Jobs, jobs, jobs!
That's what it's all about, or not about today. Last week we got much better than expected numbers as Job losses fell from 640,000 to 565,000 but how much of that was due to the July 4th holiday weekend we will see this morning. Analysts have quickly lowered their expectations to match last week's figure (as they don't have a clue of their own) and now we are expected to lose "only" 550,000 jobs this morning – still a 6.6M annual pace so keep that in mind should the markets decide to "celebrate" that number. Looking at the chart, you'll see that July of '08 had a sharp downturn in Job losses as well, down from 400,000 to 350,000 with July 4th celebrated on a Friday last year too. Those reports arrested a slide in the Dow from 13,000 in May to 11,000 in mid-July and the market ran back to 11,800 on Aug 11th and we held around 11,500 until things fell apart in September and we fell all the way to 8,000. I know – history is just soooooo boring, what could possibly be learned from it?
Yesterday was an amazing day as we ran right up to the target levels I predicted on Monday, which I reiterated in yesterday's morning post, saying: "Our upper targets to break the dreaded head and shoulders pattern are: Dow 8,500, S&P 930, Nasdaq 1,825, NYSE 6,000 and Russell 510." We had what we call a "Free Money Day" as the markets went up and up and up some more with the Dow topping out way up at 8,620, a 6.4% move off the bottom, which is just about a 20% retrace of the 33% drop so, of course, we shorted it! The S&P made it right to 932 and finished there, up 7.1% since Friday. The Nasdaq made it all the way to 1,860 after gapping just over our target at the open, up 6.9% for the week. The NYSE hit 6,000 on the nose and finished just under it – up 7.1% while the Russell over-achieved to 515, up 8.4% in 3 days.
As I mentioned yesterday, just because we made our targets, we are not automatically expecting a "breakout." We are not happy with the WAY in which we got here – a short rally on fairly low volume leaves what I call an "air pocket" below the gains as there is little support. The way to think of this is that AAPL, for example, has 900M shares outstanding and, over the last 3 days 60M shares changed hands, taking the stock from $136 to $147 (up 8%). Does that mean if the other 840M shares held need to be sold that they too will get $147? That is the flaw with the stock market's pricing system, you are looking at very small slices of sales and assigning a "value" to the whole based on, in the case of AAPL, the sale of 6% of the stock under favorable conditions. As our financial community discovered with the CDO market – you never really know what something is worth until someone tries to sell it. It's very easy to drive the market higher on low volume but it's very dangerous to apply "value" to the whole from statistically insignificant samples – this is why we use 50 and 200 day moving averages – to smooth out the nonsense.
We took advantage of that discrepancy to add two short plays to our $5,000 Virtual Portfolio as stocks ran up to "silly" levels at 2pm. I sent out an Alert to Members (and also on Stock Talk at Seeking Alpha) at 2:04 saying: "Earnings – Up here (on this gain) we look to see who might miss and play them straight down. $5KP Play – 5 CY Aug $9 puts at .28. Hopefully they don’t drop more than 1/2 as CY won’t gap through $10 so easily. $5KP Play – 3 MAR Aug $20 puts, for .60. Same idea." Both stocks had run up ahead of earnings and both stocks were good for a possible miss and, even if they didn't miss, my logic was that they had already priced in "good" earnings. So far, so good as MAR had a beat (.23 vs .21 expected) but lowered guidance and CY also beat expectations of losing 0.9 per share by only losing 0.3 per share (although GAAP losses were .32 per share). We'll see how the jobs picture is at 8:30 but I'm inclined to stick with both of those puts over the weekend as they offer little resistance to a larger market pullback although CY we will have to watch closely if people buy the headline beat.
We maintained a bullish stance on YUM at what we hope is a bottom. In other virtual portfolios, we get a test of our JPM put spread this morning as we took the Aug $38 puts for $4.05 and sold the Aug $35 puts for $2.22 and JPM kicked ass this morning with earnings of .28 vs. 0.4 expected. That trade idea was based on the concept that a beat was priced in and we'll likely be looking to take out the $35 puts if we get a good price and then holding for a pullback to sell the $35 puts into. Of course we took our 50% and ran on INTC, that was plenty to make for 2 trading hours worth of work! As I said in the morning post, we were looking for bearish plays to balance out last week's very bullish selections. I also mentioned shorting FAS and FAZ at $45 each and FAS finished at $48.51 ($3.51 loss) and FAZ finished at $41.60 ($3.40 gain) so down .11 so far – we'll check in with that trade from time to time…
8:30 Update: Job losses were good. "Only" 522,000 job losses on the week ending July 11th. This will suck for our remaining DIA puts but I'm still not very excited by the jobs report as July records a lot of seasonal hires (see chart above) and is NOT a good indicator for what's really going on out there. Continuing claims fell a whopping 642,000 to 6,273,000, the lowest figure since April 11th and double the previous record decline set in 1983. "This big drop is not necessarily an indication of what is going on economically," a Labor Department analyst said, adding that the seasonally adjusted numbers are really clouded by the timing of the layoffs in the automobile industry and other manufacturing sectors. Within a week or two, the data should be more reflective of the true state of the labor market, the analyst said.
Still, you headline shoots don't get any greener than this so we'll see if we break over our levels this morning (we are already well over on most) or take a pause and do the 1.25% retrace we expect before, hopefully, consolidating (some say flatlining) into the weekend at right about our upper levels. Of couse we still have plenty of earnings to get through and it's a sea of green this morning with just HOG, MMR, MTG, NXY and USAK missing so far this morning although last night was kind of ugly with EWBC, LSTR, RECN, SGK and STLY all missing (half the reporting companies). To have a "good" earnings season, we need over 60% of the companies to beat and we're not there yet. Later today we hear from GOOG and IBM in addition to ESLR and PBCT and tomorrow morning we close out the week with BAC, C, FHN, GE and MAT – all potential market movers so fun, fun, fun in store on options expiration day!
Asia had a decent morning. The Baltic Dry Index flew 7.33% back to 3,324 so someone is shipping something somewhere but you wouldn't know it from our own transport index. Both the HSI and the Nikkei took tremendous hits in the afternoon and went from up 2% to up about 0.5%, about the pattern we expected from US markets this morning only without the gap up at the open that saved both from taking losses (we already had ours yesterday). China posted a Q2 GDP of 7.9%, just 0.1% off the government's target and that is incredible (as in NOT credible) but the Shanghai is already up 75% this year and held flat on the day on this FANTASTIC (as in "based on fantasy") report.
China has rebounded after authorities used the state-controlled banking system to engineer one of the most dramatic monetary expansions in history. Banks have issued twice as much in new loans so far this year as in the first half of 2008, and China's money supply is now expanding at nearly triple the rate in the U.S. Along with China's stimulus plan of four trillion yuan ($585 billion), the credit boost has helped to restore confidence, and the activity it supports is, at least in the short term, good news for home builders, car makers and suppliers of commodities like copper.
But the government's strategy carries risks. The flood of easy money into the economy could be spilling over into markets for stocks and real estate, and inflating fresh bubbles. Any buildup in bad loans and dud projects could weigh down growth and public finances. Also, the economy's dependence on government-driven investment and credit means that any policy hiccups could derail the pickup in confidence. "I do think there is a distinct and rising risk of an asset bubble and fluctuation in growth," said Wang Tao, China economist for UBS. With so much activity crammed into the first half of the year, it gets harder to come up with more stimulus projects in the future, she said. It is urgent that the government devise ways to generate sustained growth in the private sector. "In addition to short-term stimulus, there needs to be medium-term thinking about changing the growth model," Ms. Wang said.
One reason officials are reluctant to start phasing out the stimulus is weak demand for China's exports, which are down 22% so far this year. Despite official concern about unemployment, the small businesses that account for most jobs remain starved for credit even amid the boom. The benefits of the stimulus program have so far been concentrated in the state sector, which employs about 20% of the work force. "The current recovery is mainly based on a short-term rebound in inventories, which is not the same as a trend recovery," the State Information Center, an official think tank in Beijing, said in a report last week. "The material basis for an economic recovery would be the beginning of a new round of large-scale investment in capital equipment," the center said, urging the government to do more to support private-sector investment.
Europe is up about half a point ahead of the US open (9am). NOK had the poor profits we expected but is calling a bottom in their outlook. LYG, a resident of our $100,000 Virtual Portfolio, have announced another 1,200 layoffs as they consolidate the HBOS acquisition and they are up 10% for the week. The UK had a mixed jobs report, with a slower rise but still on a record pace for the quarter. "The latest U.K. labor figures contain conflicting signals about whether conditions in the labor market are getting better or worse," said Vicky Redwood, an economist at Capital Economics. "However, the big picture is that unemployment still has significantly further to rise," she said. Despite beign bankrupt, Iceland is unconvinced joining the EU would help. This is like throwing a drowning person a life preserver and them saying "I'll have to think about it."
Global PC shipments fell 5%, which means DELL accounted for a good portion of the losses (HPQ is taking market share from them) and that decline is less than expected so a green shoot there as well. Not so green is CIT, who will not be bailed out by the government and that could have severe repercussions to small businesses who use their lease-lines of credit to make major purchases. Expect a negative impact on durable goods orders in Q3. That stock is a fun short at $1.64 but stop at $1.81 as something is wrong if they gain 10%.
Well, I was wrong about jobs so we'll have to see how the morning plays out. We're still going to be looking for a 1.25% technical pullback in the major indexes but, if they hold that, then we may have something to build off.