MP 5/7/08

Traders,

Yesterday was an interesting day – we saw pressure across the banking sector and the oil rally additionally created pressure on the market. However – there was lots of talk about the stimulus package boosting the economy. The end of the day saw a fairly decent rally into the close as we continue to hang just above these resistance or should I say support levels. The longer we are able to stay above them and inch away from them the more strength will eventually build into these levels.

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Disney rallies in the pre-market

I was just at Disney World for my son’s birthday over the weekend and had a wonderful time. The level of service is what makes the Theme Parks shine – it is the attention to detail. Of course as I walked around I was counting people, profit, expenses. No doubt that beyond the tickets it is the $4 Cokes and the plethora of nickel-dime items that really juices the profit line. Disney has a fairly large entertainment line from ABC to movie studios – additionally they have a vault of films they can roll-out for the next anniversary edition.
As much as I like going to Disney World, there is something utopia-like odd about it, I cannot put my finger on it – maybe it’s the plastic smiles and all those animatronics?

The question…..is Disney a recession stock? I am not sure, traditionally Vegas and gambling do well in a recession as people move from gambling for fun to gambling for hope. Disney would get hurt if advertising drops in their ABC pipeline – but their parks and films might absorb the blow. I am sure the parks can offer special deals to help keep attendance levels up if things get tight.

They did have better than expected profits from Easter. Disney is up in the premarket. As far as a recession stock – I think they are better off than other companies as they have a wide variety of product lines and the weak dollar might spur MORE foreign visitors to the parks in the States. At the same time an increase of profits from the weak dollar from the foreign parks.

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Cisco Systems – sales exceed

Another company to do well the last qtr was Cisco systems. While Chambers (CEO) had issued concerns previously about a slump in sales that would extend throughout the year and well into 2009, the first quarter was a rather surprising to the upside. The stock initially popped in the aftermarket above $27 per share – but now has pulled off. Growth going forward, even with the recent better than expected earnings, is still questionable. The stock is now below the previous day’s close.


It is important to remember that earnings are how they DID, not how they will DO. The forecast moving forward is usually more important than the earnings themselves – as they will create the initial knee jerk reaction and then investors will start LISTENING to what the CEO and Analyst say about them moving forward.

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Productivity Rises MORE than forecast – Of course it would!

I always find it funny how some people look at an increase in Productivity numbers as a good sign of a stronger economy and that inflation is at bay. The reality is that Productivity numbers RISE when you get MORE out of your workers. How does that happened – well when you lay off people and reduce overtime work – fewer people have to do more work to meet the same output of work. So obviously productivity rises!

For me increase in productivity means companies are becoming LEANER and trimming the fat – mostly middle management and frivolous expenses. The companies are battening down the hatches as money becomes tight and consumer buying power weakens. Productivity increases indicate that the companies do not EXPECT juicy profits of the past.

Typically when the economy is doing well and money is being made hand-over-fist – companies become fat. They hire MORE people – middle management gets bloated – incentives are paid for just doing what is expect of you. Crazy bonuses are paid, expansions – new cafeteria, on-sight dry cleaning and day care. All these extra services mean more costs, more jobs, more net overhead – but profits are up and the economy is strong. Expansion is expected. When this happens productivity usually DROPS. As you hire MORE people to work LESS to produce the same amount of out-put = lower productivity.




Of course this doesn’t seem logical – you would think that with more profits and booming economy companies would look to horde more money and remain lean – look to tweak out more money. But typically the American philosophy is to CONSUME – that means spend and expand when money is flowing.

This is not true with ALL companies – but it IS true with MANY of them – especially when you have UNIONS involved demanding more when profits are up. Now things are tight – jobs are cut – bonus cut – overtime cut – incentives cut. Well productivity will go up.

Beyond the interesting phenomenon and being an interesting statistic – I don’t think it should have too much impact on the market. Of course the talking heads will debate whether it is showing lower or higher inflation and how the Fed will read into it.

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First City to Fall ?

I was told recently by a life-long government worker (a believer of the system) is that the Government can NOT go bankrupt. I asked him why not? He said it can’t and that is foolish talk. His blindness of how his paycheck is created is beyond me. He is so ingrained into the system that he just expects the paychecks to come – since the government can just print money. It is this kind of philosophy and limited understanding of economics, fiat currencies, and the fundamental understanding of how margins, profit, expenses, revenues all fit together – yes even at the government level these rules do NOT change. This is probably one of the most frustrating thing when talking to a socialist, it’s there blindness as to where the money comes from.



Well – that is not true. Vallejo, California (city council) voted to go into bankruptcy. The city doesn’t have enough money to pay its bills! It is the largest city in California to ever file bankruptcy. Of course under bankruptcy the city will keep running and all this does is freeze creditor claims. Furthermore the State and Federal government will just bail them out. So maybe I am wrong and my socialist life-long government worker is right – they will just print MORE money.



However – it is serious – we are seeing many cities and local operations that rely on tax payer money (mostly via property taxes) suffer and having to cut back to meet their budget. If this spreads to many cities or even to the state level – it will put serious pressure on the federal government – as it will face a NEW drain on the system. Printing more money will also cause more inflation.
Unlike the Orange County debacle (that some analyst are saying Vallejo is an isolated event) – I disagree. Orange County made a investment decision that went bad. Vallejo is just trying to meet normal budget concerns as their revenue contracts (property tax revenue). I don’t think we will see how serious this story will get until the end of the year and going into 2009 – as city, counties, and states start seeing SERIOUS short falls in tax revenue. I can tell you in Florida it is going to get very bad in 2009 – if the state and local government do NOT plan ahead. Add on top of this any outstanding bonds they have to pay interest on – and it could become a very big problem that only Bernanke will be able solve by pouring in MORE money into the system to keep them going.

So why is this important for investors? Well – it could create to problems going forward – first it would create inflation if they print more money (billions to keep these companies going forward), second we could see defaults in mono-line bonds if they are unable to pay, third we could see the Fed forced to lower rates AGAIN to keep cheap money flowing to keep them afloat – which would create the cycle going again - lowering the dollar and increasing inflation.

Keep an eye on this story – does it repeat itself across the country? It is a very real risk factor.

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Futures Pre-Market

We have seen some volatility this morning – initially down and then a pop with the productivity numbers – but them a fall off again. Additionally with Oil breaking the 120 barrier there is some additional pressure on the market. The futures are pretty flat compared to the cash basket – so I do not expect the ARB traders to create too much pressure on the cash basket on the opening.

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Support / Resistance

From a technical stand point the market looks to have broken the resistance levels. Those companies that have over-seas exposure have been reporting better than expected earnings boosting some sectors. However, the banking and financial sector keeps taking blows with more write-downs and in the weak economy, job losses, and higher oil prices – we are in uncharted waters. Traditionally – I would say this is a new support and a place to get long – but I am very cautious and would say to hedge those longs.

INDU 13000 (It seems to be a magnet – we were below it and then above it yesterday. This market WANTS to rally – but the economic landscape and commodities is putting the pressure on it. We also have the stimulus package would could create a 2nd -3rd quarter pop on consumer spending – but that is just masking the underlying problem.)

NDX 1950 / 2000 (This market is driven by a few stocks. It has broken out to the upside – unlike the rest of the indices. How long are the legs in this rally – not sure. 2000 is a fairly good resistance level – but keep watching the top ten overweight’s to really get a good grasp of what is going on.)

SPX 1400 (Another magnet area – we are well above it and want to stretch our legs like the NDX – but there is a mix of issues in here – unlike the SPX – which is creating a little bit of a drag.)
RUT 720 – 740 (We have been above that 720 area – which is now short-term support – can we break through 740?)

We are topping out in the resistance areas and created some short-term supports that we remain above. How many punches can the economy take before the market also feels it? I am not sure – but the investor resolve to get this market to rally is amazing – no doubt. It is prudent to hedge all hard deltas at these levels.

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Conclusion

The disconnect between the economy and the market place is pretty vast. Which one will be right in the end? Will the economy rebound, consumers flush with cash, new jobs, housing bottoms and starts to rally, dollar gets strong, and oil come off – so the economy can meet the market expectations? Or does the market eventually give up a little to meet the economic weakness. The market moves in short bursts up and down and the economic picture moves more slowly. Warren Buffet, Rogers, and other billionaire investors are VERY concerned and think we are already in a recession and it will last a long time. It is hard to ignore these billionaires as they have made Billions in the market and control vast sums of money. We are not talking about a CRASH – but are looking at what companies will be strong in a recession. We can NOT separate the market from the economy – yet it continues to move away from each other. It is the consumers at the end of the day that grease the wheels of the economy.

My humble advice, if Rogers, Buffet, and other billionaire investors (self made men) think we are in a recession and it is going to get worse – well maybe it is time to HEDGE those hard deltas and look to invest in companies that benefit from a rising commodity market and do well in a recession. Instead of just looking at technical’s.


SIDE NOTE: The word Liberalism

One of the most frustrating issue during this election is the MISS USE of the word Liberal(ism) (by both the Republicans and Democrats). Democrats say it with pride and Republicans treat it as a bad word. However, they have both twisted and misused this word to a point that its definition has changed.

Initially, the word Socialism had a negative connotation to it – as it is part of the genus of collectivism and similar to communism. The NAZIs were the National Socialist Party. So it is obvious that people in the US do not really want to call themselves Socialist. However – Liberal and Liberalism in this country are used synonymously with socialism – which couldn’t be further from the truth. It is interesting that the rest of the world uses Liberal to meaning something COMPLETELY different than what we here in the U.S. think of as Liberal. The Democrat and Republican miss use of the word has lead to having to ADD the word CLASSIC in front of Liberal to refer to its intended original meaning (a doctrine stressing individual freedom and limited government – individual property rights, natural rights, protection of civil liberties, constitutional limitations of government, free markets, and individual freedom from restraint.).

When I hear someone say they are a liberal (inferring they are for more social programs and nationalizing of services) – it is frustrating. Not that I have a problem with their view (that is a different matter) it is the use of the word – they should just say they are a Socialist. The frustration lies in that they have no IDEA what liberalism means. We have completely changed the meaning of the word – we ignorant fools. The reason for the change – no one wants to call themselves a Socialist – because of the possible negative connotation – but that is WHAT we mean in this country when someone is referred to a liberal or liberalism.

I am a liberal – but only in the CLASSICAL sense – what the founding fathers and the rest of the world consider a Liberal. Unfortunately I have to use the word Classic in front of liberal – since the meaning in this country has changed so drastically. Even when I say Classic Liberal – people think I am some far Left Socialist Nut – which couldn’t be farther from the truth. It is too bad that the Democrats and Republicans have butchered that very important word the defines what our founding fathers fought for.


Bring back that beloved word that is a derivative of Liberty!