Brace For a Rough Open
A: Futures are under pressure as global equities plunge on news the V-shaped recovery that stocks seemed to be pricing in, is not revealing itself. For now, it seems out indexes are a bit lucky as China was down 6%, Japan down 3% and most European indexes down close to 2%. If we were to trade down 3% like Japan, that we would mean our DOW closes down around 280 points and the S&P down around 30. For now, equity futures with a bit of fair value working in their favor, seem to point to a down 1.8% open. Is 'less worse' no longer enough for markets? Does a new wave of foreclosures actually still mean something? As money flies to safety of treasuries and dollars, will credit indicators once again get hairy? Are whole loans really a problem? Will animal behaviors kick in and feed on itself? These are the ultimate tests for the strength or weaknesses of the markets - and this market has been strong like bull for over 5 months now. Lets see how it handles the pressure today.
Remember to keep your eyes on the credit markets (especially at corporate bond spreads if treasuries surge via a flight to safety) for signs that this may be something other than a healthy correction after a 50% surge. Its not uncommon for stocks to be wrong and get way ahead of themselves. Afterall, stocks were very wrong in October 2007 by ignoring the credit markets and very very wrong in May 2008 by assuming the fed removed all systemic risk by organizing a rescue of Bear Stearns. Wall street has a severe case of ADS as investors/traders frequently forget about the past. Being so wrong not once, but twice since this crisis began all but seems forgotten at this point as people once again look at stocks as being rational and the ultimate predictor of a strong recovery ahead. Stocks are not rational.
Posted by anon
Mon Aug 17th, 2009 07:23 AM
all doom all the time. when will you get positive Noah?
Posted by Noah
Mon Aug 17th, 2009 07:35 AM
Oh thats not fair. I was the most doomy I ever had been around Fall 2007, and rightfully so. Look what happened.
Then, starting in NOV 2008, I started publicly saying i was LESS BEARISH - here check it out for yourself at the bottom of the post:
http://www.urbandigs.com/2008/11/halstead_tv_behind_the_numbers.html
In june I titled a post, LESS BEARISH, but tried to keep it real as I still had concerns:
http://www.urbandigs.com/2009/06/keeping_it_real_less_bearish.html
Notice the links in that piece to 4 other prior articles throughout FEB - MAY with more less bearish statements. I have to keep it real, and for now I still see pressures. I dont care what stocks do, I really dont. Stocks are not rational. They could rally 75%, I dont care, in the end the fundamentals matter and what I see is rising unemployment (less bad is fine, but still not good), toxic loans still remaining, spreading to higher quality debt classes, cre, lbos, helocs, tons of foreclosures coming, state budget issues, tons of part time workers, UE insurance benefits running out, tax receipts way way down, treasury funding of 1.5trln over next few years, tons of negative equity and near negative equity, a debt laden consumer, bankruptcies soaring, etc..
fundamentally we are not healthy yet, although the worst pace of destruction seems to have happened already - so naturally there will be a bounce, and some optimism. This cycle of debt deflation will take years to play out, not quarters. We are 2 years in. Perhaps we have 2-3 more years to go with spurts of growth and optimism mixed in before all toxicity is purged and bad debts written down. Balance sheets need to be fixed without accounting gimmickry. Plain old write downs of bad debts and corporate restructuring. Thats what we need. Bad models fail, good ones survive. And I didnt get into unintended consequences of policy actions taken to stem this crisis. That comes later with endgame. there are no free lunches, yet many want one.
Sorry for rant. In short, Ill get positive, by that I think you mean Bullish on equities/housing/economy/employment/banks/etc..overall growth, when time is right. I think we may have another, less severe wave to go through first. Have to keep it real for now, while everyone else jumps on V-shaped bandwagon
Posted by Will Howard
Mon Aug 17th, 2009 08:50 AM
http://www.cnbc.com/id/32445255
Thing are already looking up.
How come you don't cover that 75% of companies reporting earnings far exceeded expectations? That GDP, though negative 1%, was far, far better than anyone anticipated a couple of months ago? That unemployment went DOWN last month! Yes, I know if MAY go up a little more and may bounce around, but that was a far better statistic than anticipated. And expectations already built in people dropping out of the job market, so don't give me that one.
Home prices nationally rose last month for the first time in I don't know how long. And sales are up.
Yeah, right, a lot is still wrong. And once we have a fuller and clearer recovery the doomsayers are going to be yelling about deficits and inflation. They are already worrying about inflation. That is, when they are not worrying about deflation. Oh no, a falling dollar. Oh no, a rising dollar!
Hey, and what about inventory dropping here in Manhattan!!! Looks like it is moving in the right direction to me!! Yeah, we're not going to party like it's 2006 for a while but it is looking much better.
The point is, we are better off now than we were five months ago. Things may bump around for a while but for different reasons, it will feel more like the 70s than the 30s. And we'll be partying like it's 1999 in by 2012.
Posted by Noah
Mon Aug 17th, 2009 08:57 AM
"How come you don't cover that 75% of companies reporting earnings far exceeded expectations?"
did you see the top line? it was all bottom line growth from aggressive cost cuts and job layoffs. revenues for most were down.
the inventory widget is broken on UD, I mentioned that in a post. Streeteasy is working on it but I think inventory has not dropped as much as my widget states. Im told it will be fixed in 2-3 days by streeteasy, with a new feed set up. We will get backdata to refill holes and check past data. Once done Ill put a post up.
Home prices nationally were wallopped, and the hardest hit areas are seeing rebound in low and mid end markets while high end is still deteriorating. Hard to get excited considering the damage. Its natural forces at work with buyers scooping up 50% + bargains.
Again, Jeff and I discussed how we were not nearly as bearish as we were, but we both are still cautious and not ready to get bullish. We have our opinions why and state them here. Jeff is more bullish then me on iventory restocking and less worse bull market in place
Posted by Fred
Mon Aug 17th, 2009 09:23 AM
I tend to agree with Noah in that we are definitely at an inflection point and picking the right stocks is crucial. There are a number of sector plays that can easily shave 5% to 7% from friday's close without batting an eyelash. Metals and miners def come to mind. We are accumulating the big ones on the dips simply because we feel that medium term, these will rise. I think consumer discretionary despite all the optimism is probably sideways at best for the next year. Energy seems to be getting back to basics again - love the fact that the solar stocks are getting whacked since they are just not free market enterprises and i think that gov't stimulus is waning as a cause celebre for investing. Now, i did my usual classified cruising in sunday's NYT and remain aghast at the asking prices, tone and tenor of the broker community about how real estate has bottomed in NY. i remain committed to the belief that until residential prices reset to 2000/2001 levels, meaningful equity will stay out of the game which means ultimately that the risk of downside outweighs the upside. i wonder how much of the current activity is just spill-over from 2007/2008 demand? last of the Mohicans so-to-speak.
Posted by cfranch
Mon Aug 17th, 2009 09:27 AM
funny how throwing a little cold water on this market rally gets a strong reaction. many IRA's and brokerage accounts have been somewhat repaired by this rally. nobody wants to give up those gains. however the macroeconomic picture remains precarious. we are also entering a typically bearish period for the market. we are due for a sell off. how low do we go? we are gapping below double tops on the market. i think we fall at least 5% over the next few days. going to get trail stopped out on my longs today. have my shorts lined up particularly financials and RE stocks. market bouncing off premarket lows. however hi volume buying in the last 30 minutes of friday have lots of longs trapped. fasten your seatbelts it's going to be a bumpy morning!
Posted by Noah
Mon Aug 17th, 2009 09:31 AM
Will - you raise a good point about the deflationists vs inflationsists, falling dollar vs weaker dollar.
I consider myself to be in deflationaists camp, and I discussed that here. Did you see my posts on that topic? Would love to hear your comments about my thoughts on that topic.
The dollar should strengthen in deflationary times, but a dollar negative policy is fighting that trend. Its all relative. What is the dollar falling against? For me, I see dollar strength first and then perhaps a significant fall. We all know the fed is trying to inflate us out of a deflationary spiral. Period. And they are engineering a bank recapitalization environment. Period.
But I do think it is okay to be concerned about the unintended consequences if you put all the pieces together - rising rates, rising taxes, and inflation in all the things we dont want it may be the end game here.
For now, as you say, its all talk
Posted by Noah
Mon Aug 17th, 2009 09:41 AM
I think we need to keep in mind where we came from. This market surged 50% in 5 months. That is not sustainable as china is showing us now. If we had a correction in past 4-5 days like China did, after the runup, we would see a 10% move down. We are not even close yet.
So, this is nothing but a health adjustment down for now. Just too early to tell if its anything more. Thats why we must watch credit. If its something more, we will see it in LIBOR, TED, corporate bond spreads, CMBXs cliff diving way more than they have so far, dollar strength, commodity weakness, CDS spreads widen, etc..
If we can share what we learn on a daily basis on that front, that will be beneficial to all.
Posted by anonymous
Mon Aug 17th, 2009 10:49 AM
I have been watching shares of GE closely for the past year, and I have been using it as a gauge for fear in the equity markets. Historically this had been a boring stock, but since the correction it seems that GE has been trading with a high beta, primarily on fear and lack of it.
Every time fear enters the market and the dow gets cut 2% or so, this stock gets crushed. Today is no different which would indicate to me that people are still very concerned with financials, credit writedowns, and the general economy.
Posted by Fred
Mon Aug 17th, 2009 11:07 AM
GE's current beta is 1.6 - which blows its historical out of the water, think 0.5 or so. as a data point, the XLF's beta is 1.6 so basically you get all the volatility of a financial with the limitation of being an industrial. it is the hardest stock for us to decide what to do. i frakkin hate it but would prefer to exit in the high teens.
Posted by anonymous
Mon Aug 17th, 2009 11:19 AM
If you are holding it and the waters look shaky, I think there is enough fear with the CDS nonsense to send this stock back under $10. Just imagine headline: GE CDS Skyrocket, Shares down 12%.
Recently, Immelt was quoted saying GE Capital is worth about $10-20 Billion. I thought to myself, OMG...that's it. But was he really covering up the fact that it is worth nothing? Or maybe even a drag?
The other thing is that the industrial part of this company is very tricky and very weighted in Energy for now. That may be a good or bad thing, I don't really know.
Posted by In Debt We Trust
Mon Aug 17th, 2009 01:08 PM
Noah,
What is the China credit index? I have been watching CDX.EM diversified but that's a mixed pool.
Thanks.
Posted by Noah
Mon Aug 17th, 2009 04:17 PM
hmmm, dont know. sorry.