Black Friday?

Black Friday for retailers is the day that sales traditionally put retailers in the black for the year (not going to happen this year of course).

It is often, but not always, the busiest shopping day of the year and, at 6am this morning, WMT's server crashed from the traffic so we're off to a good start as shoppers, no matter how depressed, start thinking about Christmas shopping – often spurred on by a list handed to them by a nephew or niece or grandchild at Thanksgiving dinner last night.  Giving the market a positive spin last week was key as it allowed the media to focus on the holiday sales, rather than the market meltdown they would have focused on had we finished Wednesday below 8,000 so let's hear is for the Plunge Protection Team!

We'll see how real this week's 20% rally was – but not today.  Today is a meaningless low-volume day where we hope to hold the 8,600 mark on the Dow and nothing more so let's say we are looking for pullbacks of less than 1.25% across the board to maintain our slightly better than neutral stance.  We took advantage of Wednesday's rally to press our short bets by rolling up our index puts and that is key to managing this market as tight downside protection, which allows us to hold off on covering the longs we are most fond of (or cover the bull side a little lighter than we would otherwise).

The market has had simply spectacular performance since last Friday with wild double-digit gains in all of the US indices and the entire MSCI World Index tacking on 13.7%, now down "only" 44.8% for the year:

I will remind you, as we discussed in yesterday's post, that the US alone has spent/committed $7.8Tn to keep the markets over that 50% off line while the rest of the world is in for about 5 or 6 Trillion Dollars as well (it's hard to quantify the real cost of bank guarantees until it's over) so how could we NOT get a small boost to the global economy.  The problem is, the boost is being applied on the famous trickle down theory as bailing out the banks is somehow supposed to eventually help the people they lend to.  What has not occurred to our mindless leaders is:  What happens if that cycle is broken?   What happens if the US consumer (including the corporate consumer) is no longer willing to borrow more to spend more?

Note that we are not forgiving any debts or creating any jobs, all the administration is doing is making sure the institutions that made poor lending decisions by pushing tens of millions of people far past their credit limits will not suffer the consequences as a percentage of those people, VERY NOT SURPRISINGLY, fail to make their payments.  We are guaranteeing there will be a bank that is able to process millions of foreclosure notices but America is still littered with ghost developments and abandoned construction projects as the housing value of the peopel who are making their payments drops 25% and, for most Americans – that represents the bulk of their life savings.

Why is nothing being done to address this very obvious crisis while the administration has an open checkbook to the lenders?  Well, aside from the fact that the banker who pretty much invented the sub-prime debacle now runs our Treasury, we've been sold a huge bill of goods by the media, who told us it was un-American to bail out home buyers who couldn't pay their mortgages.  I'm not going to debate the nuances of personal responsibility today but the fact of the matter is that the failure of 4M homeowners to fulfill their obligations on less than $1.5Tn worth of mortgages has led to $3Tn in write-downs (once called tax deductions) by the banks and the resulting collapse of the financial markets has cost global investors $40Tn in equity value and US homeowners $10Tn in property value so I guess we showed those deadbeats…

This is, perhaps, the worst allocation of government resources in history and I can only hope that we truly begin to address the actual problem in January when we finally do "throw the bums out" and, until then, the best we can hope for is to tread water around the 8,700 mark, which I noted back on November 17th was the mid-point of our expected range.  No matter what happens today, we will cover up a little more into the weekend.  If we survive that, we have heavy data next week including Retail Reports, ISM, ADP, Productivity, the Beige Book, Factory Orders, Non-Farm Payrolls and Consumer Credit.  How much are you willing to bet that everything is great now and all that data will be turning up?  All the reports except Factory Orders and Consumer Credit are for November, so this will be our first look at the second to last month of the year.  Like I said – a little more protection could go a long way!

Mega Kudos to the Asian Plunge Protection Team where the Hang Seng was taken to 13,888 for the second day in a row but this time they held it on the button.  8 is considered a lucky number in China so bringing the market to that finish over the weekend was the best they could do to send a strong signal to investors.  This is not like "lucky 7" in the US, the Chinese take this a bit more seriously than we do.  In Chendu, the telephone number 8888 8888 was sold for $270,000 and a man in Hangzhou wants $150,000 to part with his license plate A88888.  In mainland China, the Shanghai composite fell a very unlucky 4 points to 195.80 while the Nikkei rose 1.7% to just above the 8,500 mark.   India's market reopened and actually held up, despite the terrorist drama that closed them yesterday.

Financials and commodity stocks led Asia higher, including oil companies who are encouraged by talks of further OPEC cut-backs – probably a good idea as the US alone is piling up 1Mb a day of unused oil as of Wednesday's inventory report.  OPEC has cut production twice in the past 60 days and they are hoping the third time is a charm and, at $50 a barrel, we almost hope so too or the next round of bailout money may be heading to the OPEC nations, who's break-even price on crude is about $52 a barrel. 

An Emergency meeting is set for Saturday in Cairo and rumor is they are going to try to cut another 1Mbd, bringing the ADDITIONAL CAPACITY SURPLUS up  another 3Mbd since September.  This is the problem OPEC faces – the only reason oil was high was because of the possibility of supply disruptions and strong demand making it a speculative vehicle.  If the demand is down and a supply disruption will no longer push us to capacity limits – there is still no point to paying more than $50 for a barrel of oil. 

Some analysts now predict that global demand could turn negative both this year and next, adding to a growing spare supply cushion that the world hasn't seen for years.  OPEC countries appear so far to have abided fairly well to pledges made since September to cut supply. With financial and social pressures rising, some OPEC nations are nearing an inflection point economically that could result in members such as Venezuela, Ecuador and Nigeria flatly ignoring additional production cuts. Ecuador, OPEC's smallest member by production, is flirting with default on hundreds of millions of dollars of debt.  PFC Energy analyst David Kirsch says no OPEC nation, not even the lowest cost producer Saudi Arabia, can maintain macroeconomic stability and all their current and planned budget expenditures if oil prices fall and stay under $50 a barrel.

Europe is down about a point ahead of the US open as business and consumer confidence in the Euro-Zone hits new lows.  UBS is moving forward with plans to beg for government assistance but investors are avoiding them and a bailout for UBS will put pressure on other EU majors to do what it takes to shore up their books.  Spain approved a $14.37Bn stimulus package, which is sort of a joke as Spain itself is in danger of over $100Bn in defaults and two major retailers,  Woolworths and MFI, filed for reorganization in the UK while DSG (electronics) and Kingfisher (home improvements/general merchandise) posted terrible retail numbers with 9% and 7% drops respectively. 

I'm going out on limb and expecting what passes for a tight range these days, between 1.25% up and down.  In a break down, we will get a little more bearish but a break up will not get us more than 60:40 bullish, no matter what number they print in a low-volume rally because, if retailers finish today far out of the black – Monday may be a very black day for the markets so be very careful out there!

Members:  Please try to fill in your shopping observations in the PSW Holiday Retail Survey.  Last year we got great insights into which retailers to back and back off from and Q4 earnings reports are just around the corner!