Just Another Manic Monday

As soon as Paulson runs out of money Barack steps in!

Obama said, in his weekly radio address (fireside chat), that he will create 2.5M jobs by making the "single largest new investment" in roads, bridges and public buildings since the Eisenhower Administration to lift the sagging economy and create jobs.  His plan to includes making public buildings more energy efficient, repairing schools and modernizing health care with electronic medical records.  “We won’t just throw money at the problem,” he said. “We’ll measure progress by the reforms we make and the results we achieve — by the jobs we create, by the energy we save, by whether America is more competitive in the world.  When Congress reconvenes in January, I look forward to working with them to pass a plan immediately.”

This is just what we expected him to do but the timing is a little strange and that worries me as both the outgoing in incoming administration seem a little too worried about saving the economy ahead of the holidays.  We remain in the roller coaster economy until our trajectory improves drastically on the weekly charts.  In any given session, it may look like we are taking off like a rocket but, as soon as you pull back to a longer view, things do not look as good.  I discussed in the Weekend Wrap-Up that, for all the excitement at the end of the week, we are still 200 points shy of Monday’s open and it is 8,800 or bust this week for sure.  Obama effectively just promised a fresh $700Bn in stimulus starting as soon as he takes office – our last stimulus push came the week before Thanksgiving and we improved from below 8,000 to 8,800 so we’ll see how far we can get on a fresh 3/4 of a Trillion dollars.  By the way, as part of the PSW program to prepare our children for the future:  After 999 Trillion comes a Quadrillion, which is 10¹⁵ , or 1,000,000,000,000,000.  Have I mentioned I like gold lately?

India is spending 200Bn Rupees ($4Bn) to shore up thier economy, which is dealing with both recession and terrorist attacks.  That will bring Indias spending for Q4 up to 3 Trillion Rupees (see how fast we’re going to need Quadrillions?).  Nonetheless, IT IS NOT ENOUGH: "The incremental spending is less than what was originally thought,” said Sonal Varma, a Mumbai-based economist at Nomura International Plc. “Any fiscal stimulus will help alleviate the stress in the economy, but a slowdown is inevitable."  Forty percent of Indian industry’s funding in the year ended March 31, when India grew at 9 percent, came from overseas borrowings and the sale of new shares in the stock market, said Tehmina Khan, international economist at Capital Economics Ltd. in London.  “The moderation in growth will be more than anticipated,” Governor Duvvuri Subbarao said yesterday while announcing the rate cuts. He said the 7.5 percent growth forecast for the current year will be revised in the next monetary policy statement scheduled on Jan. 27. The country’s ratio of gross current account and gross capital flows to GDP has increased 117.0 percent from 46.8 percent during the period, the central bank said.

So, you see, a Trillion here, a Trillion there and before you know it we’re up to a thousand Trillion and you have to know what to call it – so practice saying Quadrillion every once in a while and you can sound authoritative when it comes up in conversation.  Make sure the kids can say it too because, when you were a kid, I bet you never imagined you would be reading about Trillions every day like we are now. 

$32 Trillion in global capital was wiped out this year alone but, according to Bloomberg, companies in the MSCI World Index are now trading for an average of $1.17 per dollar of net assets, the lowest level since 1995 and 39% are selling at a discount to shareholder equity.  I mentioned in the weekend wrap how I had made this point to members on Friday – that the global market is trading below what I see as it’s liquidation level.  For quite some time I’ve been defending my floor at 8,200 by reminding people that we did not have a nuclear war and an asteroid did not hit the earth – 6.6Bn people will wake up this morning and want to eat breakfast and get dressed and put on a pair of Nikes and some of them will buy a Big Mac and some of them will need to buy fertilizer for their crops and somewhere on this 197Bn square mile planet of ours, someone just may want to transport something from one place to another without walking and they may even use an oil-based fuel to do it.  Sure, you can’t tell it from the way things are trading but it will happen – mark my words…

If those 6.6Bn people buy and consume just $5Bn worth of goods and services each per year then you have a $33Tn global economy.  That would be 34% less than last year’s economy which should lead us to conclude that a 40% sell-off in the global markets this year (over 50% off the top) may just be a bit of an overreaction.  BK is one of 49 companies with a market capitalization greater than $1 billion that hold more cash than the value of their stock and debt, out of 2,267 overall, data compiled by Bloomberg show.  Businesses with reserves will be cushioned from insolvency and may even benefit from deflation because buying power and the value of dividends increase as prices retreat, said Arlene Rockefeller, chief investment officer for global equities at State Street Global Advisors, which oversees $1.7 Trillion (there’s that word again!).

Just 276 companies had cash that exceeded the value of their stock and debt when the S&P 500 bottomed in 2002. Those shares posted a median total return of 115 percent over the next 12 months, according to data compiled by Bloomberg. That’s more than triple the return for the S&P 500 during the same span.  Usually this would not happen because companies trading too cheaply get taken over but banks are not funding takeovers lately so the bargains are piling up.  Of course some companies may fail as well but, as I said to members last Monday night when picking 36 Stocks to Buy at the Bottom:  "All of these companies are industry leaders, brand names we will remember the way our grandparents remembered American Can, Nash Motors, Victor Talking Machines and Wright Aeronautical – which didn’t survive the depression but they also had the opportunity to buy GE, SHLD, XOM and X at the same kind of discounts we are being offered on this century’s greatest corporate names."

Ken Heebner of CGM focus fund has joined me on the bullish side of the financials sector, specifically blessing our C stock holdings with the following "back of the envelope" calculation:

"A year from now, credit will be available because of the government’s actions," said Mr. Heebner, who works at CGM Funds in Boston.  CGM has been hit of late with an early move into the financials as they flipped from bearish when the XLF was down at 20 and the government (and Buffett) began to step in.  In addition to C and BAC, they also had a significant stake in WFC.  40% of Heebner’s fund was in Financial stocks as of September 30th and they have taken a big hit but I agree with his bottom call from a value perspective and that is why we remain long on both the XLF and UYG ETFs.  I like adding BK at $30 but the Bloomberg story will have it getting away from us so a hedged entry into the initial excitement is the way to go, buying the stock, selling the Jan $32.50 calls for $4+ and waiting for a pullback to sell some puts.

Asia had bailout fever this morning and Tokyo jumped 5.2% while the Hang Seng gained a whopping 8.7% on the day in a very strong session that (perspective again) took them back just over 15,000, still more than 50% off the closing high of 30,638.  The Shanghai put up a 4% gain, back to 224 and continues to lead but volume was low across the board. "I’m happy to see it bounce a bit, and we may see a bit of a bear market rally in December and a bit of Obama euphoria, but the world’s still a very ugly place in the first half of 2009," said Goldman Sachs JBWere senior trader Patrick Crabb in Australia.  Added  Jan Lambregts, Rabobank’s Asian research head, "Job losses of the magnitude [seen in November] dismiss the notion this recession’s just another blip that will blow over soon."

Hong Kong’s market in particular was buoyed by a statement by Hong Kong Financial Secretary John Tsang Monday that a long-delayed program aimed at allowing mainland Chinese residents to directly invest in Hong Kong’s stock market hasn’t been scrapped. But he gave no timetable, and markets watchers said adoption near-term was unlikely given the weakened markets in Hong Kong and China.

Europe is partying ahead of the US open with better than 5% gains across the board.  HSBC announced it would increase the funds available for UK morgages by 20%, seen as a bullish bottom call but the bottom line is everyone is looking at everyone else for signs of a bottom: "It was a very powerful statement by the equity market on Friday when U.S. stocks closed up 3% despite the worst employment report since 1951. This has to make some participants wonder whether, with all the worst possible news on the economy priced in, we can at least start to find some kind of bottom," said Kenneth Broux, economist at Lloyds TSB Corporates & Markets.  I have said to members that this is very much like one of those gunfights, where all the buyers stand around waiting to see who’s going to reach for the buy button first but, once the shooting starts – it’s utter chaos. 

The US markets are looing like they will run right up to the 2.5% rule at the open and that’s the least we expected for the week – it’s a shame we’re getting it so soon as what is too easily done, is also easily undone so let’s not go too crazy unless we see a firm hold over those levels.   I’ll run a new Big Chart Review toninght but keep in mind that 8,800 is not very impressive in the longer view.  We want to see 9,000 and 900 on the S&P, 1,550 on the Nasdaq, 5,600 on the NYSE and 480 on the Russell and, if they act as serious resistance, we’ll actually go a little short.  Remember, we are not yet bullish – just bottomish, and it’s going to take a heck of a lot of fill to raise the water level.  It’s just another manic Monday and we’ve seen this movie too many times to be surprised by the plot…