General Equity Market/Economic Comments
So, no sooner had I returned home than the equity markets shot aggressively higher (making me look a good deal smarter than I actually am), driven by mildly positive comments from Citi and B of A (these days, ANYTHING positive out of those 2 could be seen as a minor miracle and should also be taken with a grain of salt given the utter lack of credibility at those 2 institutions), talk of amending "mark to market" rules and reinstating the "uptick" rule, and a surprisingly positive (all things relative) retail sales report. I'd say that an 11% move in 3 days would be considered a stellar "pop" in the pops and drops scenario that I mentioned last week, and I must say that the magnitude of the strength has surprised me, illustrating just how oversold the market was, at least on a short term basis.
Last week, we discussed the idea of looking for "less bad" data going forward as the impetus for a true bottoming process to begin. While I wholeheartedly believe that this process will take a good deal of time, complete with a trip down to retest the lows (if these are indeed in), I also think that we're at the beginning of a period where ALL news will not be terrible, at least on a relative basis. So while it's very probably too soon to break out any party hats, it at least seems plausible that the front end of the process has slowly started to begin, and remember that you have to start somewhere.
This said, let's have a look at the goings on in the consumer space this week. While it is true that February's retail sales number was still down very slightly (0.1%), it was nicely above the consensus estimate and actually UP 0.7% when you exclude auto sales. On top of this, January's data was revised upwards from a gain of 1% to a gain of 1.8% - the first monthly sales gain in 6 months. Holy shnikeys!
Now, there's good news and bad news here. With the savings rate up to 5%, this was a surprise to me and anyone else who's been paying any sort of attention, and it was very welcome. It shows that, at least as of now, the consumer hasn't completely and utterly disappeared. It also suggests that, perhaps, the upcoming consumer confidence data may be "less bad" than it has been, which again, might be fodder for further near term gains. This, coupled with a down 1% inventory number for the month helps with the thought I laid out last week about employment losses beginning to move towards a peak (see the "It's Spriiiing Agaiiin" post).
This, however, leads to the bad news: the 4-week average of initial unemployment claims continues to creep higher and will likely continue to do so, at least for a while longer. So while I think we might be in the process of topping out in terms of initial claims, I doubt the number shoots lower soon. It is for this reason (AND the subsequent continued rise in savings I expect) that I think we may be setting up for disappointment in sales next month, especially if folks feel that the downward trend has been broken. However, this is a month away, and we'll cross that bridge when we get to it.
Quickly expanding upon my housing market comments from last week, foreclosures indeed continue to rise unabated, which is obviously not a good thing. However, remember you have to start somewhere, and with this in mind, I'd point out that there was a MASSIVE and successful auction of foreclosed homes at the Jacob Javits center in NYC this week. The bargain hunters are beginning to appear, and I'd expect this to continue as we head into the Spring. I'll repeat, prices are likely to continue to drop nationally through the back half of the year, BUT we seem to entering the initial period of PRICE DISCOVERY, which is where the healing must start.
The trick to investing is to keep your eyes ahead. One has to look not at what's going on today, but rather at any evidence that may point to a change in trend in the future. The equity market is a discounting mechanism: it most often takes into account what is going on today weeks of months in advance. This is why I believe that watching the talking heads on financial TV is a COLOSSAL waste of time and a detriment to the average investor, as they yell and scream about this or that. Do me a favor: unless you're day trading, turn it off. Read a book. Watch Oprah. Listen to music. Anything else.
Boiling it all down, the question here is, "does the recent move have legs?". In my opinion, the answer is "yes, but they're short ones". I would not be surprised to see consolidation here, with a pullback next week as investors digest this week's action. However, I also believe that we may well see some more "less bad" data to help us along, perhaps moving the S&P towards 800 before this bear market rally is complete. I'd be looking to take money off the table at that point and trade back into SDS. Remember, bottoms are marked by pops and drops, and we're probably just getting started with this process here.
Short Yen Update
As you know, a few weeks back I suggested those with a more aggressive bent take a look at going short the Japanese Yen vs. the U.S. Dollar by buying YCS (Short Yen ETF). After an initial, violent move in our favor, the Yen/Dollar has been consolidating recently, which is what I expected. I feel, however, that we might be ready for another move in the right direction here.
Let's take a look at a couple of reasons I lean in this direction generally. Fist, Japan is a very insular nation, and this leads to general, long-term issues. Immigration policies are quite strict, and this leads to a very big demographic issue. Only 27% of the population is under 25 years old and 54% is over 40. 21% are over 65, compared to the global average of 7.5%. The birth rate has declined from 2 million per year in '73 to 1.1 million, and this continues to drop. So the issues here are: 1) there are a disproportionate number of retirees vs. entrants into the workforce, suggesting long-term pressure on economic growth; 2) the cost of caring for the elderly is likely to be high (sounds familiar, but they're well ahead of us on the timeline and they DO NOT have a stream of immigrants to pick up the slack).
With this as a backdrop, there are near-term issues that suggest that the Yen could continue to weaken even given the recent drop. The 4th quarter GDP number was once again nasty, falling 3.2% (12%+ annualized), and expectations are that this trend is likely to continue. Yes, growth in the US is terrible as well at the moment, but the thought is that we should see improvement well before they do. Second, Japan is running a current account deficit for the first time in 13 years. Therefore, the pressure is very high and growing for the government to do something to help Japan's iconic exporters. One of the things that the Government has been prone to do on this front is to intervene in the currency markets, driving the Yen lower in order to make Japanese goods cheaper on international markets. They have yet to do this, but I have a feeling it's coming.
Importantly, something interesting happened this week (and thanks to Dennis Gartman for pointing this out). The normally quiet Swiss National Bank intervened in the currency market this week for the first time since the mid '90s, driving the Swiss Franc lower in order to stave off deflation and boost exports. Now, it's been a while since ANY central bank has intervened openly, and I think that, with the seal broken, it's only a matter of time before Japan does the same. Soooooo, after a period of consolidation between 96-98 Yen/Dollar, I think that the move above "par" (100) is imminent.
Oil Update
Finally, I want to take another look at my view on oil. I initiated a partial position in DXO (double long crude ETF) last week with the thought that we're may be seeing the worst of the economy in the USA while China is preparing yet another dose of stimulus to their economy. Additionally, and importantly, OPEC seems to have found some discipline, helping out on the supply side of the equation.
With the latter point in mind, OPEC meets this weekend to discuss oil quotas, and I'd expect yet another cut. The main players: the Saudis, Iranians, and Venezuelans have all made it quite clear that they are in favor of a large production cut, so it's a forgone conclusion that this will be done. Given that the market, as mentioned before, is a discounting mechanism, crude has moved higher in advance of the meeting, but I'm not looking at this as a short term trade. So if there's a "sell the news" decline post this weekend, I'd use it to add to positions as there are a couple of other interesting tidbits to consider.
First, the Russian oil minister will be at the meeting as an observer. As you know, Russia is a major exporter of oil as well, and the importance of his presence at the meeting should not be lost. It seems as if we could be moving towards at least a bit of near-term coordination between major exporters (OPEC and Non-OPEC) in terms of output, which could further drive crude supplies lower.
Finally, looking at the futures market, there has been some interesting activity in crude as well. In a crude bull market, the futures can trade in (or near) something called "backwardation", where contract prices in the near months trade at higher levels than contracts in the outer months. In a bear market, the futures trade in "contango" which is the opposite. Recently, we've been in a contango market, and a very wide one at that. However, recently the contango has narrowed substantially, which is a bullish sign suggesting that supply might be closing in on near-term demand. Stay tuned here.
Again, I don't view this as a trade. Oil is a depleting asset, and an important one at that. Unless you think that the global economy will forever be in the tank, you want to opportunistically get long oil in one way shape or form. Now, as the economy tries to find its footing, concerns regarding demand will pop up, driving oil lower. However, demand will eventually return, and my eyes are on the supply side at the moment, which to me is flashing green. Many may want to play this by owning shares in the major oil companies, which is fine. However, I lean towards wanting to play the commodity itself, given Washington's constant yammering about "windfall" profits taxes and the like.
That's all for this week. Have a super weekend, despite the fact that many of us can't hit the links (yet)!
TRB
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