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Friday, March 29, 2024

Thrill-Ride Thursday

That was a short rally!

I have long said that there are 3 things that can take the markets down 20% EACH (from our 8,650 Dow target mid-point, already looking far away).  They are:  A major bank failure, a medium country failure (bigger than Iceland) or a major auto failure.  Well today we're getting negative outlook warnings from Moodys on 3 major banks (JPM, WFC and BAC) and GM's auditor "expressed substantial doubt about the auto maker's ability to continue as a going concern."  On top of that, Russia has been forced to substantially raise the rates they pay on bonds to 9.98% in order to stabilize the Ruble, which has fallen 30% in the past 6 months despite Russia spending 1/3 of their currency reserves trying to support it at various levels.

When we say S&P 500 will we be talking about the 500 companies in the index or the index's value? 

Things are indeed getting scary out there.  Russia is paying people 10% to lend them money, the Ukraine is paying 28.7% on 2015 bonds (any takers?).  With all these struggling economies willing to pay ANYTHING for a loan – how long will the US be able to keep borrowing cash for 30 years at 3%?  Even Warren Buffett is feeling the pain as Berkshire Hathaways credit default swaps (instruments that protect lenders against Berkshire defaulting on a loan) jumped to 535 yesterday – that is near JUNK levels.  This CDS level is generally consistent with Ba2 credit, 11 grades lower than Berkshire's pristine Aaa rating.  So if a triple-A rated company is trading like junk, what chance do the rest have?

GE's CFO is also feeling the pain: "We have an incredibly strong liquidity position," Keith Sherin told CNBC.  "We've got $45 billion of cash; we have no triggers that we could see that would have any call on our cash in the short term."  He said the capital unit will post a profit in the first quarter, and the larger company's position is even stronger.  "We can basically fund ourselves all the way through 2010.  You look through a three-year period here, we're going to basically deal with $35 billion of losses and impairments, while being profitable in GE Capital."

Yawn right?  Another financial CFO saying his company is in good shape while the share prices are relentlessy driven into the ground.  Well GE was one of the few stocks we added yesterday as we took a hedged entry at 10:30 when I said to members:  "GE at $6.15, selling Apr $5 puts and calls for $3 is $3.15/4.08 if you are very brave."  Today Deutsche Bank backed me up saying "the market was factoring the unit of General Electric at a negative valuation of as much as $60 Billion."  The firm is inclined to be much more positive, it said, since GE's industrial businesses are "clearly worth" more than the current share price."  There are plenty of stocks that are priced irrationally low in this market but GE certainly tops the list

Unfortunately, the market is dominated by technical selling programs and they don't read annual reports, look at balance sheets or sit down with CFOs.  Yesterday we failed to hold the technical gains of 2.5% I said we must have in Wednesday's morning post and it looks like this morning we'll be heading back to test our lows.  We went into the close slightly bearish but mainly hoping the rally would follow through but with so many of our worst-case scenarios clearly in play this morning, there's not too much surprise that we are looking at a substantially lower open (8am).  “People are doing crazy things in this market right now, but if you just stop and ask about the logic of it, it doesn’t make any sense.” said Guy Spier of Aquamarine Funds

As expected, Wen Jiabao promised to bolster China's economy and reaffirmed an economic growth forecast of 8% this year but he stopped short of promising a new stimulus package that had been widely rumored in China and that hit the Asian markets hard. "We must significantly increase investment and government expenditures to stimulate economic growth, improve people's lives and deepen reform," Mr. Wen said.  The Hang Seng did hold onto most of yesterday's gains, giving back one point but holding onto 12,200.  The Shanghai Composite added a point to close at 253, up 47% from their November lows and running into a very critical test of the declining 200 dma (speaking of technicals).  The Nikkei gained 2% DESPITE a 17.3% decline in Q4 capital spending and a 64.6 decline in pre-tax profits among 25,000 firms surveyed.  India cut their rates half a point but the Bombay Sensex still fell 3% this morning.

Europe is also adding monetary fuel to the fire with the ECB cutting half a point to 1.5% while the BOE cut rates in half, leaving just 0.5% on the table.  The BOE also launched a $105Bn program aimed at pumping money into the economy.  The bank can spend the cash on a wide range of securities, but policy makers' statement Thursday suggested they will focus the bulk of their firepower on government debt in the program's first three months. Ideally, much of the money will make its way into the banking system, increasing banks' ability to make new loans.  "I don't think it's going to change things overnight, but together with all the other measures it could ultimately help turn things around," said Howard Archer, chief U.K. economist at consultancy Global Insight in London. 

European markets are testing the 2.5% rule to the downside today, giving up 1/2 of yesterday's gains and we'll keep an eye on yesterday's goals of DAX 3,800, FTSE 3,600 and CAC 2,650, all of which are blown as of 9am.  If the EU markets can't retake those levels, then it's doubtful anything Asia can do will save us from breaking through our lows over here!

There is some good news though:  Jobless claims actually fell last week to "just" 639,000, below the 650,000 losses expected but productivity fell 0.4%, far worse than the up 0.8% expected and unit labor costs climbed 5.7% – both indicators showing that corporate cost cutting has already passed the easy stage where less jobs save money and moved into the trade-off zone, where companies are forced to decide what permanent production cuts will be made as they try to trim losses.  Too much of this and there will be no back to bounce to…

Non-farm business output plunged 8.7% during the fourth quarter, the Labor Department said Thursday, the steepest decline since 1980. Hours worked fell almost as fast, by 8.3%, the biggest drop since 1975.  Hourly compensation increased 5.3% last quarter. Real compensation, adjusted for inflation, jumped a record 15.9%, a sign that falling energy prices increased disposable incomes at the end of 2008.

So all we can do this morning is strap in and hold on for the ride, we'll see if the bottom of this loop in our roller coaster holds or if we are going to drop to new levels of pain.  Yesterday I was not in a buying mood as we were very concerned that it was just a weak bounce.  If we hold our levels today, I'll be a little more inclined to do a little bottom fishing and turn a little bullish at the finish.  We are still speculating on the SKF puts but we are also still worried about a run up to $250 on that index – where we will short the hell out of it! 

For now, my favorite SPECULATIVE recovery plays are still FAS – the dreaded triple-long financials at $3.50 as well as SKF puts like the $160 puts for $6 or less, but you have to be prepared for them to drop to $2 or less and then spend $5 more to roll them up to higher puts (maybe the $200 puts) and even then, with just over 2 weeks left, there is a possiblility of a wipe-out so not for the feint of heart by any means.   Meanwhile, I'm very, very glad we agressively rolled up our DIA hedges yesterday! 

Retail sales, notably Wal-Mart's were better than expected with WMT posting a 5.1% increase in sales.  "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending towards discretionary categories," said Vice-Chairman Eduardo Castro-Wright said.  As usual, the WSJ has an excellent chart to keep track of retail sales.

 

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