May

23

Stock Market Summary - May 23rd 2008

By Chuck

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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.