It's all about the Qs today.
As David Fry's chart indicates, we are down in that channel below our much-watched 32.50 line that makes or breaks our rallies and just above (as of yesterday's close) the death line at 30. If the Qs go below 30, we have to throw up our hands and sadly go back to weighted bearish but I just can't see it as even these terrible earnings reports we've been getting this quarter do not justify a 5-year retrace in stock prices for the index, 45% off last year's highs. I laid out my technical case in last night's Big Chart review so I won't go back into it here but we are as comfortable as we can be using options spreads to give ourselves a 20% discount on entries at this point as we feel that the 50% line (off the highs) will be holding and we're very comfortable holding long-term at that level and generating an income selling calls every month for as long as we remain in what would have to be a very prolonged recession to keep the markets at that level.
We have no intention of giving up that 30% on the bear side that will guard us against a Great Depression-style sell-off should a major bank, GM or a country fail in the next 6 months but, hopefully, every week we go without such an event we will see a few more investors move some cash off the sidelines. We get to, hopefully, move past GM and F earnings today and they are expected to be a disaster. A lot of yesterday's selling was based on rumors that GM was not likely to last out 2009. I think there is no doubt of a government bail-out, the question is how much and how tremendous a waste of money it will end up being. They say 2.5M people may lose their jobs if GM goes under. I say, rather than give GM $25Bn so they can last another year or two, just give the 2.5M people $20,000 each ($50Bn) and let them find jobs in companies that don't suck. Keeping GM on life support when they need $25Bn a year to survive is not good policy and does nothing for the long-term health of our economy.
I have been saying for several years and now the data is finally coming to light – GM is burning over $1Bn a month in cash and that says nothing for spiraling unmet pension obligations and their ridiculously overbooked assets. The government is already bailing them out through low-interest loan programs and the more we give them the more they will need as there is nothing they are likely to do to turn this sinking ship around. I called GM the Titanic of the Dow back in 2006 and, obviously, I have had no reason to change that opinion now that they are down 85%. Yes the global economy is failing the Auto Makers in general but GM wasn't going to survive in a great economy. We are now in an economic war zone and we need to do some basic triage – GM is a patient that cannot be saved and we will lose other patients if we spend resources trying to resurrect the dead. Yes we need to keep them going for now but – unlike the actual war – we need a firm exit strategy or we will get bogged down in a quagmire that will take the nation with it.
TM once again led the Nikkei down as that index fell another 3.5%, down to 8,583 but that was a 50% recovery off the early lows. South Korea led other Asian stocks higher as the Bank of Korea cut rates another quarter point, it's third cut in four weeks! The Hang Seng came back 1.8% as HBC cut it's Hong Kong prime lending rate to 5% and reversed an early sell-off. The rate cut was later matched by Standard Chartered Bank and Hang Seng Bank. "The news is giving the market a short-term push, as other banks will likely follow the move to show an improving credit environment," said Castor Pang, strategist at SHK Financial. "But in the end we'll still have to look at the economy," he said, as signs increase a recession in Hong Kong is all but inevitable. "The Bank of Korea's continued efforts to ease the local liquidity crunch and expectations surrounding Obama's scheduled press conference following U.S. nonfarm payrolls data later Friday helped the stock market to attempt a technical rebound," said Lee Jae-Mahn, an analyst at Tong Yang Securities.
Europe is up slightly (read Trichet's statement) ahead of the US open and we're keeping a very close eye on the DAX at 4,891 – which is their 40% line. The FTSE is above at 35% off the top and the CAC is below so we should take the direction of the DAX today VERY seriously as they are the swing vote for Europe's direction. The IMF slashed their global growth outlook yesterday to 2.2% in 2009, way down from 3.7% this year and a global 3% is considered a recession. Just last month, the IMF had forecast 3% for 2009. In Thursday's report, however, the IMF said that "prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen." The IMF added that "global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth." The U.S. forecast was cut to 1.4% growth this year and a 0.7% contraction in 2009, down from last month's estimates for growth rates of 1.6% in 2008 and 0.1% in 2009.
Back in the USA, hedge funds continue to liquidate at a record pace, giving us those crazy low entries on perfectly good stocks. Hedge funds are sitting on $400Bn in cash, an all-time record and, if we can get past this redemption cycle, we could be looking at one mother of a rally as they move to reposition as that works out to about 5 solid days of market buys! Financial firms are blaming a lack of clarity in the bailout package for making them hesitant to go back to business as usual. A survey of more than 400 financial firms by Sifma and other financial-industry trade groups found that a large percentage of financial firms would be reluctant to participate without more details about any potential program. More than nine in 10 said they were less likely to participate in the so-called Troubled Asset Relief Program because of a "lack of clarity."
October Non-Farm payrolls came in 20% worse than expected with 240,000 jobs lost and it turns out the government lied to us ahead of the election and September job losses were 284,000 – not the 159,000 fairy tale the administration gave us a month ago (a difference of 78%). Unemployment shot up to 6.5% from 6.1% in September and this is higher than our peak unemployment from the 1994 recession. It would be nice if we were shocked about the extent of the deception in the last jobs report but we're not, it's business as usual and traders (as of 8:35) are taking it in stride and the pre-markets remain lightly positive despite the record losses.
Still, I think the reality of those jobs figures means we need to weight a little more bearish into the weekend as there's not much positive to be spun out of those numbers and jobs will be the discussion on all the weekend magazines – not a topic that's going to put traders in a good mood on Monday. 2.8M people have lost their jobs in the past 12 months, that is a post-depression record and the pace has been accelerating the past 3 months (and who knows what this month may be adjusted to!).
We almost don't mind a blow-off bottom based on the jobs numbers but let's keep our heads and watch our levels from last night's Big Chart, especially the critical levels we have on the Qs and the Russell. If oil does fail $60 we can expect that sector to drag us further down but our goal for the day is to get close to neutral into the weekend as there is simply no way of being sure what's in store for us this Monday, with just two weeks to expiration.
Have a good weekend,
– Phil
