Friday Morning – Goldman’s Global Goose!

We have talked about manipulation all week but this takes the cake!

The Nikkei was plunging 250 points this morning as the dollar collapsed (in a move to boost commodities and the US markets – more on that later) below the critical 94 Yen mark and, EXACTLY AT THE MOMENT the Nikkei crossed the critical 10,200 line we've been watching all week (11 am, just as they were closing for lunch), Kathy Matsui, chief equity strategist at Goldman Sachs, jumped on the phone and literally stopped the presses by calling for a 73% increase in Japan's corporate profits next year buoyed by cost cuts, a weaker yen and rising demand.  “People are going to be surprised at how sharp the recovery will be,” Matsui said in a phone interview.  

Goldman’s estimates equate to 48.9 yen in earnings per share for the Topix in the financial year ending March 2011, placing the benchmark at 19.4 times estimated earnings. The brokerage also reversed its forecast among all industries to a 23.3 percent increase in pretax profits this year from a 15 percent decline.  “Our forecasts for both the March 2010 and March 2011 financial years exceed consensus estimates largely due to our expectations of stronger global growth, continued restructuring benefits, and a weaker yen,” Matsui wrote in a report titled “Back in Black.”

Note that Ms. Matsui is the only analyst who sees this Asian miracle occurring this year as Global emerging-market equity funds posted their biggest weekly outflows of 2009 as investors pulled money out of China on concern banks expanded credit too rapidly, EPFR Global said.  Funds that invest in emerging-market stocks worldwide lost $946 million, while China funds had their worst week since the first quarter of 2008, according to the Cambridge, Massachusetts-based research company. Investors pulled $810 million from Asia excluding-Japan funds, the most in 24 weeks, while Latin America and Europe, Middle East and Africa funds had “modest inflows,” said EPFR, which tracks funds with $10 trillion worldwide.  

This amazing 200% reversal of forecast timed at 10pm on option expiration eve East Coast time, took the S&P futures from 996 all the way back to 1,010 and took the Dow futures from 9,250 (down 100 from Thursday's close) all the way to 9,375.  The Nikkei managed a "stick save" and finished the day down "just" 1.4% at 10,250 and the Hang Seng was able to rally back 300 points off it's lows to finish it's session at 20,200 after a 400-point plunge to the 20,000 line at their lunch break.  Energy and other commodity pushers led the rally as oil soared from $72 at midnight back to $74 by 8am.  Gold had fallen back below $440 and is back near $450 ahead of the US open so everything must be fantastic in the world again. 

Well I'm going to be the bigger man and say Kudos to GS alumni Jim Cramer and the rest of the Goldman crew as I've never seen anything like this week in my entire life.  They say "you can't fight the Fed" but when the Fed teams up with GS, JPM and CS – all of whom made huge bullish calls this week with amazing timing, then all you can do is say "moo" and join the stampede.  Washington chipped in with the new Cash for Appliances program and I think this is just the first in a series of stimulus announcements that are designed to save Christmas this year. 

We are back to the point where we cashed out our long plays last week and I don't really regret sitting out this week's rally.  My annoyance is more that we were hoping for a pullback to give us an entry to buy.  We are long-term bullish – Christmas MUST be saved and saved it will be – it's just that we have a hard time buying more at these over-pumped levels.  We did follow through with yesterday's plan to go long on SHLD, and we made a good call on DIA calls early in the day but we cashed them out into the close, really never expecting Goldman's coup de grace this morning.  I did say to members in the 9:50 Alert: "If you don’t have any bull plays – GET SOME – as we could break higher here" but our hearts just weren't in the bull plays.  We're going to get nailed on SRS and we left our long DIA puts naked and that's a shame and our SKF calls will not be pretty this morning (but we'll roll them).

Commodities should be flying this morning as the dollar dives, because spinning the Fed's purchase of $66.6Bn of mortgage-backed securities THIS WEEK and the Fed's spending of $7.1Bn on Treasuries THIS WEEK as a "2.3% increase in their balance sheet" isn't fooling anyone who knows something about the currency game.  The Fed printed $46.4Bn this week, that's a rate of $2.4 Trillion added to the money supply in a year (about 20%).  So of course you need to have gold as a hedge against inflation because, if this hits the fan – it's going to hit hard!  We've been using gold as a hedge all year so I won't get into it now but new members should check out our strategy post from March "Spinning Straw Trades Into Gold" and we can discuss various entry strategies in chat. 

This is in no way an endorsement of commodities in general.  We are out of our DBC play as we close the $100,000 Virtual Portfolio and it will not be in the new one that we will be setting up this weekend as that play has run its course.  BHP's CEO just this morning said: "Global demand for metals won’t rise beyond what is required to rebuild stockpiles for the remainder of this year.  We won’t see clean demand until early next year," said the head of the World's largest mining company.  He does see inventory rebuilding as driving global demand for the remainder of the year but will they rebuild to what was obviously, in retrospect, excessive levels of the past? 

Also good for gold:  Our friends at Hezbollah are stockpiling arms and readying themselves for a new round of attacks on Israel. Israeli Defense Minister Ehud Barak told Army Radio on Aug. 4 that Hezbollah has stockpiled more than 40,000 rockets and “if there is a conflict on our northern border, we will use all necessary force.”  Hezbollah leader Sheikh Hassan Nasrallah, appearing on a giant screen at a Beirut rally on Aug. 14, warned that the group would bomb Tel Aviv if Israel bombed the Lebanese capital.

Not that it matters though, Europe also got the good news about Japan this morning and the EU markets took off like rockets and are up about 1.5% ahead of the US Open at 9am.  There was a good report on EU PMI data, which was flat for the first time after 14 months of contraction and we had the first increase in manufacturing output since May of last year.  Armed with that bit of good news, Europe is able to shake off Britain's weakening finances and the total horror-show that is the Baltic  states (see chart).

Overall, the GDP of the OECD is 4.6% lower than Q2 of last year and that is a marginal improvement from the 4.7% decline that was booked in the first quarter but it plays perfectly into the global theme of "getting worse more slowly" that is the bullish investing premise for the year.  The OECD's director said: "It's very difficult to say what the recovery will look like," because there isn't enough data in hand. But there is nothing at this time to suggest it will be anything but the "weakish recovery" previously expected, he added. Compared with the second quarter of last year, Japan had the steepest drop in GDP of the major seven, with a 6.5% decrease. Italy posted a 6% slump, followed by Germany with a 5.9% decline, and the U.K. with a 5.6% drop. The U.S. posted a 3.9% drop in year-on-year terms, and France fell 2.6%.

A separate report by the International Chamber of Commerce and the German Ifo institute for economic research also said high unemployment rates and rising public debt in many countries had led to concerns about a sustained recovery in the global economy in the near term. "We need to caution against excess optimism and realize that the signs of recovery that we are seeing remain unfortunately weak," Jean Rozwadowski, the general secretary of the ICC, said in a statement

So you'll have to forgive me for not jumping on the bandwagon this morning.  I promise to drink heavily this weekend and kill as many brain cells as possible so that I can come back on Monday and be a good bull and follow the herd.  Well, probably not that far but I will do my best in setting up our new porfolio to be a little more bullish where I can but I'm still going a bit bearish into this weekend – simply because it's prudent (and, it's easier to press our bearish bets than to flip at the moment!).