Showing posts with label Target. Show all posts
Showing posts with label Target. Show all posts

Saturday, January 25, 2014

Saturday Afternoon Quarterback: The Day After the Great January Stock Slide

OK, it's Saturday, and the world hasn't ended, but what's important is to keep abreast of developments over the weekend in places like Argentina and Turkey, both of which are experiencing significant currency issues.

The other part of today's exercise is to see if there is anything that might give a clue to the future, and as to whether the massive selloff on Friday (and all week on the Dow) was a one-off, or if it is going to lead to more dislocations in stocks, a further decline, a 10% correction, or a bear market, which is where the fun really starts for those bent on restoring some semblance of sanity to stock valuations.

Yes, Cry for Argentina

Argentina, a country already shut off from foreign credit markets (could be a blessing in disguise) after the financial collapse of 2001-2002, has been in crisis mode for most of the past three years, with citizens unable to purchase US Dollars with their local currency, the peso, except on black markets, where the going rate is roughly 11-1 or 12-1.

Other restrictions on the movement of money have been imposed by the autocratic government of Christina Kirchner during the recent past, but on Friday, the government was said to be lifting the ban on the purchase of dollars, with an official rate of 8-to-1, and a 20% surcharge, pushing the "official" exchange rate closer to black market prices, though not equal to them. The new policy is said to take effect on Monday, though local chatter is that the government won't have enough dollars available by then to meet expected demand.

The black market is thriving in Argentina's cities, the Euro and US Dollar being the main currencies accepted for millions in hidden transactions. With inflation running at about 30% over the past year, this crisis seems to have legs, eventually resulting in full-blown currency rejection, prompting various economic, social and political problems, likely precisely what the overlords at the World Bank and IMF have in mind.

Argentina is Greece writ large, without bailouts. The take-away is that this is nothing short of economic warfare, with the citizenry being the victims via inflation, social unrest, political uncertainty, with the goal being having the government succumb to the demands of international bankers, who will grind the country down with crushing debt packages disguised as "aid."

Turkey Stew?

In a nutshell, Turkey, a country that is a geographic crossroad between Europe, Asia and the Middle East, is at more crossroads - economic, social and political - than its current leaders can handle. While the country is mostly Sunni Muslim, most of its neighbors to the South (Syria, Iran and Iraq) are Shiite. On the other side to the West is Europe, and the struggle to admit Turkey to the EU has been ongoing for nearly a decade.

The rapid devaluation of the lira, the country's official currency, was a design of European technocrats, who seek to weaken the country's finances to a point at which acceptance of the Euro as the "new" currency would be greeted with cheers of economic progress and stability, though opponents of entering into full-blown Euro acceptance consider that a move characteristic of failure, and point to the loss of sovereignty that would result.

To the North, lies Georgia, Russia and, across the Black Sea, the Ukraine, which has descended into a condition close to civil war, mostly over the issue of whether to join the European Union or throw in with Russia, which holds sway over the country's gas supply. This is somewhat of the same situation facing the Turks and makes the situation all the more confusing. With so much turmoil in the region already, it wouldn't take much of a spark to turn Turkey into a pretty large battlefield, some of it, mostly the southern region, already torn up by the Syrian conflict.

It doesn't take much imagination to see the Turkish situation spiraling wildly out of control. Al Queda already runs arms and terrorists through the country, and Russia also smuggles weaponry to Syria through it. If Turkey were to erupt into violence, one could easily see a wide swath of nations - from Egypt all the way to the Ukraine - as a war zone, much of it already engulfed by violence.

The Wider View

If the situation in Turkey, Syria and the Ukraine wasn't enough to destabilize markets, Argentina and the brewing banking crisis in China certainly have to be rankling the money-handlers.

Here is a brief clip and transcript (about eight minutes) that describes the shadow banking problems in China. Essentially, shadow banking enterprises are financing loans made to companies who borrowed from official channels and have run out of credit or the ability to borrow more on good terms from China's official banking system has been exhausted. The issue is one of rolling over credit in order to avoid default, but, as the article explains, China is going to slow and some industries will be negatively affected, and whole businesses shuttered.

With the difficulty of getting straight information out of China still a huge problem, it's unclear how bad China's debt-to-GDP ratio has become, though it is certainly more than the officially reported 125%.

Of course, with debt-to-GDP at that level or higher in the bulk of developed and emerging nations, China's problems just add to the mix, though it's like dropping a whole stick of butter into a small bowl of flour and milk. It's so big, it threatens to clog up the entire operation and that's what is most worrisome.

There are, naturally, many more reasons why stocks plunged on Friday, from Italy's unemployment at an all-time high of 12.7%, to Spain's unemployment dwarfing that, at 26.8%.

Other indicators include the Baltic Dry Index (BDI), which collapsed in the two weeks after the holidays by an unprecedented amount, and, China's most recent PMI, which the financial media give a wide berth for the cause of the selloff in US stocks. The PMI fell to 49.6, indicating contraction in the manufacturing sector, the lifeblood of the Chinese - and to a great degree, the global - economy.

Here at home, retailers are feeling the pinch from a horrid holiday shopping season, the worst since 2008. JC Penny and Sears have already announced store closings and layoffs. Target and Wal-Mart announced layoffs on Friday, though they were small in number.

Technicals Matter

Technically, US indices are in pretty good shape, overall. The Dow and S&P had been making new all-time highs at the end of 2013, but the performance in the first three full weeks of 2014 are not encouraging. With Friday's decline, the Dow ripped right through its 50-day moving average. On just Thursday and Friday, the Dow more than tripled its losses for the year. The two-day decline was more than 500 points, a number that represents a roughly 3% loss, but, since the index has risen so high, the point total of over 300 points on Friday has a psychological impact.

Imagine the Dow Jones Industrials as a 1600-pound animal, maybe a small hippo. A one-percent loss in weight - 16 pounds - wouldn't seem to matter much, but a 3% loss is close to 50 pounds, possibly worth notice. If the animal were to lose 10% (a correction, in market terms), or 160 pounds, veterinarians would be consulted, and, if a 20% loss in weight were to occur (indicative of a bear market), some might the 320-pound loss in weight was indicative of the animal having a severe disease.

The S&P likewise fell through its 50-day moving average, though the NASDAQ remained in suspended animation above its 50-day moving average, buoyed by Netflix and Google in recent days, though that position may be in jeopardy if the declines from the past few weeks persist and morph into something larger.

Key support areas on the Dow are at 15,450 and 1700 on the S&P, both the 200-day moving averages.

Also, the number of new lows exceeded new highs on Friday, the first time that has happened this year.

Forward Thinking

With earnings season in full gallop, next week should provide more fireworks. Apple and Google will be reporting, and those will be the big ones to watch. Since they are techs, they'll likely give the markets some pause and reason to ignore the declines of the past week, but the big enchilada is the two-day FOMC meeting on Tuesday and Wednesday, January 28 and 29, Ben Bernanke's last.

While the Fed didn't expressly say so when it announced the tapering of their bond purchase program by $10 billion last month, the fear on the Street is that they will announce another $10 billion reduction, bringing their monthly purchases down to $65 billion in February, from $85 billion in December.

Nowhere in its press release from last month
did the Fed even mention further cuts, so a reasonable expectation is that they will continue asset purchases at a rate of $75 billion per month, which, seriously, is more than enough, though market crybabies would like to see even more artificial stimulus.

Interest rates are also normalizing again, with the 10-year dropping to its lowest yield since prior to the "taper" announcement, closing Friday at a yield of 2.72%

Essentially, the turnback on Friday wasn't such a big deal, though any downturn is viewed with skepticism since the Fed is still supplying so much liquidity. If stocks can't maintain their current valuations, it means one of a couple of things. One, the Fed's policies are a complete failure, or, two, the economy is much weaker than anyone thought, or, three, stocks ran up to a highly overbought level and investors are just taking profits, albeit, at a rapid pace.

What's important to watch is how stocks act next week, the final week in January. The Fed announcement will be key, though they shouldn't influence markets considerably unless they taper even more, an unlikely event. If the major indices make it through the week without losing much or actually making gains, keep a close eye on the recent all-time highs on the S&P and the Dow. If these levels are not surpassed, that's a plain signal of a primary bear market. That should surprise nobody except perma-bulls, because this bull market will be a full five years old - 60 months - on March 9th. If the market makes a V bottom and rebounds past the highs (a correction and rebound), short at your own risk, because that would be a sign of a continuing liquidity-driven push higher.

One other indicator to consider is the January Barometer, which, at this juncture, looks certain to be negative. The direction of stocks in January has about a 90% correlation to direction for the rest of the year, so, unless there's a miracle rally this coming week, 2014 appears to be heading South.

For now, it's too early to call direction, but this brief summary of some of the key issues should provide background for all investors.

Friday, January 6, 2012

Stocks Finish First Week of 2012 in Mixed Fashion, Though Higher for Week

Yesterday, a commenter on a popular blog site made the bold statement that we may have already seen the highs for the year - meaning 2012, just three trading days into the new year.

While this prognosis has already been proven wrong vis-a-vis the NASDAQ, which was the only major US index to finish with a gain today, he may actually have a point.

Holiday sales figures continue to trickle in, and, as expected, the optimistic gains predicted by the National Federation of Retailers (talk about having an agenda!) have been somewhat diminished. The International Council of Shopping Centers reported that November-December sales were up just 3.3%, as opposed to last year's 3.8% gain and less than the NFR's rosy 4.5% prediction.

While companies such as Limited Brands, Macy's and Nordstrom showed solid gains over last year, their revenue figures may have exacted a serious toll on their profit margins and earnings. Target, Kohl's, Best Buy and J.C. Penney have already slashed their 4th quarter estimates, citing warmer-than-usual weather and a tough economy (duh!) as the main factors contributing to a slowdown in holiday sales.

Wal-Mart, the nation's largest retailer by number of stores and gross sales volume does not report figures on a month-by-month basis, but was expected to have had a good, though not stellar, holiday sales season.

Bloomingdale's and Macy's have already announced planned store closures as America's appetite for non-stop spending on non-essentials seems to have fallen victim to real economic pain.

Today's release of the BLS' December non-farm payroll data put credence to the idea that Thursday's ADP announcement of 325,000 net new private sector jobs in the month was - as usual - coming from a separate reality, as the Labor Department reported 200,000 (a nice round number) new American jobs in December.

However, a number of analysts - notably those from Morgan Stanley - contend that the BLS figures, which are supposedly seasonally-adjusted, may not, in fact, have been adequately adjusted, citing the huge gains in transportation, particularly in the subset of couriers and messengers (+42,000), and retail (+28,000). Also, the construction industry gains of 20,000 were due to mild weather across most of the country, so the real figure, which will be eventually revised lower, though probably not down to its actual level, is likely somewhere in the neighborhood of 120,000.

Wall Street certainly wasn't buying any of it, as Thursday was mostly flat after the ADP report and Friday was a loser overall. Traders - those few remaining in the worst trading market in years - seemed more concerned about the weakening Euro and the prospects of an EU breakup prompted by any of a number of characters, from Greece to Italy, Spain, Hungary or Portugal.

So, could 2012 be a real downer for stocks? It's probably too early to tell, though there are signs from europe that nothing is fixed, which is similar to what happened in the US in the aftermath of the 2008 financial crisis. The banks were bailed out and business went on for many, almost as usual. The core issues plaguing both the US and Europe are still government-related. Huge bureaucracies spend too much money they don't have, tax rates can't get any higher and unfunded liabilities - primarily pensions and health care - continue to contribute to a growing mountain of debt.

It is too soon to tell, for sure, but no catalyst for positive gains is present or on the horizon. Earnings reports will start to trickle in beginning Monday and will become a deluge by mid-month, and that will provide some direction. Corporate profits have been solid, but 4th quarter results will be a key element moving forward.

There's a sense that solid 4th quarter results have already been priced in and any misses or near-misses will be dealt with severely. The remainder of January and early February may be a period in which companies are punished even for just meeting expectations as investors may view this time as the end of a virtuous profit cycle.

And, of course, there's always Iran, and China, and the ongoing continental problems in the European Union. Any gains will be indeed climbing a wall of real worry.

The first week of 2012 was positive, but marginally so. The Dow Industrials sported a gain of just 142 points, the S&P 500 was up 20 points, the NASDAQ gained 69 points and the NYSE Composite added 80. Volume remained at disinterested levels.

Dow 12,359.92, -55.78 (0.45%)
NASDAQ 2,674.22, +4.36 (0.16%)
S&P 500 1,277.81, -3.25 (0.25%)
NYSE Composite 7,557.68, -42.29 (0.56%)
NASDAQ Volume 1,706,200,875
NYSE Volume 3,544,665,750
Combined NYSE & NASDAQ Advance - Decline: 2524-3040
Combined NYSE & NASDAQ New highs - New lows: 138-47
WTI crude oil: 101.56, -0.25
Gold: 1,616.80, -3.30
Silver: 28.68, -0.61