Recessionary Wednesday Morning

It's official (or semi-official, anyway), we are in a recession.

While we've been using the "R" word for ages, finally Jeffrey Frankel of the Business Cycle Dating Committee (who are in charge of declaring recessions) agrees, saying: "The weight of evidence is now overwhelming: We are currently in recession."  Despite this "stunning" revelation, our nation's top economic thinkers are still unclear as to the timing, asking: "Did it start at the end of 2007, when employment and the other indicators peaked?     Or was the stimulus from the government and from exports enough to postpone the turning point, and did the recession thus only start towards the end of the summer, when the financial crisis intensified very sharply?   I am afraid that we need to wait for some more data and some more (regularly scheduled) revisions before we will know."  Gee Jeff, let us know when you get a fix on it will you?

For a more informed look at how screwed up things are, check out "The Financial Crisis From A-Z" a tragically funny article from Forbes.  You know things are bad when top financial writers turn to gallows humor when discussing the economy, part of the process of depersonalizing something that is going to die…

I've been saying for a while that the various stimulus plans have been very much like injecting adrenaline into a coma patient – you may get a quick reaction but don't mistake it for signs of life until you get some steady vitals.  Yesterday the S&P flat-lined at the 900 mark and we are back below our critical 40% levels as well as our "Must Hold" levels on most of the Big Chart:

The brightest spot we can point to is that the Shanghai came off the 70% mark since last Thursday's Review but, on the whole, we have lost ground around the world despite the $500Bn Chinese bailout and despite the continued daily Billions being written to US companies, our markets are down across the board.  The EU is still hanging in the "Must Hold" zone but, if we lose those, we're all heading to China (as in down 70%).

Losing the Transports will put us firmly in a downward spiral and their performance has been downright pathetic with oil dropping below $60.  Yesterday morning, in member chat, I noted that we had dropped about 10% since last Wednesday and I listed the 10% lines we needed to watch and the bounces (in brackets) we expected to get before we could even consider it to be a possible turn and they were:  Dow 8,662 (8,835), S&P 904 (922), Nasdaq 1,602 (1,634) and NYSE 5,710 (5,825). 

While we did spend the morning bottom fishing, picking 18 positive plays ahead of the 1:30 rally, watching our levels kept us level-headed and we never took the "rally" seriously.    At 2:38, near the top of the Dow's 300-point run, I commented: "Running out of gas but that was fun."  We are really getting the hang of this market and, as David Fry says in yesterday's wrap-up: "As long as we continue to have 2-4% intraday trading ranges as routine, the environment will only be safe for day-traders."  The only day-trade we took in the morning was the GOOG $320s at $8.50 as they bottomed out in the morning and they yeilded a nice $13 (up 52%) into the rally and finished the day at $10.50 for those who were too greedy to take 50% off the table…

Day trading is not a bad thing to do while you wait for market clarity.  My 10:29 entry call on GOOG laid out the strategy as such: "GOOG $320s are nice risk/reward play at $8 with a stop at $7 as they were $9.50 this morning and $20 yesterday and $30 on Friday."  That's how you need to enter your day trades – with reasons and limits.  We had been watching GOOG $300 for a bounce for 2 days so it wasn't an impulse buy and the same 10% logic we applied to our indexes led us to conclude we should get at least a $6 bounce off that level as we fell from $330 last week.

Our other 18 morning trade ideas were along the lines of the spread entries I discussed in last night's educational post "How to Buy Stocsk for a 15-20% Discount."   What's really terrifying is how many of these stocks we've entered in the past few weeks that have already gone below our 20% discount levels as we are still trying to firm up a bottom.  Still, the point is, as long as we are going to generate a long-term, forward income of 20% of our basis annually – we don't really care what the face value of the stock is – again, it is all about goal setting!  If we are truly entering a recession, especially a deflationary one, generating a reliable annual income in the 15-20% range off our equities is going to come quite in handy.

Asian stocks traded off about 1.25% this morning on no particular news with airlines and brokerages putting in the best performances and the energy sector continuing to lead down as oil fell back to $58 a barrel in overnight trading and Brent Crude broke below $55 for a while.  There is growing investor concern that, without Obama's participation in this weekend's G20 conference, nothing of note is likely to be accomplished.

Europe is flat ahead of our open, which is not bad as the BOE came out with a downright gloomy forecast for the first half but they do expect conditions to improve mid-year and would be "rising somewhat above its historical average rate" by 2011.  Rising somewhat by 2011 – Woo Hoo! "In the central projection, inflation slows sharply in the near term, as the contributions from energy and food prices decline," the BOE said. "Further out, inflation falls well below the 2% target, reflecting a larger margin of spare capacity and the waning impact of import prices."

Also worth noting in Europe is the Ruble may be the next currency to fall as Russia begins removing long-standing supports and immediately investors pushed the Ruble limit-down, forcing the RCB to spend $7Bn to cover their currency.  Since the summer, the RCB has spend $112Bn defending the Ruble and is seriously depleted.  This caused the RTS to fall 10.7% as falling oil decimates the Russian economy.  "Today's move achieves nothing," Renaissance Capital economist Alexei Moiseyev said in a note Tuesday. The modest decline in the ruble "has only served to raise market expectations of a further devaluation." "The more rubles they print now at a fixed exchange rate, the more reserves they lose," said Yevgeny Gavrilenkov, economist at Troika-Dialog, a Moscow investment house. "It's in effect a road to devaluation."

Have I mentioned lately that I like gold long term?  Anyway, speaking of Socialist states that take over industry, it looks like AXP will be lining up for $3.5Bn in US government aid while GM is turning up their nose at anything less than $50Bn for their industry.  We actually discussed a GM play with a net entry of $.85 ($1.93 if put to you) in yesterday's chat on the premise that the government simply can't let them die but it was too much of a gamble to bold it (recommend).  Finally FRE and FNM are announcing something concrete to aid the actual homeowners but it is certainly far too little and probably far too late to have a serious impact and it looks like we'll have to wait for January 20th to see some real change in policy that will help the actual people who are suffering in this crisis.

Somebody needs to bail out BBY, who lowered their forecasts despite the fact that CC, their main competitor, is going under.  We discussed this in chat the other day and I pointed out that CC's bankruptcy was likely to be a headache for BBY as it will put pressure on pricing while CC dumps its assets but BBY is citing: "rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen," not the sort of thing that seems confined to just their particular market segment. 

So, will the "R" word finally send us to that blow-off bottom the buyers seem to be waiting for (the real buyers, that is, not the manipulators who swing the market every which way each afternoon)?  I still maintain that, fundamentally, a recession is already priced into most of the market and 8,200 remains our BUYBUYBUY target but investing remains a game for the patient – there is no quick turnaround coming as it's the consumers who are hurting and consumer spending makes up 70% of our economy and there is nothing that Bush, Bernanke or Paulson have done so far that does a damn thing for those consumers so – CAVEAT EMPTOR!