Traderbill's Financial Markets Weblog

…somehow the Dow managed a 76 point rally out of the chute which was curtailed by the fourth consecutive decline in Leading Economic Indicators – generally regarded as a recession and that along with  a sharp deterioration in the Philly Fed Survey did the market in  …worse the outlooks six months from now was -16.9 fro +5.2, the first negative number since Jan. 2001…meanwhile prices paid continued the sharp increases of the past three months while prices received increased but at a slower pace. Then the selloff was on but what is lacking here?

What is lacking over the past three weeks is direction and a lack of volume to support a stock market rally…but the reason should be obvious: not only do we have a rapidly weakening US economy and rather than the rest of the world being able to carry us, the emerging markets are failing rapidly (see China and India in the overnight commentary). Emerging market growth is also being impeded by rising inflation, high energy prices and a lack of power generation even though they are putting plants on line rapidly…just can’t keep pace. While energy prices may have peaked temporarily at $100 crude, it won’t decline below mid-$80’s if that, so no relief in sight. TB has coined a word which he will now define:

Perhaps it will become as popular as Gary Schilling’s coining of stagflation, but hopefully won’t make a pariah of him as it did Schilling for two decades. But if the situation persists all of those brilliant economists who have declared that consumption will not slow…after all it hasn’t for 25 years…are going to look very foolish. They fail to understand the meaning of a credit crisis and excessive leverage on all of their brilliant calculations. Interesting that the two most accurate people these days have names starting with ‘Schill’, Schilling and Schiller…and neither is a shill like those representing the financial sector.

There are signs of acceptance of the problems we face yet they are only spotty. There has been no attempt to understand the problem more of denial. Kudlow has only shifted his stance slightly (still leaning far to the right of course) from Goldilocks is alive and well which he has repeated ever since the subprime problems came to light, to: we must keep Goldilocks alive. It is unclear whether he means that as a market analyst or as a supply-side neo-con. Last night, Jim Cramer who has been all over the lot from tirades at the Bernanke Fed to stopping recommending individual stocks (briefly) because everything he liked tanked, to last nights: to make money you have to be in the market not sit idly by on the sidelines. Of course the opposite is true in a bear market…especially a secular bear which TB believes we are in that is not aided by demographics or slowing emerging market economies (still strong but less likely to be able to carry anyone else). But as TB has said it isn’t enough to come to grips with the problem you have to watch all the others in their failed attempts to rally it and then step in. Listen to anyone who says they like the market on CNBC and while they still outnumber the bears, the bears are becoming more vocal. The comments are like: “I like tech stocks (or retail, or homebuilders) here.” Followed by: are you buying here? “No, we are long the sector and fully invested.”  Question: IF they are long and fully invested and retail is out of the equation, doesn’t that leave the market at the mercy of the only other active players: hedge funds? Yes, and you can make money at it, but you might win one or two and give it all back on a third. This will be a string of ‘hit and run’ rallies…countertrend ones and as you saw yesterday many stocks were up 3, 5 or even 8% intraday. The pattern is clear: the most popular momentum stocks, most notably the four horsemen, then got hammered, then were perceived too cheap or more likely heavily shorted so a short-covering squeeze ensues. But this has happened by sectors even daily, up, down, up, down…going nowhere but some big players are making money and they are making it on technical, not fundamental analysis. Look at yesterday: JC Penney spiked on the open on strong earnings…only to close near the session lows and about at the prior days high. Garmin which surprised…TB wasn’t, as they flooded Costco with their GPS navigators…the stock sold off big. How about Microsoft’s BIG ANNOUNCEMENT…publishing all their source codes…the stock surged early in anticipation then went negative as soon as it came and the lowest close since 8/26/07! Starbucks down and the lowest close since Jan. 2004 on job cuts…cutting jobs and partners by 600 and a reorganization…gosh and all was supposed to be good once the founder announced his return in January a la Steve Jobs  …but he is no Steve Jobs and there is nothing magical about selling coffee. Ah, but Research in Motion (RIMM), the only one of the four horsemen to stage a rally rose on a positive surprise and higher forecast…readers may recall the comments of Fred Hickey on how many units were shipped out but not activated or TB’s observation of 35% discounts. That stock was the only significant gainer in index points on the NDQ 100…5.8 index points while the other three subtracted from 1 to 3.3. There were no other significant contributors. Now some more points:

Housing: A friend in Florida reports big money is starting to buy distressed real estate…remember that makes sense IF we are near a bottom and have a lot to invest…plus deep pockets to wait it out. No hurry for a small investor, you will get it cheaper. This is why the Buffets of the world are announcing their buys…to get company. Meanwhile in California, last weekend there was a 2 day foreclosed real estate auction in Oakland with more than 300 parcels on the block. A warning: this is not the same as a foreclosure sale, like TB has been reporting on. The real players would never buy into this  …also note they can go through 500 parcels in a single day at about 5-10 seconds each whereas this took two days. The auctioneer is never on your side. In this case the auctioneer was Hudson & Marshall from Dallas, the largest real estate auctioneers in the country. A spokesman interviewed after the sale said it was a success and people got some great auctions, then added: we are moving on to other areas of the state now but don’t worry we will be back in 2-3 months and will do so for probably the next two years. This as Bay Area real estate sales slowed to the lowest in 20 years while foreclosures in Oakland have tripled. Also look at all the seminars on buying foreclosed property as well as all those gimmicky stock systems that come out every day. Time to buy? Not yet…but a good time to sell once the conforming guidelines are set…remember that mortgage rates have risen for the past three weeks despite 100 basis points of easing by the Fed. Also, don’t forget the subprime problems are spreading to prime and even commercial properties and REITS…Sam Zell might be the smartest man on the planet! 

Subprime and monoline insurers: TB heard the other day that there was starting to be a market again in those subprime derivatives…although you could drive a truck between the bid and offer. The monoline insurers problems have focused attention on RISK, when in all but the ones with investment grade ratings of A+ or better, the issue is not CREDIT RISK, but LIQUIDITY RISK. Here too, after the headline 10-20% tax free rates for 7 days and 5-7% for 28 and 25 day paper, smart buyers are starting to emerge  …in one auction yesterday that came a week ago at 12%, it came at 9.4%. If you don’t need the money soon why not. TB is skeptical of the ones issued by muni bond funds like Nuveen or from non-profits as they are funding a long term asset but the ones backed by muni bonds issued by state and local governments they can ‘relink’ them and issue the underlying bonds outright…and the calendar is building of those that are doing so. TB believes this increased issuance, along with deterioration of the insurers (a temporary event as they will be split off, but the insurers will likely go down the tubes due to their real risk problems), will result in a sharp increase in long muni bond yields (the further out the curve you go the fewer number of buyers…also, they know enough not to chase markets and bide their time). This too will prove temporary and we could see the best high grade muni credit spreads in years…a buying opportunity! That’s how TB sees it…so muni’s could be a buy over the next 1-3 months…meanwhile your money market fund yields will decline sharply…while real estate related investments could take from a year to three years or more to pay off. This is not a recommendation, merely an observation but one that should be explored. One must exploit fear not run from risk…again, timing is everything.    

The point of the above is we are finally coming to grips with the issues…don’t become so absorbed with headline risk and some truly poor reporting of issues that you stay sidelined forever…just for now. 

TB