5/14/09 (Wal-mart! Green shoots yellowing?)

Traders,

Yesterday we saw the short-term supports that were tested the previous day not hold and the indices continue to move lower throughout the day. Whether this was a short-term retracement or the beginning of a correction has yet to be determine – 20, 30, 50 day averages have seemed to hold but could easily be tested.

The concern is that while all seem to agree that the contraction in the economy has slowed the recovery seems to be farther off. Consumer spending seems to be the driver that all eyes are on. It is the consumption of goods that drives the wheels of the economy. With a trade deficit widening and shipping traffic at anchor it is clear that the consumption continues to contract. Revisions of growth for 2009, 10, and 11 continue to be lowered – which is alarming on the national deficit side – as the administration expects (or hopes) for growth in the 3+% range – which is needed to reduce the debt and deficit.

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Wal-mart – stays inline…

Wal-mart the recession company – as people of all consumer class steps down to Wal-mart to buy their essentials. Wal-marts might is their many vertical markets – from food, clothing, pharmaceuticals, etc. They are the one stop shop and prices are competitive. As consumers have less to spend – a one stop, low price shop is the answer.

But even Wal-mart is seeing contraction in growth. While they are gaining market share – the consumers are still spending less and focusing on essentials, rather than big ticket items (like TVs). That realization was also seen in Sony’s recent report of losses as revenues drop and lower prices to move merchandise means leaner margins.

Wal-mart reported their profit was in line with estimates (note: those estimates had been lower). Their revenue dropped by $2 billion in the quarter (from 96 to 94 billion) and while margins determine profit potential – it is revenue that drives in the money. Business formula is simple, if revenue drops then cost cutting is necessary to keep margins in line.

Expectations for next quarter [83-88] bracket the analyst estimates of 85 cent per share, which is good news that Wal-mart didn’t lower guidance.

Wal-mart still seems to be the leader of the retailers, which the retail sales report showed a surprising drop. Wal-mart now needs to focus on gaining market share, keeping it, focus on the margins of essential goods, and manage the high ticket items. They will no doubt remain a foundation in a contracting economy and have continued to beat the INDU and S&P.
While I wouldn’t get long retail stocks in general, Wal-mart is the exception to the rule. Make sure to hedge and use options for short-term yield enhancement.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aetDKT5OYyMM&refer=home

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Jobless and Inflation

Jobless claims were up by 32,000 and the total now on unemployment have risen to over 6.5 million.

Producer Price Index (PPI) which measures inflation at the wholesale level among producers was up .3%.

Both indicators released today, after the lower retail numbers yesterday, are starting to bring a skeptical eye to those “Green Shoots”. The talk has turned from short-term optimistic view of finding a bottom, to a skeptical concern about the long-term recovery.

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Future Pre-market

Futures seem to see a little volatility in the pre-market, up a little to slight better than fair value, to head back lower. The Wal-mart numbers – combined with the Jobless / PPI numbers injected some down/up knee jerk action. The ARB traders are sitting on the sideline as the opening looks mixed and Asia / Europe looked weak. Look for a mixed opening if the fluctuation remains.

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Support / Resistance

We didn’t hold the recent short-term supports, but the sell off - while broad – was contained and mild. The VIX, while higher, didn’t spike. I gauge the sell off as a controlled profit taking and certainly not a panic. But if we get a follow through to the downside – we might begin to spark fear and see a rise in the VIX. The question today – is this a buying opportunity or was yesterday a confirmation of a profit taking indicator?

INDU 8000 (8250) 8500 (We are in the middle of the range – and waiting to see a move up or down – perception and renew concerned will be the driving force.)

NDX 1300 / 1400 (We are in the middle as well – which way do we drive?)

SPX 875? (We are just above the 20 day moving average – which this is a fairly good bottom support measurement of the recent rally. It is 879, which we closed just above. While the self fore filling prophecy of moving average watchers that causes concern if we close below it? Watch the close – so far it has closed above it since March 12th. – make of that what you will.)

RUT 470? (Unlike the SPX the RUT seriously broke the 20 day – and as a broader measure of the market – it didn’t look good yesterday. Pressure is on. If the RUT is any indicator yesterday of the SPX, than expect the SPX to visit and pass through that 20 day.)

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Gold 900+ (Gold is still in the 900 plus range and some have said it looks like it may have broken support. But I didn’t see it make the serious leg up yet. I would like to see 950!)

Silver 13+ (We broke 14, but came back a little just below.)

OIL 55+ (Well it was a one day visit to 60 and now we are heading back down to 55. Dollar value vs. supply & demand. There are two factors playing on oil price)

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Conclusion

The sell-off yesterday was mild – sure it was over 2% in most indices (and 4% in the RUT) – but it didn’t GAP down, it was a controlled sell off. The VIX did move higher – but not in a knee jerk panic sort of way. And investors had time to sell out positions through-out the day. So as the jobless and PPI information is absorb the market participants will have to determine is today a buying opportunity or was yesterday a reminder to maybe take some profit off the table.

Certainly the contraction in the retail sales, jobless claims up, and inflation starting to see signs in the PPI – are not economic good news. However, the market moves on perception. Yesterday I mentioned that there is a wide spread between recent market values and economic reality. Sure the spread can widen more (stock can go up or the economy get worse) and it is also questionable as to when they start tracking each other again. But as the commentator on Bloomberg said as he reported the jobless and PPI numbers, “The green shoots are starting to yellow.” – It is now up to the market participants on how to absorb that news.

For those long equities, it is probably better to lock in gains and hedge positions – as the data continues to show a contraction in the economy, regardless if that contraction is slowing.
I don’t think the move yesterday reflected the hidden volatility that is building. I was surprised that the VIX didn’t even make it to 35 - which clearly showed that there was little concern, or as the talking heads say “Fear”. As optimism rises and fear subsides , in the face of poor economic data – that should be a warning sign.