Stock Market Summary - May 23rd 2008

A weakening economy plus a housing market implosion led to a credit implosion, which then led to the financial institution crisis, which led to the Federal Reserves aggressive action to back stop the banking system, which has contributed to quickly rising inflation, and this leads us right back to where we started which is the weak economy that is now weakening faster.

A falling dominos situation is in motion and can’t be stopped. A while back I wrote that the stock market was in the eye of a hurricane with everybody feeling good about the markets and everyone was telling you to buy stocks. I also wrote that if you were holding onto stocks (long positions), the market had given you a gift, an opportunity to get out for the next part of the hurricane was approaching. And I must say from my analysis that the second half of the hurricane appears to be more powerful than the first.

This morning we received data on existing home sales and it was not good. Inventory of homes on the market is increasing rapidly with prices still falling. As the number of people who are becoming ‘cash broke’ rises they are resorting to the only option left to them, and that is to sell their home. There are no more home equity loans, credit card limits are being slashed or even pulled altogether. There is simply no more credit available to keep people going. Add that to the homes going on the market due to foreclosure and you have ‘for sale’ signs appearing as if they are sprouting out of the ground like weeds.

Just as in the stock market, when the supply of an asset exceeds the demand, prices fall. Now we are entering into a period where supply of homes on the market is rising much faster then they are selling and this tells us that price declines have much further to go. Additionally, the rapidly rising inflation is akin to twisting a knife in an already open wound of the average consumer. My latest checks of the retail establishment (yes, I go out in the field and ask questions, I go right to the source) revels that conditions have gone from bad which was in March, to now being terrible.

The market had been trading on the concept that the credit crisis would end and that was all there was to it. But you know we said to you ‘no way’, there was more to come. And now not only is there more to come, it is deteriorating at a faster pace now. When the next earnings season begins it will show just how bad conditions have become and the retail sector will be hit hard. This in turn will lead to further declines in the economy as more layoffs will be taking place from the retail sector, and others as well.

In a report issued by the Bureau of Labor Statistics on Wednesday, the data shows that the employment situation actually deteriorated earlier then first reported by the official non farm labor statistics data. This will lead to revisions of previous non farm payroll data reports in the coming months. And the revisions will be to the down side. These down ward revisions will occur, this is a mathematical certainty.

When the impact of the economy is reflected in the retail sector, and the additional job losses mount, it is easy to see how the unemployment will continue to rise, and based on this new data from the Government showing the breakdown, I am raising my projection of unemployment to now be 5.7% to 6.3% if there is no immediate and substantial action taken by the Government to correct all the wrongs, but that is unlikely.

The credit crisis? Not over yet by a long shot. I surmise that the worst is still in front of us, not behind as the media reports. We have been writing for months about the assets being put into ‘level 3′ by the banks and other financial institutions. Remember, level 3 is where you want to put your dirty laundry so now one can see it. Our long time readers will recall that we were warning of this danger when these level 3 assets come out of the basement and have to be realized on the books. Now it seems that the banks and financial institutions are playing some games with their earnings and how they are accounting for the dirty laundry.

David Einhorn of Greenlight Capital, a man who got himself into a lot of trouble by telling an audience in 2002 why he felt that Allied Capital was in trouble and that he was shorting their stock has come out with some statistics concerning Lehman (LEH). In 2002 Mr. Einhorn had been made to look like he was a manipulator, a liar, and did not know what he was talking about. The securities and Exchange Commission went after him and his firm. All for telling the truth. Just like Bill Ackman of Pershing Square Capital Management studied the bond insurers, he too was ridiculed for claiming that the bond insurer mess was going to explode. And we know how that turned out. Short sellers are usually more insightful and do intensive research, and their findings are usually accurate. Remember that it was short sellers who became suspicious of Enron’s  earnings in the beginning. David Einhorn wrote a great book on how companies will hide the truth, I highly recommend it. Anyway, where this is leading is that Mr. Einhorn has discovered some discrepancies in Lehman’s (LEH) earnings and is the reason why we have seen LEH selling off lately. The link HERE is a transcript of a recent speech in which he brought out the story on Lehman.

There is still a lot of shoes to fall in this market. And the economy is getting worse at the same time. A perfect storm IS upon us. I will have more charts and more stocks we have identified as trades for you by Monday night.

I have a busy weekend with family, but I will get those charts posted as time permits over the weekend.

Lisa and I wish everyone a happy, safe, and a healthy Memorial Day holiday.

Stock Market Close

Dow closes at 12479.63, S&P at 1375.93 and the Nasdaq at 2444.67.   Pretty?  I think not.  Next week is a four day trading week and I can’t even pretend to know if the market will do an oversold bounce.  If it does, it will just fall again.  So if by some chance one has not exited long positions, a bounce may be your last chance.  This isn’t a doom and gloom prognosis, just a reality check.  I sure hope everyone had a profitable week and that you had no nasty surprises to the downside. 

We took the MKSI short position (swing trade), so we’ll be monitoring that position for you next week.  The only upside I really saw in this market today was some short-covering before the long weekend, and that wasn’t at all surprising.  It was just a very small intraday movement.  The volume on the sell side is still high, even though overall volume on the NYSE is pitiful.  Hmmm….no real buying.

I know it’s a holiday weekend, but check in with us when you can.  We will have commentary and any other updates tonight and over the weekend, as usual. 

Market News Update

We aren’t driving as much (I’m going to cut back, too):

DOT: US VEHICLE MILES TRAVELED IN MARCH -4.3% Y/Y, FIRST DROP IN MARCH SINCE 1979

Moody’s has absolutely NO credibility with me.  None, nada, zip:

MCO Moody’s CEO: RECOGNIZES SERIOUSNESS OF QUESTIONS RAISED BY MEDIA REPORTS ON ERROR IN RATINGS MODELS
- Says will act quickly and decisively to address any need for changes in process.
- Notes will be vigilant in efforts to establish facts of situation.

No one has any answers to the oil prices, apparently:

US ENERGY SEC BODMAN: DOES NOT BELIEVE ANY US INTERVENTION IN CURRENCY MARKETS WOULD AFFECT PRICE OF OIL - CNBC COMMENTS
- also notes raising current margin requirements for commodities would do little to affect the price as well

And a "Source" is saying that the Fed may make the TAF a permanent credit facility.  Damn them (and all the rest of us) if they do, is all I can say. 

Market News Update

FED SETS FIVE-DAY REPOS, ACCEPTS $11.75B…..Will this ever end?

Merrill-Lynch raises Mexico’s GDP forecast from 2.3% to 2.5%….Would love to see the convoluted fantasy land these guys live in.  I forecast Mexico’s true GDP to be near 0% for 2008.  Let’s see who’s closer come year end.

April Existing Home sales came in at 4.89 Million versus the prior sales of 4.93 Million.  Still slowing down.

This is "moral hazard" evidence, as far as I’m concerned….shame on Bill Gross:

FIXED INCOME: PIMCO’S GROSS HAS ALMOST TRIPLED HIS HOLDINGS OF MORTGAGE DEBT TO MORE THAN 60% OF HIS FUND - FT
- The Pimco Total Return fund has $130B of assets
- Gross said he has decided to invest more in mortgage debt due to the US government’s implicit guarantee of Freddie Mac and Fannie Mae.
- Gross said Pimco was mostly mortgage agency debt.

Stock Market - Pre Open Report for May 23rd 2008

Futures are pointing to a significantly lower open this morning, so far. S&P futures dropped fairly large in the overnight hours and they are still near the overnight lows, currently sitting at 1387.

With the holiday weekend upon us, we may be seeing a "sell and go away" situation unfolding on us today. With the economy faltering almost by the minute anymore with crude oil having reached the tipping point, the impact to the consumers won’t take long to be realized. The nation was already entering into a recession even before this recent oil increase. This just adds further to the depth of the recession that is descending on the United States.

Apple had some upgrades this morning, but I’m not changing my short position as I see the rapid decline in the consumer spending outpacing the long term picture for Apple. If it were a healthy bull market, then I would have taken my short off the table. But, in this declining economy I’m comfortable keeping my Apple short intact. The upgrades just means that the next down leg in Apple will take a little longer. My thesis on Apple is that their expensive products will not be able to meet expectations in this rapidly deteriorating economy.

Keep an eye on MKSI for a short entry today if the price drops to $23.25. See the chart in yesterday’s post.