Dubai World Debt Crises: How Far Will the Damage Go Around the World? (EEM, UUP, UDN, SPY, IVV, USO, OIL)
If recent history has taught us anything (Argentina, Brazil, Mexico, Thailand, Malaysia etc.), it is that events like the recent technical default of Dubai World (owned by Nakheel) are not things that go away quickly and without widespread pain. Aside from the high-level macroeconomic effects involving the foreign exchange markets and capital outflows, there is a huge technical implication here (not to mention the damage this could do to other middle eastern and emerging markets economies and the associated moral hazard implications).
An extremely disproportionate amount of the market is short the dollar and an event like this could be exactly the kind of thing that would break down the trade and have huge implications on the equity markets, especially in the US. The S&P 500 has been extremely correlated to the movement of the US Dollar of late and a rise in the Dollar would very likely cause a drop in the market. There is also a possibility that the increased strain on budgets in the United Arab Emirates could put pressure on the price of oil as they consider increasing output for additional revenue.
A very big thing to watch will be the market’s reaction and perception to this news over the next couple of weeks as volume comes back in following the Thanksgiving holiday. It will also be very interesting to see how money managers will be reallocating to reposition themselves for 2010. Will the chase for performance continue or turn into a race for the exits?
- Michael J. Burns
Disclosure: Long EEM, ILF, IVV, GXC, COP, CVX, several foreign stocks and foreign oriented mutual funds
Happy Thanksgiving!
It’s that time of year again and we would like to wish everyone a very happy Thanksgiving.
All the best,
Lucid Markets Team
Black Friday Retail Sales – Holiday Season Upside Surprise? (XRT, RTH)
Crazed shoppers go for black friday gold
With the unofficial unemployment rates approaching 20%, consumer confidence at 60% its normal level, and retail sales showing only slight percentage increases over abysmally low levels, one would be forgiven for having a low amount of confidence in consumer spending juicing the economy this holiday season. Add to this the declining levels of credit available to consumers, and a generally bad attitude towards taking on more debt as consumers retrench (especially those 25% of mortgage-holders who are underwater in their mortgage), and it looks like we are in for a rough post-thanksgiving period.
But, is it actually going to be that bad?
Last year, despite Thanksgiving weekend finding itself a few weeks after the start of the worst financial crises since the Great Depression, sales actually increased by 7.2%, with the average person spending $372.57. Over 50% of Americans were out during that weekend (source here) Since then, unemployment has become worse, but consumer confidence as measured by the UoM has increased from 57.9 to 66 (although normal levels are closer to 90).
And of course, there is always the pent-up demand. Spending this year has been unbelievably low, as exhibited by the repeated 2% declines in retail sales last year followed by scattered and inconsistent recovery. Eventually, consumers will get frustrated with the lack of new things that they have, and will crave shopping. The sale prices that will be available on Black Friday could be the trigger consumers need to dig back into their wallets.
Finally, on a personal note, how many times have we heard that some part of the economy is reaching a new paradigm (like we are hearing now). We heard it during the tech boom of the early 2000s, during the S&L boom of the 1990s, and about the economy during just about every recession. The most dangerous words I have heard when it comes to investing are: This time it is different. Consumer spending will come back, and I think it will be sooner than people think.
-AH
Disclosure: Long TGT, and am net long the market with other positions.
Short Term Trouble on the SPX? (SPY, SSO)
To add some color to my co-authors post about intermediate term trouble for the market, I thought I would add my two cents about some ugly things I have seen on the S&P 500 chart (represented by SPX).
Here, we see the chart for the last year, using daily intervals.
What we can see here is that until now, this move up has been a normal, albeit fast, rally. We have had a series of higher highs with higher lows following those highs within 2 weeks, almost like clockwork. What we are seeing now looks different, because the market has risen to a higher high, but the wave pattern has become far smaller. What I believe is causing this short-term stall is a combination of things. Mike has covered the fundamental reasons, all of which I believe are valid, but here are the technicals.
This Fibonacci extension was drawn over the previous wave; the headfake as the market dipped below the 120 DEMA but then stalled and rose back up to where we are now. This chart shows clearly that we are having more upside resistance than we previously have had at the highs, and it is localized around the 100% Fib extension line. The market has tried three times over the past 2 weeks to break through the 1112.83 line, and has bounced down every time. I believe this proves the final capitulation of the bears, as they let the bulls take control, but the bulls cannot muster the legs to take the market higher. This will embolden the bears, and we could see some downside in the near future.
Of course, if the market breaks above the line, all this is meaningless and we will have to reevaluate. Happy Thanksgiving!
-AH
Disclosure: Long the market, although always excited by the prospect of better prices.
Changing Intermediate-Term Stance on Market from Bullish to Bearish (SPY, DIA, QQQQ)
I brought up some long term technical issues regarding the market in my post from October 30th and although we broke over the downward trend line, I am now changing my overall intermediate-term stance on the stock market from slightly bullish, to moderately bearish. I will outline my reasoning below:
Unemployment and continued joblessness
The unemployment number have been slightly improving of late but they cant seem to stay under the 500,000 mark. The number of continuing jobless claims are falling faster but Jon Ogg from 24/7 Wall St. aptly points out that the number needs to fall to 400,000 from the current 5,611,000 for the unemployment to stop growing.
We haven’t even felt the real pain from unemployment yet
Thus far, the majority of the unemployed have been receiving jobless benefits under the American Recovery and Reinvestment Act which provides extra unemployment assistance so that they can continue to spend and contribute to the economy. This runs out in January, 2010 (only a bit more than a month from now) and nobody is even talking about it (more on this here).
Holiday retail sales may do well after having consumers save for it all year, but this is almost certainly a case where current demand will be coming from future purchasing power. Retail and discretionary sales are down hugely so far in 2009 and instead of getting better, it’s very likely to get substantially worse in 2010. Are people really going to have the same gusto to spend when they have homeless relatives staying with them at home? This is very troubling to me because of the potential negative feedback loop it could cause with additional layoffs.
Congress hates Americans
Whatever happened to all that infrastructure and education spending that was going to create jobs? Oh that’s right, congress and Nanci Pelosi had to pay off all of their supporters and donors before the real economy got any money. Too bad there isn’t much left that hasn’t been appropriated already…
All I see when I watch hearing is a bunch of stunningly uninformed (or plain stupid) grandstanding by our representatives in Congress and it doesn’t seem like the issues of financial regulation, energy independence or health care overhaul are going anywhere. The government has succeded in changing the playing field and rules of the game, unfortunately, the new playing field and rules seem to change whimsically on a quarterly basis. I believe that all the the uncertainty created by the Government is a large contributor to the lack of investment in capital and workers because there is no way to effectively forecast and plan.
Reading Obama’s tea leaves
By now I’m sure many of you have noticed that President Obama has been pretty on the money with a lot of his recent ‘hunches’ and ‘expectations’ of the economy and the unemployment situation. He talked about how job losses would likely continue in 2010 and a few days later the unemployment numbers came out with the first reading above 10% since the 1980’s.
President Obama also recently broke with the presidential tradition of being the economies cheerleader by saying “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession”.
I think that the only reason he mentioned the deficit was to give lip service to the Chinese (who had been pressuring him over the falling Dollar) while he was on tour in Asia, but the fact that he brought the phrase “double-dip recession” into things was a little scary. This is especially eerie because of all the things that could put us into a double-dip recession, our deficit is probably not even in the top three. My interpretation is that President Obama is hinting at a double-dip recession in GDP in 2010 and using the deficit as cover.
I feel that people would need to be very greedy and imprudent for the market to be pushed up much from here. Just some food for thought…
- Michael J. Burns
Disclosure: I am net long the market with slight exposure to gold though GLD
Amazon and the Incredible Rising PE (AMZN, FDX, UPS, M, TGT, BGP, AAPL, GOOG, PG)
Certainly, we can look at the obvious trends that have been taking place over the past decade or so. The slow (or not so slow) decline of brick-and-mortar is well documented, as is the amazing, almost parabolic, rise of online e-commerce. The large overhead and real estate costs of running a physical store put shops like Macy’s (M), Target (TGT) and Borders (BGP) at a disadvantage when it comes to pricing. Add to that the advantage that customers in most states do not pay sales tax for online purchases (although this may change), and the advantages of Internet shopping are huge.
But, based on this years earning expectations of 1.88, AMZN is trading at a multiple of 72 as of todays close. Granted, this is lower than was found during the bubble years but they have real revenue now and far lower growth prospects. Analysts expect the company to grow by 25% per year, which in the next 5 years would give AMZN a market cap of about $180bn, equivalent to Apple (AAPL), Google (GOOG), or Proctor & Gamble (PG) today.
I could not think more highly of Amazon the company. They have proven resiliant, resourceful and innovative in their highly competitive market. They refuse to rest on their successes, as shown by their unveiling of the Kindle; a product that is making people take E-Readers seriously for the first time. And I believe that the company will show continued success. AMZN the stock, however, has gone too far. There are less pricey ways to play the shift to E-Commerce (Fedex (FDX) and UPS (UPS) spring to mind), but frankly, this whole e-shopping trade is getting too crowded for my blood.
-AH
Disclosure: Long TGT, no positions in any other stock mentioned.