Let us go back in time…
Way back to January 14th, when the Dow was at 8,440 and the Beige Book of that day said: ""The New York Fed reported that “a contact monitoring the financial sector maintains that the industry is still far from hitting bottom.” Gosh – we should really take these thing seriously don't you think? The XLF fell about 50% from that day to March 9th but had already gone from $11 to $8 by Jan 20th. Over at PSW, we actually go through the trouble of reading this report as it's actually a really great indicator of what's going on in the economy. Today, at 2pm, we get the Fed's third report of the year and we'll be looking for those "green shoots" Bernanke has been talking about.
We were pleased to hold our levels yesterday, with only the Dow giving us a real scare as they tested 7,900 in the early afternoon and finishing at just 7,920. As the overall action continued to mirror last Tuesday's move, we'll be looking for a repeat of last Wednesday today, where we get another level test, probably ahead of the Beige Book, followed by (hopefully) a rally into the close based on optimistic data coming in from the Fed's 12 reporting districts.
We MUST move sharply higher this week or we will end up in technical hell, as is neatly illustrated in this chart tutorial of the S&P. As Adam Hewison suggests, we NEED to retest our lows to build a strong base. A big breakout rally here will only keep us nervous that is will all come undone one day so we're in the funny position of preferring to see a correction here, during earnings month so we can find a real floor and hopefully bring some long-term money off the sidelines. As it stands now, the market is full of day traders, moving up and down 2.5% sometimes several times in a day.
Now that GS had gotten their $5Bn at over 100% off their Jan lows, after using our TARP money to game the markets (see yesterday's post and where the hell is our cut?) – will the market be able to stand on it's own? Don't get me wrong, GS will still play their games but the money has been made on the long side for them so, if it's easier for them to flip short – down we may go. This isn't a conspiracy theory, we have a chart showing they traded more shares in their Principal Account than the next 14 brokers combined! If the person who trades half the market's volume decides to cash out – we're going down. That's not a conspiracy, that's the law of supply and demand. So this is going to be a very critical three days for the market as we have to give Goldman and Trillions of dollars worth of sidelined investors a reason to play the upside. We were clearly a bargain at 6,500 but 8,000 is a slightly tougher sell without that re-test.
When you need to sell something (the Dow over 8,000), you need to do some marketing. Both Obama and Bernanke gave sales pitches yesterday with the Fed Chariman saying he was "fundamentally optimistic" about the economy's prospects. Obama gave us more of a "bad cop", "State of the Economy" speech, cautioning that, while we are making progress, there is still a long way to go before we are out of the woods. Obama warned of more "difficult and unpopular choices" in the months ahead as the economy continues to struggle. Addressing a largely supportive student audience, he painted a grim picture of the economy even as he noted "glimmers of hope" among rising unemployment and declining growth figures. This year "will continue to be a difficult year for America's economy," the president said. "The severity of this recession will cause more job loss, more foreclosures and more pain before it ends."
China needs to start doing some PR as Foreign direct investment into China fell 20.6% for the first Quarter despite the "amazing" 50% rallies in the Hang Seng and Shanghai Composite. Is it possible that the Chinese markets are even more manipulated than Goldman Sach's stock (also up 50% for the quarter)? As I noted yesterday, we shorted BIDU as a shy way of playing poor GOOG results with the May $175 puts, looking for a possible pullback. Intel's less than enthusiastic guidance sent tech shares lower in Japan and they, along with banks, pulled the Nikkei down another 1%, now giving up all of last week's gains (as have we). The rest of Asia was flattish, with the Hang Seng up 0.6% and the Shanghai up 0.4% with India starring, up 2.9% despite restrained guidance from INFY, who had nice earnings.
"People are getting too bullish just like they were getting too pessimistic in January… the strong Chinese lending and the change in the U.S. [marked-to-market] accounting rules is giving people the false impression that the worst is over," said Steve Cheng, associate director at Shenyin Wanguo. "Some of the bank loans that entered the [Chinese] economy are rumored to be finding their way into stocks."
UBS wasn't bullish. In fact, their shareholder meeting was downright depressing with lines of stockholders waiting to speak out against management, who had just announced $1.76Bn in losses for the quarter as well as their intention to cut 11% of the workforce or 8,700 jobs. [Important note: When you see major company after major company announcing 10% job cuts – then unemployment WILL eventually be 10% – it just takes longer for smaller companies to "right-size"] That go EU markets off to a poor start, led down by the banking sector.
The game plan for the US is to begin releasing the "Stress Tests" this week in order to boost our confidence. They already told us all 19 banks passed last week so I'm not sure how much it will really help. This plan could backfire as a senior U.S. Treasury official said the government will accept repayment of rescue funds from any institution whose regulator dubs it healthy enough to operate without federal capital. The move to stop treating banks equally is sparking concern about the effect on specific institutions seen as weaker than peers. "You can create a run on a bank pretty quickly," said Eugene Ludwig, chief executive of consulting firm Promontory Financial Group and a former Comptroller of the Currency. We'll have to see how this one plays out – at the moment we are playing financials both ways.
Like yesterday's PPI, the CPI is down 0.1% this morning. This is the first time in over 50 years that US Consumer Prices have dropped year-to-year. The report was in-line with expectations and the core CPI was up 0.2% but 60% of the rise was due to tobacco prices, not likely to be sustained. The NY Empire Manufacturing Index fell 14.65% this month. While terrible, this is much better than the -35% expected so we will read the New York section of the Beige Book with great interest. Overall Capacity Utilization fell another 1.6% to 69.3% and that's worse than the 69.7% expected while Industrial Production also fell a more than expected 1.5% (0.9% expected) so, again – I cannot imagine what is keeping oil up.
We get the oil inventory today. Last week we had a very small build and I think there were shenanigans last week as the number made no sense. Last week I expected a 5M barrel build and we got just 1.6Mb so we'll see if they can make it up this week with a greater than 5Mb build as it gets harder and harder to hide barrels as we close in on the end of the May trading cycle. A big dip in oil can spark a big market sell-off at 10:30 so watch that but it's all about the Beige Book today – will we see green shoots or dead roots?
