MP 5/8/08

Traders,

Support, what support – you mean Resistance! I DID have a bad feeling about calling the previous resistance a support. It just seemed that the decoupling of the market rally from the economy made no sense and those billionaires (Buffet, Ross, Rogers, Bogle, etc.) who are looking to China and saying we ARE in a recession and inflation is real continue to be right. What do THEY know that we do not? Maybe it is because they have “clear vision” and avoid listening to Wall Street pundits. I can assure you they do NOT read the “Hot Stock Day-Trading” message boards or listen to the Talking Heads on TV.

I remember – back in the rally of the Dot.com market – when analyst and talking heads were saying “This is a NEW economy, Buffet is old school and doesn’t understand!” – Buffet was considered by many to “Miss The Boat” and not understand this NEW ECONOMY. I saw Buffet on CNBC back in 2000 say “I’m a fundamentalist – if I cannot SEE revenue or an actual business model – I will NOT invest!” – maybe that was old school. He did miss out of the rally – but he sure did NOT miss out on the collapse. You have to ask yourself – how come Buffet, Rogers, Ross, Bogle, and other billionaires keep making money? Because they THINK for themselves and cut through the fluff. They don’t take ANYTHING for granted and unless they can do the MATH for themselves.

While most people NEVER question the Government Data the pours out of Washington about Inflation and Job numbers – you will find that these billionaires DO question it. As you may know I wrote an essay about government reporting data http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html - feeling like I might be wrong (for who am I to question government reporting data?) – I sent it out to a few people to get there response recently (if you had read it you already know that I got feedback from a Nobel Prize winning economist) – more recently I received an email from “Jack” Bogle (founder and CEO of Vanguard and one of the most influential people in the financial world - http://en.wikipedia.org/wiki/John_Bogle ) Here is what he had to say:

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Hi, Michael,

Thanks for your note and your perceptive essay.

Given the press of time, I've only had the opportunity to scan your work.
But I find myself in agreement with your analysis. Indeed, I have often commented on issues such as "core" and "hedonics," and share your concern that true inflation is far larger than the government data suggest. And yet the inflation-linked Treasury is priced to an assumed 2.3% (CPI) inflation rate. I'd argue that is absurdly low, even as our government (whichever party takes power next year) has an enormous vested interest in using that flawed data.

Keep up the fine work, and "Press On, Regardless."

Best,
Jack Bogle
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Should we be concerned? I think so – maybe my essay has hit the mark! Now if we can only get mainstream media and the man on the street to take notice.
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Sales increase at retail stores.

Wal-Mart and Costco see sales rise more than estimated for April, excluding gas expenditures. However, after taking a closer look at this there are some concerns with just taking this for face value. The first was clearly pointed out by the Retail Analyst on CNBC this morning –Easter fell in April instead of May like last year – which boosted sales. The second was the increase in consumer credit spending on a year-over-year basis. One analyst said this morning that could be contributed to two items – they have less “hard cash” to spend AND the pre-spending of the stimulus check.

I additionally heard an interesting observation about the stimulus check – “Has the increase in consumer credit spending a result of pre-spending the stimulus check and if so – will it be DOUBLE spent?” – meaning that they pre-spent it on their credit cards – but when it actually comes instead of paying down the credit card spending – they will just spend the actual “hard money”?

The biggest boost in sales has no doubt come from the early Easter (in April). “Much, if not all, of the sales growth for April is coming from the Easter calendar shift. When you strip that away, growth is pretty sluggish.” Said Michael Niemira, chief economist of ICSC (New York trade group). Wal-Mart pretty much confirmed Niemira by forecasting a 0-2% growth rate, far lower than previous expectations. However, it is been very difficult for any retail firms to predict the impact of the stimulus checks. Have they already pre-spent them with credit cards, will more go into the gas tank than retail sales, will it be used to pay down the increase in credit spending? All those are hard to measure.

No doubt that Wal-mart and Costco have the edge over many retail firms – since they have a pretty large exposure to the grocery sector and Wal-mart has also moved into the pharmaceutical sector – that is off-setting slowdown on traditional retail goods.

CNBC asked Forbes this morning – “Do the Forbes look to bargains at Wal-Mart?” – Forbes “Always looking to save money!” I guess you could say that Wal-Mart is a recession stock – we still need our staples.

Wal-Mart is seeing a pop in the pre-market and the futures have also seen a rally after the data was released. While on the surface it does show that consumers ARE spending money – I think once dig a little deeper and see that the increase of sales are on the back of a rather large increase in credit spending and also on the stimulus check – is it really a good sign?

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ECB still concerned about inflation!

The European Central Bank (ECB) keeps rates unchanged (at 4%) as inflation is still the fore-front concern. Unlike the U.S. the ECB has been focusing their attention on the economy and the value of the currency – defending their currency and shoring up their economy. They have decided to (rather than cut rates) inject capital into the lending system to keep banks solvent. In contrast, the U.S. first cut rates and later drastically, additionally they have also injected billions into the system, and also opened the Discount Window to Investment Banks (the first time in history). The cutting of interest rates in the U.S. – while it may have helped the banking sector – it has sent the dollar down and oil up – all of which has hurt the consumer in the U.S. that is already under pressure from the housing market collapse.

The U.S. would hope to see the ECB cut rates – as it would help the U.S. strengthen the dollar without Bernanke having to do anything. Asking Europe to lower their rates to strengthen our currency (after we cut rates and sent it down) is not necessarily a responsible nor accountable action by our Fed. The G7 had already told them late last year in Washington – that they were NOT in favor of continual rate cuts. Several analyst (protectionist) are blaming Europe for our weak dollar – since they will not lower their interest rates. Maybe those analyst should stop worrying about the ECB and start focusing on the accountability and responsibility of our OWN Federal Reserve.
While the dollar regained strength over the last few trading sessions (currently 1.54 to the Euro – down from 1.59) – it is still well above the 1.30 mark that was the previous resistance level and were forward borrowing was priced at. The ECB maintaining rates at 4% will sure not give the dollar any relief – but we should be focusing domestically as to strengthening the dollar. Something the FED does have power over.

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Food prices continue to rise!

Rice futures gained new ground after the cyclone in Myanmar flooded 2000 square miles of farm land (a mostly rice producing area) – the futures hit another record to $22.35 per 100 lbs on the CBOT – bring THIS year’s rally to over 61%! Food crisis is starting to spread through many countries as surplus supplies are dwindling. Several countries have STOPPED exportation of staple grains to address their domestic shortages – which is creating a worldwide increase in food prices and supply lines shrink. Countries (emerging) that RELY on imports of staple grains are unable to afford the higher prices and are having a harder time tracking down supply chains – as large first world countries snap up any remaining supplies at ANY price.

Riots have broken out in several emerging countries simultaneously as these countries with large low income population are already strapped with food costs eating up 50% of their income. The increase of 50-60% in basic grain prices have pushed their food costs to 90-120% - levels which ALL their income goes to food.

Thailand is stepping up and selling 500,000 tons to Malaysia – to help off-set the massive grain shortages – but at market prices. However, additional concerns is that Myanmar HAD been expected to export 600,000 tons of rice this year – which will fall far short after the cyclone damage. The major concern (which is helping fuel Rice future prices) is that if Myanmar switches to become a NET IMPORTER rather than one of the large EXPORTERS it will seriously affect rice prices worldwide.

While the U.S. is not seeing shortages of food (yet?) – the prices will no doubt affect the margins of food suppliers and most assuredly at some level be passed onto consumers. Combine a weak dollar to that equation and we will see MORE inflation on food prices which will affect consumer buying power.

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Futures Pre-Market

We initially saw futures fairly flat – but the same store sales numbers have sent a small boost to the futures market. The futures are front running the cash by a couple of points – so expect to see the Arb traders short futures into the opening and leg into the cash basket – which should send the indices up at the opening.

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Support /Resistance

We saw a breakdown through the support (or were they resistance) levels. The economy vs. market continues its bi-polar push-pull with each other – the market wanting to rally and the economy wanting to pull it back down. Where to next?

INDU 12800 / 13000 (We are RIGHT at a very short-term support area – which looks to hold for now. The futures are showing a rally in the INDU – but watch the 12800 level to see if that can hold.)

NDX 1950 / 2000 (We are at a short-term support area and the futures look like we are rallying off this area – but again watch the support going into the close.)

SPX 1400 (We are just below that 1400 number that everyone was watching and it looks like we could get up to it at the opening. Can we get above it and close above it? I am not sure.)

RUT 700 / 720 (We are below that 720 area – but also above 700 - waiting for the next news.)

We are in some interesting areas and the VIX had pulled off below 20. It looks like the need for the consumer to recover, oil to fall off, and the dollar strengthen is important to get this rally to have ANY legs. We did have a significant rally from the bottom back up to these levels – but the economy continues to take more blows – the latest is the world food prices.
At these areas it is probably best NOT to take a long or short stance – but rather own a little gamma and expect a move away from these areas – it will either be optimistic perception to the upside or fundamental economic woes to the downside.

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Conclusion

Is world food prices the next shoe to drop? It seems just when we have seemed to work through the banking sector problem, most of the housing bubble, beginning to absorb higher oil prices – another blow to the economy happens – Food Prices. The shock has not yet hit our shores – but you can bet it will as Food Suppliers WILL pass through higher costs – in order for them to remain in the black. No doubt the consumer is getting beaten up pretty hard and the more they get beaten up the more we will hear the presidential candidates make new promises to help them – but can they?

Hillary – who pretty much lost – is not backing down and is taking this to the final round – to the determent of the Democrat party – which is already fractured. Some have speculated that she will take the same course as Senator Lieberman – when he left the Democrat party to run as an independent against the Democrat (he won!). But WHAT would happen if Hillary ran on a independent ticket? Well – you can be sure that McCain would win and that would pretty much be the end of the Democrat party for some time – as she (the wife of one of the most beloved Democrats) would be the catalyst for such a fracture.

As with the presidential election the uncertainty and volatility of the market place is still facing many questions. Many are looking hopeful at the retail sales numbers – but they are only looking at the surface of those numbers, “hoping” that an increase in spending (regardless of if it came from credit lines or government handouts) are a good thing.

Better hedge and let the market break up or down from these levels before putting big money into play.