Wednesday, November 5, 2008

Market Tanks on Job/Earnings news

Good Evening Everyone!

Sorry I am a little late tonight. I had a busy day. The traders sold the news today as the Obama rally was pummeled by a string of negative reports on the economy. The DOW and NASDAQ both ended up down over 5%.

I knew I smelled a rat yesterday! I think the street kinda got distracted by the presidential election . There was absolutely no fundamental reason to push equities up 20% in the last week in a half.

Now that Obama has won the election, investors are now starting to focus back on earnings and the economy. The problem here is they both suck! Things are starting to unravel at lightning speed my friends.

Take a look at the ADP jobs report that was released today:

"Nov. 5 (Bloomberg) -- Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a private report based on payroll data showed today.

The drop was larger than forecast and followed a revised 26,000 decrease in September that was bigger than previously estimated, ADP Employer Services said. The decline in employment was the biggest since November 2002, when the U.S. was emerging from a recession.

Firings have spread from automakers, financial and housing- related companies to retailers and other services as the economic slump deepened. A government report in two days may show the economy lost jobs in October for a 10th consecutive month, according to a Bloomberg News survey of economists.

``We are starting to see more recession-like declines in employment,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The loss of jobs means consumers will continue to retrench in the next couple of quarters.''

The ADP report was forecast to show a decline of 102,000 jobs, after an originally reported drop of 8,000 in September, according to the median estimate of 28 economists in a Bloomberg News survey"

Quick Take:

This was the tenth month in a row that the economy lost jobs. This was by far the worst month. 157,000 is a HUGE number. Whats even scarier is the ADP report has been consistently light versus the government jobs report that comes out on Friday. I wouldn't be surprised to see a 200,000 loss print on Friday. Expect some serious pain in the market if I am right.


I thought the jobs report would be the worst news of the day until CIsco dropped a bomb after hours:

"Nov. 5 (Bloomberg) -- Cisco Systems Inc., the world's largest maker of networking equipment, said first-quarter sales rose at the slowest pace in three years and revenue this quarter will drop as the slumping economy crimps customers' budgets.

Second-quarter sales will decline as much as 10 percent from a year earlier, Chief Executive Officer John Chambers said today on a conference call. The shares sank in late trading.

``It is the second most difficult time in my career in terms of the forecast,'' Chambers said. Cisco sales also slumped after the dot-com bubble burst in 2000.

The economic challenges faced by Cisco's U.S. financial customers have now expanded to Europe and Asia, said Chambers, who added that a ``pause in hiring'' will be implemented. Revenue in the period ended Oct. 25 climbed 8.1 percent to $10.3 billion, in line with analysts' estimates, as customers clamped down because of the credit crisis.

``The overall tone of business especially in October was so poor,'' said Chuck Heath, an analyst at UMB Investment Advisors in Kansas City, Missouri. UMB owns about 760,000 Cisco shares among $11 billion under management. ``They are clearly seeing that business is deteriorating in the current environment,'' said Heath, who recommends buying Cisco shares.

"Cisco, based in San Jose, California, fell 6.4 percent in extended trading to $16.34 after losing 94 cents to $17.39 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have declined 36 percent this year.

Investors view Cisco as a technology industry barometer because it dominates the market for routers and switches, which direct and control the flow of data over networks."

Final Take:

Expect tech stocks to get routed on this news tomorrow. Cisco is one of those bellweather stocks that you use as a gauge for tech. The report above essentially tells you that sales fell off a cliff in October. A 10% drop in revenue is a huge drop for a company like Cisco.

Bottom Line:

It appears that the bear market bounce is over. Investors simply can't ignore horrific news stories like the two above. The volume was very low today. The financial networks explained that a lot of the drop was caused by a lack buyers versus panicked sellers.

Traders hate this type of "no bid" market. You tend to see a lot of days like this in recessionary environments. There were actually years in the 70's where stocks had "no bid". As a result they can't move higher. Its simple supply and demand folks. Without demand its hard to raise the price of anything including stocks!

The bulls are finding it hard to buy this market after seeing a 157k job loss in the past month. To make matters worse, the largest steelmaker came out after hours and said that demand for steel has been cut by 50%. That's not a typo folks, demand has been cut in half! If we continue to see things unravel at this pace we are soon going to find ourselves in a depression.

All of my sources in different areas of the economy have indicated to me that the economy came to a standstill in October as the market crashed. One of my sources in the steel industry told me that steel is selling for about half the price it was when oil peaked at $147 a barrel. He has seen demand fall off a cliff in the past couple months.

Demand destruction is now rampant in many areas of the economy. You see it everywhere: Cars, steel, retail, housing. How many stores do you see with sale signs out there? How much junk mail are you getting? I bet its a lot. I got a flyer today from Banana Republic announcing a 25% off everything sale. Seeing this less than two months before Christmas shows you how bad things are out there! As I have said before, this is turning into a classic deflationary spiral that was last seen in Japan.

I always remember what Dr. Shiller said about bubble. He explained that they are extremely psychological. When bubbles like housing are inflating, investors get euphoric and prices become completly distorted. They then turn tragic when they explode, and usually overshoot to the downside. Prices often end up below where they were when the bubble started inflating!

I believe the same theory can be used in the financial markets. October did a lot of damage in the psychology department. Its hard to spend like a good little American consumer when your 401k was sliced in half this year! Corporations have also lost confidence and thus reigned in spending. The Cisco numbers above validate this theory. I think the stock market needs a shrink versus a bunch of bailouts!

I continue to believe that the bottom of this market will be seen with one giant capitulation. The bottom callers last week were silly in my view. Investors must reach the point where they never want to own stocks again. I haven't seen this folks. The big bounce last week showed ne we aren't there yet. Until I see this type of fear, any bounce from here means nothing and will be temporary.

From a trading standpoint I took no positions today. I held my shorts into the close. I expect some follow through here tomorrow, and if the jobs report sucks on Friday, look out below!

We are in a trading range here folks. The only way to make money in this environment is to play the volatility.

Today's horrific news was an eye opener for me folks. Things are happening at a far faster pace than I imagined. Continue to play defense. Its ugly out there.


Avl Guy said...

Ur call for capitulation is consistent with Mish's observation that we may be entering into an Elliot Wave 5 down for a Bear market.
As noted, Elliot Waves dont reflect changes in fundamentals, just herd psychology. But I can see the herd readying for a downward trip given that no fundamentals justified this recent 17% jump.

Jeff said...


Thanks for the info. I haven't read Mish for awhile.

I have started to get away from the elliot wave type analysis. Its great and I think it works in a normal market.

I have tried using Elliot and the Fib's in this market. I have come to the conclusion that you miss too many moves using these platforms.

To me, its similiar to the quant investing used by Wall St. The math doesn't work in this complicated environment.

I am trading more by feel, the news, and fundemaentals. I also try to think "like a criminal" when playing the long side on these bounces.

I usually try to wait for the bounces and play the short side. Going long without when I think we are heading into a nightmare makes no sense to me.

I see many people making nice bank on risky long plays on these bounces. I will pass but thats just me.

I would rather take positions that make sense to me fundamentally for me.

Mish is awesome and I am sure the Elliot works for him.

Dot Papers said...

Thanks this post..
keep writing your blog will be more attractive. To Your Success!