8/28/08 (GDP shocker, Sears Fall, Fannie's chopping block)

Traders,


It seems that we are making some good progress getting through the credit crisis on several fronts, consumers are able to absorb the higher gas prices, Freddie and Fannie are making some money on the spread, and even MBIA is reinsuring some muni bonds. And while all these things are a positive step forward, we should not embrace it as if everything has been solved.

We are a long way from finding fundamental resolution to the problems. Additionally – how much of these advances are short-term and/or from government intervention. It seems that we are making progress, but the training wheels are still seriously bolted on – so riding is not that difficult.

We did see a rally in the market across the board – but several markets were rather mixed. The Durable Goods help create a pop, which help keep the gains throughout the day. The support at these levels are building – seeing the INDU close at 11,500 and NDX at 1900 was a fairly good sign .

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The GDP 2nd quarter shocker

The government GDP numbers came in a 3.3% and topped the prior quarter and economist forecasts, surprisingly. The futures got a solid boost in the pre-market when the numbers were released. The increase in growth is being credited to the jump in exports based on the weak dollar and also the billions in stimulus checks. However, as one economist pointed out, what does that really mean for the country as a whole? His issue is that relying on an increase of GDP because of exports and government injections of capital creates a foggy picture as to the true health of the economy. He pointed out the huge increase in the jobless claims and the imbalance on spending (declining sales in retail goods and increase prices in food and energy). I see his point – GDP growth based on exports on a weak dollar and the government giving out billions in stimulus checks to get people to spend – how much faith in a real recovery is that? He concluded that it is just pushing out the possibility of a recession, not eliminating it’s possibility.

The jobless claims however have remain high and are expected to, so unless we get another stimulus check don’t expect consumer spending to continue to ramp. Now only are economist taking a dimmer view of the second quarter (if it remains unaided by the government), even the Federal Reserve staff according to Bloomberg is making the same call, “Federal Reserve staff also marked down the central bank’s forecast for growth in the second half of 2008, according to the minutes of the Federal Open Market Committee.”

But what is even more alarming is the earnings, and this is probably a shocker to most. For the first time in the history of the Dow Jones Industrial Average (INDU) the net earnings for the quarter was negative. The chart at this link spells it out better than any words: http://caseyresearch.com/displayCcs.php?e=true

The reality – the market price is all based on perception, not reality of the balance sheets of these firms.

What continues to concern me is the helping hand of the government and the continual leverage of lending money. If it were not for ongoing bailouts and lending, would many of these troubled companies be in business? GM, Freddie, Fannie, Lehman, MBIA, etc. Helping hand is nice, but unless these balance sheets can get cleaned up and they can stand on their own – how are we to know the REAL solvency of these firms?

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Sears decline in sales

Totally contrary to the GDP numbers, Sears (the biggest US department store) is reporting a huge short fall in profits from a decline in sales. Net income decreased 62% (or 50 cents a share), from $1.15 per share a year earlier. The big reorganization and marketing changes at the beginning of the year has yet to see any help – clearly Wal-mart being a one-stop-shop is stealing more traditional retail business from Sears and Kmart (who are mono-line sales). Competition is getting fierce and Sears doesn’t have a game plan.

Don’t expect to see any gains in mono-sales retail stores. Wal-marts variety of vertical markets has it ready to compete in a tighter market. Until we see Food, Gas, Pharmacies, Banking, and other services at Sears – sticking to selling appliances and clothes is not going to cut it – don’t expect to see big gains in sales any time soon.

The stock is getting hit in the premarket.

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Fannie Mae rearranges the deck chairs!

The top three executives of Fannie Mae are getting the sharp end of the boot! CEO, CFO, CBO, and some others have been shown the exit door. Some of these people have just been in the job for a year or two. Even more comforting is that they are promoting from within, yeah that doesn’t sound to bright – but what do you expect from this government run operation. How a entire new staff of management (promoted from within) will increase their balance sheets and get them out of debt is unknown, it seems more about selling the faith then really addressing the problem, taking on more debt with no money.
Investors seem to buy it as we see the stock getting a good pop in the pre-market. Go figure.

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Futures Pre-Market

The futures were weak and looking lower prior to the GDP news – then the GDP shocker shot futures into positive territory. The spread is positive so expect to see the ARB traders buy the basket against the short future. Expect a gap up at the opening.

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Support / Resistance

We made a good move back to the upside and stalled at some resistance areas – the futures are pushing those indices through those numbers in the pre-market, but it’s not about the opening it’s about the closing and intra-day action.

INDU >>>11,500<<<< (This is a straddle strike – and we are WEDGING – top of the wedge is about 11,600 bottom is about 11,400. If we break 11,600 or 11,400 we will move HARD and FAST. So expect an explosive move if we break out. 2-3% move after a break is very much in the cards.)

NDX 1900/1950 (We are above the 1900 level which is a part of a wider support area – the futures are showing some strength – but it will take a good move to get back to 1950. Watch the close – 1900 or above means building support.)

SPX >>>>1275<<<<< (Just like the INDU we are ready to EXPLODE up or down if we break out of the wedge. 1290 topside and 1260 bottom side. If we see a big move out of 1290 or 1260 we could see and explosive 2-3% move. Volatility is building as the range narrows.)

RUT 720/740 (This index has been in some wide volatility ranges. It has been consolidating between 720 and 740 but if it gets as wedgy as the INDU or SPX – we could see a serious breakout up or down.)

The wedge in INDU and SPX are building and hidden volatility is ramping – if we break from out of the wedge we could get a violent up or down move – which would spur short-covering to the upside or panic selling to the downside. I have a feeling we are not going to be in these ranges long.

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Conclusion

As I mentioned, we are seeing some good moves forward – but we are still being carried by credit and the government and have not been freed to try to stand on our own. That will not happen until the (earliest) 1st quarter of 09 when the Discount Window closes (which I am doubtful of). The GDP number is definitely a feather in the GOP cap and I am SURE that at the GOP convention that recent GDP number showing a stronger economy is going to be touted that we are getting through this credit crisis. It’s good spin, if you buy the GDP numbers – however the retailers and jobless claims are telling a different story. I think that is why more economist and analyst have been scratching their heads and their forecasts continue to be so far off that you would swear these people failed basic math.

We are also wedging getting ready for a big move – not based on any economic changes but really a loading of positions that will be forced to unload to the downside or cover to the upside. Meaning expect a big statistical volatility jolt to the market – probably higher, but should be lower. The storm building in the Gulf is putting some premiums back into oil – so I am sure that too will build some volatility that will tug on the market. The dollar has also seen some volatility up and down and up and down. As the EU and Asia release some of their economic forecasts.

Get ready for some rocking and rolling – it’s building.