1/22/09 (“Sell the Rhetoric, Buy the Executive Orders!” )

Traders,

I was thinking about what my friend said yesterday, “Buy the Rumor, Sell the News” – I think I have a new one, “Sell the Rhetoric, Buy the Executive Orders!” – As you know the market sold off pretty hard on inauguration day – I was “hoping” that Obama could sell the confidence the market needed and was disappointed. However, the next day he came out ripping fast balls (and for not being a Democrat) - I was no doubt impressed with the Executive order ( Limiting Lobbying and Gifts, lowering wages, etc.) and also putting money where his mouth is by halting the Terror Trials. The market seemed to like action and not talk. These are difficult times and one thing Obama has shown so far (that I applaud) is that he is not willing to walk lock-step with his fellow Democrats and not afraid to ruffle some feathers.

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China’s growth slows….but?

Now if I told you that ANY country’s economy grew last year by 6.8% - you would be shell shocked. Well China’s did, but it slowed the most in 7 years. The good news is that it’s still growing by a significant amount. China’s chief concern is exports – which is the biggest portion of their GDP (the exact opposite of ours – which is consumer spending). Hopefully you can see the important relationship between China and the U.S. (they make money from selling us junk, they lend our government money so we can buy more junk) – really – China is on the winning side on both those trades. You could say – we are in debt to China (in more than one way).

However – being on the winning side of a trade – doesn’t mean it will always be a winning trade (you are only as good as your last trade). China’s reliance on us to borrow money to buy their junk is now their undoing. The U.S. is tapping out on collateral to borrow more money (consumers have tapped out their home equity and credit lines – now they are losing jobs) – China COULD lend more money – but that WOULD be a losing trade since the consumers (and government) can post no more collateral to secure such funding – hence China’s announcement in 2007 that they would start reducing their US back assets (they saw the writing on the wall – the US was going into massive debt and probably would have a hard time paying back that debt).

2008 showed the reality of such massive leveraged debt and the housing crisis was just the beginning of unwinding that massive debt. Now China sees the government printing MORE money, we have taken interest rates to zero, and have allowed companies to post junk as collateral. That certainly doesn’t attract investors (China being one of the largest) – but that also poses a large problem for China, if the US has run out of credit to spend, how will consumers buy more China junk? = Hence the slowing growth.

Food for thought – a question I have not heard asked or answered – has China made enough headway that domestic consumption can pick up the slack of foreign consumption? Certainly not enough to fully off-set it – but could it be enough that while China’s growth may contract it also may stabilize. Remember – millions of rural Chinese have moved into booming metropolises where service, tech, and manufacturing jobs boomed to service the rest of the world.

These new employees need phones, computers, cars, food, etc. A funny example of domestic growth in China is the online game market, for example the game World of Warcraft when released in China in a single month had more Chinese subscribers than the US in one year. That obviously means there are millions with computers already and also millions of consumers looking for content and products. If China is able to move over to domestic consumption to ease the burden – it means we may not see China to hardly hit by a recession or slow down.

This ALSO means that foreign companies have a new consumer that didn’t exist 10 years ago – the CHINESE. It is quite possible in the next 10 years that China surpasses the US as a consumer nation. We have already seen several US companies make headway into China – McDonald’s and CAT to name a few. Could China be our economic salvation as we begin to tap the Chinese consumer to sell OUR junk to? Could there be a role reversal? The one thing for sure – the Chinese consumer has awakened and even with slow growth (because of exports) the domestic side is still growing at accelerated rates.

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Cell phones everywhere!

I was at the mall a few weeks ago and began to ask myself a question….. Have cell phones just become a commodity? There are so many makes and models – there are now 8 i-phone clones and more versions of the blackberry to count. Prices are coming down (to almost free) with a contract. And worldwide consumers are still gobbling them up – even in this slowing economy.
Now you probably know I am a huge believer in competition (because it brings better products to the market and lowers prices) – we saw that with Flat Screen TVs and DVDs (the more people who make them, the more choices, the more bells and whistles to get you to buy, the cheaper the prices). You can now buy a DVD player for $50 (that even upscale to 1080p – almost as good as Blue-Ray). The same is happening with Cell Phones. All that is GREAT for the consumer – but what does it do to companies?

Well NOKIA is seeing a slump – and it is a one-two punch. Apple introduced the i-Phone which meant a ramping up in spending for all competitors to bring out their own version of i-phone (day late and dollar short) – it also means if they want to break the i-Phone market they need to come in at a lower price with more bells and whistles (the bet is risky because the upfront cost could sink the ship if they don’t get penetration) add to that the slowing economy and consumers with less money to spend and OUCH!

Nokia cut their dividend and I don’t expect cell phone makers to do well in the coming year – between pricing competition and slowing economies – the cell phone has reached the tipping point of becoming a commodity!

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Futures Pre-Market

The futures are seeing a serious whack in the pre-market – maybe the over extension of the Obama takes Action rally of yesterday – but Housing starts just knocked the wind out of the sails (down 16% lowest on record). The spreads are in and if they remain expect pressure on the market at the opening.

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Support / Resistance

I guess that was inauguration supports because we rallied hard of them – could we retest them?

INDU 8000 / 8500 (We are right in the middle now – a pivot point – certainly)

NDX 1100-1150 / 1200 (We are just above the weaker support of 1150 and didn’t make it to 1200 – 1150 test could be in the cards.)

SPX 800 (850) 900 (We are back to that 850 pivot or is that resistance?)

RUT 400 (450) 500 (The RUT never hit that 400 bottom that SPX and INDU hit – it is now back to the pivot point – which way to we move?)

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Conclusion

The market seems to be testing the new president – it likes action and hates words (it would seem – but we only have two days to compare it to). While I am not a believer of more bailout and FDR New Deal programs – Obama came out with a executive order that did please us few Constitution fans.

The housing start numbers this morning confirmed things are getting worse (down 16% worse on record) – and Obama has a serious uphill fight. Credit is drying up and he is going to need to put the country seriously in debt to juice the market. That is his plan – and maybe his only option (I think there are others – but who am I?) – however my concern is while it might band-aid the problem we are putting serious stress on the dollar. Maybe we should start cheerleading “Go China, Go!”