Another day, another bottom test.
The market took on some bad news yesterday as Paulson said he won’t be doling out the second $350Bn of TARP money as fast as the first as criticism finally built to critical mass over the weekend. In an interview Monday, Mr. Paulson said the financial system is stabilizing, and he is thinking about how the remaining $410 billion could be best utilized, but that he doesn’t plan to tap it unless a further need arises. "I’m going to do what we need to do to keep the system strong and to react the ways we need to react during the nine weeks I’m here, but I’m not going to be looking to start up new things unless they’re necessary or it’s just clear that they need to be done or [that they] make great sense," Mr. Paulson said. "I want to preserve the firepower, the flexibility we have now and those that come after us will have."
This sounds like a very responsible statement actually. My fear was they were going to overstimulate the market and spur inflation but this sudden restraint on the part of Paulson is a good sign and the Dollar shot up to 88 before settling down near a 3-year high at 86.80. Of course, the markets didn’t like this one bit and it pushed the S&P within 2 points of the closing low of 848 although the spike low of 827 was set just last Thursday. We are within 1.5% of the closing low of the S&P when priced in Euros, so lets say that a close below 848 would be bad but a close below 837 would be catastrophic. The dollar is likely to continue gaining ground as the rest of the world loses it. This is great for the US consumers and "economists" need to give up on the idea that it’s bad for exports as this country barely exports anything anyway and it’s a lot better off with a strong dollar that lets the US consumers (who make up 70% of the economy) have a little discretionary income. Look for oil to give up $55 as the dollar gathers strength and $50 may fall if the dollar can punch through 90.
Things were bad enough yesterday that we didn’t even pick up any stocks as we got close, but not close enough our 8,200 shopping goal. Perhaps we were a little greedy but we decided to wait to see if we test 8,000 again as we had a clear failure of our retrace levels early in the morning and that set the negative tone for the day. We were watching Dow 8,400, S&P 860, Nas 1,500, NYSE 5,400 and 455 on the Russell – none of which held up and you can see the S&P clearly breaking down right at the close but (at least) holding 850 for the moment.
We were watching the VIX, which is finally giving us an indication that a spike down may be coming, but yesterday’s volume was anemic: 1.8Bn on the Nasdaq (see Trader Mike’s chart left) compared to 3Bn on Thursday and 4.2Bn on October 10th. If we’re going to have a sell-off, we need some conviction behind it or we’re not going to take it seriously! On Friday morning we noted the S&P was simply following a declining trendline at the highs and we need a real break-out to get any sort of rally going. Fortunately, like the Nasday, the rapidly declining trendline means that every day our breakout target gets lower and lower so let’s hear it for low expectations!
We’re still buying this morning, assuming we hold our lower levels, as there are plenty of excellent bargains out there. HPQ is perking up the pre-markts with a 3-cent beat of low expectations and is actually guiding UP, that’s right UP for ALL of 2009! That stock is one of our favorites, especially in the low $30s and it will be interesting to see how far good news gets them today. Speaking of good news, interesting to see CNBC having a mass freak-out at 8:30 because a guest is bringing up the Plunge Protection Team – I’ll be looking for the video later but obviously this guest never got the official word that the PPT doesn’t exist (because, if they did exist, then the markets would be a farce and viewers may get fed up and tune out)!
Asia could use a Plunge Protection Team of their own as the Hang Seng plunged 4.5% (and a beautiful picture of the 5% rule in action in today’s chart) while the Nikkei fell 2.5%, finishing near the lows of the day, both markets indicating likely follow-through to the downside tomorrow. If the US markets turn up, we will kill our FXPs as we’re looking for a bottom here anyway and we’re now at a 50% retrace off Thursday’s buy-in, so no point in risking very good gains. The Shanghai dropped 7.3%, back to 197 led down by real estate and banking stocks.
Europe is down about a point ahead of our open, also weighed down by banks. Both Asia and Europe are still reeling over the 50,000 CitiGroup job cut announcement from yesterday while the US is losing so many jobs per month that it seems like a drop in the bucket and our investors have already moved on (we love C at $9!). As we expected, now European auto makers are putting their hands up for a hand-out. European auto sales are, if possible, worse than US car makers but, of course, the biggest European auto maker requesting a hand-out is none other than — GM! That’s right, GM owns Opel and Vauxhall and, if you said "who?" then you understand the problem… GM is able to make the least desirable cars in any global market and Europe is no exception. German Chancellor, Andrea Merkel, met with GM executives who are strong-arming her for $1.27Bn under the threat of 26,000 German jobs being on the line. "We discussed a possible guarantee which would secure a liquidity requirement for the medium term" for Opel, Ms. Merkel told reporters. This is getting to the point where the plot of the next James Bond movie should have him putting a stop to GM before they destroy the global economy. Oh, sorry, too late…
Our PPI report was good, down 2.8% but it was all driven by declining oil prices. The core PPI was up 0.4% as inflation is taking hold in all the things that are permanent and 0.4% was 0.4% more than expected by the usual gaggle of experts who predict such things. HD beat their low expectations so we’ll see how that plays out today, they already rallied yesterday ahead of the news but it will be nice just to see that there really is a bottom in this peripheral housing play. Jerry Yang is stepping down from YHOO – too little, too late to get the company back the 66% it’s lost since he came in to "rescue" them from MSFT’s cash offer of $31.
Tomorrow is a big data day with Building Permits, Housing Starts, the CPI Report and FOMC minutes so a lot to chew on as we drift along our lows. I would prefer a little consolidation ahead of Thursday’s Jobless Claims, Leading Economic Indicators and the Philly Fed Report because, if we can get through that, then the non-existant PPT can go to work and rally us into expiration day, hopefully giving us a close for the week closer to 9,200 than 8,200 but hope is not a strategy and we’ll be watching our levels to guide our investments this week!
