Round and round the markets go, where they stop – no one knows!
I'm feeling really good about our decision to lean more bearish into the weekend, as summarized in the wrap-up. While nothing bad happened, noting particularly good happened either. In our roller coaster market model, the absence of stimulus (usually in the form of government money) can only lead to gravity taking it's toll. As the picture on the right illustrates – is there enough money in the world to push our ships of state free of the relentless downward market spiral? That is the question that will have to be answered over the next few months but clearly, there are analysts on one side of the ship who see calm seas ahead while analysts on the other side of the ship see nothing but oblivion ahead.
On our downside, we have a global slowdown, rising unemployment, terrorism and collapsing global markets and, on the upside – we have the world governments getting together and throwing incredible amounts of money at the problem in a chaotic and haphazard fashion that may or may not work. The bottom line is, we are nowhere near the potential bottom of a real bear market. Doug Short has overlayed our current bear market with the bear market of 1929, the Nikkei in 1989 and the Nasdaq "post tech bubble" which gives us some very good perspective on how deep this crisis can go:
So let's not break our arms patting ourselves on the back that we bounced off a 50% drop at a rate of speed that was only matched by the Nasdaq bubble burst and we are still over 20% away from the bottom of all three major bear markets. Of course, this level of government intervention so soon in the cycle is unprecedented so it is possible that we also make an unprecedented recovery but let's all make sure we see real evidence of that happening before we start placing bets on a massive recovery.
The biggest news over the weekend was OPEC failing to agree on an additional production cut, which I pointed out on Friday would be nothing more than an increase in spare capacity. Oil is down 67% off its highs and MER is now forecasting 2009 crude to average $43 in the first quarter. As I pointed out last week, the US is building up stockpiles of oil at the rate of over 1M unwanted barrels a day – if that is the norm around the globe, even a 2Mb cut won't have an impact on the supply glut we are now in. As I have been pointing out for years, the shortage was always artificial and there is nowhere to hide that fact in a slowing economy as the game of hot potato played with ridiculously inflated energy contracts begins to run out of chairs.
Chinese manufacturing fell significantly as their PMI dropped from 44.6 in October to 38.8 in November while export orders fell from 41.4 in October all the way to 29 for November. This put huge pressure on commodity prices, sending copper limit-down 9.8% with gold, silver and platinum following along. That coupled with oils 5% pullback pre-market is sending the relevant sectors right back down and dragging most of the global markets with them and that is the story of the day. The Hang Seng managed to make gains as China mulls over the stimulus moves by that government but the Nikkei fell as that government has little to give them with rates already at 0.3%.
European shares are being dragged down around the 2.5% rule this morning ahead of the US open with commodities leading the decline. We don't mind the commodities, especially the energy sector, selling off (in fact XOM is our only company-specific put) as long as we see some signs of leadership from other sectors, giving us a hint of some long hoped for rotation.
Euro-zone manufacturing also dove, falling from 41.1 in Octopber to 35.6 but new orders, an early indicator for December, were at just 28.8, which points to a 20% overall decline year-on-year – precipitous to say the least! Virtual Portfolio strategists at Citigroup said that macroeconomic indicators suggest life is likely to get even tougher for European companies. "We expect 2009 earnings to fall in the region of 30%," they said.
Today may be the day Obama's winning streak ends as he is scheduled to name more cabinet picks later today but I'm not sure if it will be enough to give us a rally to positive. Consumers had a pretty good weekend overall with spending up 7.2% over last year but shoppers were drawn in early by "unprecedented" discounts and, as I pointed out last week, there are very few shopping days to Christmas this year so we may be getting some data compression that won't play out over the long haul. Our PSW Holiday Retail Survey is not looking so optimistic and I urge members to continue to contribute as we flesh out a real picture of the holiday shopping season.
According to the WSJ: "Although unprecedented discounts lured shoppers into stores, momentum ebbed Saturday, raising concerns that shoppers were merely exploiting the "door-buster" deals and then walking out of stores. Indeed, as many as 70% of consumers purchased only deeply-discounted merchandise Friday, according to Charleston, S.C.-based America's Research Group, which polled 700 shoppers over the weekend. "They didn't stay if they didn't get the deals," says Britt Beemer, the firm's founder."
This is not unlike our own bottom-fishing strategy for the market. We are picking up stocks that are 50-60% off and taking advantage of additional 20-30% discounts afforded us by selling option contracts in order to protect ourselves in case we are, in fact, in for more market pain. Meanwhile, our short plays should do well this morning, we'll be looking to see what we can hold and maybe get a little more bullish for the afternoon as the energy sector bottoms out. I would really like to see some tech leadership so let's watch the Qs to hold 28 and get back over 29. Electronics Botique was, by far, the most crowded store I was in all weekend…
