Retail Slump, Obama Pump, Pain All Around

Stocks ended the day mixed, amid poor retail results and fear of huge job losses continuing through Spring. The overhanging fear of the government's Friday's Nonfarm Payroll report showing a second consecutive month of more than 500,000 job losses in December was palpable. Nevertheless, stocks rallied off mid-day lows for gains in all indices save the Dow.

Dow 8,742.46, -27.24 (0.31%)
NASDAQ 1,617.01, +17.95 (1.12%)
S&P 500 909.73, +3.08 (0.34%)
NYSE Composite 5,837.14, +38.09 (0.66%)

Retail sales for December were released by a variety of major chains, and the results, fully expected, showed mass declines, despite 50-7-% markdowns throughout the important holiday season. Among the highlights for same-store sales:

• Wal-Mart was the only company reporting an increase in same-store sales, +1.2%


• Costco -4%


• Sears -7.3%


• Macy's -4%


• Saks Fifth Avenue -19.8%


• Limited Brands -10%


• Gap -14%


• Abercrombie & Fitch -24%


• Williams-Sonoma -24%


• Dillard's -5%


• Target -4.1%


• Kohl's -1.4%


• JC Penny's -8.1%

Well, as apples go, that's a bunch of bruised, rotting fruit.

Shortly after 11:00 am, President-elect Barack Obama issued a terse pre-inaugural speech on his proposed American Recovery and Reinvestment Plan (ARRP). Obama outlined plans to jump-start four major areas of interest: health care, education, energy and infrastructure. The ideas put forward included retrofitting federal buildings with smart or green-tech energy solutions, providing computers and technology to schools, money for road, bridge and building projects that are shovel-ready and in need of funding and computerization of medical records, to name just a few.

The ARRP also is proposed to include incentives to business, plus a $1000 tax break for "95% of middle class taxpayers." Obama directed his speech primarily to legislators in congress, urging them to put aside partisanship and special interests in favor of "what's good for America." The speech was short - about 15 minutes - and lacking in specifics, though one cannot fault the President-elect on that account, since he is not yet officially our head of state.

Markets, which had recovered from earlier declines, fell back into or further into the red. The Dow, in particular, remained underwater, sinking roughly 100 points by the end of the speech. It is entirely possible that Wall Street may not like what Obama is proposing, because he may actually take on the players, CEOs, regulators, crooks and criminals who caused the economic issues we are currently enduring. If Obama is true to his word, Wall Street firms will be forced to commit to more accountability and scrutiny than has existed for the past 20 years.

If the election of Barack Obama was a truly historic event, then his proposals may prove to be the kind of stimulus which at least limits the pain of the economic downturn and shortens its duration. That's about as much as we can hope for from a new president inheriting a set of economic conditions that are the worst in at least 80 years.

Change is surely in the wind, and Wall Street, already dead, may be setting up for the burial ritual in which financial firms and companies overloaded with debt are quickly dispatched, destroyed in value and liquidated. That is the message coming from Washington. Wall Street and the investment community would be wise to heed the headwinds blowing from the Potomac to the Hudson.

Obama's plan - depending on how badly congress distorts the original intent - is likely to be good for Main Street and ranging from neutral to bad for Wall Street. Tough luck for those who refuse to change, upgrade and grow into the 21st century.

There is still plenty of excess, overhang and waste that has yet to be discounted in the stocks which constitute the major indices, though all indications are that investors will seek more transparency and accountability from publicly-traded firms. The discounting mechanism that is the stock exchange should manage to squeeze out the remaining overvaluations.

On the day, advancing issues outflanked decliners, 4002-2574. New lows remained stubbornly ahead of hew highs, 87-27.

Volume remains light, likely a permanent feature in the new paradigm of the US stock markets until the economy begins to recover, at least. Many participants are sitting on the sidelines or seeking safer havens for their money. The associated rise in the number of bond issuance offers a clue to just how fearful or dissuaded investors have become,

NYSE Volume 1,196,486,000
NASDAQ Volume 2,011,787,000

Commodities were also mixed. Oil dipped 93 cents, to $41.70. Gold gained $12.80 to $854.50. Silver dropped a penny, closing at $11.10.

The upcoming Nonfarms Payroll report, due to be released at 8:30 Friday morning, may have already been discounted on Wednesday, when private payroll firm ADP announced their figure of 693,000 jobs lost in December. Thus, it's a 50-50 proposition on whether stocks will rally or sell-off tomorrow. ADP seems to have taken some of the sting out of the government report. Investor reaction should be more measured than normal.

Stocks Slammed on Bleak Employment Numbers

Why investors were surprised at the wickedly bad numbers contained in the ADP National Employment Report [PDF] is a mystery. That they sold off stocks in such a panicky manner is testament to the futility of US equity markets in what eventually will be known as either "The Second Great Depression" or "The Greater Depression" or something even more depressing.

After the US Dept. of Labor recorded over 500,000 job losses for November, and traders fretfully awaited the Non-farm Payroll report on Friday, private firm ADP beat everyone to the punch by a couple of days. It should be noted that ADP's figures are probably more reliable than the overly massaged and managed government numbers since ADP processes 1 out of every 5 private payrolls in the US and they have no vested interest in working the figures one way or the other.

The report, released prior to the opening bell, said the private sector shed some 693,000 jobs in December, a number so large that it defies usual comprehension. It's like putting the entire adult population of a large population center - think Dallas or San Diego - out of work in just a month's time. The devastating loss of jobs, most in the retail and service sector (we've already decimated the goods-producing sector) is the furtherance of the great unwinding and destruction of the US economy.

Looking outward, all those lost jobs will ripple across the global economy, affecting every other nation from Denmark to Thailand to varying degrees. In the long run, nobody is going to be spared from the massive destruction of wealth through stock losses, and declining values in all asset classes.

Dow 8,769.70, -245.40 (2.72%)
NASDAQ 1,599.06, -53.32 (3.23%)
S&P 500 906.65, -28.05 (3.00%)
NYSE Composite 5,799.05, -169.79 (2.84%)

Of course, today's losses are only the beginning. The Dow and fellow major indices have been on something of a rally recently, and, having chalked up a huge gain on Friday, January 2, the first day of trading in 2009, are close to falling into negative territory for the year. The Dow already has, though only by a few points. This sudden reversal of fortune has surely caused some degree of consternation for the few bulls still standing, hoping for "recovery" before we've even hit bottom, but the sea change in sentiment is representative of bear markets, in which markets turn on a dime, or a whim, or, like today, on actual bad news.

As expected, declining issues far out polled advancers, 5071-1566, though that spread isn't even close to what it should be. A 3-1 ratio on a day like today, dominated by bad economic news, a warning from Intel and on the heels of Alcoa's announced layoffs of 13,000, is ridiculously short of expectations. How a quarter of companies can be seen positively is a question only those bidding them up can answer, but it speaks volumes to the lack of understanding of the seriousness of the malaise by market participants. New lows again beat back new highs, 86-18, and, since that trend has yet to be reversed, more declines in the indices - and individual stocks - are to be expected. Volume was not high, but on par with Tuesday, an improvement, though possibly this level is becoming the new normal.

NYSE Volume 1,233,276,000
NASDAQ Volume 2,060,124,000

It wasn't just equities taking a beating. Commodities suffered severe losses, especially oil, which fell $5.95, to $42.63, a 12% drop, on futures exchanges. Gold dropped $24.30, to $841.70, with silver dipping 34 cents, to $11.11. The deflationary environment is taking no prisoners, though the metals are likely to fare better than most asset classes. Incidentally, all food-related futures suffered substantial losses.

It's a good thing that food and fuel are getting cheaper by the minute, as those are just about the only things many people are going to be able to afford for some considerable time. Amazingly, the US economy has yet to reach rock bottom. That could be as long as a year or two away, but for many, including the more than ten million Americans who are already out of work, this winter surely must seem like the worst of times.

It's getting worse, a lot worse, and it's not going to get better any time soon.

Wall Street: DEAD AS A DOORNAIL

Economic reports dominated the headlines on Tuesday, where weakness in manufacturing, an all-time low in pending home sales and a release of the Fed's December meeting minutes were offset by a better-than-expected ISM Services reading for December of 40.6, up from 37.3 a month ago.

Preliminary figures provided by the US Census Bureau on manufacturers' shipments, inventories and orders was unsurprising but sobering. Following a 6% decline in October, new orders fell 4.6% in November, the 4th consecutive month of declines. Further, the inventories-to-shipments ratio rose again, from 1.33 to 1.41. Inventories are piling up on producers' shelves and in stores as the holiday season failed to produce a break in the negative trend in spending.

The Fed minutes (linked above) from the December meeting were released at 2:00 in the afternoon, just in time to rally the markets, though one would be hard-pressed to produce any positive spin, save that the Fed was prepared to expand its own balance sheet and make hefty open-market purchases of a wide range of mortgage and agency debt. While those purchases might alleviate some strain on stressed-out bankers, it only prolongs the drag on the economy until such a time that it becomes impossible to contain the downward price pressures of outright deflation.

Those minutes are an interesting read, if only to characterize the FOMC and the entire Federal Reserve as a roomful of fat, impotent old men in suits who think the economy can be maneuvered in whichever way they like through monetary policy. It's also useful in realizing that the Fed is essentially hell-bent on inflation as a major tool for their stated dual goals of full employment and price stability. The unfortunate reality for the fools of the Fed is that Keynesian economics never advocated outright inflation (or money creation out of thin air) as a tool for price stability. Proponents of the Austrian school of economics, in which no intervention is the preferred model, is probably going to have the last laugh when this episode of economic and moral turpitude has run its fatal course.

With the uneven news came an unsteady market, which opened higher, collapsed just after 10:00 am and staged a late-session recovery, with the major indices finishing moderately higher.

Dow 9,015.10, +62.21 (0.69%)
NASDAQ 1,652.38, +24.35 (1.50%)
S&P 500 934.70, +7.25 (0.78%)
NYSE Composite 5,968.84, +60.41 (1.02%)

The good news is that better volume has finally returned as volatility continues to decline. The entire day's range for the Dow was a mere 148 points. More good news came from the internal data showing advancers far ahead of declining issues, 5010-1661. New lows remained stubbornly ahead of new highs, 94-40.

NYSE Volume 1,334,630,000
NASDAQ Volume 2,179,892,000

As for direction, there are dithering indicators. The new high-new low metric refuses to break and stocks seem to be stuck at resistance in the 9000-9100 level on the Dow. There will need to be a significant catalyst to break through said resistance, and the December Non-farm Payroll report, due on Friday prior to the opening bell, isn't likely to produce anything approaching good news. Therefore, the emphasis must be on safety and risk aversion, as the market now seems poised for either a rally continuation or a sharp reversal. Something is going to give, and soon.

There seems to be a little more of an appetite for stocks, now that the average investor has lost a bundle and now sees equities as just about the only way out. It's a natural occurrence, as the old saying, time heals all wounds works equally well for investments as for romances. With stocks staging a slow recovery, investors may well be licking their chops over what seem to be enticing valuations.

Surely, stocks are cheap, but they are that way for a variety of reasons. As mentioned in previous posts, the rationale to steer clear of stocks at this juncture consists of interlinking parts: 4th quarter numbers are likely to be poor and will be reported - for the majority of companies - within weeks; the US and global economy are in the midst of the worst setback since WWII and recovery will be slow; government attempts to reinvigorate the economy have failed and have been costly; nothing has been done to affect the hundreds of thousands of people losing their homes and/or jobs, and whatever will be done will likely not be enough to offset the prevailing headwinds of slack demand and price deflation.

So, go ahead and jump in at your pleasure, but don't tell anyone you heard that advice here. I have been completely out of buy side positions since September, 2007, and continue to advise against stocks. Cash is the very best friend you've ever had right now. Real bargains have not yet begun to appear and won't until the housing market bottoms out and then stabilizes. That pair of events is still a good 12-18 months away.

I am so negative on stocks that I'm considering not even reporting on them any more as we move further toward a cash-based - as opposed to credit-based - economy. Distortions, disruptions and price permutations are going to be all over the map for the next two years in everything from car prices to used comic books. Value investors will have a field day buying distressed assets at rock-bottom prices.

Wall Street committed suicide by holding their own toxic blend of mortgage-backed securities (MBS) and structured investment vehicles (SIV) and is thus DEAD AS A DOORNAIL. The major banks are insolvent (as is the US government), lending is still occurring at a snail's pace and capital formation has been nearly entirely wiped out. 2009 will be remembered as the year in which globalization failed completely and all of the excesses of the past 20 years began to unwind in recognizable ways. Real job growth will not take place until at least October of this year, though probably later than that. There's nothing the government can do to prevent the unwinding, which is necessary and real, though they will spend $$$ trillions trying to stem the inevitable tide of foreclosures, liquidations, defaults and bankruptcies which must occur in order to restore function to both the financial and societal structure.

On the day, commodity prices see-sawed to a mixed close. Oil ended down slightly, by 23 cents, to $48.58. Precious metals reversed earlier selling to finish the day with gains. Gold was up $8.20, to $866.00, while silver added 18 cents, to $11.45.

At 5:00 pm, an hour after the close, Alcoa (AA) announced plans to slash 13,500 jobs and 1700 contractors in a cost savings measure.

Stocks Sag in Sluggish Session

It was back to business as usual for the first trading day of the first full week of 2009, meaning that investors went about the business of shedding losers and making incremental bets on safety stocks. Speculation has just about been wrung out of the market along with the wicked volatility that marked trading in the 4th quarter of 2008. In fact, the Dow Jones Industrials, in which 300-500 point daily swings had become commonplace, has only had one day, has only had one 300-point swing - from the low to the high of the day - in its last eight sessions.

Traders have grown weary of the relentless selling pressure, while many are surely sitting out until close to Inauguration Day (Jan. 20) which neatly coincides with the kickoff of 4th quarter earnings season. The duopoly of events should make for some interesting developments nearing the end of the month. For now, however, the major indices are holding onto pretty good gains for '09, garnered on Friday's New Year rally.

Dow 8,952.89, -81.80 (0.91%)
NASDAQ 1,628.03, -4.18 (0.26%)
S&P 500 927.45, -4.35 (0.47%)
NYSE Composite 5,908.43, -7.30 (0.12%)

Monday's losses finished off a three-day winning streak for the major indices, though advancing issues outdid decliners by a wide margin, 4016-2655. New lows continued their domineering streak over new highs, though the margin narrowed once more, to 68-40, in favor of the lows.

Volume was again modest, if not downright depressing. There is a notable lack of enthusiasm, due, no doubt to the vicious beating investors took in 2008. There needs to be more clarity from Washington as well as Wall Street for investors to regain a modicum of confidence that stocks are still good investments. The Dow spent all day underwater, while the other averages only briefly posted positive numbers.

NYSE Volume 1,322,749,000
NASDAQ Volume 1,800,739,000

Commodities were all over the place. Oil gained $2.47, to close at $48.81. Gold slipped $21.70, to $857.80, while silver fell 22 cents, to $11.27. Natural gas futures for March remain stubbornly above their seasonal norm, today gaining 9 cents to close at $6.09. Potential disruptions in Eastern Europe and an unusually cold December have contributed to higher prices for the commodity by which nearly 2/3rds of American homes are heated.

As the world awaits the official taking of power by President-elect Barack Obama, there is a palpably tense mood overwhelming the nation, if not the world. It is as though we are holding our collective breaths - especially with the ongoing violence in Gaza - until we can exhale when we officially appoint a new leader. Until then, the market should only take baby steps, unless there is some remarkable news or event to disrupt the anxiety.

Optimistic Investors Push Dow Past 9000

It's a new year, so let's all buy the stocks we sold for losses in 2008.

That seemed to be the prevailing mentality as Wall Street staged its third consecutive rally in a row, starting 2009 off with a veritable bang.

Of course, this kind of optimism is exactly what bears like, even more than bulls. The January Effect seems to be in full flower, with investors jumping in with abandon. Apparently, there's still far too many plungers out there willing to take risks on stocks - even following the worst year on Wall Street since the 1930s - for a realistic bottom to form.

That a real, enduring bottom will form at some later date is almost assured, unless President Obama turns out to be a miracle worker instead of a politician. His administration begins in just 18 days, and investors are encouraged that a change of parties and policies will produce prosperity.

While stocks scrambled up the charts on Friday, economic news was less-than-reassuring. The Institute for Supply Management (ISM) Manufacturing Index, a key measure of manufacturing strength or weakness, tumbled to 32.4% in December, following a reading of 36.2% in November. It was the lowest reading for this particular report since June 1980. The report included some nuggets of just how weak the manufacturing sector really is, including this:

"New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948. Order backlogs have fallen to the lowest level since ISM began tracking the Backlog of Orders Index in January 1993. Manufacturers are reducing inventories and shutting down capacity to offset the slower rate of activity."

Despite that sobering bit of news, investors were undeterred from staking out positions.

Dow 9,034.69, +258.30 (2.94%)
NASDAQ 1,632.21, +55.18 (3.50%)
S&P 500 931.80, +28.55 (3.16%)
NYSE Composite 5,915.73, +158.68 (2.76%)

Another indication that the recent rally is unsustainable is the relatively low volume, which, for the past three sessions, including today's, were more in line with mid-Summer doldrums rather than an expanding market condition.

NYSE Volume 4,075,754,500
NASDAQ Volume 1,464,044,875

Advancing issues leaped ahead of decliners, 5084-1415. New lows outnumbered new highs, but by a very slim margin, 54-20. This indicates that the market is either headed for a long reversal rally or that this 3-day event is just about over. New highs have only surpassed new lows 4 or 5 times (on a day-to-day basis) in the last 14 months.

Commodities were mixed. Oil gained $1.74 per barrel, to $46.34. Gold lost $4.80, to $879.50. Silver gained 20 cents to $11.49.

It was a welcome relief rally for investors, who want to at least believe that the market cannot go down any more.

Did somebody say, "sucker rally?" We'll see in days and weeks ahead. Earnings for the 4th quarter will begin to flow to the street in three weeks and they're predicted to be short of expectations in a variety of industries, not the least of which will be retail.

It will be interesting to note the January Barometer, which is a highly accurate predictive tool based on the premise that whatever direction the S&P 500 ends the month is the direction for stocks the rest of the year.

The January Barometer was a highly useful predictor last year, when the S&P lost 90 points in January, presaging a 2008 total loss of 465 points.