their 200 day ma. Today 78.6% are over their 200 day ma.Almost everything is participating. Margin debt is at an all time record.
I didn't mention that the CPI came in a little hot yesterday, because the bond market really didn't react to it. There is the rub. All the negative news I mentioned is being tempered by the bond market backing down to a 4.7% 10 yr yield from 4.9% and the last GDP number coming in at 3.5% after we saw such weak numbers in December. The market has seen this movie before and is not going buy the economic weakness story so easily especially when a little weakness is good for softer bond yields.So we may have to wait for the GDP to be revised down to 2-2.5% and first qtr estimates to come in below that before that story gains traction. So even though we are long in the tooth, the catalyst is not yet upon us, but we may be running out of fumes.
Thursday, November 16, 2006
WHERE ARE WE NOW
First let me toot my own horn for a moment, something I do very infrequently. My last post, which was on Walmart was not only timely but right on the money. The stock hit its closing high the next day, 51.75 and went south consistently hitting its low two days ago at 46.32. I took my profits a little early, but I'm not complaining. My post prior to that was also pretty good and timely in laying out the bull case for the overall market. Although it saved me a lot of money, I didn't profit quite as handsomely. It serves as a good starting point to review where we are now.
One of the points I was trying to make then, was how remarkable the stock market rally was in light of all the economic weakness. In that regard, not much has changed, and in fact the economy has deteriorated since then. Back then I argued that the first revision in 2nd qtr GDP, up to 2.9% from 2.6% is what swept away all economic concerns and accelerated the stock rally. Similarly, when the Dow declined 6 days in a row from 10/26 to 11/03, it was the strong rebound in the ISM services index and the large revisions in non-farm payrolls for the prior two months and corresponding drop in the unemployment rate, that once again swept away economic concerns and reignited the rally.
Now however, I believe the rally is running on fumes, and here is why:
Not only was 2qtr GDP revised back down to 2.6%, but 3rd qtr came in at 1.6%.
Auto sales have declined further to 16.1 mln in Oct from 16.6 in Sep and manufacturers have cut production further in the 4th quarter because they are choking on inventories.
Existing home sales and prices continued to drop. Sales to 6.18 vs 6.3 in Aug, prices another 1.9% vs a 3% drop in Aug.
New home sales showed an uptick has they have for the last several months but then is revised away in subsequent data. Prices, however showed a steep drop from 239,000 in Aug to 217,100 in September.
The ISM dropped to 51.2 in Oct vs 52.9 in Sep.
The Democrats have indeed taken the house and Senate.
Walmart sales have been below the low end of forecasts for two months and not at the high end as the were in Aug.
It's hard to be bullish about $60n oil, when most of my working life $40-$50 oil was looked at with aghast.
Eventually, the top line rules. You can continue to generate earnings for a while as the top line slows down as many companies have, but eventually they have to follow.
Technically and sentiment wise the market is extremely overbought. Barchart's momentum indicator shows 79% of stocks are over their 100 day ma and 71% are over their 200day mvg. Newsletter writers are at their most bullish since May.
Those betting on a soft landing are now bucking the trend. We have all been told, the trend is your friend. They economic trend is now down and bulls are trying to catch the bottom. If you are bearish be just as careful and do not try to catch the top. In momentum markets like this, the last 10% in time can be very large in amount. Like Barry Ritholtz said recently on his blog thebigpicture.com you can be early being long, you can even be early going to cash, but the death of a money manager is being early going short. Or as I heard said once, the canyons of wall street are filled with the corpses of those who where right but too early.
Conclusion: Its to late to get in or but more. Its time to scale out and prepare an exit plan. What will be the straw that breaks the camels back? It could be and ISM reading below 50, a drop in auto sales below 16mln units, a further decline in home sales or prices, a renewed climb in oil prices, and actual decline in Walmart SSS, or many other things. Or as John Mauldin discusses in his e-letter of 8/26, fingers of instability, it could be some seemingly trivial event, the market not acting well after a good news item, one bad earnings or Christmas sales report. So as usual, we wait for a fundamental, technical or sentiment signal to ell when to hit the exit door. Time is drawing near.
One of the points I was trying to make then, was how remarkable the stock market rally was in light of all the economic weakness. In that regard, not much has changed, and in fact the economy has deteriorated since then. Back then I argued that the first revision in 2nd qtr GDP, up to 2.9% from 2.6% is what swept away all economic concerns and accelerated the stock rally. Similarly, when the Dow declined 6 days in a row from 10/26 to 11/03, it was the strong rebound in the ISM services index and the large revisions in non-farm payrolls for the prior two months and corresponding drop in the unemployment rate, that once again swept away economic concerns and reignited the rally.
Now however, I believe the rally is running on fumes, and here is why:
Not only was 2qtr GDP revised back down to 2.6%, but 3rd qtr came in at 1.6%.
Auto sales have declined further to 16.1 mln in Oct from 16.6 in Sep and manufacturers have cut production further in the 4th quarter because they are choking on inventories.
Existing home sales and prices continued to drop. Sales to 6.18 vs 6.3 in Aug, prices another 1.9% vs a 3% drop in Aug.
New home sales showed an uptick has they have for the last several months but then is revised away in subsequent data. Prices, however showed a steep drop from 239,000 in Aug to 217,100 in September.
The ISM dropped to 51.2 in Oct vs 52.9 in Sep.
The Democrats have indeed taken the house and Senate.
Walmart sales have been below the low end of forecasts for two months and not at the high end as the were in Aug.
It's hard to be bullish about $60n oil, when most of my working life $40-$50 oil was looked at with aghast.
Eventually, the top line rules. You can continue to generate earnings for a while as the top line slows down as many companies have, but eventually they have to follow.
Technically and sentiment wise the market is extremely overbought. Barchart's momentum indicator shows 79% of stocks are over their 100 day ma and 71% are over their 200day mvg. Newsletter writers are at their most bullish since May.
Those betting on a soft landing are now bucking the trend. We have all been told, the trend is your friend. They economic trend is now down and bulls are trying to catch the bottom. If you are bearish be just as careful and do not try to catch the top. In momentum markets like this, the last 10% in time can be very large in amount. Like Barry Ritholtz said recently on his blog thebigpicture.com you can be early being long, you can even be early going to cash, but the death of a money manager is being early going short. Or as I heard said once, the canyons of wall street are filled with the corpses of those who where right but too early.
Conclusion: Its to late to get in or but more. Its time to scale out and prepare an exit plan. What will be the straw that breaks the camels back? It could be and ISM reading below 50, a drop in auto sales below 16mln units, a further decline in home sales or prices, a renewed climb in oil prices, and actual decline in Walmart SSS, or many other things. Or as John Mauldin discusses in his e-letter of 8/26, fingers of instability, it could be some seemingly trivial event, the market not acting well after a good news item, one bad earnings or Christmas sales report. So as usual, we wait for a fundamental, technical or sentiment signal to ell when to hit the exit door. Time is drawing near.
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