Well – it looks like fundamental reality popped the balloon of optimistic euphoria yesterday. The horizon on jobs and consumer purchases started to sink back in yesterday – which helped end the steady upward move we started seeing at the end of the year into the New Year.
I had been hearing the term “priced in already” more often than of late – from TV pundits to financial advisors. What does “Priced In” really mean? We hear it all the time – and it is said as if it is a matter of fact. You might hear “The slowdown in consumer spending is already priced-in to Wal-mart stock!” – what does that mean? It means that they ASSUME that the price of the stock will not be impacted by the news or data coming out. In all reality, “Priced In” is just an assumption. If the stock doesn’t move on the news they’ll say it is “priced in” – if they don’t think the stock will move on the news they’ll say it is “priced in”. At the end of the day is it just a simple value judgment – but what really is value? Just another assumption no less. If the market moves on perception of this value – it is those people that can forecast market perception, rather than actual value that are the winners (as far as investors go). These days – “priced in” is more of a volatility assessment than a value assessment – hoping for something to remain rather low in volatility. Let’s just hope that losses are already “priced in” to our portfolios.
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Forecasts – even lower
Wal-Mart had already lowered expectations in the 4th quarter going into the holiday season. If you had been following the Market Preview last year you would remember I was trying to ascertain which retail chains were recession survivalist vs. those that were not. Certainly Wal-mart is not the typical one-trick pony – it has several vertical markets from groceries, clothes, hardware, electronics, pharmacies, banking, etc. Regardless of the economic conditions we need to eat and take our meds. Thus when one part of the store is hurting the other part of the store is picking up slack. No doubt Wal-mart is a survivalist. However, it’s those retail one-trick pony stores that only sell one line (like cloths) that get hurt harder and faster. While you might go to Macy’s for a shirt, you certainly will not go there for food or your meds.
However – as much as Wal-mart was forecasting (what many thought) conservative numbers for the 4th quarter – it looks to be even worse than they expected as the holiday sales data starts being reviewed. Sales for the 4th quarter rose only 1.7% - clearly at the bottom-end of economist forecasts. If Wal-mart is can hit the ball on those conservative numbers – what do you think Macy’s, the Limited, Gap, and other one-trick pony chains are going to look like? Probably not much better. Victoria Secret fell 10% in December alone.
Now the next shoe to drop – Jan and Feb are typically the slower months for sales (since usually everyone goes into debt shopping in Dec.) – That means for those typical retail chains it could get worse before getting better. If retailers couldn’t move existing inventory at 40-70% price cuts in Dec – how much more do they need to cut to move inventory in Jan and Feb? Additionally – the trickle down affect means that if they are sitting on inventory with less cash – they certainly will not be stocking the stores with the new spring line anytime soon. They need to move that old inventory – expectations are for more cuts below cost and larger dumps of inventory into the out-let centers which are already loaded to the gills.
Macy’s, Gap, J. Crew, and others have already slashed FULL YEAR forecasts – and more are expected. With the jobs numbers coming out tomorrow – it could look even worse.
While Wal-mart maybe a survivor, it doesn’t mean it’s going to be a winner. Many others may just be losers. Remember Macy’s filled Chapter 11 a decade ago or so – will they do it again and will other’s join them is the next question.
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Fixed mortgages finally coming down….
We are starting to see fixed rate mortgages finally come down – even breaking the 5% barrier. However, it is still VERY hard to get that rate or loan. Just because they offer it – doesn’t mean people are getting it. The rules, conditions, etc – are fairly step. In my neighborhood a couple homes sold (for good prices) – however to get the fix rate they had to put up over 25% down. That’s a big chunk of change and if you don’t have it – forget getting the good rate.
Many don’t expect to see the rate trickle down to those that don’t have the coin for the down – unless the government steps in to backstop losses, or promises more guarantees. Freddie and Fannie (still operating as per usual) have started offering better rates – but they are still issuing questionable loans (IMHO) that are the non-traditional 30 year fix. FHB loans are still being issued with little or no money down – as well as option arms. Sure Freddie and Fannie can do it – they are trying to keep forecloses and move inventory – now they have the full backing of the government (and the Fed discount window).
What does this all mean? In my eyes – the letting anyone fail is not an option and they still haven’t revisited the model as to why it failed. Not all people can afford a home – but that is not stopping these two companies (which have already collapsed). I wouldn’t be surprised if we start seeing a Freddie/Fannie mortgage window at the DMV. It’s starting to sound a lot like government housing to me.
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Futures Pre-market
They took a quick little whack earlier as job numbers are expected to come in worse and some of the first sales data from X-mass is not making the grade. The spreads are wide (but fluctuating). Expect Arb traders to buy futures and sell the basket into the opening putting pressure on the market.
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Support / Resistance
Well I guess those were resistances – I suspected they just might be. Additionally that hidden volatility reared its head for us – driving up implied volatility.
INDU 8500 / 9000 (We made a good slide down – it is not right in the middle – do we head towards 8500 or 9000. The job numbers might be the catalyst for the next jolt.)
NDX 1200 (1250) 1300 (We never made it to 1300 and headed back below 1250. I am not a big fan of the 1200 support area – would treat it as an area to get flat, but very careful on the long side.)
SPX 850 (900) 950 (Who knows what 900 is – support / resistance. I know it will not stay there and there seems to be a drag on it – if we look at the futures. 850 is in the cards.)
RUT 450 / 500 (We cracked down below 500 – sure we were above it – but I still thought it was more a resistance than an area to get long. We are just below it – do we head lower from here?)
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Conclusion
Jobless numbers are going to be on everyone’s mind today and tomorrow – sure they could be “priced in” to the market (hee hee) – but don’t bet on it. The market could move up or down – it’s perception, greed, and panic that is driving this train. There is still the Obama “hope” that is coming – and that means a inauguration rally – why not? It’s perception not reality. Like the story yesterday from the economist, two of the largest gains (per year) were in the Depression – the economy can go into a slump and people could believe it is “priced in” – run from treasuries and start buying equities , all why paying very little attention to PE ratios. So expect some ups and downs.
Side note: I will be out this Friday and next Monday – so you’re on your own.
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