3/4/09 (ADP losses, Costco !, Short-term bottom?)

Traders,

Yesterday seemed a holding pattern, for a second I thought we might just rally (even if short-term) – but I think it was a day of absorbing information. The Jobless numbers are coming out and I think investors are become more keen on watching the weekly economic data to find that moment or bit of information that they can point to as a bottoming opportunity. The market is due (regardless of economic conditions) for a bit of a pause and short-term rally – it is time to look for some opportunity – traders.

For investors – look for this as a situation to hedge and adjust positions – but do NOT put too much faith that this IS the bottom – rather it is just a short-term support area.

I suggest for investors it is a time of support and resistance trading, rather than just long-term accumulation. We could easily be in a stagnate market condition for some time – if not bearish. Look at shorter time horizons.

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ADP Reports more job cuts

ADP reported that Companies in the U.S. cut an est. 697,000 jobs – topping estimates of 630,000 (according to economist surveys). Companies seem to be still cutting their largest expense, employees – and that trend will continue. I believe one of the reason for the massive cuts is not revenue as much as it is the ability to borrow short and long-term money. Many larger companies carry huge amounts of debt to make short-term payments (some of which includes payroll). However, as short-term money is frozen – companies have to rely on revenue to cover the nut, and that will force their hand to start cutting staff as well as anything else.

It has been amazing and even if we look at the math – it the writing was on the wall. A question no one ever REALLY asked – if a company has to continue to borrow short-term (and long-term) money, are they REALLY profitable? Many would argue YES – and suggest the borrowing of money was for GROWTH. But in my book that is suggestive, rather than fact. Many would argue YES – because if they are able to PAY the debt that counts for something, again that is suggestive. It really comes down to – can the company survive on its revenue without having to borrow money? Once we start taking a closer look at many major U.S. companies that answer is NO. Excuses range from the need to grow to having to pay upfront cost for materials. But at the end of the day – at some point – shouldn’t the company be generating enough profit to cover growth, up front materials, etc.

Reality has come to town and those companies that (regardless of revenue) became reliant upon debt to cover the nut are seriously suffering. The best example is GM – who had borrowed BILLIONS for decades to make payroll. With most companies unable to borrow what they need – the only answer is to down size.

Maybe this is a good thing – as we get back to REAL profit and losses. Maybe we should look at corporate debt as what it is DEBT – and until it is paid off – there really is NO PROFIT.

I am not an accountant – and I am sure they have some fancy words and explanations – or maybe that is just how things are done. But to me – DEBT is DEBT (regardless of label) and the business formula is pretty easy to understand Revenue – Cost = Margins (which determine profit or lost).
Of course MANY will argue with me – I don’t understand or that is not how it works or I am confused. I only ask one question – If a company has to borrow money every month to cover their nut, are they REALLY profitable?

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Costco missed….

Costco is bulk food and on the cheap. They do sell other merchandize and ARE making a profit – but it seems that people may not be able to afford bulk and are looking to down size and actually SAVE money. It doesn’t matter if you are only paying .20 per ounce for Peanut Butter, if you have to buy it in two gallon containers that is still more cash you have to spend then paying .30 per ounce for a 10 ounce container.

It IS about saving actual money, not about how much you get for your money. If the consumer has less to spend – they are looking at NET cost as WELL as cost savings. Something that Wal-mart is mastering and Costco may have to think about selling in smaller sizes. I had this exact same conversation with a friend – who pointed it out. It is an interesting dilemma for consumers – is LESS really MORE?

Costco is down in the pre-market, but not by much. They posted 55 cents – less than expected. However, they are a recession company and still sell the staples we need. Question is how do they reinvent themselves to meet the customer who might have less to spend and can afford bulk?

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Futures Pre-market

The futures were up – I think they wanted to go up yesterday. They seem to be absorbing the ADP numbers fairly well. The spreads are in so expect the ARB traders to buy the CASH at the opening sending the market higher – as they cover their short futures positions.

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Support Resistance

It’s about find supports….

INDU 6750 ? (Could 6750 be the support that needs to put in. We are looking at a good opening rally – can we get back to the 7k marker?)

NDX 1075? (Again we didn’t hit those November lows – but we have come off pretty well. Do we get up above the 1100 hump?)

SPX 700? (I think we will see us sneak above 700 – but do we close above it?)

RUT 350 – 400 (The RUT gave up the most yesterday – not something I like to see – but we would like to see this above 375 and maybe even 400. The broader market HAS to show strength to bring up the narrower based indices. )
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Gold 900+ (We are above 900 – which is the first support – if we don’t hold 850 is in the cards. I think there is some good support at this level)

Silver 12+ (Gold’s little bro – same in here.)

Oil 35-40+ (We are above that support band – does it continue higher?)

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Conclusion

Obama has tossed everything at the problem except the kitchen sink – many think it is too much – and that will be the debate of the ages. I think now is the time to see if any of the rubber meets the road. Does any of the 100s of billions get through the clog and into the bottom line? Only time will tell. It certainly is not over and we should expect more bank problems and more money being tossed at the problem. However, we may see a short-term reprieve at these levels. A time to see if Obama is right, if the market is absorbing the money, and if we can find some floor on this muddy bottom.

Remember – what may seem right today – can have repercussions in the future (that is my very serious concern). What does that mean for you? If we do get any rallies and you are a long-term investor – you better get your hedge on, just in case. We can’t afford to HOPE forever at some point you need to shore up your investments and cover your risk.