"This must be Thursday," said Arthur musing to himself, sinking low over his beer, "I never could get the hang of Thursdays." – Hitchiker's Guide to the Galaxy
Thursdays have not been kind to the dollar this year. Last week we had a pre-G7 take-down and this week we have the post-G7 "what a load of crap that was" sort of reaction.
I mentioned on Monday that Minister Lagarde was incredulous at the lack of interest shown by the markets to what she considered a significant policy shift by the G7 but, as I also said at the time, you have to convince the Japanese housewives to stop shorting the dollar or all is lost. We expected the G7 to give Bush and Paulson a week or two to save face and do something on this end but we know that's not going to happen as there is little left you can really do to embarrass these guys into action as Bush's approval rating has already broken below 30%.
The markets ignored yesterday's Beige Book, which indicated widespread inflation along with rising prices that led to a decline in consumer spending and I mentioned in last night's post that we still have significant issues that need to be addressed. Janet Yellen chimed in yesterday and said that the housing sector "will be a major drag" on the economy into next year, pretty much in-line with my own projections but she is also predicting and even slower economy for the remainder of the year and I'm not seeing that yet in earnings or guidance.
MER did post a loss for the quarter and wrote down another $9Bn of assets. Of course the assets are still there, they are simply declaring them a loss for tax purposes. This is $1Bn more than had been expected and dropped MERs taxable revenues down to just $825M on the nearly $10Bn they earned (and remember, they still have the assets, they are just saying they are worthless). They have also pledged to add 4,000 people to the jobless rolls this quarter (this week came in at 372,000 overall)!
PFE was worse than expected but this has little to do with consumer spending and the overall economy but EBAY had decent numbers and fell in-line with our premise that International growth still trumps a slowdown in the US. We're having a rough morning, with misses from AMFI, BK, CIT, CNW, CY, FCS, GKK, HNI, IGT, KKD, VIVO, MER, PFE, PNC, PPG, SPSN, UFPI and WERN – which are spooking the markets but there are also 38 beats including EBAY, GILD, IBM, KMP, CHKP, CAL, HOG (surprise!), KEY, MTG, NOK, SLM, LUV, SPWR, TXT and UTX with JUST 4 companies issuing lower guidance. Does this sound like a catastrophe?
Tonight we hear from AMD, GOOG, ISRG and SNDK and tomorrow it's CAT, C, HON and SLB so we'll have a pretty clear picture by then. C is getting tempting again with a nervous sell-off taking them back to $23 and we already have some long positions but I think it will be fun to pick up the $25 calls for .15 today, hopefully .10. The trick is to buy a lot and then sell 1/2 on a .10 move up, leaving you with a fairly free trade. Because of earnings, you can get out at .10 at the day's end if it doesn't work so this is a great trade if you have the cash and low commission rates. As an example, you can buy 100 for $1,000, sell 50 at .20 on a spike up and another 25 at the day's end for .10, giving you a $250 profit and 25 free calls.
Asian markets were strong overnight except the Shanghai, which dropped yet another 2.5%. I'm ignoring them because their gains were based on IBM's news and they never saw all the bad stuff we see this morning. Europe was off to a good start until they heard the MER news and that has now set a tone in which all news is bad news today.
We're not going to panic until we retrace 1/2 of yesterday's gains. This is why we cover, markets go up AND down but, so far, other than the persistant rise in oil, things are moving along just as we expected so don't panic – there will be plenty of time for that if Google misses tonight!
We still need something to be done on the Federal level to put a floor under the housing/mortgage market and something needs to be done to stop the dollar from breaking below 70, which will put us at $1.60 to the Euro and under 100 yen to the dollar – things that will make this month's CPI and PPI look very mild by comparison.
It's just another tricky day in the markets – let's be careful out there!
