More To Come

Sorry for not having more timely updates today!  Chuck will have a wrap-up commentary later and I will have some posts this weekend.  Quite a sea of red today.

Market Update

Financial sector worries and new concerns over bonds and bond insurers all have the market in a sell off. Just about everything being sold down today, but the worst is anything associated with financials.

Stock Market Update

The market opened down, but has stayed rather flat ever since.  The news doesn’t get any better, nothing to rally about today.  I have no idea what the close will bring, just going to watch the action. 

Commodities

I told Chuck last night that I was a bit worried for retail traders "playing" the commodity run.  Commodities are a tricky play, even for those who specialize in them.  Commodities are most likely a good buy and hold, but if you don’t time them properly they can hurt you.  Many are now buying agriculture and oil related stocks.  I’m not saying don’t do that, not at all.  Just watch your charts carefully and keep a stop-loss or trailing stop-loss to protect yourself.  If the whole market goes down, the commodity stocks will lose, too.  So if you are buying to hold, remember you will have to weather that volatility.  And then there is the unexpected news that can turn these stocks on a dime.  For instance, POT (Potash) is vulnerable due to negative talk on potash pricing, after a report that a  Russian producer is working with the government to increase production.

Chicago PMI

FEB Chicago Purchasing Manager’s Index:  44.5 V 49.5E  This is the lowest number since 2001.

- sub-indices:

- Prices Paid: 79.4 v 81.7 last
- New Orders: 48.8  v 44.7 last
- Employment: 33.5 v 47.0 last, lowest since Jan 2002
- Inventories:  46.0 v 51.1 last
- Supplier Deliveries:  39.6 v 61.7 last
- Production:  46.5 v 51.3 last
- Order Backlogs: 38.3 v 48.0 last

Stock Market - Pre Open Report for February 29th 2008

Bond insurer soap opera continues. MBIA (MBI) announced this morning in their form 10-K that they see material mark to market losses in January. They also stated that they essentially stopped taking on any new business for the time being. It is still amazing that the ratings agencies gave Ambac and MBIA the AAA rating. I wonder what S&P and Moody’s will do now that MBIA has announced "material losses". Will they have to go back to the drawing board and re-evaluate now? Who knows, but I will say that there is a growing belief that the ratings agencies have become a laughing joke.

Ambac ‘bail out’, as reported by CNBC has hit a snag. Apparently over how much money is needed to keep the AAA ratings. No matter how you look at this it remains a huge mess and the long term outlook for the bond insurers still looks bad.

Personal Consumption, spending, and income data came out this morning and it was essentially unchanged. There has been no material change in consumer spending, it remains weak. And income rose only slightly, and when compared to inflation the personal income is getting weaker.

The currency ‘carry trades’ have been unwinding throughout the night with the Japanese Yen continuing to go higher against the US dollar. Overnight the US Dollar hit another new low at 73.58. As the US dollar continues to deteriorate it brings added worry that large foreign investments in the US dollar could begin to pull out as there appears to be no bottom in sight for the dollar at this point.

Futures are down significantly at this time. We remain in our short position on the Dow Jones Industrials.

Stock Market Summary for February 28th 2008

Denial: de·ni·al

• refusal to believe a doctrine, theory, or the like
• disbelief in the existence or reality of a thing

Today President Bush held a news conference. One of the questions asked was about the state of the economy and his response was "I don’t think we’re headed to a recession, but no question we’re in a slowdown". Now either this man has some extraordinary tricks up his sleeve for rescuing the economy and is not telling us or he is just in denial of the facts. He may very well understand the facts, but instead of telling the truth, he chooses to treat the American people as though they are uninformed.  So he will keep saying "The fundamentals of the economy are strong". The fundamentals of the economy are nowhere near strong.

Ben Bernanke, in his second day of testimony today, said that there is a possibility of some bank failures. Last Monday we learned that the FDIC was hiring back people who were involved with the last large bank failure episode. The Savings & Loan implosion in the 1980’s brought down many financial institutions. The FDIC is trying to bring some of these people out of retirement now. I have this thought… If you are only expecting a handful of bank failures, would not the staff you have be sufficient? Why bring back people who handled the last large banking system failure? Sounds to me like there is an expectation for a lot more than just a handful of bank failures in the future. Just the fact that Ben Bernanke acknowledged the possibility of bank failures tells me it’s very likely to be reality and be worse than he says.

This reinforces, to me, why Ben Bernanke is so hell-bent on cutting interest rates even in light of inflation, which is getting out of control. He is seeing the possible breakdown of the credit and banking system. He can’t say that publicly, of course, for if he did it may create a panic. But for him to say that "there may be some bank failures‘ tells me that there is more going on then we are being told (that should be no surprise, when has the Government ever told people the full story?)

So denial (or not wanting to tell the whole story) is keeping the average retail investor thinking that everything will be OK. But, what happens if the trends of data and other economic data we analyze stay true to their predictions and we see a deep recession? I’ll tell you what happens, it is the average Mom & Pop investors that get screwed, that’s what. Right now the politicians are doing their best to keep everybody from thinking that the economy is falling apart. Even the large banking institutions are afraid of the average Mom & Pop  pulling their money out of the banks or 401K’s. The banks would suffer even greater losses if that happened. Look, we are not trying to sound some alarm bell here or anything, but we don’t like what we are seeing and we always tell it like it is.

Back on December 2nd, 2007, I published a commentary titled "Close your eyes and cover your ears". It was about a letter that an investment bank sent to their clients. In the letter they tried to tell people to ignore what you hear on TV and simply don’t worry about anything. What is happening today is just a continuation of that same thing, just keep people in the dark, tell them to go shopping and buy more things, and everything will be OK. But it is not OK.  Since the time I published that commentary, more banks have suffered even greater losses; foreclosures on homes are growing; unemployment is growing; the economy is deteriorating; and the financial markets of many other countries are in trouble. Now I understand the principal of a ’self-fulfilling prophecy", where if you tell everybody long enough things are bad, they will believe it and will cut back on spending, thus adding to the already deteriorating economy.  But it is a different matter altogether if you deliberately try to keep people from knowing the true scope of a situation, only to keep people from withdrawing their own money if they choose to. We already know that banks and other financial institutions are hurting badly for cash. Why else would they be going to the discount window and to the "TAF" to borrow large sums of money in order to have enough liquidity to keep operating. The banks want you to keep your money with them, regardless of whether the financial system continues to deteriorate. Decisions as to what to do with one’s own money should be made by the individual based on factual information. This is why we are bothered when we read or see people telling the public statements such as "everything is fine", or "this is a normal correction". For what if it is not a normal correction, how will anyone know if they never get the facts

.After the market close we got Dell (DELL) earnings which were not quite up to expectations and they were trading slightly lower in after hours trading. American International Group (AIG) reported their earnings and they were dismal. Tomorrow morning AIG will hold their conference call, if they do not say anything reassuring expect to see AIG sell off sharply. Tonight Fitch Ratings Service said that AIG may be downgraded.

A question tonight from one of our readers regarding Deckers Outdoor Corp. (DECK). Deckers reported earnings tonight:

[DECK] Deckers Outdoor Corp Reports Q4 $2.69 v $2.41e, R$ v $184Me

- guides Q1 EPS "the same or modestly higher than 2007" (implies $0.75+ v 0.92e); guides Q1 sales growth 25% y/y (implies Q1 R$90.8M v $89.6Me)
- guides 2008 EPS up 20% (implies $6.07 v $5.82e); Guides 2008 sales growth 25% (implies 2008 R$561Mv $531Me)
- expects earnings to grow at a slower pace in the first half

The reason DECK sold off so sharply in after hours trading is due to their weak guidance. The company said that their EPS for the next quarter would be about the same as in 2007, this is not good. Additionally, they warned that sales growth would be at a slower pace. The share structure on DECK is so thin that it does not take much to create extremely high volatility. The after market volume suggests to me that there were many share holders who wanted to cash out but needed the volume in order to close their positions. In other words this was a classic ’sell the news’. Large share holders need a significant news event in order to bring in buyers to take their shares from them. The top line (headline) number was a beat of their earnings, this brought in new buyers while at the same time those who were already holders saw the lower guidance and wanted to get out. In this case the selling was more dominate and the price dropped sharply. This is why we are always very cautious with stocks that have such a small float. I would not do anything with DECK at this time. However, Based on the weekly chart a price drop below $95 would be a good place to try a short position. for a failure of that price level would be a signal of a larger failure and a drop is likely. But one still has to be careful of low float stocks.

Another question regarding Cummins (CMI). I agree that CMI looks ready to fall but I would wait for just a little bit of added confidence and wait for it to break below $51.50 which is the lows from today.

At the present time the S&P 500 futures are down 0.65%. Tomorrow should be another interesting day with more economic data coming in at 8:30 am and the Chicago PMI at 9:45am.

We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort ETF, symbol DXD.