Tuesday, July 28, 2009

Green Shoots? Don't Think So

So how far has our mighty economy fallen from the peak from an earnings perspective? Take a look at this chart from the gold speculator:

My Take:

Earnings are down 98% since Q3 of 2007! Yikes!

Yet everyday, all we here on CNBC is how company after company came in above earnings expectations. What's obviously going on here is analysts are dropping their expectations down to practically nothing. At the same time, companies are slashing costs.

When you add these two ingredients together, you create the perfect "positive spin tool" for the pigmen. Almost instantaneously after a company beats earnings, the news media begins screaming recovery! and Green Shoots!

Hell, at this point, corporate earnings are released right into Maria's earpiece once they are reported after hours. The market pumping begins literally seconds after a company beats expectations.

The reality here folks is these earnings beats are a joke. The chart above puts these beats in perspective.

Nothing has changed folks. The economy has collapsed and there are practically no earnings when you include all of the companies that are reporting losses. The consumer is still hiding under a rock, and the only thing saving the economy is all of the government created liquidity.

This government stimulus has basically replaced the consumer. The problem is this game can only go on for so long. At some point the treasury sales will begin to fail and thats going to force the Fed to pull away the punch bowl.

Somehow despite reality, the market has continued to march higher.

I wanted to share some interesting comments from some of my favorite people on Wall St. It appears many believe we may have seen the end of the rally.

Art Cashin

Markets Sleepwalk To Another Plus Close The stock market meandered through much of Monday’s session only to lock in a higher close in the final ten minutes of trading. The force behind the ten minute pop appeared to be, once again, electronic program trading.

The uptick was no where near as broad as recent sessions. On the NYSE, Advances beat Declines by a meek 1.7 to 1. On the NASDAQ, Advances eked out Declines by just 248 stocks. Volume was also limp.

The lackluster session technically extended the rally but there were some signs of wheezing. Robert McHugh points out that the number of stocks trading above their respective 30 day and 10 day averages rose to 86%. The number above their 5 day moving average declined from 86% to 83%. The rise in the first two suggests to us that the rally is clearly overbought while the slip in the latter hints it may be tiring. The McClellan Oscillator was compressed again Monday. That builds pressure for that possible “big day” by Thursday. We’ll watch closely.

Jeremy Grantham

Jeremy Grantham has compiled a rather remarkable record over the last two decades. He avoided the tech bubble. It cost him some clients but he saved money for those who stayed. He stayed out of the finance/real estate play but made big bucks on emerging markets. He even began to buy as stocks were heading to their March lows.

He now thinks the bargains have disappeared. Here’s how he opened July Quarterly Letter: A year is certainly a long time in markets, and so is a quarter.

A year ago, equities globally – and everything else for that matter – were very overpriced, particularly if they were risky.

A quarter ago, in mid March, prices everywhere were cheap. Now they have all – or almost all – converged for a few unusual moments at fair value. A year ago, it was very easy to know what to be: a risk avoider. It was not so easy reinvesting when terrified, but most of us knew that we should have been doing more. But today? It’s difficult to be inspired at fair value.

Bottom Line:

Jeremy is also short treasuries. He has repeatedly said that this is his trade of the year.

So is the rally over?

I have a feeling we are going to find out very shortly.

The bond auction today was shaky at best:

"The U.S. Treasury sold $42 billion in two-year debt on Tuesday in a sale that drew lackluster demand by some measures and might not bode well for other bond auctions later in the week.

The $42 billion auction fetched a yield of 1.08 percent and a bid-to-cover ratio of 2.75. The results might not bode well for other bond auctions later in the week. Demand overall was above average, measured by the bid-to-cover ratio. However, a key proxy for foreign interest, the indirect bidder category, was below average at 32.6 percent."

Quick Take:

Keep a close eye on these auctions. We could very well see an ugly bond auction by the end of the week.

Also, keep in mind the primary dealers need to buy up whatever bonds are left in these auctions. The question you need to ask yourself here is do the primary dealers(Goldman etc.) keep liquidity on the sidelines in order to keep the bond auctions clean?

If so, do they sell or stop buying stocks in order to create enough liquidity in order to keep the treasury auctions moving?

Time will tell.

Stay Tuned!


getyourselfconnected said...

Great post! I am firmly in the camp that the primary dealers have been tapped by the FED/Treasury (the Axis Powers I call them) to ensure a completed sale. Zero Hedge had an artcile today highlighting the new "Indirect Bidder" defintitions which were just changed, what a coincidence!

The metric to watch is if the banks have to buy these debt sales, then will they lack the liquid to push stocks as well? I would think no, but the late day pumps are effective at minimal volume, so if I had to bet I would say they can do both.

On the personal side, hope you are doing ok. The blog will always be here for an outlet should you need one.

Jeff said...


thanks. I really appreciate it.

I have been reading about the whole indirect bidder rule changes as well.

I have noticed that they keep adding new primary dealers as well. There will probably be 400 of them by the end of the year if we continue to sell treasury debt at this rate!

AS your this program trading into the close, its working for now.

The market may snore through the summer if the bond market keeps itself together.

We will know soon enough!

Jeff said...

BTC on the bond Auction 1.92!