The stock-market-playground
for the week ahead

by Stephen Tetreault, T-Waves | April 6, 2009

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The bad news (or will it be good news again) this week is that the markets will probably be trading on news related to dismal earnings and deteriorating guidance as the economic calendar is devoid of any real material reports other than the FOMC minutes on Tuesday and the initial claims report on Thursday. The Fed-heads have been beating the streets with more public appearances that I have ever-seen and they have done such a good job with their post meeting releases the minutes are almost non-essential at this juncture, thought they could still produce volatility but there is little we don't already know about what happened leading up to that meeting.

The earnings calendar is also quite light (picks up the following week) with only a couple names we might focus on such as Alcoa which officially kicks off the earnings cycle on Tuesday and expectations are for a second consecutive quarterly loss as the price for aluminum has declined along with demand. Alcoa is expected to report a loss of $0.57 on revenue of $4.08 billion; its worth noting that Alcoa has rallied about over 58% over the past 3-4 weeks on what I believe was bad news already priced in to the stock. This was one of the most widely reported on stories of late a real recession tragedy as aluminum prices were running hot two years ago and Alcoa could not produce it fast enough to keep up with overall demand; they opened new mines, added shifts and expanded plants; then bang just as those efforts began to shift into high gear the global market imploded leaving them running at full speed the destination was over the proverbial cliff! Right now there is also a takeover premium on Alcoa with several potential suitors being mentioned over the last several weeks.

Mosaic will also report on Tuesday and this will be a key report. With global credit tight there is a problem shipping massive amounts of fertilizer overseas; and the major firms like POT and MOS and it will be interesting to see if they can put together a positive-earnings surprise. I like both of these firms and for the longer term I’m quite bullish as once the global rebound starts these firms are again going to be bursting with profits but we have to get past their earnings first and start to see a rebound as they could experience another leg down. In the energy sector Chevron reports on Thursday and they also are expected to post losses caused by the sharp drop in natural gas prices and crude…and their Burlington purchase several years ago looked good when natural gas went to $12 but at today's $3.60 the down-trend in natural gas is going to seriously impact their earnings 9the question is whether or not its already baked into the stock’s price). Regardless of their earnings and the subsequent reaction this will be our first real peak inside the energy sector this quarter and it should provide us a lot of tells.

Our friendly butt-heads at Goldman Sachs issued a report on Friday that is worth noting as they for once agree with me….they stated that the FASB rule change will not prevent bank shares from falling because bad loans are increasing at a greater than 3.1% annual rate compared to a 2.5% rise in earnings before their loan loss reserves…this is not a path to profitability as the numbers just do not work out as suck. In their note they stated that U.S. regulators may force the top twelve U.S. banks to write down another $1 trillion in loans based on values set in FDIC auctions of failed bank assets (this is just what I have been writing about for the past 3-4 months) This is a huge contagion as this is twice the amount they have already written down. According to my research the FDIC has shown through their actions and data that these loans may only be worth $0.32 on the dollar compared to the $0.84 on average currently being carried on the books of these major banks….so many financial bulls are living in an (Alice in wonderland world) they failed to do the math and realize that true fundamentals will always trump irrational hope and exuberance. If you recollect from my past writings I pointed out that some of the FDIC auctions of toxic paper got as little as $0.02 on the dollar, and despite the new FASB relaxation these loans have not been written down as strenuously as they should have been. The bank loan portfolios are still relatively undamaged by the write down rules but with the number of accelerating delinquencies the hammer of Damocles is about to drop.
If the FDIC and Treasury (as I believe could happen) forces these banks to write-down or sell these loans into the so called TALF program it could cause another capital raise cycle similar to the one we saw in 2008 and this could serious impact share-holders thru dilution, and it could be worse because I doubt there are many fools or so called speculative investors left that are willing to buy billions in bank stocks under these deteriorating and negative conditions.

And let’s not forget that the top 19 banks are undergoing their so called Treasury mandated stress tests and the results will be out by the end of this month. Those that fail will be given six months to raise additional capital or be forced to take money from the government at terms already laid out and detrimental to the lecherous insiders. Given the recent retroactive FASB rules you can bet any of these banks in trouble is already pounding the private capital markets in an effort to beat the so-called deadline, as I doubt that any will want to be labeled a bad bank because they failed the stress test, a huge scarlet letter to be placed on their proverbial foreheads.

We have all seen this before (or should I say that I have) the bad-news-bears (especially the newbie-cub-bears) have been crushed as they keep (sometime like me) trying to short into what was once strong support [now OHR] only to see the very-next day despite dismal and deteriorating economic news/conditions the markets gap over us and squeeze the bears like a massive 50’ anaconda. After a four-week parabolic bear-market relief rally even some seasoned traders and bears are starting to question whether or not this is the start of something more. Lets me be the first to state that it's possible (but so isn’t it possible that I win the lottery tonight). All we know right now is that the bulls are stampeding for the land of milk and honey and they want revenge for many months of the bears grinding them into chuck. I don't want to sound like a broken record here but the current relief rally continues to mimic all the necessary characteristics of a classic bear-market rally.

The bear case for a continued deterioration of our economy (for that matter the global economy) appears to be significantly stronger than the bulls but optimism and hope are powerful sentiment weapon of the bulls as they normally out number the bears 4:1 any way. I believe (incorrectly) that way too many traders and investors are hoping that the U.S. and the global economy will be significantly better off 6-8 months from now. Strangely though I found it very perplexing that the FASB vote on Thursday relaxing the mark-to-market rules did not produce a bigger rally in financials (they actually sold off); this suggests that the FASB news was already baked into stocks [as I suggested]. Friday produced a similar surprise for me as the indexes ignored the terrible jobs number; as the markets keep rising on terrible news for a few weeks now.

I’m what you would call agnostic about this being a new bull market. I won't repeat myself on why stocks should correct or how this economy still has several terrible quarters ahead of it. It's more important for us as traders and investors to keep an open mind about market direction. We have to be flexible enough to switch hats (change bear-cap for bull cap and vise versa) when conditions warrant it; as it’s nutty to fight the market manipulators when volume has been light despite all the contagions. Placing your ego in front of your head and trying to be right about why the market should move in the direction that you deem it should and over leveraging into a position when it's going in the opposite direction will grind your account into dust. For now the long-term trend is down but short-term it's up…and we must trade cautiously with lighter volume when counter trend trading and we must also be able to buy dips when warranted.

Technically we are in a proverbial bull-market as over the past four weeks the SPX is up 23% and the Nasdog up a whopping 24%; and right now some old-time bears like myself have been in some stages of denial in the past week and the bad news bulls keep the indexes crawling higher as they are in a controlling position for the time being. We only saw two important reports on Friday and they caused some wide spread depression in the markets into and after the open.

Fortunately the bad news bulls were still feeling quite giddy and traders subsequently bought the opening plunge just like they did on Wednesday; and for the time being this markets has switched from a sell the rip into a buy the dip and many bears are in serious denial and continue to short the bad news (instead of being patient) only to have those shorts bleeding red within hours of being entered.

Almost every news event has threatened to reverse this stellar relief rally and their have been dozens of reasons why this rally should reverse. However the bad news bulls continue to put their heads down and move forward. It looks like many fund and hedge-fund managers who believed the premise that lower lows were ahead stood idly by and watched the market run away from them, and as the quarter ended they found themselves chasing stocks to appear more intelligent than they really in an effort to paint their respective portfolios. Surely once the quarter was over reality would return in the form of a correction or at least some profit taking, but that has yet to be the case. The market open on April 1st dipped sharply for about 15 minutes then resumed the upward crawl despite warnings and vastly overbought conditions. I agree as do the technicals that the market looks quite overbought and should be due for a retracement, but history has shown that a market in rally mode tends to ignore the technical aspects and trade more on emotion and hype, and the emotional denial on the part of the bears is helping fuel the rally.

If the bears continue to short the rallies and the bulls and fund managers many of whom as still overleveraged in cash continue to buy the dips the markets could run higher, as right now the bulls have the upper hand. The bears right now have lost their edge and the bulls are gaining some secure footing and are becoming less skittish with each passing day. Every move higher over any resistance levels convinces a few more traders and investors to come back into the shark-infested cesspool/markets; and the proverbial leak in the levee could turn into a deluge drowning many a bear in the near-term. So we must be careful shorting at over-head resistance (and the vast number of non-shortable stocks continues to grow) as the trend has changed for the time being, and we must recognize that the fed’s hyperinflation efforts are bleeding through. (JMHO)

Once again this week we saw that American workers were sacrificed by corporate America the very-numbnuts who want them to be loyal little drones and thwart the unions that seek to protect their jobs…Americans were hammered again in March with large job losses, pushing the total number of jobs lost since the recession began to 5.3 million, according to the labor department. Payrolls fell by 663,000 in March and this pro forma number was close to expectations, while the unemployment rate jumped to a 26-year high 8.5% from 8.1%. And despite what the Mad-man-Cramer stated yesterday this recession is far from a trough or being close over. I have found little to nothing in this report that points to economic recovery, or a mitigation of the employment contagion. As the details of the report confirm that our economy likely contracted violently again in the first quarter. While the unemployment rate is a lagging indicator, turning it appears that the jobless rate will continue to rise at a rapid rate over the next few quarter to a year and should breach 10% sometime in the second half of 2009 and likely 13-14% in 2010 in my opinion.

• We saw a dismal revision that showed that payrolls in previous months were revised lower by a total of 86,000 as January's revised job loss of 741,000 was the worst since 1949.
• In the past six months, 3.7 million jobs have been destroyed or 2.7% of payrolls, the second-largest percentage loss in over 50 years.
• Worse yet total hours worked in the economy fell by 1%. The average workweek fell by 6 minutes to a record-low 33.2 hours.

Businesses are pulling in and cocooning for a long siege taking the chainsaw al approach as they are slashing employment and dividends at record rates. They are preparing for a depression and the eclipse of American leadership…despite what the so called pundits on the bubble-vision networks state…their actions speak louder than their words. Job losses were widespread across many industries in March. Among major sectors, only health care added jobs, but the increase of 14,000 was about half the average gain over the past six months. According to a survey:

• Goods-producing industries shed 305,000 jobs, and the services industries cut 358,000.
• Manufacturing industries cut 126,000 workers.
• Hours worked in manufacturing fell by 2.1%.
• Construction cut 161,000 jobs.
• The unemployment rate for construction workers rose to 22.3%.
• In the services, professional and business services cut 133,000 jobs, including 72,000 temp jobs.
• Retail companies cut 48,000 jobs.
• Financial services cut 43,000 jobs.
• Transportation industries lost 34,000.

In the separate survey of households…we saw employment dropped by 861,000, with unemployment rising by 694,000 to 13.2 million. The employment-population ratio dropped to 59.9%, the lowest rate since 1985. Also in a separate report the gauge of unemployment that includes discouraged workers and workers who can find only part-time work rose to a record 15.6%, with data reached back to 1994.

The number of workers who wanted full-time work but can only find part-time jobs rose by 423,000 to 9 million in March.; since the recession began, involuntary part-time workers have increased by a huge number (4.6 million folks). Worse yet about a 25% of the 13.2 million officially unemployed have been out of work longer than six months, the highest percentage since 1983.

On the bullish front I have read and listened to a host of so called influential analyst that believe the worst of the job losses are now over as the economy has not materially worsened in 2009Q1 and firms are now down to their core work-force. It would take another major economic blow to force firms to endure another round of mass layoffs. As you are all aware nonessential and unskilled workers are the first to go followed by staff reductions in the mid level ranks and managers who have ceased to produce and who are quite overpaid. It the deterioration in employment continues these firms will be forced to cut skilled individuals they spent huge amounts of resources to train and develop. These folks usually have large severance packages and extended benefits so keeping them on the payroll for an extended period of time is often cheaper than firing them.

Not a very-bullish report….can not and should not be ignored……we saw on Friday that our service sectors “non-manufacturing” contracted at a faster pace in March than many even thought it would as according to the ISM report as the global slowdown continued to take its toll on our service sector. We saw that the ISM non-manufacturing index dropped to 40.8% in March from a reading of 41.6% in February, the street was looking for 42.0-42.7%. We saw that many of the respondents remained very concerned about the negative economic outlook and rising unemployment. Among 18 industries, only one reported growth in March. The service sector is about 65-70% of our overall economic performance and a turnaround in our economy (no matter what the talking-head idiots state on the various bubblevision networks) is not going to happen without a turnaround in this vital sector.

ISM services details

• The business activity index rose to 44.1% from 40.2%.
• New orders fell to 38.8% from 40.7%.
• The employment index fell to 32.3% from 37.3%.
• The prices index plunged to 39.1% from 48.1%.

These are contagion worth noting….As they are the black holes of our economy, cash is ripped away fron the balance sheets of the American Household at an alarming rate and they account for 65-70% of GDP. This is the tragic oversigh for the bailout specialists as they are focusing on the wrong group in their massive bailout-programs, as in my opinion their distinct failure to get cash into the hands of american households is the real problem that will grow as the day’s continue.

The credit system is still drying up as are consumer balance sheets, thanks to jobs losses and a contracting economy. All Americans get is the promise of higher taxes once things get better, shrinking credit lines from credit card firms and nearly impossible hoops through in order to obtain new loans. Ant the situation continues to deterioate….its not getting better, although for a short while folks will be led to believe the worst is over. A cataclysmic Tsunmi wave down in my opinion remains in the future for the markets and the economy.

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