What an exciting day yesterday!
As I said in the morning post, the news was just so terrible, the only thing to do was BUYBUYBUY. Not that we did, as we chose to hang onto our cash (and, in fact, went short into the close), but that seems to be the winning trade these days – buy like there is no tomorrow on any tidbit of good news. Yesterday's catalyst was a strong Consumer Confidence number showing a 20% increase over last month. Of course, these are the same consumers that were polled two weeks ago and 60% of them thought their homes had gone up in value or maintained their value over the last 12 months and, just yesterday as well, we got the Case-Shiller report that factually proved that 60% of the people who are being polled are CLUELESS.
So we have 60% of the population who haven't got the brains to know that their home has lost value when 100% of the homes in the US have lost value over the past 12 months. Not 80%, not 90%, not even 99% – according to Case-Shiller, which is pretty accurate, there is not a single place in the United States where homes have gone up in value since last year. Now what happens is we go back to the same group (US consumers) and ask then how confident they are and we find that about 1/2 of the people who think their homes are up in value say they are confident about the economy. Also realize that the rapid rise in foreclosures means that the Gloomy Gus', who showed up in the last poll, no longer have a phone to answer for the current survey. No one asks the destitute how they feel about the economy – just the people who are home for the pollsters. Don't get too excited about a reading of 54 though, we are down from 120, not 100 so still more than 50% off the recent highs.
Another group that is getting confident is business economists, who said the recession in the U.S. “will probably end in the third quarter.” As Barry Ritholtz points out, "these are the same folks who said there would not be a recession" in the first place. This is my concern about the current run-up, people's expectations are just getting too high too fast and we're setting up for another bubble burst as things may be getting better, but they are not getting THAT MUCH better and certainly not that quickly. David Rosenberg, now Chief Economist & Strategist at Glusking Sheff, notes that going back to 1960, “the only times we have seen increases of this magnitude in recessions were at the very tail end of the downturns.” However, he warns that “even if the LEI has bottomed, it typically takes another six months for the recession to come to an end and that lag time has been known to be as long as 10 months.” Given the severity of this downturn relative to prior recessions, we are likely to be on the longer end of the range.
Asia certainly got excited with the both the Hang Seng and the Baltic Dry Index hitting the 5% rules for the day with the Hang Seng adding 893 points to close at a 7-month high 17,885. NOW we will want to sell naked FXP puts (I had told members to wait in yesterday's chat), perhaps the July $12 puts for $1 this morning. We don't think 18,000 will break very easily and we'd be willing to roll these puts down (in price) and out (in time) if we're wrong as a great long-term hedge on emerging markets. 18,000 puts the Hang Seng just about 60% up from the March 9th low of 11,344 and we'll be expecting a re-test of 17,000 once the excitement dies down. The Shanghai gained a much more modest 1.7% as much of the Hang Seng's gain was due to a $16.8Bn stimulus package from the Hong Kong government that includes one-time tax-relief measures, loan guarantees for companies and the suspension on a wide range of government fees. "The fiscal stimulus helps banks and the property market," said Cantor Fitzgerald economist Uwe Parpart, "Banks are getting money for nothing. On top of that the Hong Kong government is handing out cash."
Japanese exports fell 39.1% from last April but this is "getting worse more slowly" than March's 49% decline so the Nikkei was UP 1.3% despite SNE having their credit rating lowered by Moody's on concerns about slumping demand. "I think we can say the brakes have, to an extent, been put on the declining trend [in exports] we've seen since last fall," said Naoyuki Miyazawa, a ministry director. "The decline in exports to all areas has moderated." China has played a big role in the improvement, with exports to the key trading partner falling only 25.8%, the third month of more moderate decline after January's 45.2% plunge. Shipments to the U.S. also fell less sharply for the second straight month.
So, just to make sure we're all on plan: China is counting on demand from Japan, Europe and the US and the US is counting on China along with our own consumers and Japan is counting on China, Europe and the US and Europe is counting on China, Japan and the US. If everyone just does their job and starts consuming mass quantities again, everything will be fine! What can possibly go wrong with this plan?
"We believe exports will continue to follow a moderate recovery trend, led by exports to Asia, especially China," Kyohei Morita, chief economist for Barclays Capital in Japan said in a note to clients. "A lie told often enough becomes truth" said Vladimir Lenin. Meanwhile, not even China is buying this BS as a report published in the official China Securities Journal, the State Information Office, a policy organization under the National Development and Reform Commission, noted that consumption has been hit along with the rest of the economy. The SIC report said that retail sales numbers “don’t fully and accurately reflect the changing trends in consumer demand,” in part because they don’t include consumer spending on services and housing, which have seen relatively steeper drops than spending in other areas. Monthly retail sales data should be considered in conjunction with quarterly household expenditure data and year-end total consumer spending growth, which it said are trending downwards. According to year-end data, consumer spending nominally increased by 16.1% in 2008. But with inflation, real growth was only 9.6%, the lowest level of growth since 2005. Darn, these facts are just so annoying – let's ignore them!
Europe is not ignoring the facts this morning as an early rally faded fast (9am) as the indexes are flatlining ahead of our open. Germany is offering $2Bn in financing to anyone willing to buy GMs Opel and Vauxhall brands out of bankruptcy but, so far, no takers, not even the crazy Russian firm that gave Facebook $200M at an implied valuation of $10Bn – even they have their limits! RDS.A announced a major restructuring, the first oil major to admit that things are not so good in that sector (almost time to short the XLE again). Also this morning, Germany announced that Q1 GDP fell 3,8% from Q4 and 6.9% from last year, the worst decline since records began back in 1970 but at least their Consumer Confidence is up: "Consumers are assuming that the worst is behind us," but general job anxieties remain high, GfK said. German GDP will also contract in the second quarter, albeit less sharply than in the first three months of the year, before stabilizing in the second half of this year, economists predict. "Nevertheless, stabilization does not mean recovery and, least of all, return to normality," said Carsten Brzeski, an economist at ING Bank NV. "A recovery in the truest sense of the word will only materialize in 2010," he said.
So forgive us for sitting out yesterday's rally but, with GM about to go bankrupt (the bondholders did not settle) and the global situation iffy at best, we felt it's a little more fun to start establishing some short positions into this rally. If we do continue higher, then those shorts become our hedges as we begin to deploy more cash but, for now, cash remains king and we'll take quick profits on the dips as we wait to see where things settle out.
