This Week in Barrons – 07_19_09:
Nowhere but in the U.S. could (arguably) the 2nd most powerful man in the world – Vice President R. Biden – utter the words – “We have to spend more money to keep from going bankrupt!” And when given the chance to retract it said: “Yes, that’s what I’m telling you.” With minds like this leading our comeback – is it any wonder why the rest of the world has had to "lend" us $2B per day to keep us solvent? Someone should tell ‘good ole Joe’ that in the real world – if you spend money you don't have, soon you are insolvent. OK ‘Joe’ back into the real world – it’s 2009 and:
- We've shed 5 million jobs.
- Unemployment is almost 20% in real terms.
- Our nation is virtually bankrupt, running more deficits than all the last 100 years COMBINED.
- Our National debt is now 95 TRILLION dollars
- Our Tax revenues are shrinking by 30%.
- There is still $600 trillion worth of derivatives that no one can accurately price, hiding in the shadows.
- Manufacturing is virtually dead.
- Commercial real estate is imploding.
- Sheila Blair of the FDIC said that 500 more banks will fail.
- Credit card delinquencies hit another all time high, foreclosure notices hit 1.5 MILLION households in just the first 6 months of the year, a 15% jump from last year.
- AND Goldman Sachs raped (oops) reaped the largest profits in their history.
The Congressional Budget Office (CBO) said the following this week: “Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy.” And yet despite this - Obama pushes forward for Cap and Trade legislation and with nationalized Healthcare. The CBO itself said: “The health care overhauls released to date would increase, not reduce, the burgeoning long-term health costs facing the government.” AND – in my world – NONE of this was by accident, and I’ll revert to the old Boy Scout Motto – “Be Prepared.”
We’re in earnings season, where companies tell the world how their last quarter went and how much money they made. 72% of the companies that have reported have beaten their estimates. But let’s take a peek ourselves – at just one ‘bell weather’ company – GE – who was reported to have ‘blown the doors off” estimates. The Headline Number: “GE’s 2nd quarter results – earned 26 cents per share – beating the estimates by 3 cents on revenues of over $39Billion.” The Reality was: GE’s net income fell 47 percent, to $2.9 billion, down from $5.4 billion a year ago. The company's revenue fell 17 percent, to $39.08 billion, and after adjusting for a stronger dollar, which reduces the value of overseas sales, sales were down 12 percent from the previous year. In a conference call with analysts, company executives said they expected industrial equipment orders to be off about 25 percent for the year. The finance business was the biggest drag on G.E.'s results as its operating profits fell 80 percent, to $590 million, down from $2.9 billion a year ago. And revenue in the finance unit, which includes home mortgages in Britain and private-label credit cards in the United States, declined 29 percent, to less than $12.8 billion, from nearly $18 billion.” So GE’s profits plunged 47%, cut their dividend, lost their AAA rating, revenue fell 17%, finance arm profits fell 80%, but they BEAT the estimates.
The Point is that today it’s ALL about the psychology of the market – and where the government (temporarily) wants the market to go. As always the question is the same, what's next? After the market has gone up 5 days in a row - some form of logic has to enter the picture – yes? In other words, at some point you are going to get a down day, that's just life. But here's the deeper question, the chart slaves were convinced we were going to plunge 1000 points – and the economic news agrees with that, it's all horrible. Yet the market roars for 700 points upward. Now consider the psychology. The shorts that just got burned are now screaming that this is just a bounce, nothing more. Those same shorts are salivating over the idea of reshorting, so they can make their money back. Even the smarter one's didn’t short the last time are now talking about how smart they were to hold off, so they could short this bounce from even higher. Is the market going to reward them?
Considering how bad earnings really are, the economic reports (horrific) – this market should fall like a rock. Is it going to be that accommodating? I doubt it. Our guess is that after an overbought pull down, that adjusts for the recent move up, this thing roars again, eventually taking us to the 9600 level. By then all the shorts will have been chewed up, and all the people that missed the last move will have bought in, so it could THEN roll over and land downward.
- we’re holding the GDX (a basket of gold mining stocks) with No Stop
- we’re holding NGD (a gold miner) from $2.59 and will be doubling up on Monday with this
- we’re holding MOO (agricultural business ETF)
- we’re hold XLK (a technology (minus healthcare) ETF)
- we’re holding IPI (a potash hold – again in the agricultural theme – we’re underwater here)
- we’re holding CSCO @ 19.20 / hard stop @ 19.80
I really wanted to see some ‘red’ on Friday in order to purchase about 20 contracts of the August 80 DIA calls. I wanted to do this on a down day – and on the next decent pullback, even if it's just 100 points I will buy some contracts on the August DIA 80 calls. They were just 6.80 an hour ago, so it's costing you 80 cents a share to gamble on them going much higher in a month. I think I like that gamble.
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Until next week – be safe.