TB’s Quote of the Day:
You don’t tug on Fuperman’s cape
You don’t spit into the wind
You don’t pull the mask off that old Lone Ranger
And you don’t mess around with Jim
- the late Jim Croce
…after Thursday’s stock market breakdown that couldn’t even benefit the long end of the bond market, hopefully dear reader you can forgive TB for being convinced that yesterday would be downright ugly. To recap, the major stock indices were down 2-3% on Thursday and some major sectors fared even worse (Energy -3.5%; Oil Services -4.4%; Financials -3.7%…REITS -5.9%). The only forgiving fact was that volume was just 738 million shares, less than half a normal day and lowest of the year! Then over the weekend as TB was checking the stocks he follows (about 60…not being a Jim Cramer who can keep 2,000 stocks or more in his head), he noted that an inordinate number gapped down on the open Thursday in response to the rout in the global markets, a trend that continued and was even worse on Monday…especially India which fell 5.8% due to record debt issuance both in dollar terms and as a percentage of GDP causing the Rupee to do a death spiral.
So the stage was set for a huge selloff…yet it failed to materialize. Despite the futures being down well over 100 overnight, and still off 70 or so, the Dow opened down 1, then oscillated around unchanged for most of the session before rallying in to the close in the final half hour as we have begun to expect. TB left for the gym before the opening and was shocked when he saw the monitors!
But just what did we get? No closing of the opening gap down from Monday, several indices took out key moving averages, the highs were not much different than Thursday’s lows and the moves of individual stocks were random and pathetic. In other words, it was a meaningless session aside from bucking the entire rest of the world. But think about that: as mentioned above, global markets tanked on Thursday, then we went down which in turn took them down on Friday while we par-tayed. Then down again yesterday before the open so were we to follow suit? Apparently not.
So TB will no longer prognosticate in this ‘thin of thins’ market. He won’t tug on Superman’s cape, definitely not spit in the wind, no way will he try to remove the Lone Ranger’s mask and while we don’t have Jim to mess around with anymore, he will not tempt Mr. Market! No sir! …but he will remain a BEAR!
There are definitely two schools of thought on the economy. The ‘V’ shaped recovery contingent, and the ‘L’ or worse minority. Is ‘L’ the new ‘V’?
TB is in the latter camp and has been due to his own enlightened theory (if we are trying to repair our balance sheets…corporations like Microsoft are borrowing when they don’t need it just so they have it if and when they do need it…banks are being more restrictive than ever in their lending and focusing on rebuilding their balance sheets and of course paying back TARP funds so they can pay execs whatever they want (it may not be the primary reason but TB has yet to hear another)…unemployment is near 10%…actually around 16% when you count discouraged workers and those working part time but wishing to work full time…wages are not going up…the stimulus is being offset by increases in state and local taxes…it’s a mess.
Yet the supply-siders, Art Laffer, Brian Wesbury, Larry Kudlow, and others are worried about INFLATION! Wait…weren’t we just worried about DE-flation and shouldn’t we still be? We should unless the ‘V’ is on the way and employers will somehow use up all that excess capacity and in a feeding frenzy start giving out big wage increases to the rank and file…and that folks is NOT going to happen…any more than the consumer will be back.
Just as they did in 2007, this same group was worried about rising commodities prices causing inflation…yet while it was double digit in raw materials prices due to the rigged commodities market where the banks were buying unlimited contracts in oil and other commodities so they could write ‘commodity index swaps’ to funds, and those increases even carried over into intermediate goods but the end users were already concerned about their mortgage payments, housing prices had already peaked, retailers were seeing it so they balked at paying the wholesalers who ended up with excess inventory and that stopped the entire process…can anyone recall a similar time? Just out: banks issued 38% fewer credit cards in the first half of this year than the prior year.
Yet the supply-siders insist that we have to have a huge jump in interest rates…what with all that debt…and they might be right but it seems highly unlikely. Yesterday, TB read in John Mauldin’s Outside the Box edition a compelling case for the ‘L’ team and why even though commodities prices might rise (except it appears that even that idea may be wrong as speculation was driving prices higher again, not demand…how can there be rising demand when every storage container in the world, except coffee cans is brimming with crude? Also, the selloff in crude yesterday was precipitated by a report that crude could fall to $20….T. Boone Pickens was on CNBC this morning and recall he saw $70 oil while Goldman was calling for $75-85. But today he repeated what he had said when oil was in the $50 range: we will see $60 before $40. TB recalls that too. Whatever happened to those dire ‘peak oil’ forecasts? A good recession will cure that every time but it is now what we do that will determine the future price. If we do as we Americans so often tend to do and think we dodged a bullet we will pay for it later…in spades! We have to conserve and we have to find alternative sources of energy or at least develop them.
But even if commodities prices do rise, if incomes are not rising and credit isn’t available doesn’t the elasticity of food and energy mean that we have to take more from discretionary income and divert it to paying the heating bill? TB would say yes and in the article they proved it with actual data not just a gut feeling as TB was working from.
That also means that corporate earnings will be less…and remember the banks have not even addressed their commercial loan problems yet…and that means that the p/e ratios are still too high…particularly after last quarter’s huge rally. So either the ‘E’ has to go up or the ‘P’ has to go down. Think about it.
There was only one issue TB had with the piece and that was a biased support of hedge funds. It said that we should not blame the financial crisis on hedge funds with 1.5 to 2 times leverage yet trust banks with 30 times leverage. Hedge funds were NOT using that lower leverage during the build up to the crisis…certainly not the average fund. The only thing John Merriwether learned from his fiasco at LTCM was to not use 100 times leverage. His new improved fund was at ‘just’ 30 times when he had to shut it down. Also, there is a huge difference between a long only fund and one that either uses derivatives exclusively or significantly since derivatives by their very nature are leveraged! As for the banks, he is right…you should not trust a bank with 30 times leverage yet that is where they are. Remove the FDIC guarantees and they are toast!
A last comment: Libor, the rate banks lend to one another at in London, is still dropping. While the 1 month rate has been steady at 0.30%, the 3 month rate continues to fall On June 18 it was 0.61% while overnight it fell to a new low of 0.54%. A caution here as that rate is an ‘average’ and Citi or BofA are not borrowing at the same rate, in fact the spread from the high to the low is quite large. Think about this as the 2 yr T-Note rate is <1%!
Yesterday TB closed with: “Good luck today and this week…it looks like we are going to need a lot of it!” That remains solid advice.
TB
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, © July 7, 2009.
