6/24/08 (GM done?, Job Losses, Government Puts!)

Traders,

Yesterday we continue to flirt with this delicate support area, we are back down close to Feb lows in the INDU and the SPX is also getting down there. The RUT has stayed above 720, but yesterday it stuck it’s head just below that line. It needs to stay above it to show the money flow is not coming out of the broader market. So far serious hits have only been targeted by sector and they have not been sweeping. Keep an eye on the Rut!

I received some feedback about the Cramer video from yesterday – thankfully no one that receives this email in the morning is a supporter of that truly mad man. Video’s like that goes to show these people are to provide entertainment only – they really don’t know up from down anymore than the rest of us. Truly, their jobs are hard, because they daily have to come up with reasons why the market is doing what it is doing – when 90% of the time they really have no idea. It is just a guess – the problem with Cramer (unlike the other talking heads) is that he creates serious damage by recommending stuff to people. The flip-flop video is proof of the danger of listening to him. Anyway – it was good entertainment.

_________________________________________________
GM getting the one-two punch

As energy prices are rising GM sales are dropping and fast. Their regular auto-line (none-trucks) are down 17%, but the big crush ARE the truck sales down over 40%. While gas prices are hurting sales, along with the weak dollar and consumers tapped for cash – the big second blow is commodity prices (STEEL) – which has been going up.

We don’t usually talk about or hear about commodity prices that do not DIRECTLY affect us – because we don’t have to shell money out for them. Steel, Cooper, Cement, Pot Ash, etc. are all what I would call secondary commodities to the consumer. Consumers don’t go out and buy steel, so they never think about the costs. However, GM has to buy steel to build their cars. The “TRICKLE” down affect is that car prices will have to go up and that is exactly what GM has done – even if they don’t want too.

They have already raised prices on their 2008 vehicles to off-set the higher commodity prices (like steel), however since the sales are SERIOUSLY down and 2008 models are just sitting on the lots – they are offering 6 year / 0% financing to get them moving. Some of them are even offering guaranteed fuel prices for the next couple of years. All kinds of incentives to get them moving. GM dealers got more bad news – a memo went out from GM saying that they will be RAISING prices on the 2009 models because of higher commodity prices. Dealers are not happy – no one wants to buy a truck with gas prices this high and those looking to buy cars are tapped for cash and are starting to look at hybrids. GM doesn’t have a deep vertical market on Hybrids OR Small cars with higher gas millage. No doubt they are scrabbling.

This does not paint a good picture for GM, or for that matter Ford or the other auto makers. This is not the time to be bottom picking auto makers – they are facing the squeeze on all sides (higher gas prices, consumers with little money, weaker dollar, and higher commodity prices). You could say it is a perfect storm.

This sector has been pulling down on the indices – and GM in real dollar share price terms is close to a 30 year low ($12.91). Yeah, $13 sounds like a low price – however one of the most important thing about investing (which 90% of retail people don’t understand) – is that it is NOT PRICE it IS about VALUE. Dollar cost-averaging and bottom picking only work if you understand value. However, retail people never understand that – they simply look at price.
Expect this sector to continue to be a drag.

____________________________________________________
More job losses expected

According to an article by Bloomberg – the financial firms have already announced about 83,000 job cuts since last year – however it would seem that they continue to announce more cuts daily. Expectations according to the article is for 175,000 jobs in financial related services as deep cuts are to be expected.

That’s not all – NPR reported this morning that United Airline is the latest to announce up to 15,000 job lay-offs and several other airlines are also trimming the fat. Airlines are getting squeezed with higher fuel prices and they too are looking to cut costs anywhere and everywhere.

Several shipping companies (FedEx and UPS) are also expected to cut jobs as schedule high-speed routes maybe consolidated as fuel surcharges are putting pressure on sales. UPS is expected to see a slower quarter and job cuts are predicted.

The problem with the employment data coming out of the Government has several issues. 1st it only counts the unemployed that ARE receiving benefits, however if those people do NOT find work in 18 months they are lumped into a new label called “Discouraged Workers” (the government believes they have given up) and they are NO longer counted. This keeps the unemployment looking lower than it actually is. Additionally, several additions have been made to the employed data over the last couple of decades – including those part-time or temp workers into the regular labor force. Going back to traditional methods of unemployment measurements we are in the range of 10-13% unemployed in this country according to some economist, not the 5% the government reports.

I found it interesting that over the last 6 months as companies are announcing lay-offs (in some cases massive lay-offs) and I didn’t hear ONE company in the US announce they were going into hiring mode, that the government job numbers remained relatively flat or in some cases more new jobs (what?). I continued to scratch my head. Well, at least the recent data has finally caught up with them – you can only revise some many times.

Regardless which numbers you wish to believe – the reality is that there ARE more lay-offs and less new jobs.

______________________________________________________
The beauty of government PUTS!

Those concerned politicians granted new powers to their beloved government-charted (nationalized) companies, Freddie Mac and Fanny Mae – allowing them (of course government backed) to buy home-loans (jumbo loans). Our Congress believed that this would help relieve the stress of the market and they could take the risk of these failing loans (of course backed by the government) and keep the housing market and loan market from further collapse.

Critics of this REDICULOUS proposal (myself included) stated that giving those government-charted companies the ability to purchase jumbo loans and repackage them into securities is just giving them a loaded gun and they will look to take care of themselves. They are just nationalizing the mortgage industry and putting the government further behind the 8-ball – with more risk and government sponsored debt – to shore up their OWN books.

Not that I want to point the finger at one party or another – but damn the champions of this ridiculous endeavor ( Hillary Clinton, Barney “mumble” Frank, and Nancy “Nationalize” Pelosi). They actually believed and convinced their party and told the American people that if we grant these government-charted companies to purchase more loans (debt – on the government/tax payer’s nut) that they would go out and purchase debt and help free up the lenders and those allow the American people to still be able to refinance, get jumbo loans, keep mortgage rates lower, and reduce the burden to the banks.

However, what most expected and what happened – is that these government-charted companies are doing with this new found power is ONLY cleaning up their OWN books and buying down their OWN losses and writing it off! Freddie Mac and Fannie Mae will be sending the Tax payers a nice big Thank You card this holiday. Everything that we were told is NOT happening.

You wonder why Socialism and Nationalization of companies don’t work? Absolute power corrupts absolutely! Remember – these companies had massive write-downs (Billions), they just came out of one of the biggest accounting scandals (book cooking and manipulation), and now they have been granted free access to buy MORE debt on the tax payers back. Great! – It’s funny how when the government wants to make an example out of a CEO of a crooked company – they never go to Freddie Mac or Fannie Mae.

Expect your taxes to get raised more to pay off more debt at Freddie and Fannie – thank you Barney (I wish he would stick to wearing that purple dinosaur outfit and dance around – he has no place in politics or economics).

_______________________________________________________
Bernanke’s Bluff?

Bernanke has been hinting and talking about raising rates as inflation rises – but can he REALLY do that. Is this just cheap talk – the days are ticking away to the next meeting and Fed Fund Futures are predicting one. However, economist are predicting that Bernanke is in the Perfect Storm – jobs are being lost, dollar is weak, commodity prices are going up, consumers are tapped – how CAN you raise rates?

However, I think he does have an Ace in the hole. He could do the following – raise the Target Rate, Lower the Discount Rate, and work something out (prior to September) to keep the Investment Banks coming to the Discount Window. Doing that might appease everyone (for the most part). His problem is he can’t control LIBOR, as much as he would like to.

Bernanke is on a Lower Inflation Flush Draw, the turn is coming up and he has 18% chance of getting that lower inflation card to make his flush. The probability is low and he has talked “Raise”. Good luck!

_______________________________________________________
Futures Pre-Market

The market is seeing pressure before the opening. The commodity story has spread beyond just oil as several companies are talking about getting the pinch on higher prices (and not just fuel), Dow Chemical, Auto Makers, Builders, etc. We are seeing a little bit of a hit in the futures. They are front running the cash small – if the spread remains expect the Arb traders to put some pressure on at the opening.

_______________________________________________________
Support / Resistance

We saw the RUT pull back some (just a tad below that 720) – the INDU and the SPX remained in their low bands and NDX seem to come down and join them. If you listen to Cramer (depending on the day of the week) he might be saying BUY BUY BUY – it’s a crap shoot and the news is trying to keep the beat down on.

INDU 11750 / 12250 (We are very close to those previous lows – it’s a psychological area that is making many investors sick to their stomach as they can’t hang onto this roller coaster ride and just want to get off and get into to supposed “SAFE” treasuries (yeah right). Others are looking for the big bounce (Cramer) and the mother of all rallies. Whatever the case – don’t play it stupid with naked hard deltas because it is true we will NOT be sitting here long – a move either way is coming!)

NDX 1900 / 1950 (We are getting close to the 1900 area – while the other indices have fallen to their previous lows this monster remains near the top. Those euphoric high flying tech stocks with new gadgets have everyone running to them. However – can that euphoria hold. Watch the RUT to get confidence at 1900.)

SPX 1300 / 1350 (Not as sick as the INDU – it is still looking ugly. I think 1300 is in the cards before we make a move further – but we could get a massive rally on the back of short-covering and euphoria. Expect more volatility.)

RUT 720 720 720 720 720 (Can you say 720!?!?!? This is puppy needs to tread water and get above that area. Think of the RUT as a river of money flowing in and out of the broad market. If you see this thing head down below 720 – then you know in the broader sense that money is exiting the market. 700 is the next support area. If it holds above 720 then we can say that the river is not really flowing and the dam seems to be holding. Watch this!)

__________________________________________________________
Conclusion

Sorry about my rant on Freddie Mac and Fannie Mae – I just can’t believe the latitude that these companies get. Not to mention they have a permanent PUT built into them because the government will continue to through more money after them. I agree with Hillary, Barney, and Nancy that something needs to be done to help the people struggling in this economic time, however giving MORE power and MORE money to Freddie Mac and Fanny Mae was one of the worse decisions they could of made. They made an economic decisions based on HOPE, hope that Freddie and Fannie would do the right thing with this power granted to them. You can’t give companies access to unlimited funding, that have billions of dollars of losses, and billions more of risk and expect them NOT to use it to pay off their own problems!

Socialism works great at the local level – when we as citizens become socially responsible for our community and neighbors. It doesn’t work when you apply that to companies in a capitalistic market! Everyone wants to try to solve this economic problem we are having – no one wants to admit that maybe some companies have to go, some borrowers will have to face bankruptcy, that there WILL BE losers. We can NOT save everyone. There will always be losers – not accepting that is the fast track to communism. Let us stand on our own and fail own our own. Don’t keep propping up bad decisions with more bad decisions.

We have a rough road ahead – let us make smart decisions and not put our faith in companies that have made poor decisions and give them access to MORE money.