Saturday, May 17, 2008

Weekly Commentary From the BWS Contributors

There is no denying the stock market remains resilient thanks, we think, to the chorus of the "worst is over" from a crowd of talking heads, Wall Street execs and DC denizens. Senate housing bailout may also provide market support. For the week, Dow rose 1.89 percent, S&P 500 gained 2.67 percent, Nasdaq added 3.41 percent. The S&P 500, Nasdaq at five-month highs.

We remain long term bearish on the stock market and view the rebound from March as a bear market rally. "The worst is over" mantra is nothing new as a quick view of the Dow from 1931 to 1934 shows some strong rallies predicated on the worst being over, but of course the worst was yet to come. The more important debate may well be whether we're in the calm eye of the storm, or if the angst markets have experienced since last summer has only been strong outer bands of the approaching real storm. We think the ladder given signs of growing damage in the HELOC world where real losses as opposed to write downs will have to be booked. Commercial and retail real estate continue to show signs of cracking as commercial net loan charge-offs, just one example of many, are increasing.

We're still keeping an eye on complacent volatility readings relative to moving avgs and increasingly shabby put to call ratios. A low VIX doesn't necessarily mean an automatic slump in the stock markets, but many a times it has been a decent trade (either short SPX, or long VIX). Pundits say its different this time and the big drop in the VIX is too simple a way to look at the market. What? LOL. All we can say is be careful out there. In very recent history, the VIX has been good to help determine major tops and bottoms as well.

Dow could see a lift Monday from settlement of American Axle vs UAW which could help GM.

Crude parabolic in the early days of the month, still a locomotive; attempts to slow it down unsuccessful, so no meaningful correction for the time being. Dennis Gartman, famed futures trader and pros pro, has said he is not trading in the crude market because of the huge volatility. That says something about who should and shouldn't be trading energy futures. Just stay away.

Gold back above $900 Friday. We love the frustration this gives to folks who have a vested interest in selling you either their excess stock inventory, or shyster stock related products (stock market pumping newsletters, a variety of hedge funds, etc); they damn gold to be melted in hell, yet with inflation running amok and geopolitical events simmering towards a boil there shall be no such outcome for gold - quite the opposite.

The dollar shall play a key role in how all of the markets will move. What better indicator of what's ahead for the buck then a Fed balance sheet that has deteriorated so rapidly?

The powers-that-be will try to scapegoat many of the present financial ills on a variety of parties. "Shoddy monetary policy" should be at the top of all lists. The Fed, as illustrated by the above chart is public enemy number one for its reckless bailout of its own on Wall Street. We'll all be paying for this for the rest of our lives, and many generations thereafter will also foot this huge bill.

Economic data points last week - Pretty bad stuff.
  • The latest TIC report showed more net outflows of foreign capital
  • Consumer confidence is now cliff diving.
  • Single family homes sales, the lowest in 16 yrs. When population growth (pool of potential home buyers now vs 16 yrs ago) is taken into account, the housing numbers are looking truly dreadful.
  • Toll Bros said there is "pent up demand" for housing, but didn't know when slump would ease. I would imagine there is "pent up" demand for Bentleys, just that most of those who would love to buy a Bentley can't say when they'll ever have the money to afford one.
  • Inflation spiral. Ex the whopping impact of crude rise, YoY import prices up 6% last month.
  • Inflation denial. Gov't CPI data shows a decline gasoline prices for April thanks to seasonal adjustment.
  • Industrial production down more than double expectations
  • Monthly retail sales ex-gasoline, down; Redbook weekly numbers a bit firmer
  • Jobless claims were in line remaining under 400k, a trend likely to continue to employers go from cutting hours to all out cutting of jobs
Week ahead includes Leading Indicators, PPI. Also latest Fed minutes are due.

A few other indicators we continue to watch - yields across the yield curve, also demand by banks for funds from the Fed, European monetary statements, data; deeper level credit indicators. In a moment of clarity and real honesty this week, Ben Bernanke said credit market conditions were far from normal. Paulson, the grand puppet master of financial system propaganda, is probably water boarding Benanke this weekend for having such a loose tongue, but Bernanke's words should be deeply considered.

MMK for the BWS