Here are the key levels in our models for the S&P500 (see chart), given an SPX level of 1014, at the time of this post:
1. Buy Stocks for the “Trade” line = 967.97
2. Sell the “Trade” line = 1102.89
You can drive a truck through these lines. It’s math – it’s called US government sponsored socialism/volatility. This markets is to be rented, not owned.
Enjoy the close,
With a rusted-out war fleet en route to visit Hugo Chavez, a potential bailout for the Icelandic Banking system, a few bomber incursions into Japanese airspace and the announcement that he has a Judo instructional DVD about to come to market, Vladimir Putin is doing his utmost today to project the image of a strong, resurgent Russia to the world. When you consider the fact that the Russian equity markets have been closed more than they have been open over the past two weeks as stocks there have continued their plunge despite repeated attempts by the government to inject more liquidity into the local credit system (a total of $186 billion in government funds have been earmarked for the bailout to date) this bear suddenly looks sickly.
As any hunter will tell you, a wounded bear can be much more dangerous than a healthy one –an animal in pain is less likely to behave rationally. As such Putin & co. must still be approached with absolute caution. If the Russian government leaders can’t get their way in free markets, they will be more than happy to take a page from their old KGB training manuals.
Ignore Mark Mobius and the other emerging markets “gurus” who have been crushed here. With a meltdown this severe and this global there will be LOTS of opportunities to find equal value in better markets - markets where the referees don’t change the rules halfway through the game.
Who knows, if the SEC’s Chris Cox & Co. are removed from power, the US might even become one of those markets.
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Repeating what they did is not the point of this note. Reminding you what Japan COULD NOT do is, however.
The Japanese central bankers "welcomed changes, but kept rates unchanged."
I bet they “welcomed change”. The Japanese are in a politicized box of negative real rates and have zero flexibility to do anything else. This is the central problem associated with the market’s respective US Fed and global central banking manias altogether. Market participants do not respect history. Cutting interest rates to zero (or negative) on a real basis ends up putting your country in a sad sad place.
I don't have to have my office across the street from the Yale Economics department to remind you of Economics 101 here. If you are Japan, you are the equivalent of a man standing on the shore waiving aimlessly at capitalist boats as they engage in free market trade warfare. No one is going to come to your shores and invest if you don’t issue them some positive rate of return.
Having a compromised and constrained country balance sheet is the result of this manic behavior. That's why the USA needs to wake up and smell the coffee here and raise interest rates, or else our Titanic lender (China) is going to be leaving Americas shores for good.
The current Bush administration clearly doesn’t get this. They are too busy reacting to economic scenarios that they didn’t proactively prepare for. Obama is going to have to bring in Volcker and get all hands on the USS Capitalism’s deck again.
Thailand’s central bank left the one day repo rate unchanged at 3.75% at today’s Governors meeting. The decline of inflation numbers in recent months had left conjecture that rates might be eased to help stimulate growth in light of the current global credit meltdown, but Bank of Thailand Governor Tarisa Watanagase –a career bureaucrat who was with the bank during the late 90’s currency crises, has focused on defending the Baht and the domestic risks brought by civil unrest.
Calm heads prevail inside the central bank, but in the streets of Bangkok anarchy reigns. Yesterday 400 protesters were injured (including 2 that required limb amputations) and 2 killed in clashes with military security forces as they attempted to halt the inauguration of the new government of Prime Minister Somchai Wongsawat -regarded as a puppet of ousted leader Thaksin Shinawatra by many (Somchai is the brother in law of Thaksin). An explosion near the capitol building is believed to have been a car bomb.
In the face of a global market meltdown and spiraling violence in the streets, equity investors ran for the exits taking the SET Index to its lowest level in five years.
Slice and dice today’s retail sales results any way you want. I’m not even going to try to drill down how much of retail’s price reaction was due to ‘less than toxic’ sales numbers, or the fact that they came in conjunction with a coordinated global rate cut. Either way, the ‘Trade’ here is a good one. That synch’s well with my partner Keith’s bullish call into the turmoil early this week and started, when he started to deploy cash and buy stocks again.
What we can’t hide, however, is that the ‘Trend’ across channels is not only negative, but is eroding relative to prior months. I’m not trying to be a downer by any means. I just tell it like it is. Discount stores? Ok performance, but rolled over by a full point on a 1, 2 and 3-year basis. Multiply that by 3 and you get the rate of erosion for the department stores.
We’ve had 64 consecutive quarters of growth in consumer spending in the US. Our team here at Research Edge collectively thinks that not only is it going negative, but the duration will be well over a year. Through 2010 is not that tough to model. If consumer spending is negative, core inflation and higher interest rates (impacting housing costs – a component of PCE) eat into the consumer’s wallet then the reality is that the magnitude of a consumption decline is magnified by at least 2-3x for discretionary spending.
Bottom line, I still think that margin, earnings, and cash flow growth expectations for US retail are too high for next year, and unlike other consumer spaces, this one is not particularly cheap. If these names bounce with the market ‘Trade’ then look to step on the gas with key short ideas – DSW, GIL, GES, WRC, BWS, TJX, and ADS, to name a few.
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