Stock Market Summary - May 15th 2008

I’m very afraid for the millions of investors who are being suckered into the market believing that the economy is improving. But, that is what creates bear market rallies in the first place.

Bear market rallies take place like passing ‘eyes of a hurricane’. There is an initial storm, then the skies clear and people come out believing that all is well, and then get caught outside in the hurricane when the next part passes overhead. Just like in a real hurricane, many deaths occur when people venture out thinking it is all over. In the stock market when people see a clearing in the sky they start buying stocks again, but when the storm picks up again they are caught and have to sell all over again as they start taking on water.

As history has shown us many times over the past hundred years, when the next part of the storm passes overhead people can’t get out fast enough and take on more and more losses. It is not until there is a complete acknowledgement that the economy (and the stock market) is in danger that the down trend becomes firmly planted.

Over the past 8 months we have had one heck of an economic hurricane with the financial system nearing a complete collapse. With the lull in the financial implosion the market is coming out of their bunkers thinking the storm has passed completely. But has it really passed?

May 15 (Bloomberg) — The Federal Reserve’s direct loans of cash to commercial banks climbed to the highest level on record in the past week, a sign of continued stress in financial markets that threatens to curtail credit for households and companies.

May 15 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke pushed banks to keep raising capital in the aftermath of losses from the credit crisis to avert deeper damage to the U.S. economy.

“Firms are hunkering down,” Bernanke said at a conference in Chicago today. “They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy.”

Ben Bernanke keeps pounding the table for banks and financial institutions to keep raising capital. If the crisis is over than why the urgent need to keep pressing them to raise more and more capital? Ben knows what is coming down the pike and it is not going to be pretty.

The housing market will continue to deteriorate, perhaps not bottoming until 2010. This is, and will, have large implication to the broad economy as consumers will be pushed further into personal hardships. One thing leads to another and you have another hurricane bearing down on us. I see the global economy as one hurricane after another, with brief clear skies to give people the sense that all is well. My own personal belief is that people need to be paying off debt as quickly as possible, protect their capital at all costs, and reduce the risk of loss in the markets by keeping tight stop loss levels on any long term investments.

Are you outside under the clear skies thinking all is over? Or are you simply restocking your storm shelter so you are prepared for the next phase of the hurricane?

How about some charts and graphs…

 

 

 

 

 

 

 

 

This chart is a comparison of industrial production of the United States vs. the S&P 500. While I acknowledge that the industrial complex of this country has been declining as more and more work is being shipped to foreign countries, it remains a valid indicator of ‘general’ health of the economy. If the market is relying more and more on foreign growth then we may very well be in for a very big storm. For many high growth nations are topping out.

 

 

 

 

 

 

 

(Small Business - Earnings growth - Data Source: Moody’s Economy.com)

 

 

 

 

 

 

(Internet retail sales - Data Source: Census Bureau)

 

 

 

 

 

 

 

(Job Availability - Data Source: Moody’s Economy.com)

 

 

 

 

 

 

 

(Commercial Paper Market - Data Source: Moody’s Economy.com)

Asset backed paper (mortgages) continues to deteriorate on the open market

 

 

 

 

 

 

 

 

(Jobless Claims- Data Source: Moody’s Economy.com)

People on unemployment still deteriorating.

 

And tonight we have this:

FANNIE MAE IS EXPECTED TO ANNOUNCE ON FRIDAY THAT IT IS ENDING ITS POLICY OF REQUIRING HIGHER DOWN PAYMENTS ON HOME LOANS IN AREAS WHERE PROPERTY PRICES ARE DECLINING - WSJ

Ok, the housing crisis began with the sub prime mess. Now Fannie Mae is going to lower their lending requirements in the hardest it areas? This is desperation on part of the Government GSE’s, plain and simple. Fannie Mae (and it’s brother Freddie Mac), are going to implode at some point as their losses will grow to unsustainable levels.

 

And the last chart I want to show you tonight is one that we have shown many times before… But, it is worthy of reminding people of just how bad the financial system is in this country.

 

 

 

 

 

 

Just look at how much money banks have had to borrow from the Government. Never has it been this high.

 

And one final bit of news tonight:

UN says world economy will only grow by 1.8 percent
Thursday May 15, 10:26 pm ET

United Nations says economy is ‘teetering on brink’ of severe downturn.

UNITED NATIONS (AP) — The U.N. says the world economy is "teetering on the brink" of a severe downturn and will grow by only 1.8 percent in 2008.

That’s down from a global growth rate of 3.8 percent in 2007.

The U.N.’s midyear economic projections released Thursday blamed the downturn on further deterioration in the U.S. housing and financial sectors in the first quarter.

The U.N. said the U.S. problems are expected to continue to be "a major drag for the world economy" into 2009. It forecast global economic growth of 2.1 percent next year.

But developing countries won’t suffer as badly. The U.N. said they should reach 5 percent growth this year, compared to a robust 7.3 percent in 2007.

Stock Market Close

First, this comes out on the wire:    US SEN DODD: WE DO NOT HAVE A DEAL ‘YET’ ON HOUSING LEGISLATION, ‘IT MAY NOT BE POSSIBLE’ TO GET A BIPARTISAN DEALLess than 45 minutes later, the following comes out:     SOURCES SAYING SENATE HAS REACHED A DEAL ON MORTGAGE BAILOUT BILL - Deal would have FRE, FNM bear much of the costs of a mortgage insurance fund.

Guess we’ll find out later which “version of the truth” wins out.

I wish I could tell you that this was all very bullish, and that the market moves today (especially in to the close) were healthy signs.  But, I’d be lying to you if I did.  Rebeltraders took positions in DXD and SDS.  My personal account has a short or two and I’ve daytraded long and short positions.  Anybody else play the CAT waves?  Caterpillar(CAT) has been one of my “on again/off again” trades for a long time.  I’ve played long and short.  There is a way to make money in the market, although right now it isn’t real easy.  We aren’t recommending any other trades right now, because in spite of this “rally”, anything could topple it at any given moment.  You could continue to play it on certain technical levels alone and pray the fundamentals don’t catch up with ‘ya.  It’s all about how much risk you are willing to take with your portfolio.  I don’t see the need to cover my shorts yet (they are still within my “money management” guidelines), and I really don’t see a need to start taking on long positions. 

Less Borrowing?

There are those who say the following numbers are proof the credit crisis is nearing an end, as it shows less demand for money from the Fed’s.  I say they are simply running out of quality/acceptable collateral.  We’ll see.

NY FED: $7.24B IN TOTAL BIDS SUBMITTED AT $25B 28-DAY TSLF AUCTION, BID TO COVER RATIO 0.29

- Stop out rate 0.1%

No Confidence From Builders

MAY NAHB HOUSING MARKET INDEX: 19 V 20EI like this graph (Calculated Risk) showing the negative trend going on: Recession VS. National Housing Market Index Graph

Market internals continue to show volume weakness.  It almost looks like a holiday week, as far as volume.  Did everybody pack up and go to the Hamptons already?

Philly Fed Index

FED SETS OVERNIGHT REPOS, ACCEPTS $10.25B 

The Fed is, also, opening the lending window to smaller banks now.

May Philadelphia Fed numbers not as bad as the prior numbers:

MAY PHILADELPHIA FED INDEX: -15.6 V -19E

- New Orders: -3.7 v -18.8 prior

- Employment: -1 v -11.1 prior

- Prices Paid: 53.8 v 51.6 prior

- Inventories: -13.1 v -26.2 prior

- Six-month business conditions outlook: 28.2 v 13.7 prior

Market Update 8:45amET

Ok, April Industrial Production and Capacity Utilization numbers aren’t pretty: 

APR INDUSTRIAL PRODUCTION: -0.7% V -0.3%E; CAPACITY UTILIZATION: 79.7% V 80.1%E

- Prior Industrial Production revised from 0.3% to 0.2%

- Prior Capacity Utilization revised from 80.5% to 80.4%

 I wonder about the quality of collateral here, too:

ECB’S MERSCH SAYS BANK IS REVIEWING COLLATERAL QUALITY AND NOTICED DETERIORATION IN QUALITY - CONF COMMENTS

- Lower collateral quality is a high concern

Stock Market - Pre Open Report for May 15th 2008

INITIAL JOBLESS CLAIMS: 371K V 370KE; CONTINUING CLAIMS: 3.06M V 3.035ME
- Prior Continuing Claims revised from 3.020M to  3.032M

 

MAY EMPIRE MANUFACTURING: -3.2 V 0.0E
- No revisions
- Prices Paid : 69.57 v 57.29 prior m/m
- New Orders:  -0.46 v 0.6 prior m/m

 

Blackstone Group (BX) REPORTS Q1 -$0.06 V $0.13E, R$68.5M V $457.0ME
- Q1 revenue is down 94% y/y

 

JC Penney (JCP) REPORTS Q1 $0.54 V $0.50E, R $4.13B V $4.27BE, SSS -7.4%
- Q1 GM’s 40.0% v 41.5% y/y and vs 36.2% q/q sequential.
- Guides Q2 EPS $0.38 v $0.37e, sales down low single digits.
- Guides Q2 SSS down mid-single digits.
- CEO sees "difficult conditions for the rest of the year."

 

APR INDUSTRIAL PRODUCTION: -0.7% V -0.3%E; CAPACITY UTILIZATION: 79.7% V 80.1%E
- Prior Industrial Production revised from 0.3% to 0.2%
- Prior Capacity Utilization revised from 80.5% to  80.4%