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T-Waves Near-Term Out-Look and Market/Economic Analysis

by Stephen Tetreault, T-Waves | July 20, 2009

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The economic calendar this week is one of the lightest we have seen in some time. If it were not for Bernanke’s Humphrey Hawkins testimony there would have been nothing of extreme interest. Bernanke testimony this week on Tuesday and Wednesday could be a market mover as he is expected to discuss how the FOMC might exit their largest monetary expansion in history, and the Federal Reserve has been interjecting itself into far too many venues and areas where it has no real authority or mandate! Congress will want to know how Bernanke plans to drain the massive amounts of liquidity that he has been injecting into the system (above board and stealthily) without causing another economic collapse; so his testimony could be very interesting and a market mover!

This past week was promoted by several short squeezes a perfect example of very strong bearish sentiment (due to expectations of a violated H&S pattern) being met with a sudden and unexpected improvement in earnings during an option expiration week. It was the perfect storm for the bears that were very bloodied. Just looking at some of the percentage gains last week is staggering. The Dow gained 7.3%, the SPX-500 gained 6.52% the Nasdaq 7.44% while the Russell-2000 7.95%....while the sectors were also stellar winners as the SOX gained 12%, we saw a 11% in the housing index, 9% plus in the energy complex and commodities gained 7.5% or better. It was a banner week and the most orchestrated short squeeze I can remember witnessing since I have been trading.

On Friday we saw a semi-positive report as the New Residential Construction for June. Housing starts rose by 3.6% to 582,000 annualized units; and this was the briskest. This was the fastest pace since November but this was hardly a report that to be an enduring bullish signal as it is still only about 32% of where we were before the crisis began. The 582,000 number is still a 47% drop from June 2008 levels so we need another 94% increase just to get back to par. Single-family starts were up 14.4% in June; however we saw that housing completions declined by 0.4% to 818,000 units. This is due in part to the very low number of units in progress because of low starts over the last six months; remember that its impossible to complete house you have not started.

Now before the bullish juices start flow its worth noting that the housing sector is doing slightly better but remember from earlier in the week that foreclosures were up 15% for the first six months of 2009. There are 340-350,000 newly foreclosure homes coming on the market each month and this supply is a massive contagion. This will keep a lid on home-prices for new homes.

The earnings environment looks quite bullish right now, but, please remember….the best earnings are always the early earnings, and as the days and weeks move by the quality of earnings will deteriorate. So far we have seen 55 SPX-500 firms reported and so far 70% have beaten their significantly lowered and massaged estimates, 21% missed and 9% reported inline. However this week over 150 SPX-500 firms report their earnings. The surprise factor is sure to decline as more companies miss their estimates. When we saw that The CEO from GE is happy just to break even for the rest of the year you can imagine what the guidance will be from the bottom tier firms. I expect that many firms will beat their lowered estimates and quite a few will echo the GE/BAC comments that profits in the second half of 2009 will be a extremely tougher to come by.

A significant report to watch for this week is Apple’s as they report on Tuesday and they are widely expected to beat estimates because nobody believes their massaged-lower guidance. Apple has guided lower in 10 of the past 12 quarters. Dan Niles said on Friday that nobody pays attention to Apple's guidance because it never makes any sense. However, I believe there is a chink in their so called bullet-proof armor. Apple buys 20-24% of all the flash memory produced in the world; and we have seen that flash memory has risen in price 40-50% over just the past 90 days according, so their margins will likely be squeezed. The increase probably will not have hurt them significantly in Q2 since the increase is recent but this could impact their forward guidance significantly. I believe as I said on Friday in our trading room that AAPL’s the 2009Q2 earnings are already priced into the stock; and since APPL is up over $16 in just the past 2-weeks; a near-term break-out is close at hand; strong real earnings could push it higher. However I believe that all the bullish news is already priced in and AAPL could get cored significantly if they say something anything negative. Note I will be taking on a PUT-Play using ATM September puts late Monday!

UPS reports on Thursday and their guidance could be market critical as will be their economic outlook. If they say package traffic is down then the markets will follow that trend. I am very suspicious of this economy as you are aware….on Friday before I left my office I received an UPS delivery at 7:35pm and when conversing with the driver I asked why he was running several hours later than normal. She said that her manager was required to lay off a number of their drivers 2-weeks ago because there was not enough work (where are the green-shoots was all I could think about). This means she has a bigger area to cover and more packages to deliver this is due to layoffs not increased demand-traffic. I will be watching to see if UPS breaks back below the 200sma and if they say anything about these layoffs. OHR comes into play at $55.75 and UPS closed at $52.17.

From my vast experience a failed head and shoulders pattern usually results in a strong bullish move with a surge in volume as when the right neckline fails to breakdown and the stock/index rallies back over the right shoulder the potential for a breakout is very strong. The reason for this is the pattern itself. A head and shoulders pattern is one of the easiest patterns to recognize and one of the most dependable. This means nearly every trader with access to charts is normally all over the falling right shoulder like stink on a poop. Shorts had backed up the truck so to speak. Obviously this resulted was anything but bearish a 598+/- point short squeeze last week. Shorts had loaded up after market technicians had been hyping a H&S breakdown. Unfortunately the market exists to fool the maximum number of traders possible whenever it can (I was one of those traders last week).

The $64,000 question to be answered this week is simple **are there enough buyers left who want to buy stocks at these bloated levels** we have seen this earnings story before and we know how it ends. Lowered expectations are beaten through cost cuts, lay-offs and asset sales and guidance is once again massaged lowered. Doesn't sound like a runaway bull market to me, but maybe a loco-weed induced bullish hysteria market instead.

Please Note My turn wave forecast is getting significantly stronger, and it pointing toward a HUGE inflection period ahead, the window is tightening as we get nearer to the potential turn....and according to my wave analysis we have multiple waves converging and a major Inflection & Fibonacci collision possibility hitting the overall markets on/between 7/23 and 7/28 and since we have been in strong bullish up-trend from the March 6th lows This corrective wave could be (key-word could) be the start of a significant major Bearish corrective period ...my system and analysis is telling me that this could be a very significant correction period lasting 18-27 trading days...with the potential for a slight retracement after the initial down-cycle then another downward corrective wave will likely play...it could be that we have seen an options-X fake out, and that we will reverse abruptly on heavy volume and take out the previously forecasted head & shoulder necklines (I have seen light volume fake-out reversals before)

I am looking for a potential drop of 1000-1200 Dow points

I am looking for a potential drop of 200-250 Nasdog points

I am looking for a potential drop of 120-155 SPX points

I am looking for a potential drop of 95-120 Russell-2000 points

Interesting confluence of seasonal fundamental along with technical indicators and elements are converging in my opinion. Most importantly we have opened up a significant topside gap between the 55 and 200 day simple moving averages (~15-point gap) and this appears to be the widest gap between these averages since 1986. As such these technicals suggest the potential for a rapid move towards the 200 day moving average now at 45+/- a very distinct probability…it’s also note worthy that the 61.8% fib come into play at 45.65+/- as well. The last time we saw a good move of this magnitude (a doubling of volatility) was in November 2008. This technical analysis is backed up by highly suspicious options trading (huge call position out of the money $45’s, 50’s and 55 strike prices) during the past several weeks, strong seasonal trends and deteriorating stock market fundamentals. We also have a near-perfect falling wedge pattern setting up as well (see chart)

Recently we saw that a trader spent $946 million in pure premium on buying 22,000 July calls at the 45 strike while selling the same amount of 55 strike calls, thus lowering the overall premium to $0.425. The VIX hasn’t traded above 40 since April 21 and one would have to wonder what this trader knows that has yet to be made public.

We should reflect on the following

So if we look back over all these major years in over a quarter of a century (9 instances) in 7 of them the period from the 7/17/ to 7/26 we have begun a significant move lower in equities. In the 2 instances (1987 and 2008) that we did not immediately head lower we ended up with stock market crashes later in those years…..all in all an ominous set up…heading forward right at us so please be very cautions taking new-long-positions!

A potential market Contagion, especially for retailers and food service firms

Millions of U.S. workers to see pay raise with minimum wage hike to $7.25… on July 24 we get an increase in the federal minimum wage? From the rhetoric of the supply side idiots (my take) the very same so called professionals who advocated more than $1.3-1.4 trillion in 2001-2008 upper-income-favoring tax cuts that created the fewest jobs in any 8-year presidency since World War II (increasing the minimum wage by 10.7% to $7.25 per hour) will mark the end of the free enterprise system in the United States, or something close to it.

Tens of thousands small businesses will go out of business, millions of jobs will be lost, the supply side pundits like Kudlow and other have proclaimed.

The reality: Could be that the federal minimum wage increase could serve as a valuable stimulus for our lackluster economy that needs all the stimulus it can get. Moreover, particularly in the frugal consumer era a pay increase particularly for those lowest-wage workers is a welcome sight! As every dollar spent or saved in the workforce is one more dollar that re-circulates through U.S. commerce eventually. Still, the critics counter that it's perfectly acceptable to pay the lowest-valued work categories sub-standard wages because these are so called transitional jobs that Americans hold for a temp-period, obtain new skills/experience, and then move on to other, higher-paying positions.

They reality is quite different: many Americans remain in minimum wage positions for very long periods of time in this deteriorating economy. And for some (including those in the cleaning, hospitality, hairdressing, textile, social care, and retail sectors) this is when their raise occurs….when the federal law says it must. It goes without saying then, that for these Americans the federal minimum wage increase is no inconsequential event.

Where will the economy recovery come from?

I see no recovery as there is not any real economy left to revive and recover…Our manufacturing economy was lost to off-shoring and the ridiculous free trade ideology (we make very little to export in this economy of ours), and millions of workers were displaced and unfortunately it was replaced by a mythical and in my opinion a ponzi scheme “New Economy.”

The “New Economy” is based on services (a joke, Wall-Street, IT-Services, Wal-Mart and services like McDonalds). This so called Dot-Com and service economy was created like “an artificial life form” and it was incessantly fueled by the Federal Reserve’s artificially manipulated low interest rates, which produced a real Dot-Com bubble, Real Estate bubble, and a massive Debt-Bubble, and by hyping a so called “free market” mantra and massive financial deregulation, we saw the unleashing of monstrous financial gangsters and they were propelled to new heights thanks to massive amounts of debt leverage and fraudulent financial products.

Our real economy and standard of living was traded away by politicians and business leaders (also the Federal Reserve) for a make-believe ponzi economy. Now when the make-believe economy has collapsed, American’s wealth in their real estate, pensions, and savings has also been stripped away as it too has collapsed dramatically while their precious jobs have disappeared, and many have become extinct.

The massive ballooning debt economy created by the Federal Reserve, Politicians Business leaders (and the most contemptible were the lecherous bankers, lenders and Wall-Street titans, who created products out of thin air and offloaded these POS-products to unsuspecting investors around the world) this has caused far too many Americans to over leverage their assets. They were lured/enticed into refinancing their homes and then they spent the new-found temporary equity (as their home’s value has plummeted). Then they were forced through economic hardships to max out numerous credit cards, and they took on loans that they should have never qualified for. They are now being forced to work as many jobs as they could find just to tread water and keep paying the minimum on their debt-loads. (Remember, a swimmer can only tread water for so long before exhaustion takes over and they drown.)

Debt expansion and multiple family incomes were the temporary fuel that kept this ponzi economy going......And now suddenly Americans due to the implosion of the credit-ponzi scheme can’t borrow in order to continue their Pavlov-conditioning-of-spending. They are now so far over their heads in debt, that many who are so depressed over their financial situations are now resorting to drugs to keep themselves in a frame of mind to function. Their Jobs are disappearing at a very fast pace, and due to little to no savings many are forced into foreclosures and bankruptcy.

This so called American--consumer economy, of which approximately 70% is attributed to GDP, is a walking dead-zombie. Those Americans who still have jobs are saving heavily against the prospect of losing one or both of their jobs. While millions of their friends and neighbors; either are already or are on the very threshold of becoming homeless. Many children and the elderly have been forced to move moved in with family and friends; others are living in tent cities.

Meanwhile the US government continues to spend like a drunken sailor money that they do not have (or have little hope of recouping through tax-revenue) and the budget deficit has ballooned from $455 billion in 2008 to $2+ trillion this year, with another $2+/- trillion already on the books to be spent in 2010.

There is no way for these deficits to be financed except by printing money (hyper-inflation) or by a further collapse in the various stock markets that would drive people out of equities into government bonds…hence why I’m so bearish longer term for the global markets! Our government’s budget is 50-60% in the red, meaning that more than half of every dollar the federal government spends must be borrowed or printed, and if foreigners stop buying out debt we will be forced to take some drastic measures!.

Because of the worldwide debacle in the debt and credit markets caused by Wall Street’s financial gangsters, Americans and others that live in the real world needs their own money and they do not have $2 trillion annually to lend to Washington to spend it on social and lackluster programs that will not really lead to economic growth.

Since Bush came into office the dollar index has fallen from 119.90 to a low of 71.62 losing a whopping 67% of its buying power (making more Americans worth-less especially their assets if held in dollar dominated items) (no wonder we have seen a parabolic rise in commodity prices that are tied to the value of the dollar) under his watch….since Obama’s election the index rallied to 89.17 before rolling over during the past 4-months again, which has helped to spur the recent relief rally!

As the Federal Reserve (the largest thug of them all) continue to print dollars, the growing supply adds to the pressure on the dollar’s role as the world’s reserve currency (just look how hard the dollar has fallen). Already America’s largest creditor, China, is admonishing Obama’s administration, asking/demanding that they protect China’s investment in US debt; while they lobby other nations (the G-8/G-20) for a new reserve currency to replace our precious greenback before it collapses to a worthless piece of paper.

According to various reports, China is spending down their holdings of US dollars by acquiring gold and purchasing massive quantities of raw materials (steel, cooper etc) and energy products…this could be the stage for a huge contagion brewing later on!

The price of one ounce gold is trading right now for $937+/- despite efforts of the US government and other global governments to hold down the gold price…it makes me wonder if Gold will be held in check at $1,500 or $2,000 or even $3,000 and ounce when the rest of the world realizes and comes to the conclusion that the bankruptcy of “the world’s only remaining superpower” is close at hand? And what will happen to our ability to import not only crude (since we are net consumers, but also the manufactured goods on which so nay Americans are so import-dependent?

If the Federal Reserve continues to print money, and the Treasury continues to offer out our bond-debt at record a record pace…the over-supplied dollar will eventually loses its precious reserve currency role, and when that happens the US will no longer be able to pay for its massive imports of real goods and services with pieces of worthless paper.

Nothing Obama’s economic policies have seriously addressed the real issues. Instead, Goldman Sachs and the other major lecherous banks and lenders were bailed out with taxpayer monies more than once. As Eliot Spitzer said, the banks made a “bloody fortune” with taxpayer funds.

It was not the millions of current and pending homeowners many of whom will soon (if not already) will be homeless, who were bailed out; nor was it the lingering remains of out once super manufacturing base General Motors and Chrysler, that were bailed out…not al all, the majority of the bailout money 85-90% went to the very Wall Street Banks, and firms that were responsible for creating the last mega bubble and its implosion.

Goldman Sachs’s current record earnings from their essentially free to extremely low cost capital supplied by impoverished American taxpayers…and what has Goldman decided to do with their new-found riches….they have decided to boost compensation and benefits by 33%....so they are paying the very same folks who helped create last past ponzi-scheme of financial destruction! On an annual basis, this compensation will amount to approximately $775,000 per employee…I sure wish I worked for them. They still have massive loads to toxic assets on their balance sheet and over 54-trillion in derivative exposure!

I still believe the worst of the economic crisis has not yet hit, and that there is a ballooning disconnection between the expectations for an economic recovery as Wall-Street has been seeing massive green-shoots, and Main Street is embroiled in a huge recession!

And I don’t mean the remaining contagions associated with the real estate crisis that is waiting in the wings. I believe that home prices will continue to fall further when the foreclosed properties currently held off of the market balance sheets are forced back into he markets.

Foreclosures are still soaring, and store and office closings are adversely impacting the ability of owners of the various shopping malls and office buildings to make their mortgage payments as well. Commercial real estate loans were also securitized and turned into repetitive derivatives…and speaking about loans, many will be resetting, and the availability to roll-over loans in this terrible credit environment.

The real crisis is awaiting us in the dark-shadows of this economic environment. It is the contagion of rising unemployment, of stagnant and declining real wages confronted with rising prices (commodities: heating oil, gasoline, food, electricity etc.) from the excessive printing of money to pay the massive government’s spending spree and from the dollar’s loss of exchange value.

So far (just like the Bush administration) nothing in Obama’s economic policies that change almost weekly is directed at saving the depreciating dollar or saving it as the world’s reserve currency or the livelihoods of real true blooded Americans. Obama’s policy, like Bush’s before him, is keyed to the enrichment of the banks, and the Goldman Sachs’s of the worlds as they are the true insiders. Goldman Sachs as a great leech sucking the life blood out Americans relentless sucking from anything that smells like easy money; and all you have to do is look at the Goldman Sachs representatives in the Clinton, Bush and Obama administrations; to realize that they are the real behind the scenes marionettes operating the puppets strategically placed in the treasury, federal reserve and other branches of our government affecting economic policy of our great nation to serve their own greedy needs!

This is truly strange time to see the markets rallying unabated given the conflicting signals that we are receiving on a daily basis for the economy. The IMF has declared that the worst of the decline is over (key word = worst). However if we read further into their comments, they cautioned about the stabilization (meaning trough) will be quite uneven and that a subsequent recovery when it manifests is still expected to be very sluggish.

Many so called professional market guru’s (95% of which never get the forecast right till after it happens, they never saw the credit/debt debacle forming) have been professing a dramatic “V” or “U” shaped economic recovery, lets face it they need to be extremely optimistic as they business models of attracting new capital into their accounts depends on it! But since they arte so often 100% wrong, why are so many relying on their off handed remarks and analysis? Many are now arguing that a “V” shaped recovery is very possible as just look at China or Singapore when recent data suggests that recession may be over (these are nations that lie and manipulate their data in order to keep their populations under control).

Yet there are others who argued that the worst may be around the corner take Jim Rogers for example, he strongly believes as I do that there is a very strong likelihood that there will be a major currency crisis later this year, or next….right around the bend.

As a reference point I am an economist (a real economist, I have a MA from Boston University and an D.B.A from Southern NH University (In International Business) and I have 20+ years of real life experience, so I believe I’m very qualified to make accurate analysis plus I am not a paid shill trying to hype some investment thesis) and I have conducted extensive research into the past 15+ recessions and the Great-Depression and my overall conclusions are that any recovery out of the greatest credit/debt calamity since the Great-Depression will not be a “V” or “U” shaped but a W-shaped recovery and the most likely scenario unfortunately calls for a catastrophic “L” shaped recession. Unfortunately from my vantage point the current green shoots (the current psychological conditioning phrase that so many are using) is a mirage. And I hope and pray that we will only experience a severe “W” recession with the next leg more thorny as an L-shaped recession is very serious and deadly development as for a “W” shape the end point is always a sharp upsurge. But for an L-shaped recession the horizontal line can stretch on quite a while! It pretty much means that the current situation of slow or negative growth could likely persist for the foreseeable future 3-8 years maybe (10)! The last example of such a dastardly economic development of an “L” shaped economic recover was Japan.

Their ageing society is very saving oriented despite that their deposits only carry an interest rate effectively at zero percent. Systematically, Japan had suffered low and very depressed growth with a deflationary cycle or a very low inflation environment over a very pro-longed period. Deflation is Japan’s curse, as basically it means that assets and stuff get cheaper over time; as opposed to inflation, where the value of money is eroded over time and assets appreciate in their case, money gets more valuable.

Now I be many of you may have the thought that this could be a good situation to be in, right….well the resounding answer is Hell-No! As deflation is a poison that manifests into a cancer that stymies economic growth because the leading consequence is that spending is muted. After all, why would you want to spend today, if the item you are looking to purchase could cost less for you to buy in the future? That is the underlying dynamics in a very simplified form. Reflect back to economic 101 and you will remember that consumer and corporate spending are key drivers of the economy, so when collectively, a society is not spending, the economy comes to a screeching halt.

I believe that we are embarking into a period of serious realignment where we will undergo a systemic and fundamental de-leveraging of economies around the globe; but we must remain conscious that the current massive amounts of infused liquidity/spending called a “liquidity over-abundance” can and will lead to another round of massive inflationary pressures down the road. My former premise is based ion the ideology and the acknowledgement that past sins of massive debt/spending beyond ones means must now be repaid! I am basically referring to a generation of Americans (and others) who had been spending in anticipation of future wealth. As a whole Americans have for 20+ years spent more than they earned, and many are still on this destructive path!

Its moronic in my opinion to believe the path to wealth is to spend far more than you produce, its basic math, and it does not compute, however the great Wall-Street spin machines, credit card companies, and lenders, and many Business Titians have profess this ideology and they are directly responsible of the economic-enslavement of Americans (a story for another day)

Nevertheless within this catastrophe, the availability of loose and easy credit has been curtailed, jobs have been lost and home value has collapsed. There is little opportunity to rely on future “wealth” as the building blocks of its creation have been destroyed. As such I believe that de-leveraging must happen in this extreme deteriorating environment. But collective de-leveraging implies unfortunately that further reductions in overall spending will reduce business turnovers (reduce inventory) that will lead to further weakness in the global economies.

Given that unemployment (and under-employment) and that asset deflation potentially has more to go before a trough can be formed, the economy will likely experience another severe “shock” that can further affect other loans being carried “beyond mortgages credit cards, auto loans etc.) That could further weaken the vulnerable financial system, thus resulting in another crisis [likely more taxpayer bailouts will be used to prop up these lecherous clowns].

Please, do not dismiss the risks of a significant currency crisis given the incessant heavy borrowings of the various developed nations, especially the US. I am also very fearful down the road of ballooning inflationary pressures, due to the very low interest rates and the pump priming by governments around the globe. Collectively, global governments have increased their spending dramatically which has somewhat offset the contracted consumer and corporate spending. They have massive stimulus packages to encourage private spending; and at the same time they have injected an over abundance of liquidity into the banking systems. They are doing all they can to mitigate this serious economic contraction. And then they are acting like cheerleaders, for their very actions….as these very folks continue to make references to proverbial green shoots while they say that governments will act very responsibly (in my opinion an oxymoron statement) and proactively by pulling back this liquidity and increase interest rates when the economy looking better (these are the same nuts that missed or ignored all the contagions of the bubbles that they were directly responsible for creating). Now if they fail to act prudently, proactively and responsibly, we might have a run-away inflationary situation developing at a very brisk pace. So can we trust them, remember Greenspam had kept rates way too low in the early 2000s, contributing directly to today’s credit/debt debacle.

I believe that the recent relief rally in the global equity markets in the past few months is a sign that speculative liquidity can have adverse inflationary effects if not reined in promptly; especially in the commodity sectors.

Notwithstanding we are clearly not out of the proverbial woods yet. But we are certainly not in extreme dire straits like we were in March, when financial firms were expected to be nationalized. But it is extremely pre-mature to let our guard down now and rejoice. I think that the economies were having a heart attack and right now they have just been resuscitated after flat-lining. But their pulse is still weak and their breathing shallow, and many are still in intensive care as they remain on life support!

The Obama $787 billion stimulus package is falling way short of expectations as it is still like a tiny trickle at best…as most of it has not been heading to its intended destination, and the vast majority 75-85% is still unspent to date…as such these fiscal measures will likely not even come close to pulling the economy out of this nasty recession despite the rhetoric of green shoots!

Overall credit is still very crimped and the outlook for consumer demand is very gloomy at best due to the up trend in unemployment / underemployment and increased personal saving, and right now due to the Chain-Saw Al Dunlop mentality there is no amount of government intervention that will be able to mitigate/stop the hemorrhaging of jobs and the renewed trend of outsourcing to undeveloped nations to take advantage of very-cheap-labor! As such this stimulus in my opinion will do nothing to quickly alleviate the contagions of the deepest recession since the great depression.

Far too many households that need/want to borrow can’t, and many that are able to borrow won’t because they now must save for retirement the old-fashioned way, as they have seen their wealth destroyed (401k’s have been devastated, home values have plummeted….almost halved and 40-45% of Americans who stripped equity from their homes using home-equity loans, that they utilized to buy assets with deteriorating value etc are now upside down in their homes meaning that they owe far more than the value of their homes (minus existing mortgages). So as a result, even when we apply a very modest multiplier from even a well-designed stimulus package (which this one was not) is likely to develop into a very modest growth improvement at best.

The stimulus plan passed in February appears to be helping everyone but the those in real need (small business) and individuals and it won’t affect the economy’s primary contagions, which are falling values of assets like homes, pensions 401k’s retirement accounts and investments).

What I find astonishing is that according to the CBO, so far, only about $60 billion in spending and $43 billion in tax relief has been dispensed, accounting for 13-14% of the total…worse yet many projects that could spur growth and create jobs are being put on the back burner as the monies are being diverted to states that are hemorrhaging.

Despite the headline earnings beats of late the outlook for many firms also is very clouded (we have seen headline EPS beats due to lower tax-rates, a weaker greenback-benefiting repatriation, and some inventory restocking on hopes the recover is near); we saw this week that General Electric second-quarter profit from continuing operations declined 47%, and revenue fell 17%. GE, the world’s biggest maker of power-generation equipment and services, is targeting more than 400 stimulus projects valued at $200 billion worldwide; but the money has not been allocated as yet. CEO Immelt said he expects more to be allocated in the second half, but this could be wishful thinking.

The combination of rising unemployment/under-employment and hunkering down consumers definitely lowers the multiplier effect of every stimulus dollar spent (and its about time they be spent). That just means you need more stimulus, to affect a change and this is likely a hard premise to accept and pass as the average American is very angry at Wall-Street, the banks and big business getting all their tax-dollars, but their could be no alternative.

This past week the lamebrain Treasury Secretary Geithner stated that “The stimulus program was designed to make a contribution over a two-year period (I guess they failed to under stand that a stimulus program need to be immediate) and the biggest impact on these investment will come in the second half of this year.”

Martin Feldstein, a professor of economics at Harvard University in Cambridge, Massachusetts, and former head of the National Bureau of Economic Research, said the stimulus may provide a short-term boost that will quickly evaporate as best….“We’ll get that bounce for a couple of quarters but then it will fade out,” Feldstein said.

Right now the initial trickle of stimulus has shown little impact; as the net worth of households has dropped almost 23-24%, by almost $15 trillion, since 2007. House prices have fallen more than 32% from their 2006 peak, according to the S&P/Case-Shiller index, while SPX 500 is 40% below its October 2007 levels (meaning we need a rally of 80% just to get back to break even (a terrible situation for those putting money into the markets in 2006/2007).

This economic crisis has now unfortunately jog the memory of older Americans and smacked this current investing generation (these with their heads in the clouds) that home values can fall significantly as well as increase and that bull markets don’t last forever, causing many to start to save (a new concept for many) a much larger portion of their incomes. Recent personal saving data showed that the household savings rate rose to 6.9% in May, from zero in April 2008; this figure is the highest in almost 16 years; and this is a determent to an economic recover as it stifles spending.

Nouriel Roubini forecasted the rate could rise as high as 10%. Economists Reuven Glick and Kevin Lansing of the Federal Reserve Bank of San Francisco estimated in a May 18 paper that Americans would continue to boost their rate of savings, which could reach 10% percent by 2018; and such a rise would trim three-quarters of a percentage point per year from consumer spending.

So right now there’s been a fundamental change in people’s behavior, and its getting worse as rising joblessness could further damp the ability of consumers, whose spending in recent years has made up more than 66-70% of our ponzi service economy, and as such who will be shouldering this reduced burden.

Many are already forecasting that the unemployment rate will rise to 9.8-10.1% this year (I believe it will be 11%), and this is according to the FOMC’s latest economic forecast (just 3-months ago they expected unemployment to peak this year at 8.8%). Worse yet the rolls of the long-term unemployed are growing, with 29-30% of the unemployed out of work for more than 26 weeks, the most since records began in 1948. A broader measure of underemployment that includes those who want full- time positions but work part-time has almost doubled over the past two years, to 16.6%.

Consumer spending is forecasted to rise 1.5% in the fourth quarter and 1.7% for all of 2010, according to a July survey economists (so why are the retailers rallying so hard, these are dismal numbers). The average quarterly increase from 1997 through 2007 was 3.5%. The U.S. consumer is clearly staring to get a hangover and it could take a long time for the hangover to mitigate as Americans can no longer be consumption beast that they were for the past 10 or 20 years. The ongoing and worsening Credit Crunch…credit which consumers often turn to during recessions, remains very difficult to obtain for many. In the latest Federal Reserve survey about 50% of domestic banks tightened credit standards on prime mortgages in the past few months, up from 45% in January, according to a survey of bank loan officers. Although financial market conditions have improved a bit for some of the big banks benefiting from massive leveraged bets and taxpayer bailouts, credit was still quite tight in many sectors, the FOMC said in their minutes of the FOMC meeting just held in June 23-24. What this means, is that you’re not going to get the bang per buck that so many of the stimulus proponents have been praying for

GE the benchmark-blue chipper is telling us a lot from their earnings if we read carefully

General Electric (GE) second-quarter profit dropped 47% on continued weakness in their financial operations, though EPS numbers topped expectations (not revenues). Last year, GE once renowned for their consistently sturdy earnings shocked Wall Street by missing expectations after contagions surfaced at GE Capital. The unit's troubles over the past year have prompted the company in recent months to cut its dividend for the first time in 60 years and lose its coveted AAA debt rating. Jeff Immelt called the results solid (wow what a positive spin) and he said that the firm was working to control costs (keeping employment low) and maintain their backlog while they focused on higher-margin services. GE, an economic bellwether because of the size and breadth of their operations, posted income of $2.67 billion, or $0.24 a share, down from $5.07 billion, or $0.51 a share, a year earlier, worse yet the latest results included a net $0.05 in restructuring and other charges. The report showed that revenues decreased 17% to $39.08 billion amid a 29% drop at GE Capital. GE Capital's profit plunged 80% as the unit continues to reduce its balance sheet. Immelt said the unit remains on track to be profitable for the full year. GE Capital's Tier 1 common ratio, a key measure of financial strength, was 7.4% compared to 5.7% at the end of last year. The energy-infrastructure business, which makes turbines for power-generating facilities, fared better, posting a 1% drop in revenue and a 13% profit increase; consumer and industrial operations, saw revenue and profits drop of 20%; and unfortunately the firm had been banking on that business to help it through the contagions from its capital unit. Orders rose a mere 2% for high-margin services, but they refused to give figures for total orders. On the bright side GE generated about $7.0-billion in free cash flow from operating activities in the first half of the year, this is very light if they hope to achieve what had been their full-year goal of about $16.4-billion, but GE says it generally reaps the bulk of free-cash flow in the second half of the year….but then they went on to lowered the bar a bit, forecasting full-year free cash flow at $14illion to $16illion.

A monthly Treasury survey released Wednesday of the largest 21 financial institutions receiving capital injections from the department's bank bailout program found that new loans originated by the institutions experienced modest growth in May. The report also found that commercial real estate loan balances at the institutions surveyed fell by 1% during the month and the participating banks said that the demand for commercial real estate loans "remained well below normal levels." The survey also found that mortgage loans, credit card loans and commitments for new real estate projects rose during May.

An underreported contagion

U.S. foreclosures are still surging (a good thing right, well it was on CNBC ) as the negative trend still defies government efforts….U.S. properties in the process of foreclosure in the 2nd quarter rose to a record quarterly level of nearly 890,000, according to RealtyTrac. The total is up 11% from the first quarter and 20% from last year the firm reported.

In June, properties in foreclosure totaled 336,000, exceeding 300,000 for a fourth month and driving the second-quarter total to the highest level since RealtyTrac began conducting their survey in the first quarter of 2005. As of June 30, nearly 1.53 million U.S. properties were subject to a default notice, auction-sale notice, or bank repossession, RealtyTrac reported.

Despite an industry wide moratorium on foreclosures earlier in the year plus legislative engagement and more efforts by lenders to modify the terms of mortgages (at least on paper so they can reap fees and taxpayer bonuses) “foreclosure activity continues to increase to record levels.” People who've lost jobs “account for much” of the increase, and borrowers who owe more on their mortgages than their homes are worth represent a major-significant risk going forward, the report stated.

Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so why did so many so called experts tell us on Thursday the market was healed….I was more than baffled? In the first half of 2009, properties in foreclosure rose 9% from second-half 2008 and 15% from the year-earlier period, RealtyTrac reported.

The big drop in initial jobless claims this past week was in my opinion a bogus headline….and is sparked lots of rhetoric especially amongst the green-shoot-players about how the employment picture is getting a whole better than many have feared, but the numbers reported Thursday was far to strange to support any far-reaching solid conclusions, as the pro forma reporting labor department reported that initial claims fell 47,000 to 522,000 on a seasonally adjusted basis last week. That's the lowest since January and down nearly 25% from the peak; and they also said that continuing claims also fell by a jaw-dropping 642,000 to 6.27 million (I nearly choked when that number crossed). Those were great bullish headline numbers if they could be trusted; but they can't be and here is why. The seasonal adjustments were off the proverbial charts..

A look at the figures before seasonal adjustments tells a different story: The advance number of actual initial claims under state programs, unadjusted, totaled 667,534 in the week ending July 11, an increase of 86,389 from the previous week; and there were only 483,981 initial claims in the comparable week in 2008. The advance unadjusted number for persons claiming UI benefits in state programs totaled 6,135,066, an increase of 63,714 from the preceding week…also the unreported figures by the various bubblevision networks; showed that States reported 2,525,342 persons claiming EUC (Emergency Unemployment Compensation) benefits (as they have exhausted state unemployment benefits and still qualified for federal benefits) for the week ending June 27, an increase of 6,241 from the prior week.

The industrial sector is no longer in a freefall, based on a survey of 63 senior manufacturing executives that was released on Thursday (another second-derivative green-shoot…the plunge is slowing), but a rebound in new orders over the next 3-6 months is still dismal, according to the Manufacturers Alliance. The Manufacturers Alliance said its composite index of future business activity edged up from its record low of 21% in March to 24% in June. The present index reading indicates overall manufacturing activity is expected to contract through at least this fall. It is the first time the composite index has moved higher since June 2007. There were slight improvements among the 12 individual indexes, including the ones that gauge inventory, new orders, and shipments by foreign affiliates of U.S. firms.

Is this another Green-Shoot….on Thursday we saw that home builders saw an improvement in their current sales conditions in July, but remained concerned about the future, sending their monthly sentiment index up 2 points to 17, according to the NAHB (National Association of Home Builders). While sales conditions are seen as slightly better this month, credit problems, foreclosures and a very weak job market are major contagions for these firms in my opinion. Any so called recovery is going to be a very slow and they are facing a number of substantial negative contagions heading forward. July's result is the highest since September; but its worth noting that the index peaked at 72 four years ago and was at 16 a year ago (so no need to jump for joy yet). The rise in builder sentiment in July was concentrated in the South, with a sub-index gain to 20 from 15 in June. In the Midwest and West, sentiment remained flat, at 14 and 15, respectively. In the Northeast, the sub-index dropped to 16 from 19. The sub-index measuring expected sales over the next six months remained at 26, while the sub-index measuring builders' attitudes about current sales rose to 17 from 14. The segment for traffic of prospective buyers rose to 14 from 13.

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Copyright © 2009 Stephen Tetreault
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