Traderbill’s Financial Markets Weblog

 

  

…yesterday’s ‘mayday’ may become today’s ‘mayhem’ which could in turn become Monday’s ‘carnage’.

 

1. Housing. Don’t get all glassy-eyed but we are back to trying to explain yesterday in technical terms…after all the rally certainly was not based on fundamentals…or at least sound ones. On Wednesday, David Jones, a well known market economist who TB has followed since entering this whacky business in 1972, and who was chief economist for Aubrey G. Langston, once a premier government securities firm, stated that we definitely are in recession and it will be at least a year before we get out of it. Why is it that only a handful of economists have the guts to call a spade a spade…or a recession for what it is? At lunch in SF yesterday with a former colleague we simultaneously brought up this subject…which waiting for the proper definition from the National Bureau of Economic Research…who cares, for God’s sake? As Merrill’s David Rosenberg pointed out in his commentary Wednesday (that is the nice thing about taking BART to the city as TB can then catch up on his reading): foreclosures surged in the first quarter to 650,000 which is one in every 194 households…so at least 1.5% believe we are in recession or worse (the foreclosee and the neighbor on either side of them). Year over year foreclosures are up 112%. Of course the states with the biggest booms are suffering the most as illustrated by the latest Case-Schiller survey. In Nevada (number one in growth and now foreclosure), the ratio is 1 in 54, California 1 in 78, and in Arizona 1 in 95…no wonder Schiller sees us as only about 2/3 of the thru it…so by that standard Tsy Sec Paulson is right ”the worst is behind us”…or is it? Of the 20 areas Case-Schiller surveys, only ONE had price appreciation: Charlotte, Virginia +1.5% from a year ago, but even it is -4.3% in the last 3 months! The average for the 20 areas is -12.7% y-o-y and -24.9% for the three months! Boston, which fared worst in the last real estate boom/bust is down ‘only’ 4.6% and 15.9% respectively. Las Vegas is the leader in both categories, -22.8% and -40.8% respectively. Remember these are for broad areas since the San Francisco area is down 17.2% and 36.5% but you try to find a bargain in SF, or any other area where there hasn’t been overbuilding and subprime lending. Still, even the good areas are eventually vulnerable due to incomes not rising, real estate being a ‘food chain,’ and lastly tight credit. Hopefully, either the Frank-Dodd Bill or the FDIC proposal will provide the funds to put a floor in on real estate but even that will take a lot more time than expected…remember Project Hope? More like project disappointment.

 

Had it not been for Mortgage Equity Withdrawals (MEW) we would have been in recession long ago as they were providing the bulk of growth in the economy…without them GDP would have been at levels not much above where we are today. By the way, since everyone got giddy about the GDP being better than expected, if you took out inventories which rose 0.8% vs real final sales at 0.6% it is apparent that build which was clearly additive to GDP was also an involuntary inventory accumulation…who in their right mind adds to inventories in this environment? Rosenburg points out that home price deflation is accelerating and that is bad for consumer spending: “it is estimated that every 10% decline in home prices subtracts about $105 billion from consumer spending. This, coupled with the fact that retail gasoline prices have surged another 60 cents since early February (roughly an $80 billion drag to consumer spending, completely wipes out (offsets) the entire $117 billion tax rebate check that are now hitting consumer mailboxes.” Also, surveys show even millionaires are hurting. Manufacturing executives are pessimistic too: only 12% of them are optimistic about the US economy over the next 12 months…you saw the drop in capital expenditures…in Q4 the number was 29% and 57% in Q1 2007…worse on the global economy, 38% are optimistic vs 64% in Q4 and 83% in Q1 ‘07. Don’t look for any boosts in spending from these guys! This data also courtesy of Rosenberg.

 

Look at WalMart which proudly announced they would cash those rebate checks for their customers…most who don’t have a checking account…and are heavily discounting grocery items…trying to lower margins and make it up in volume…that can work for a quarter, but what it comes back to is: are these sustainable sales…that is what you are buying when you purchase a stock…not damage control! This brings back the question TB has repeatedly asked on the financials: even assuming the worst of the news is embedded…where will the replacement revenues come from? This is key when the S&P 500 is trading at 22x earnings (about 15x ex-financial and consumer stocks), yet the only sure thing has been when the S&P p/e is below 10x…the reason is that earnings growth is sure to slow and thus more disappointments. Look at how the misses are building up and on most stocks how little you get when the make or exceed the estimates, which is not as often.    

 

2. Stocks. Make no mistake about it, yesterday was a breakout technically…after all the Dow closed above 13,000 and the S&P 500 above 1400…both by about 10 points so poised for whatever they glean from the payrolls. TB’s bet is payrolls are worse than expected but who cares…April will still be the fourth consecutive month of decline, but it the number is better we could well see a continuation of the rally. Of course, ‘better’ is a relative term and frequently, almost daily we keep hearing on CNBC “it could have been worse” as if that is a good reason for a rally when things just keep getting worse but not as ‘worse’ as they could have been. You are informed that you will be working 5 hours a week less than you were but otherwise some people would have been laid off…see don’t you feel better already, and the one to go could have been you…hard to imagine that though since your services are invaluable!

 

The point is if you call those ‘fundamentals’ they are goofy fundamentals…like “Freakenomoics”. The mothers milk of stocks is GROWTH! Good, solid capitalistic growth! Nevermind that those running the economy have a horizon of the next three months or a year at most…look at the last section on how CEO’s see things…pretty dismal…but not the stock market mavens who have a vested interest in rallies.

So let’s look at what happened to the Dow, S&P 500, and NDQ 100 over the last three sessions (data is presented sideways to make it fit the page…with “,” indicating open, and ” ‘ ” indicating close:

 

                  DOW 30                       S&P 500                NDQ 100

Tues.     ( +)    -,—-’-  (-)                 ,—’—                    –’—–,-     Inside Day

Weds.       -,———’–                 -,——–’–            -,———’-    Key Reversal (-)/Outside Day

Thurs.  –’—————            -’————,-      -’————-      KEY REVERSAL POSITIVE!

 

TB has been commenting daily on the myriad technical indicators which seldom come close together which we have been seeing since March 24…the first day of the drop in volume which has persisted since with the lone exception of April Fool’s Day - the big rally, which like all other breakouts has failed to be sustained! The combination above…and all three indices is incredibly rare…in fact TB has never seen it before: An inside day indicating uncertainty followed by a key reversal which is very bearish and then followed again the very next day by a positive one (given the way the market is opening on a sick interpretation of the economic data, it could post another big rally today that clears away all that bearish resistance and will certainly cause more short-covering and buying by fence-sitters. Good luck!

 

On the fundamental side…it is incomprehensible that not only do we not ask where the replacement revenues will come from for financial stocks but totally ignore DILUTION…dilution to an extent never in our lifetimes have we seen…to raise capital…in Merrill’s case it was even used to make the dividend payment! All this despite the fact that everyone pumping money into the ailing financial stocks has suffered losses…thankfully someone has the guts to do it…how long before a payoff on Citi? Never? We have the worst level of financial analysis in history and that means surpassing the dotcom bubble which is a tough act to follow. We have totally taken leave of our senses…for shame!

 

3. Unemployment data. How we can focus on ’only’ losing 20k jobs when the real point is it is the fourth straight decline and for manufacturing and other goods producing sectors it has been suffering for a year. But that is the way we are and it didn’t help that the rallied bonds sharply just before the data release and then gave it back and then some. Forget the unemployment rate and instead focus on those 5.2 million households working part time but want to work full time…and forget those 362k new household jobs…they are B.S. Still “it couild have been worse.” Gimme a break!  

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC May 2, 2008