Thursday, February 26, 2009

Stocks Fold as the Economic Data Worsens

Good Afternoon Folks!

What a crazy day today in the markets. The major induces all closed down between 1-2% after being up earlier in the morning.

This has become a very difficult tape to trade. The bulls are essentially fighting for their life here folks. Everyone on the street knows that the market will most likely plunge if we break decisively below 741 on the S&P. As I have said before, there is no resistance below 741 until you get down to the 500-600 area. That's a huge move to the downside.

As a result, volatility rules the day as the battle continues. The way I see it, the bulls are in some trouble here. I say this for a variety of reasons:

The number one issue they have is the economic data continues to deteriorate at a frightening pace. Lets take a look at the two big data points from today:

Jobless Claims rose to 667,000, the highest level since 1982:

"Feb. 26 (Bloomberg) -- First-time claims for U.S. unemployment benefits unexpectedly rose last week and total benefit rolls soared to a record high, a sign companies may keep shedding jobs as the recession worsens.

First-time unemployment applications increased by 36,000 to 667,000, the highest since 1982, in the week that ended on Feb. 21 from a revised 631,000 the prior week, the Labor Department said today in Washington. The number of people staying on benefit rolls rose in the previous week by 114,000 to 5.112 million."

Data point #2

Durable goods orders dropped for the 6th consecutive month. The 5.2% drop was more than twice as bad as expected:

"Feb. 26 (Bloomberg) -- Orders for U.S. durable goods fell for a record sixth consecutive month in January, signaling companies are cutting back on spending as customers worldwide retrench.

The 5.2 percent drop was more than twice as large as projected and followed a 4.6 percent decrease the prior month, the Commerce Department said today in Washington. Comparable data began in 1992. Excluding transportation equipment, orders fell 2.5 percent.

The credit freeze that pushed the U.S. and overseas economies into a tailspin will cause companies to pare output and trim investment plans. President Barack Obama, in his first month in office, has signed into law a $787 billion stimulus bill to jump start the economy and unveiled plans to boost homeowners and unfreeze lending.

“Businesses are cutting back everyplace they can in order to survive the recession,”

Quick Take:

Yikes! Quite ugly isn't it? On top of this, Dell came out with disappointing earnings today as computer sales hit a 6 year low. Folks, the economy is literally falling off a cliff. The 667,000 jobless claims # is horrifying. Anything over 400k is considered to be recessionary. We haven't seen numbers like this since the severe 1982 recession. The durable goods data is considered to be the worst on record.

This data makes it awfully hard to hold your nose and jump in and buy stocks.

The Obama Budget

This punched some more holes in the bull case going forward. If this budget gets approved there will be two big losers: Healthcare and the wealthy.

Obama is seeking a whopping $1 trillion tax increase on the highest earning Americans:

"Feb. 26 (Bloomberg) -- President Barack Obama proposed almost $1 trillion in higher taxes over the next decade on the highest-earning Americans, Wall Street financiers, U.S.-based multinational corporations and oil companies to pay for permanent tax breaks for lower earners.

Obama’s 2010 budget proposal, released today, would reinstate the top two Clinton-era tax rates of 36 percent and 39.6 percent, up from the 33 percent and 35 percent the richest Americans now pay. That would affect about 2.6 million taxpayers. The budget also would raise taxes on capital gains and dividends to 20 percent for top earners, up from the 15 percent set by former President George W. Bush in 2003.

The tax increases, which Obama vowed to impose as a presidential candidate, would take effect in 2011 and be the first on high-income earners since 1993. They also would reverse a course set by Bush of lowering the tax burden on the nation’s wealthiest people.
‘Obama Robin Hood’

“It’s a clear repudiation of Bush’s policy,” said Peter Morici, an economist at the University of Maryland in College Park. “It’s more Obama Robin Hood.”

My Take:

This is one hell of a ballsy move by Obama. In my view, this will end up being very bad for the economy because it hurts the small business owners that create most of the jobs in this country. Obama will argue that it worked for Clinton in the 1990's. The problem here folks is Clinton had the Internet! This provided a once in a lifetime growth engine that allowed the economy thrive. It literally transformed our way of life.

Clinton also came into office after the economy had began to recover from the early '90's recession. Obama is implementing these changes under a complete different set of circumstances. The economy is collapsing, housing prices are free falling, and unemployment is soaring. Adding tax increases during this fragile period is a huge mistake in my eyes.

This could end up being the straw that breaks the camels economic back. Now I must admit, there is one part of this tax increase that I like: The pigmen are going to get taken to the cleaners!

Overall, this is a bad move in my eyes. Healthcare companies are also going to be severely punished as Obama attempts to nationalize health care. This will put further pressure on the DOW because there will be billions in profits that will be lost as Medicare shrinks reimbursements. I will get into this more at a later date.

Bottom Line:

The war is on. I am going to call this The Battle of 741(S&P)! Many are calling for a retrace here because we are so oversold. I can't say that I agree. We are still in a very delicate area and nothing has been decided. We closed at 752 on the S&P. The closing low in November was 751.

We could go either way here folks. Obama's announcements around his tax increase and health care initiatives could be the trigger that sends us lower. In my eyes, the timing on this could have been better. Why add this type of economic pressure when we are already reeling from a horrific economy?

Its been hard enough as it is for the bulls to hold these levels as the economic numbers continue to deteriorate.

My guess here is we could plunge within the next week. Nothing has been decided however. We pretty much pinned the November lows on the S&P. The next week should be fascinating to watch.

As for trades, I picked up some SPG PUTS at a shade below $35. This was my first trade in a few days. I held it into the close and so far so good. This is a dangerous market here folks so I advise you to stay nimble, and keep your positions small and limited.

A violent move in either direction from these levels is possible.

10 comments:

Tarkin said...

Fannie Mae loses another $25 billion. GM loses $30 billion. AIG's losing billions. Where does it end? Why do my tax dollars continue to be wasted on these idiots? Today's news has made me more furious than normal. I'm ready to walk away from all my loans... these bastards are bankrupting America, with the political class's gleeful assent!!!!

jeff said...

Tarkin

I know...Its frickin disgusting. I think a lot of people are thinking about not paying their loans anymore.

Why should you when millions don't have to because they get bailed out? They are playing with fire and they risk seriously getting burnt via moral hazard.

Avl Guy said...

Some 'lite' late night reading that wont keep you up (NOT!)

Moody's predicts default rate will exceed peaks hit in Great Depression.
A bigger proportion of non-investment grade companies will go bust in the US and overseas in the coming years than during the Great Depression, according to Moody's, one of the world's foremost experts on credit.

By Edmund Conway, The Telegraph Economic Editor
Last Updated: 26 Feb 2009

http://www.telegraph.co.uk/finance/economics/4840805/Moodys-predicts-default-rate-will-exceed-peaks-hit-in-Great-Depression.html

Jeff said...

Avl

I saw that. Yikes!

I picked up an excellent Citi research report tonight.

I am going to throw that up tomorrow. Possible target in the report on the S&P was 360.

This all seems surreal at times!

Minton Mckarkquey said...

I'm with you, Tarkin!

So if the government's planning to buy a large stake in Citigroup. are we suspecting a 30% gain tomorrow or 30% loss? I'm completely confused at this point.

Anonymous said...

Hi Jeff,
I think the german chancellor Merkel made a very interesting comment a couple of days ago with the regards to the german HypoRealEstate bank (another big zombie).
She spoke about a so-called "international agreement" not to let any bank collapse, that is "relevant to the system".
If this is really the case, we won't see any of those insolvent big banks go bust, no matter how broke they might be. Governments will just keep on throwing money after them or finally nationalize the whole lot.
On the other hand, if things are getting really out of control this "agreement" might end up like "Bretton Woods" in 1971.

Another thing, I do not read much about how the US are trying to get the consumer climate back on track. As far as I can see this is one of the main problems.
I also think this is the big difference between central Europe and the US, Joe the plumber is broke and homeless. Why should he buy a new Ford?
"German consumer confidence increased in January despite the global financial crisis"
http://www.thelocal.de/money/20090128-17045.html

Mat

Jeff said...

Minton

I think you got your answer on C this morning...TIMBER!!!! DOwn about 40%

Today is going to be bloody. 'futures are bleeding bigtime.

Jeff said...

Anon

Grat points.

I totally agree that through hell or high water the big banks will survive this massacre.

The question becomes at what dilution to their stock price?

Citi now sits at 1.40 after the government dilution today. Anyone that owns the common on these stocks is crazy. Many of them will sit between $1-2 a share for a long time.

I totally agree about the consumer. sO far in this country its the banks first and the people second.

If this attitude continues Joe the plumber is going to go postal and hurt someone.

We broke 741 in pre market open. Lets see how bloody this gets this morning.

Alex said...

Stephen Lewis of Monument Securities "A recession is where policy works; a depression is where it doesn't."
How is this or any previous policy the Fed has come up with worked out for us. The question of a total systemic collapse at this point isn't if but when.
Some Good Reading,

http://www.guardian.co.uk/commentisfree/2009/feb/26/credit-crunch-recession

and the latest GEAB announcement.

http://www.leap2020.eu/GEAB-N-32-is-available!-4th-quarter-2009-Beginning-of-Phase-5-of-the-global-systemic-crisis-phase-of-global-geopolitical_a2805.html


I am so lost for any solution to this at this point that I am seriously contemplating purchasing a Firearm for the first time in my life.

Alex

Jeff said...

Alex

Thanks for the great links!

Great stuff.