8/7/08 (ECB 4.25%, Dichotomy of Sales, REO)

Traders,

Yesterday saw some interesting intra-day volatility following the previous day massive upside move. At the opening the market pulled off and got to some of those support (previous resistance) levels and then moved back higher. We did not get the kind of follow-through that many had expected, but there were gains in general across the board.

The tech sector which usually sees larger volatility than the blue chips is apparent in the SPX and INDU vs. the what are traditional more volatile indices. It is the financial, banking, lending, and construction sectors that are seeing the larger (longer band) volatility than the higher risk internet and tech sector. The shift is rather concerning for many longer term investors – as they consistently look towards many of these lower volatility and high dividend stocks as safe haven when volatility does arise. With the combination of lower interest rates, higher volatility, dividend cuts, and credit squeezes – it no doubt makes it difficult to find a safe haven.

Remain vigilant and hedge your positions, even in those issues that you don’t think need hedging.

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ECB leaves rates unchanged at 4.25%

Just like the US, Europe is facing similar problems as banks are getting squeezed with credit lines, inflation is ramping, and a slow-down from cash strapped consumers is giving the entire economy a good pummeling. However, the European Central Bank – who has been raising rates while we cut them is focused on inflation and strengthening their currency, not bailing out the banks. The ECB rates are currently at 4.25% and the Euro over that last year has gained strength against the dollar (over 20%). With a fiat currency (faith backed) the need for controlling money supply as well as selling confidence.

Several of our “pointing finger” politician have blamed the ECB for our weak dollar, because they did not lower their rate as we lowered ours. But we must remember the ECB is fighting inflation and focusing on their currency, while the US FED has been on the bank and lender bailout train. The ECB is seeing inflation and a slowdown in the economy – but they also have something we don’t a stronger currency and ROOM to cut rates if they need to. We (the US) have neither – it goes to show that the FED can really only serve one master – not two.

Even with no cut in rates, the Euro is stronger and pays a higher rate – for now Euro Bonds are still a better treasury bet then the US dollar, with a stronger underlying value (buying power), higher interest rates (almost double), and they are not on the money printing train (like the FED at the Discount Window).

Side note: The UK has also left interest rates unchanged – however they are seeing a bigger squeeze on all sides than the Euro Zone.

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The Dichotomy of Same Store Sales

I guess they really are not the same are they – if one sector is growing and the other is shrinking. The Wal-marts and big discount chains are seeing an increase while specialty stores are seeing a decrease. It is clearly a downsizing and value play on consumers part, if you can get a nice white dress-shirt at Target for $14.95, why buy a white dress-shirt (with a horsey on it) at Macy’s for $59.95? Smart money is not chasing labels – as those that have borrowed to keep up with the Jones are no longer able to buy the same labels. Smart money (IMHO) never chased a label – unless deep discount.

Isn’t it the Jones that got us into this credit crunch? If we didn’t have to try to keep up with them – I guess we wouldn’t be here.

Wal-mart and their ilk also have the benefit as a one stop shop (food, retail, entertainment, gardening, pharmacy, etc.) – going to one place means saving gas. Gone are the days of driving from one store to another. Many Americans are finding the ease of going to Target and Wal-mart – vs. the driving around. Sure, you may not be able to buy a shirt with a horsey on it – but you can still buy a shirt. Funny thing is – I would wager that the white shirt was probably made by the same hands in the same foreign land – one just has the $45 horsey option on it. Side Note: Those huge discount malls with top labels are becoming more trendy – recently my wife couldn’t even find parking at one over the weekend. I guess paying $29.95 is better than paying $59.95 for the horsey shirt. It’s a trickle down – SAX shoppers are moving down to the discount label malls and Macy shoppers are moving down to Wal-mart.

Expect this trend to remain the same as the Wal-marts of the world are a recession shopping store. However, that doesn’t mean everything is rosy over at Wal-mart – they are seeing the squeeze on fuel prices and weak dollar. Margins are getting squeezed – but they will probably still tread water better than the Macy’s of the world.

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Homes – next wave of selling

We saw a big ramp up in short-sales and foreclosed homes, but guess who was at the auctions buying those foreclosed homes? Yeah – you guessed it the bank. I am now seeing all the short-sale and foreclosed homes in my neighborhood being listed a SECOND Time by the banks – that had bought them back. The REO (Real-Estate Own) are quickly becoming the leader is home listings (not necessarily sales).

The National Association of Realtors reported there are 3.9 million unsold existing family homes – the most ever reported (since it was tracked in 1982). The problem is that the inventory (by some estimates) must by 50% (below 2 million) in order to create price stabilization. The REO’s have to be sold – remember a home owned by a bank is not only a default loan, but it actually is costing them money to carry the property (taxes, upkeep, and loss of interest). The additional problem with large inventory (according to the association) is that it has slowed down sales closing from 4-5 weeks to 10-12 weeks as these banks are swamped with REOs and that is not slowing down.

The inventory is swelling and not declining as the foreclosures feed into the second wave selling of REOs. When the foreclosures do slow (so experts say end of 2008 to mid 2009) we will see the REO listing only increase (as that is the second round of selling).

Eli Broad (the co-founder of KB homes) said, “It’s going to take several years to get rid of all this inventory!” – if the co-founder of one of the largest builders is making those kinds of statements – you KNOW we have not seen the bottom yet.

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Initial Jobless Claims rose last week – 6 year high

The initial jobless claims increased by 7,000 to 455,00 in the week ending Aug 2nd. The forecast was unexpectedly higher than economist had expected at 425,000. Clearly – the job market is slacking showing an increase in weakness in the economy – which will trickle down to lower spending (less consumer buying).

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Futures Pre-Open

The futures were getting hit at the opening – specially after Wal-mart and AIG are reporting a bleaker economic landscape going forward – additionally the initial jobless claims unexpectedly rising put more pressure on futures. There is a pretty good spread in the futures vs. cash – if the spread remains at the opening expect ARB traders to buy the futures – thus putting pressure on the Cash at the opening. Expect the market to gap down at the opening.

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Support OR Resistance ???

While we did go down at the opening yesterday and test a couple of those numbers and then rallied up – I still don’t put too much credit on getting long hard deltas at these levels – and expect a retest to those previous resistance (now support) levels.

INDU 11500 (We came back down to 11,525 in the morning and then rallied back up through 11600 – however it was (IMHO) far from convincing. I still think a retest of 11,500 is in the cards. When (and IF) it does – that will be the test if we have gotten off the mat or if we just slip back down. The economy is NOT looking any better.)

NDX 1850 / 1875-1900 (The band of support and resistance is always wide in the NDX because of some overweight’s that can drive this higher or lower in a blink of an eye. We came off the 1900 level – the resistance at the close and futures are pointing lower. 1850 is in the cards – but that should be a place to get flat – not long or short .)

SPX 1250 / 1275-1300 (We have made 3 attempt to the 1300 level in the last month all of them have fallen short in the 1290 area – we did close closer this time, but did not even touch 1300 intra-day. The weakness in the futures is showing that it is going to be harder to visit 1300 and we may be going back down to visit the 1250 level)

RUT 720 (Yeah – I hear you we are at 725 at the close – but I am not convinced that 720 is SUPPORT, but rather a straddle point. Because if you really think it IS support you would be getting long at 720. I think it is better to treat 720 as a straddle point giving it a 50/50 to move back down to 700 or up. Don’t get long if we pull back to 720 – unless you hedge your positions.)

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Conclusion

I didn’t have time this morning – but I did find out some interesting information on oil and metal futures that I wanted to share. I will write something up after the close today and share it with you tomorrow (hope it is not to late) – needless to say Silver, Gold, and Oil are going higher (or so I am to believe). IMHO $16-$17 an oz for Silver is dumb it you don’t buy it, but that is just me.

My friend passed on to me this great quote (which just goes to show – we NEVER learn)

"Paper money eventually returns to its intrinsic value --- zero."

Voltaire (1694-1778)

I am expecting a pull back today and this week back to those old resistance areas – and I am skeptical to call them supports – regardless of technical’s. Of course that is just cautious me!