This Week in Barrons – 08-09-09
Apparently there are two U.S. economies. One that you hear about on TV programs such as CNBC – telling us about how the economy is improving, housing has bottomed, people are feeling better etc. – and one that appears thru absolutely facts. It’s earnings season – and almost to a ‘T’ – each company that is beating their estimates are doing in on incredibly shrinking revenues. So therefore, they need to be beating profit estimates by: 1) cost cutting, 2) or by changing accounting standards - humm. An example of #1 - Garmin – EPS of $0.83 beat by $0.32 à Revenues down 27%. For an example of #2 we need to dig a little deeper – GAAP stands for ‘Generally Accepted Accounting Principles’ – and it is the numbers companies would be POSTING if they were not allowed to charge off items and report ‘proforma’ earnings. Morgan Stanley just reported that if the 500 companies in the S&P were to have used GAAP to report their numbers – collectively the 500 companies would have made $0 in earnings over the past year! Did you know that recently GE had to pay a fine to the SEC for misleading investors – i.e. GE used “improper accounting methods to raise earnings and avoid disappointing investors”? Well, you didn’t hear about it because GE owns CNBC – and well – the rest is left to your imagination. So there are ‘two’ economies - one that CNBC tells you is happening and the real one.
A couple examples of the real economy:
- more than 126,000 new consumer bankruptcy cases were filed in July - up 34% year over year and the most since October 2005, when Congress enacted bankruptcy reform making the process more difficult
- Consumer Confidence is sitting at -49, 92% of the people surveyed say that the economy's in bad shape; 76% say it's not a good time to buy things and 56% rate their personal finances negatively
- The recession is starving the government of tax revenue. As Obama is trying to enact an incredibly expensive health care plan – the government’s tax receipts are down 18% this year – the single biggest decline since the Great Depression – while the budget deficit balloons to $1.8 Trillion
- Individual income taxes are down 22%
- Corporate income taxes are down 57%
- Personal income fell in June by 1.3% as the effects of the stimulus checks wore off.
- Retail sales fell 1.6% in July – worse than expected
- GMAC needs $5.6 Billion more from the Federal Reserve. Since the government has already invested $12.5B in GMAC – the lender is unlikely to find external investors willing to help raise capital
- Finally the Post Office is set to lose $7 Billion this year. Now if we can’t deliver LETTERS profitably – do you really think we can run an entire health care system profitably?
Finally – let’s go down a different path for a change. Since the market started its ascent, we have seen equities gain somewhere around $2.7 Trillion dollars worth of movement – and during that same period, less than $400 Billion has come out of money market funds. So where did all the money come from then to buy all this stock? Most of the hedge funds were close to fully invested all through the disaster, and there's no evidence of a major move out of bond funds. There’s only ONE avenue left - the FED is virtually laundering money through the major institutions, and they are using it to force the equity market higher. The interesting part is that the market gains are being fueled by money printed out of thin air, which is ultimately and always a taxpayer liability.
Tell me how all of this ends well? Tell me how companies beat the estimates while revenues fall 67%? Tell me how this Friday's jobs report, where we lost 247K more jobs is "great news" just because it wasn't 400K. Oh, and by the way, the next rounds of layoffs are where you ‘close up completely’. So, bottom line, the rally is a manufactured illusion – certainly one that’s tradeable – just be ready to ‘SELL.’
On Friday the market was euphoric over the jobs number. Wave after wave of experts told us how losing a quarter million more jobs in a month signaled the end of the recession. So what happens now? It's my best guess that we do some backfilling on Monday – potentially seeing a little red. Then Tuesday some sluggish trading, followed by another mindless push higher later in the week. I still think we have some "surge higher" days ahead of us before they turn out the lights, so until proven wrong, we have to continue to buy the dips.
One of the problems lately is the speed of the sector rotation we see. One day tech is hot, the next day it's financials, then over to basic materials, etc. Trying to stay ahead of the rotation is pretty hard to do. You’ll see huge spurts, then nothing, then huge spurts of growth again. Patience is tough, but it's paying off.
- we’re holding the GDX (a basket of gold mining stocks) with No Auto Stop
- we’re holding NGD (a gold miner) @ $2.48 – hard stop @ 3.05
- 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 holding DIA’s @ 84.45 with a stop @ 93
- we’re holding SPY’s @ 91.97 with a stop @ 100
- we’re holding QQQQ @ 36.26 with a stop @ 39.40
- we’re holding UYM @ 22.11 with a stop @ 23.40
- I like NVDA over 14.00
- I like CHK over 25.00
- I like YUM over 36.75
- If you purchased CitiBank ( C) over 3 weeks back – congrats – I like it going forward..
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.