US [eyes finally] Open?

Rose colored glasses are breaking and bearing voices are coming out in stronger force these days. The talk of a W-shaped recession grows. And the markets continue to react with declines after such a strong run up off March lows. And now the question begins to turn from "are we going to see a correction" to "how much of a correction?" Is the current 4% slide pretty much it? Are we headed back to March lows? How about a standard 33 or 50% retracement of the 40% pop we saw off the March lows? We're approaching a key level - the 200 day moving average on the S&P500 is 908. If we push through that, then the next support levels of note (in TSM's opinion) are 875 and 825.

Maybe, just maybe, the optimism is subsiding and our eyes are finally open to the economic reality that we're facing.

As TSM sees it - yes, the worst of the decline is over (but markets overreacted and need to come back - a V shaped recovery was priced into the market but doesn't actually exist and wont pan out in the economy. TSM thinks they are fair given the recent overshoot and that while the worst of the decline is over, there are still huge bank issues and housing issues to be resolved. Those areas aren't going to see measurable improvement for quarters and well into 2010. So retracing to 800 (50% correction) would be nice, maybe with a little pop off them and then steady, stagnant, very minimal side-ways growth from there through 2010. Also consider the storm that's brewing -- rising rates, huge debt deficits and rising gas prices. Put those into play and you have many consumers that have NO spare money for anything except survival. Not to mention that job creation is going to be very limited and that many of the jobs created will be temporary government positions.

As TSM sees other things - Oil is legit; maybe slightly too high for now, but $100 by end of 2010 is certain. Gold had its day and the dollar was weak. Inflation isn't an immediate concern but will be and so while a long position in gold wont hurt you over the next 18 months, why not stay away from it for a few months and see gains elsewhere. TSM continues to love emerging market plays in Brazil and China, although not until this market correction pans out. TSM really dislikes consumer discretionary plays and thinks shorts are the way to go here if at all.

The Wicked Witching of Friday

Apparently I'm really into the pictures and witty headlines thing now. So maybe that makes for lighter reading and is more enjoyable for the TSM afficiando. That being said, I thought I would provide a little tutorial for what's coming tomorrow (Friday, June 19th). Its... dun dun dun... a quadruple witching day for the market.

What's that mean -- well, this occurs occurs on the 3rd Friday of every quarter, and is when 4 different types of derivative instruments (stock options,single stock futures, options on index futures and certain index futures expire) expire on a single day.

Starting to sound like a routine post with too much technical terms, well the basic effect of this day is that volume is increased by 55-60% from an average day in the market. Couple that with the fact that the daily volatility of the market currently reads above 30 (which is an indicator that the market is volatile right now, historically speaking - but not really as volatile as when the reading was in the 50s and 60s over the past 6 months) --- and you COULD get a recipe for a big move in the markets. Maybe not. Its impossible to know - tom cruise on a mission style. But with the market momentum going down this week (altho not currently today) - albeit on light volume - maybe thats a snowball waiting to become an avalanche.

BOTTOM LINE - no one knows, but grab some popcorn, turn on the soundtrack to Elphaba singing "defying gravity" and see if the market swings lower in a big way Friday!

And you thought "W" was gone...

Well, he is, but the idea of a W-shaped recession is becoming more and more pronounced and, dare i say, popular. Here's a quick 60 second read that echos what TSM believes is the reality of things (ps, this was an article find by TSM's dad!). Keep in mind that a W-shaped recession (as opposed to the previously known, ramped up V-shaped recessions) may do well to keep inflation worries away. I guess its a pick your poison kind of thing.

http://247wallst.com/2009/06/15/another-vote-for-a-vicious-double-dip/


For good measure, consider recent comments and computations by the International Monetary Fund - which is decidedly less pro-American and quite objective and accurate really. The IMF:

"Raised the growth forecast for U.S. for 2009-10. GDP is forecast to contract 2.5% in 2009 compared to 2.8% previously estimated. In 2010, the economy is expected to grow 0.75%. Given financial strains and adjustments in the housing and labor markets, a solid recovery is projected to emerge only in mid-2010. The Fed can ease credit further if conditions worsen. Additional fiscal stimulus could also be considered if the economy doesn’t bounce back. But monetary and fiscal stimulus may stoke concerns about inflation and rising debt, exerting upward pressure on interest rates"

That isn't exactly in line with the strong 2nd half 2009 and particularly 2010 GDP forecasts by many of the bullish predictions that have correlated this recent market rally.

Also consider this CNBC article. Nouriel Roubini and Meredith Whitney are two mainstays as far as people or resources you must consider and listen to in any economic environment.

http://www.cnbc.com/id/31371062/site/14081545/for/cnbc/

S&P 500

May 28 -- The bulls v. bears battle continues and this morning could be very interesting. If durable goods comes in bad (which is dependent on consumer spending which isn't good, altho durable goods are much more stable than discretionary goods) and if jobless claims come in high (which might not be likely but is possible) and if new home sales come in weak or if the inventory rises, then bears may have the momentum to take the S&P 500 below and through its very strong 878 support level that its been bouncing up off of for the past weeks now. Today's fall-off on no significant news sets up for a VERY INTERESTING morning of economic data tomorrow and market reaction. Personally, I'm still a bear and expect one more dip lower and a bottom of sorts before the economy really establishes a bottom toward the end of 2009.


May 13 -- Remember that resistence barrier that the S&P struggled to break through of 875 for a while. I'm watching to see (as we return to that level) if there will be any resistence to the downside. If we break right through to the downside, then the next resistence level may not be until we get closer to 825. That would be setting up for a potential additional 8% decline.

Dow 8500? I just don't see it.

May 20 -- So the FED agrees with me. Sure they continued to use positive and optimistic phrases like "the banking system is healing" and "green shoots" and things are "turning around." And most all of those are at least somewhat true. And even necessary perhaps given the delicate psyche of people in current times. However, what else did they say? How did they agree with me?

They revised their economic projects for 2009 DOWN. Instead of the near flat GDP growth for 2009 that bulls are predicting and the -0.5% to -1.3% GDP contraction that the FED has previously predicted...it revised its estimates for GDP contraction to -1.3% to -2% now. Moreover, the FED believes that unemployment will hit 10% by year end. Remember that the bank stress tests assumed only a 10.3% unemployment level at the END OF 2010 and that was only in the MOST ADVERSE assumptions test. Sounds a little less credible now. Certainly things are at least declining at a less severe rate, but declines are still declines. What if initial unemployment claims is only 350,000 instead of the forecasted 645,000 tomorrow morning? Well that 350,000 number is at and above the last recession level. So improvement = only a normal recession? (Besides, initial unemployment claims WONT be only 350,000 tomorrow. GM and Chrysler are expected to keep those numbers in the 500s, 600s, or even 700s.

And how did the market react to this dose of reality? Relatively flatly. Interesting? unbelievably? short-term and who cares? I don't know short term trades and cyclical events (yet at least), but I do think that macro-economic data ultimately directs the market. And currently the market is living on optimism and expected GDP flatness in 2nd half of 2009. Who knows, maybe the Obama stimulus (which really kicks in in 2010...but why did we have to wait for it to start in the second half of 2009 at all?) will provide some growth. It should, even if inflationary in the long run. But still the underlying fundamentals are what I read and run with, and to me - AND NOW TO THE FED AS WELL - it appears that even if things are stabilizing, actual growth at any serious speed is a long way aways, as in early 2011 likely.

May 19 -- It appears that the S&P500 has made its run at trying to escape the 875-900 range with a huge day yesterday and what appears to be poised for another big day today. The news propelling these moves: (i) the fact that Bulls continue to rage on and aren't being wavered by logic or negative news very much; (ii) a news vacuum and the absence of meaningful economic reports translates into situations where 'optimistic' and 'hopeful' news about banks repaying TARP to get loose of the government and Indian elections and economic reform = huge gains; (iii) the assumption that the 2nd half of 2009 will be positive GDP growth; (iv) belief that the housing market has bottomed or is bottoming as a result of "good" earnings by Lowes and Home Depot and an increase in pending sales (not actual sales so much mind you); and (v) the general belief in the supremacy of American business and enterprise.

Again, while still skeptical, it appears that Bulls may not be denied. Interesting to note though -- is it possible that what we are currently seeing as progress and 'growth' is really just stabilization? A growing Bull market requires active and serious economic growth and sales and production, etc. We're not seeing that. We're seeing positive earnings from cut costs. We're seeing stabilization in various sectors due to government monetary backstopping. We're seeing unemployment start to flatten although continue to get worse. So while things do appear better...and MAYBE even to have bottomed... how will the market react when the expectations of ACTUAL growth don't start appearing in the next 6 months or even year or two?

May 15 -- Well I don't think that this past week (dropping approx 4%) necessarily marks the end of a run above 8500 but it does start conversations of doubt and uncertainty, and makes people address the underlying questions and problems that I think should be keeping this market from going up up and away. I think next week is key in the market popping one way or another. The S&P trading range is 875 - 900. First move outside that range wins I believe.

May 13 -- Also consider the ongoing impact of the Chrysler and GM bankruptcies. I guess the GM reference is a little premature but probably not really, right?

It was reported today that GM plans to cut 42% of its dealerships. Chrysler plans to cut 27%. Now that doesn't automatically = bankruptcy for these dealerships but for the over-leveraged ones... probably. And let's be honest, over-leveraging by people in those days wasn't exactly uncommon...

May 4 -- For a number of sessions now stocks have started to sell into rallies. Think about it, a month ago, stocks were rallying on "less than bad" news. Now they're having trouble rallying on "good" news, such as the April unemployment number of 539,000 which dramatically beat out the concensus of 610,000. Granted, a large chunk of unemployment in April was offset by government hiring short-term employees to conduct the 2010 census, but still.

There has been no real consolidation moments in this rally. Its been straight up. That's not good support for when things go bad. Can you image if treasury auctions or unemployment or credit losses started reporting worse again.

The stock market rally has been based upon the assumption that GDP will turn positive in the 2nd half of '09. A recent survery of CEO revealed expectations of 3Q growth of 0.5% and 4Q growth of 1.8% for 2009. I believe GDP will remain negative through 2009 and then be slightly positive (1% or less) in 2010.

Keep in mind that the Chrysler bankruptcy is still ongoing and that GM will probably be joining that bandwagon in 3 weeks (June 1). That could eventually lead to more unemployment concerns and money/etc being sucked out of the already deteriorating economy. Remember that we're not just talking Chrysler and GM employees, but also suppliers and dealers. It's a significant ripple effect.