How can a firm that never loses money be so totally wrong?
Just this Monday, Goldman Sachs helped to gap the markets higher at the open in low-volume futures trading with the following pronouncement: "Goldman Sachs resumes coverage on Dell Inc. (NASDAQ: DELL) and gave DELL a Buy rating at a 12-month price target of $19. Goldman believes that DELL will benefit from a corporate PC refresh cycle and will show better earnings as DELL is trying to optimize its cost structure. Goldman believes Dell will report better than expected earnings and beat analysts’ expectations. Goldman expects DELL to report earnings of $1.09 for CY2009 and $1.37 for CY2010 from their previous estimates of $1.07 for CY2009 and $1.35 for CY2010." Fact is, they missed by a mile.
That report took Dell up 2% for the day and the Dow gained 150 points and we were dumbfounded by the move, both in DELL, who were swallowing a difficult acquisition of Perot Systems and of the market, which acted like $31Bn DELL is the same kind of bellwether that $120Bn HPQ is, even if Goldman's report had been even close to accurate. As it was, they couldn't have been more wrong if they were playing "opposite day." How is it that a firm that has only 3 losing trading days in 6 months can be this amazingly wrong on crucial analysis?
So is Goldman actually stupid and, as many have implied, simply cheating to rack up their amazing market gains or are they intentionally manipulating the markets. Former GS-employee Jim Cramer jumped right on the bandwagon on Monday afternoon and told viewers that "obviously," since DELL is going to do so well (because GS says so) that INTC and MSFT must be buys too.
This is how manipulative stock pumping works – start a rumor, push it out through the media, extrapolate the rumor out to affect market-moving stocks that don't even have upcoming news events and then tell people they are missing an opportunity, even after the train has left the station (by Cramer's 2:30 spot on Monday, the Nasdaq had already hit the high for the week, peaking out exactly at the moment Cramer told his retail investors to pile into the market).
Were the beautiful sheeple only buying what Cramer's buddies were selling? Is that how GS makes their money, buying low on Friday, making an upgrade on Monday, getting their pals to sucker people into the "rally" and then dumping into the retail frenzy? Sure buying low and selling high is what you are supposed to do – but there's a fine line between good timing and manipulating the market and when you allow the single largest daily trader of stocks on the planet Earth to also be one its most influential stock analysts – how can you possibly draw that line?
So, was Monday's call by Goldman an indication of how inacurate their research is and a scary indication that, perhaps, everything else they've been saying about oil, gold, the economy in general is also fundamentally flawed or are they just manipulating the markets with cleverly timed market announcements and then using their influence in the mainstream media to drive investors into positions which they dump at huge profits while wiping out ordinary investors? Maybe it's all just a big coincidence, let's hide our heads in the sand and hope so…
Speaking of manipulative market pronouncements, bond king Bill Gross decided option expiration day would be the best time to say that Chinese growth is likely to be hurt by an absence of consumer demand from trading partners such as the U.S. “The Chinese, I suspect, will have a bubble of their own to confront,” Gross said in a Bloomberg Television interview yesterday from Pimco’s headquarters in Newport Beach, California. “It’s gearing up for export that doesn’t find an end consumer, that’s the real problem in China."
The “systemic risk” of new asset bubbles in global economies and markets is rising with the Federal Reserve keeping interest rates at record lows, Gross wrote in his December investment outlook, posted on Pimco’s Web site yesterday. The Organization for Economic Cooperation and Development and officials in Asia including Hong Kong Monetary Authority Chief Executive Norman Chan are also warning of bubbles in the region. “With unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has nowhere to go,” Gross said. His outlook asks:
OK, so where does that leave you, the individual investor, the small saver who is paying the price of the .01%? Damned if you do, damned if you don’t. Do you buy the investment grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2% yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis?
Two suggestions. First, as emphasized in prior Investment Outlooks, the New Normal is likely to be a significantly lower-returning world. Diminished growth, deleveraging, and increased government involvement will temper profits and their eventual distribution to investors in the form of dividends and interest. As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less.
Where does that leave us indeed? Not only is Bill Gross worried about China but Japan's Deputy Prime Minister Kan is worried about DEflation, despite runaway commodity prices. “My understanding is that Japan is in a deflationary state,” said Kan. “There’s a sense of crisis” regarding deflation, Finance Minister Fujii said today, calling on the central bank to respond to the threat while adding that rates are already “very low” limiting room for further monetary policy action. The Nikkei dropped below 9,500 this morning, joined by the Hang Seng dropping below 22,500 as Asian stocks fell for the 4th consecutive day. Even the Shanghai Composite fell today so we're feeling good about those FXPs I mentioned in yesterday's morning post.
Over in Europe we are down about half a point ahead of the US market open (9am) as Trichet says the ECB may phase out some emergency aid in seeking stable prices. “Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said at a conference in Frankfurt today. “Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.” A separate Bloomberg survey of economists and real estate brokers showed British house prices will probably fall next year, and it may not take until 2014 to return to the levels at the 2007 peak of the country’s biggest housing boom.
Nationwide Building Society Chief Executive Officer Graham Beale said the rise in U.K. house prices this year has been caused by a low number of properties available for sale and the trend may reverse next year, pushing property prices lower. “The market is still overvalued, whichever measure you use,” said Seema Shah, a housing economist at Capital Economics Ltd., a research group in London, who was the most bearish in the survey. “Prices need to fall a further 20 percent to 25 percent to get back their long-term trend.”
The dollar is looking bouncy this morning and that will be good for UUP and all our bearish commodity plays. We'll see how our levels hold up for today. 2 weeks ago I posted our expected 25% level targets for this move at Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,000 and Russell 600. We're already failing to hold those lines and it's doubtful they will be taken back so it's time to look at our expected retrace levels of Dow 9,840, S&P 1,056, Nas 2,100, NYSE 6,720 and Russell 576. Let's take failures there VERY seriously but, if we do hold them, then all this is just a healthy pullback off the top!
As we were then, we'll be watching the FTSE, who would put us globally bearish below 5,250 (right on the line) and the DAX, who would put us globally bullish above 5,750 (now at 5,650). Dow Transports need to get back over 4,000 (now 3,956) and the SOX need to hold 300 (now 310) or we may be heading for a very nasty fall next week. Hopefully it won't come to that but, meanwhile – let's continue to be very careful out there!
Have a nice weekend,
– Phil
