Rebel Traders – Analysis Without The Hype

The World Bank released their updated global projections and they have reduced the outlook significantly from the previous projection released in March

The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said.

At this time it appears that all major indices will ‘gap down’ at the open. The chart shown below is that of the S&P 500 e-mini futures. Levels to watch today are highlighted.

S&P 500 E-Mini Futures

A lot of earnings news released this morning, and the majority of the earnings data has been flat or negative. Many companies are lowering their forward guidance again.

S&P 500 Futures

The news of the Government’s possible action of converting preferred shares into common shares to give Citigroup more capital sent futures up in the overnight hours. The logic for the move was that this announcement is being perceived (for now) that nationalization will be avoided.

My argunment is that I feel this is nothing but a ‘pre-nationalization’ process. Time will tell.

I strongly believe that eventually these banks will need much more capital, or will have to be outright nationalized as economic conditions deteriorate further. My confidence in all ‘banking rescue’ efforts so far remains very low. And I base that on the past 2 years of statements such as ‘we are well capitalized’, to only weeks later needing more money.

The S&P 500 futures chart shown here is a 5 minute scale of the past several days. A bearish ascending wedge formation developed and has since confirmed.

At this time I am watching 3 levels: (see gray circles on chart)

Support: Trend line (769 – 772)

Resistance: 782 , 792

S&P 500 Futures - 5 minute scale

Little to report this morning that was not already discussed last night.

Merck (MRK) and Schering Plough (SGP) are being sold off heavily in pre market on the news we reported last night. Their cholesterol drugs have been reported as being a ‘flop’ in a study released yesterday.

Asian markets sold down last night, and European markets are weak also.

A report circulating throughout the trading pits this morning is that there is a reserve shortfall in some Dutch pension funds due to market developments. There is some early strength in ’safe haven’ bond futures and gold on this news.

The headline (so far) for the morning is the weekly jobless claims here in the United States.

INITIAL JOBLESS CLAIMS: 378K V 360K ESTIMATED; CONTINUING CLAIMS: 2.865M V 2.840ME

Producer Price Index (PPI) data reveals inflation still rising…

FEB U.S. PPI TABLE
Table Of PPI Data From Labor Department, In Percent Changes

                                             FEB.     JAN.     DEC.

PPI, Finished Goods           0.3      1.0     -0.3
PPI, Ex. Food, Energy         0.5      0.4      0.2
Energy                                    0.8      1.5     -3.0
Foods                                   -0.5      1.7      1.4
Consumer Goods                0.3      1.1     -0.4
Residential Electricity       -0.4     -1.2      0.6
Residential Gas                 5.7      0.7     -1.5
Gasoline                             2.9      2.9     -7.6
Home Heating Oil            -3.7      8.5     -0.3
Drugs                                  1.3      1.5      0.4
Autos                                  0.8      0.3     -0.5
Tobacco                              0.1     -0.1      0.6
Capital Equipment             0.5      0.4      0.1
Intermediate Goods            0.8      1.4     -0.2
Ex, Food, Energy               0.6      0.8      0.0
Crude Goods                     3.7      2.5      1.1
Ex. Food, Energy              3.3      4.0      0.2

Goldman Sachs (GS) and Lehman (LEH) reported earnings and each has reported a ‘better than expected’. Oh goodie, the crisis is over (if you listen to the talking heads). No need for any rate cuts now… LOL

Today is a wait and watch day. 2:15pm is when we find out what the Federal Reserve will do. I can’t remember a time when the market has been so convinced that the Federal reserve will cut the Fed Funds rate by so much and with so much confidence it will happen. Makes me think of a ’sell the news’ once it happens, if it happens.

Yesterday’s market rally has appeared to quickly run adrift. When the news from the Federal Reserve was issued yesterday the US dollar quickly gained some upside moves. But overnight the dollar headed back down again. If we use the US dollar as a measure of confidence in the US economy then we can safely say this morning that confidence quickly wore out after yesterday’s excitement.

The health care sector is being hit hard today as the rising cost of health costs are actually hurting the earnings of the major health insurance companies. So why the surprise drop in earnings of the health insurance companies? Loss of jobs and the subsequent loss of insurance premiums and what is very concerning is that people are actually putting off some of their health needs in order to pay other bills.

Housing market problems… best to just let the CEO of Freddie Mac speak for us this morning:

Freddie Mac CEO: We are in a 100-year storm in the housing market; "Worst housing market in a century" the CEO said at an analyst meeting.

- Says home price drops are only about one-third over.

The number of mortgage applications have rolled back over and are back on a negative trail.

MBA MORTGAGE APPLICATIONS W/E MAR 7TH: -1.9% V +3.0% PRIOR
- Refinance  -4.7% to 2448.2

The weekly jobless claims have been reported and the number for this week is 351K, continuing claims 2.831 Million. While the weekly number dropped a small amount with respect to last week, the continuing claims data continues to grow. Continuing claims is what is looked at for signs of the total employment levels of the United States. The market is viewing this data negatively as the employment situation is not showing any signs of improvement.

Monthly same-store sales data has been rolling in this morning from many of the retailers in the US.  If you only listen to the media you would take away that things are improving. But for those of us that are "thinking" analysts we see things differently. The trend is showing us that higher end retail stores are suffering more than the discount chains. Wal-Mart (WMT) reported a February same-store sales value of +2.6%. Now remember that these numbers are always relative, not an absolute. Sales relative to the previous month may have increased but it is far lower than previous revenues and sales. Be that as it may we see Wal-Marts increase as the sign that more of the middle class are shopping at the discount stores, such as Wal-Mart as the cost of living continues to increase. The more prestigious names are showing generally flat to even worse sales data. JC Penny (JCP) and  Nordstrom (JWN) are examples of higher end retail stores that are declining. And Macy’s (M) has decided to stop reporting sales data altogether which is highly unusual in the retail business. The consumer is still contracting and is shopping more at discount chains over the higher luxury stores.

Credit markets are under more stress this morning.

THE WSJ IS REPORTING THAT THE CARLYLE CAPITAL UNIT HAS RECEIVED A NOTICE OF DEFAULT FROM ONE OF THE BANKS THAT HELPS FINANCE ITS PORTFOLIO OF FREDDIE MAC AND FANNIE MAE SECURITIES THROUGH SHORT-TERM REPURCHASE AGREEMENTS.

The European Central Bank and the Bank of England left their interest rates unchanged. The Europeans are smart, they see the risks of inflation while our Federal Reserve continues to rub dirt into an open wound.

Once again CNBC has gone on the air and said that "a deal is near". Just as in the previous news leaks this news is being reported as someone "familiar with the situation". CNBC reports that the ‘deal’ may be announced today. And on this news futures took a spike upwards.

Oops, then reality hit. ADP jobs data (ADP attempts to preview the official Government unemployment data) came in significantly lower than expected suggesting a rise in unemployment. Then we received the non farm productivity final report. The shock in this data was unit labor costs, which was revised upwards to now be 2.6%. A rise in labor costs is yet one more sign of inflation.

So we have two bits of data this morning.. on one hand the ADP data suggests recession and gives the market added hopes again of big rate cuts coming. Then the next bit of data shows inflation peeking its ugly head again and this takes wind out of the rate cut idea. So the market is confused this morning.

At 10:00am  we receive the non manufacturing ISM data. In many aspects this data is more important than the manufacturing index as the United States is a country that is no longer a manufacturing super power. We are a service provide nation now as manufacturing has mostly gone to other countries. The ISM data we get at 10:00am reflects the business conditions for the majority of the business’s in the United States. So watch for some market moving events when this data is issued.

Futures started falling after the ADP data and the revised unit labor cost data was released. The market is still pricing in a Federal Reserve rate cut of 75 basis points on March 18th. If the market does not get what it wants watch for a significant selling event. Even if it does get a 75 point cut we could still be in for more significant downside moves as inflationary pressures will rise once again.

The Federal Reserve is aware that the credit markets in this country are falling apart at the seems, oh what is the Federal Reserve to do? Well, they can raise the white flag and signal that the problem is out of their control now. As Ben Bernanke said to the banking industry yesterday he is asking the banks to help the country by reducing principal on loans for homeowners who are close to foreclosure. Now there is an idea, I’ll stop paying my mortgage and let the banks reduce my principal so that they can keep my mortgage from going into foreclosure. What a stupid thing for the Federal Reserve chairman to say. Now you will have people who are financially healthy and making payments suddenly "slipping on their mortgage payments" in order to negotiate a lower principal with their banks.

Reading between the lines of the Fed speak lately provides us with two possibilities.

1. The Federal Reserve is warning the markets to not get their hopes up on a 75 basis point rate cut

2. The Federal Reserve has played all of their cards and are left with no more solutions. In other words, your on your own now.

Will the banking industry step up to the challenge and save the credit implosion? Don’t bet your house on it! The banks would rather hold out and wait for a Government bail out.

Two charts that I owe one of our readers:

SRS:

TWM:

Futures are pointing to another lower opening. Events driving this mornings futures is the revision to the gross margins from Intel (INTC) in which they have called for a lower margins due to increasingly lower prices on memory devices, mostly due to a lower demand in these products.

Redbook Retail sales data for February was down 1.7% v January

Thornburg Mortgage (TMA) is in some serious trouble as they have been running into trouble with margin calls, additionally the company’s CEO said that they were not sure if they would be able to satisfy their lenders requirements by selling portfolio securities.

Clearwire (CLWR) missed earnings significantly this morning (-1.98 v 1.01e) and lowered forward guidance significantly

BMO Capital markets (BMO) misses estimates and does not see being able to meet fiscal year earnings targets.

Citigroup (C) is in trouble again. Claims of more layoffs from the company and of additional significant losses coming down the road.

Fremont General Corp (FMT) has announced receipt of notice of covenant default with respect to guaranties issued. This is essentially the ‘nail in the coffin’ for this company.

Intel and Citigroup are the ’surprise’ issues for today, couple this with the other weak earnings and data coming in this morning and we are looking for another lower opening.

The big even in the overnight hours was the continued decline of the US Dollar. At 4:07am (US EST) the US Dollar hit a new low of $74.22. Since that time corporate events have continued to deteriorate the pre market futures. The biggest is the earnings from Fannie Mae (FNM) released a short time ago (see Lisa’s post earlier). Also we have bad news on the biotechnology front with Amgen (AMGN) and Johnson & Johnson (JNJ) having received data that one of their prize drugs used to treat anemia may be increasing the risk of blood clots and even death.

This morning we received the Durable Goods Orders data (Durable goods are industrial products with an expected life of one year or more. They include intermediate goods, such as steel, lumber and electronic components; finished industrial machinery and equipment; and finished consumer durable goods, such as furniture, autos and TVs.). The data this morning showed a decline of 5.3% for January. We have been watching this data over the past year and we identified the down ward trend long ago, this new data adds to the trend down ward (chart will be in tonight’s commentary).

At 10:00am we will also get the Mass Layoffs data, this data, which is usually not talked about much in the media is tracked by us as it provides an early look into the unemployment rate.

And Ben Bernanke will be talking today as well… grab some coffee and a bag of pop corn for the show.

Pre market futures were up and on the Dow had hit resistance. Those futures have since pulled back of the highs. The weekly jobless claims data came in and for us there was no surprises, the average of jobless claims continues to rise and the continuing claims index is also still moving upwards. Confirmations of a still deteriorating employment picture.

The chart below is the current daily chart for the Dow Jones Industrial Average. The blue circle is where we took our short position on the Dow by purchasing the Ultrashort DXD. Today is setting up to be a day of indecision. We’re holding our short position.

Daily Chart: Dow Jones Industrial Average