Yesterday could not have gone better!
I titled the morning post "Confidence is Key" and decided that, since my targets were dead on Monday, that we should stick to our bear plan into the Consumer Confidence report which was, as we expected, a huge disappointment. My 9:50 Alert to members suggested the DIA 9/30 $99 puts for $1 into the report and then we got a nice 100-point drop for the rest of the day that ran those puts up to $1.60 (up 60%). Also, in that same alert, we went back into SRS (now dubbed "The Widow-Maker") at $9 and those finished the day at $9.50 (up 5.5%) and the Nov $8 puts we sold for .75 dropped to .60 (up 20%). These are not bad trades to make while we wait around for the market to pick a real direction.
In addition to a poor Consumer Confidence report (53.1 vs 57 expected), we also got a very poor Investor Confidence reading at 118.1, down from 122.8 in August, which was a 5-year high. "There is a recognition that a portion of the recent rise in global equity prices can be attributed to liquidity expansion rather than fundamental opportunities. Institutional investors are pausing to assess this balance," study says.
Speaking of investors who are not confident, GE's own Jeff Immelt, unlike his army of pump-jocks on CNBC, isn't willing to sully his own reputation by mindlessly cheerleading the economy. He was in Singapore yesterday and said that: "high unemployment and slower lending will drag on U.S. economic growth, likely resulting in the weakest recovery in decades… Easing up money has always been the elixir to keep the economy in recovery mode," Immelt said. "But once you get interest rates to zero percent, you can't go much below that, which is kind of where we are right now. A lot of the jobs lost in financial services and construction are never coming back."
If you don't think Immelt is in touch with the economy despite GE's Global footprint and $180Bn in sales, perhaps we can listen to WMT CEO Robson Walton (yes, nepotism), who oversees $400Bn in annual sales and he said at yesterday's CEO conference: "The World recovery is going to be led by Asia although it's going to be very challenging. I think this recovery is going to be a slow one – sales have been tough."
As noted in David Fry's Daily S&P chart, volume the last two days fell off a cliff and, if you look at the lines along the bottom, you'll notice that the last time we had tow low volume days like this was in early August, just ahead of a nasty gap down and then in later August, just ahead of a nasty gap down. Far be it from me to draw any conclusions but I would like to see us hold up under "normal" volume before declaring we are out of the woods.
Our watch levels are hanging tough as the indexes hang around our toppy target levels of: Dow 9,800, S&P 1,060, Nas 2,130, NYSE 6,970 and RUT 615 and we did fail all but the S&P yesterday, which kept us bearish into the close so watch out today if the S&P gives it up but I think we're likely to flatline here into the end of quarter as so much effort has been put into getting us to these levels, I can't imagine they're going to let it all fall apart on the last day, not matter what the data may say.
We have the ADP report at 8:15 (Update: In-line at -257,000 jobs) and the Final Q2 GDP at 8:30 but no surprises there. We have the NY (9:00) and Chicago (9:45) Purchase Managers Reports but the big deal for today is going to be oil inventories, where expert analysts expect a net build of 2.8Mb but I'm shotting for 4Mb and I've already sent out an Alert to Members this morning on a short play on USO ahead of the inventories, taking advantage of the overnight run back to $68 oil as the dollar got hammered in overnight trading.
Mortgage Applications fell a seasonally adjusted 2.8% last week compared with the week before, despite more favorable mortgage rates, the Mortgage Bankers Association reported Wednesday. Applications were down an unadjusted 44.3% for the week ended Sept. 25 from the same week in 2008. Refinancings eased 0.8% on a week-to-week basis as filings for mortgages to purchase homes dropped 6.2%. This is, as my Economics Professor used to say, not good…
Speaking of mortgages (and bad ones at that), CIT is on the brink of collapse this morning as the company looks for someone to take over their stock and the $30Bn in outstanding debt that's attached to it. CIT got $2.3Bn in bailouts last fall and a $3Bn "emergency loan" in July but that didn't stop the stock from jumping 37% yesterday on rumors that John Paulson was dumb enought to save them. That boosted the whole housing sector so we'll see what happens today if it ends in bankruptcy after all.
Oops it's 8:30 and the GDP final report came in at "just" -0.7% adn that's boosting the futures as it's always good to know that our government can be 40% off in it's growth estimates for the entire economy. Also revising their estimates this morning is the IMF, who are raising their 2010 Global Growth Forecast from 2.5% to 3.1% and revising 2009 from -1.4% to -1.1%. The IMF is also reducing their estimate of global loan losses by 15% to "just" $3.4Tn, which is the market cap of the entire S&P 500. According to the report: "Systemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement. Even so, credit channels are still impaired and the economic recovery is likely to be slow."
That's right IMF, what do the CEOs of WMT and GE know? You guys have desk jobs in Washington, where you get a much clearer picture of the economy than some guys who are busy dealing with hundreds of billions of dollars of global sales. Also in global news, Asian markets were mixed ahead of China's 60th Anniversary of Communism celebration, which was kicked off with a government edict to curb excess industrial capacity and a ban on aluminum smelters for the next 3 years, that should be good for AA (now $13.30).
A failure to rein in excess capacity "will make it hard to prevent vicious competition in the market and raise profits, and will lead to shuttering of companies, or insufficient use of capacity, layoffs, big increases in bad assets held by banks," the government said in its sternest warning on the subject yet. "The worry in the industry isn't so much about new capacity, it's about the existing overcapacity," said Wang Zhouyi, senior base metals analyst for Shanghai Cifco Futures.
Europe is flat ahead of the US open (9am) and is being held up by comments from French President Nick Sarkozy, who says that even with a record budget deficit, France needs to spend more borrowed money to kick start economic growth. As the government prepares to unveil its latest tax and spending plans today, Sarkozy is promising a “grand loan” to finance spending on everything from Paris’s rail system to new supercomputers. That will swell a budget shortfall that already is the highest since 1959, the year after France’s post-war government collapsed and Charles de Gaulle took power.
As an example of how totally clueless economists are: Standard & Poor’s Rating Services on July 30 affirmed its AAA long-term and A-1+ short-term sovereign credit ratings for France, saying the outlook was stable. “The stable outlook reflects our expectations that the French economy will return to positive growth once the global economy recovers and that this will be accompanied by a clearly discernable trend in budgetary consolidation and debt reduction,” S&P said.
This plan “will add to debt and the state is already borrowing 700 million euros a day, so whatever we do it has to be in the national interest,” said Senator Jean Arthuis, a former finance minister. Adding 50 billion euros to its current borrowings would bring gross French debt to about 89 percent of GDP, surpassing Hungary. France would become the European Union’s fourth-largest debtor behind Italy, Greece and Belgium. Germany, Britain and Spain would all have smaller borrowings relative to the size of their economies, with gross debt burdens of 73 percent, 68 percent and 51 percent, according to European Commission estimates published in May.
Oh yeah, everything's just fine…