Oh great – NOW the sky is falling!
I told Henny Penny, I told Cocky Locky and I told Goosey Loosey but Foxy Woxy said we would be safe inside the Federal foxhole because he would bail out the mortgage industry by opening the discount window, making even more money available to a mortgage industry that was already consumed with greed.
But Bany Wanky no longer trusts the mortgage industry and is NOT going to use those discounted Federal dollars to lend it to the brokers. The banks have to cover their own butts because they already lent out money to pretty much anyone who could make a mark.
This thing is not going to go away just because we WISH it would. This is not some fictional monster that you THINK is hiding under your bed – this is an ACTUAL monster that has been under your bed (literally, it IS your home) for years and has grown way too big to be ignored and it WILL eat you when the lights go out!
Fukushiro Nukaga, Japan's brand new finance minister, made a statement that is scary to any Republican, as that country faces upheaval due to years of deregulation and public spending cuts that have left the average citizen feeling poorer (sound familiar?): "If there are no tax revenues, Japan can't improve its finances", he said. "So first we have to get growth on course." Japan's decade-long policy of easy money for corporations and low corporate taxes may have boosted the Nikkei 125% since 2003 but it has also run the National Debt up to 179% of the GDP, that would be like the US having a $23 Trillion National Debt! Stay the course fellahs…
Let's keep in mind that these are the guys that lend money to US! The last thing we want Japan to do is to pursue a responsible fiscal policy – that might make us look bad(er). Thank goodness Bush is on the case; Unfortunately, rather than visiting Japan, which just had an election and is in turmoil, our President traveled to the other side of the World to spend time with his last remaining ally in the war on Iraq. "Our commitment to Iraq remains," pledged Mr. Howard, "This is not the time for any proposals of a scaling down of Australian forces." Well, I'm sure all three of them will be thrilled to hear that…
The Hang Seng continued to climb but Japan dropped 262 points and the rest of Asia was a mixed bag for the day. Europe has completely rethought yesterday's rally and is giving pretty much all of it back this morning on no particular news and one day ahead of the ECB rate decision. There are limits to debt in the EU, no member country can run a debt greater than 3% of GDP and total debt may not exceed 65% of GDP (on par with ours) so they HAVE to behave. Today the ECB cut back extra funding for EU banks after letting them feed a the trough for the past several weeks. This came at a bad time as DB revealed some (but not too much) sub-prime exposure earning them a LEH downgrade (pot calling the kettle black?).
In the theme of acting responsibly, the London interbank rate or "Libor," which is a rate charged by banks for short-term loans to each other and affects pretty much everything in the banking industry, is heading higher, despite treasuries going down. The reason for this is that LIbor factors in the overall risk of the loans and ALL loans appear riskier this year. "Higher Libor rates affect the whole economy by tightening the budgets of borrowers large and small," says Lou Crandall, chief economist with Wrightson ICAP in New York. "It hurts corporate profits and tightens household budgets, too."
At home in the US, the ADP report gave us the worst jobs numbers in 4 years (back when we were trying to elect Kerry to win this war before T Boone's "Swift Boat Verterans for Truth" buried him in mud). The US added just 38,000 jobs this month with 33,000 lost in the manufacturing sector, 32,000 cuts from corporate America and 49,000 job cuts in the "Goods-Producing Sector." So we don't make stuff anymore, tell us something we don't know… "This month's ADP National Employment Report suggests that a deceleration of employment may be underway. The August increase of 38,000 was the smallest since June of 2003 and the second consecutive weak monthly reading." Then again, maybe keep it to yourself – that's depressing (or recessing in the very least).
I don't mind giving back all of yesterday's gains ahead of the Beige Book this afternoon, they were ill-gotten gains at best, but let's watch out for our low levels if the BB confirms the ADP and not the oddly rosy GDP that we got on Thursday.
As was the case yesterday, Nasdaq 2,600 is our critical indicator but look how neatly the Dow, the S&P, the NYSE and the Transports all slammed into strong resistance (the red line) so there is nothing to fear in a pullback back to the shorter-term blue support lines, which are rising and should provide decent support.
We don't work our way through economic problems by ignoring them and sweeping them under the table. We work through them by outing them, punishing the foolish and letting the rest of the market get on with its life. We need to see a good sector rotation but not a forced one, as the Nasdaq seemed to be yesterday. The brokers are trying to swap leaders without shooting their old horses – energy and financials. If it were just energy they would certainly pull the trigger with no mercy but they ARE the financials, so you have to understand how "taking one for the team" does not appeal to them.
The energy sector can't continue to grow at it's 3-year rate unless $600Bn new dollars are committed to it this year. That's never going to happen in an economic pullback and isn't very likely to happen regardless. XOM alone needs to boost its market cap by $96Bn just to grow 20% and it's up $3 ($16Bn in cap) since last Wednesday so it could happen – just try not to think of where all that money will have to come from, which 100 mid-caps will die so XOM can live?
Oil is certainly in breakout mode and gold is clearly flying but I think oil is enjoying its last gasp before reality comes rushing in and margins get called on barrels nobody actually wants. If this economy slows, demand could drop off by 1M barrels a day very quickly, that's 7M barrels a week – who will pick up that slack (or is it slick?)?
A dip today is baked into the cake ahead of the Fed Beige Book, we are WELL (overly it seems from yesterday's results) covered to the downside and I will not repeat Friday's mistake and I will move to a more neutral stance before the release but, if we go down on that data, a market recovery may not be in the immediate cards.
Be careful out there!
