IMF: Advanced Economies Now in Depression

Bloomberg is reporting this weekend that the IMF has indicated that the world's most advanced economies are now in a depression. Now that's ugly!

Here is the story.

S&P Earnings Just Keep Falling, and It's Going to Get Worse in Q1 and Q2!

In his latest newsletter released last night, John Mauldin takes a look forward into 2009 and beyond. He also looks at his previous forecasts for the past two years. What stood out to me was his interview with Howard Silverblat from Standard and Poors, whose responsibility it is to compile the data on earnings for the S&P 500 companies. No one should know these companies and their earnings better! Mauldin says the following of his interview with Silverblat:

I have been writing about analyst earnings forecasts for some time. Earnings forecasts just keep dropping...
I commented on how bad earnings were last quarter. The web site shows earnings were a negative $3.14 a share, the first time they have ever been negative for a quarter. Ever! That was with 65% of companies reporting. He commented that it was worse than that. They don't have it up yet, but with 78% of companies reporting, losses are now a staggering -$8.56 a share. And it could get worse. The write-offs this quarter are just huge.

So, how does that affect total earnings for 2008? The table above shows analyst projections from March of 2007 through today. Notice how they kept falling over time. They are now down 70% from what was expected two years ago. Earnings for 2008 are a paltry $29.57 and dropping. The S&P 500 closed at 868.60. That makes the P/E (price to earnings) ratio 29.4. (I use a decimal to show I have a sense of humor.)
So, what are they projecting for 2009? Let's take a look. Notice that they too have been falling over time.

If the S&P 500 were to close where it is today, and using the estimates for the first two quarters of 2009, the P/E ratio would be 36.4 on July 1.

But what if earnings merely fall to where they were in the last recession, or about 55-60% of where the projections are today? That would drop the 12-month trailing earnings for the four quarters ending June 30 to $15.90 and result in a nose-bleed P/E of 54.7 by the middle of the year.

If earnings don't come in dramatically better for the first quarter as opposed to last quarter, we could be setting up for a nasty summer bear market. Even in the bear market of 2001-2, the P/E did not get above 47. Which, by the way, at a 47 multiple would correspond to a range for the S&P of either 1111 if the earnings come in as projected or 731 if they come in at the lower range.

I see nothing on the horizon which suggests the economy is going to get manifestly stronger in the next two quarters. The real risk is that earnings come in weak for both quarters and investors simply despair this summer, throwing in the towel and bringing about a vicious bear market. I would seriously consider hedging any long positions you have before earnings season this next April. If they come in stronger, then we will see.

The above is only an excerpt of the entire newsletter. Italics were added by me to emphasize important points. It is all fascinating, and worth reading once each week.

Click here for an online copy of this edition of the newsletter.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

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Friday's Rally Was a Short-Covering Rally

Fellow traders and the news media have unitedly confirmed that Friday's rally was a short-covering rally, not a rally supported by strong buying activity. Financials, retail, and housing stocks led the way. Many investors were unwilling to carry short positions over the weekend in anticipation that the U.S. Senate might pass a spending bill and of the plan to be proposed on Monday by Treasury Secretary Geithner.

Treasuries Drop Over Demand Concerns

From Bloomberg:

Treasuries fell for a third straight week after the government’s announcement of a record $67 billion in note and bond sales overshadowed the biggest monthly decline in payrolls since 1974. Yields on the benchmark 10-year note touched the highest in more than two months as the government set the auctions for next week and concern mounted that debt sales will damp demand.

Here is the full story.

One of the concerns that I have about this is that possibility that the immense supply of treasury debt may cannibalize the corporate and muni bond debt markets, sopping up money that would have gone to those bonds instead. If this happens, interest rates will rise for companies, states, and local governments, making matters even worse for them.

Out of Treasuries, and Back Into Stocks

Just at the moment that stock futures rallied this morning at 10:00 am EST, treasuries plunged. Many traders toggle back and forth between them. Often, if I want more feedback on the status of a particular trade in treasuries, I will quickly glance at what stocks are doing. If stocks show signs of reversal, then I know that shift in market sentiment will also affect my treasury trade.

Stock Futures Continue to Ride Higher in Anticipation of Spending Bill Passage

Senate Majority Leader Harry Reid has indicated that the U.S. Senate will vote on a spending package today intended to stimulate the U.S. economy and which also rewards special interests. If the bill is passed "as is", it will likely be one passed largely on party line votes. Stocks are responding with a solid rally! The Dow had been down more than 100 points, but are now 100 points higher as a result.

However, two influential floor traders have suggested that stock index futures are rising in anticipation of the bill's passage, but that once it does, the "buy the rumor, sell the fact" phenomenon will eventually occur. In other words, once the bill passes, another sell-off is likely. I don't know how immediate this will be, but in the past when other bailout bills passed Congress, it occurred fairly soon thereafter. I am hoping for at least a temporary rally of a few days or even weeks, but I will be wary of this possibility.

The bill, if passed "as is", it not likely to provide sufficient stimulus or correct the imbalances that exist in the economy right now. No credible business person nor economist that I know of genuinely believes this will work. However, I would still follow any momentum higher as long as it lasts. Eventually, however, this bill, as it exists at this time, will not correct the problems in the U.S. economy, will significantly multiply the national debt, and will falter. It is mostly just more pork barrel spending! The higher stock markets rise in the meantime, the further they will have to plunge when the next drop occurs. Larger drops later mean greater profits when we short the market. The bear market has much further to go!

Stocks Erase Losses, Rebound Higher

Currency momentum of a rising USDJPY has caused stocks to rebound, erasing all losses and moving into positive territory (see the S&P 500 chart above). I have no idea why this would help stocks. It is good news that we have managed to once again bounce off the lows we struck in November. Perhaps there is also some hope that a stimlus package is likely to be passed by Congress soon.

USDJPY Currency Cross

Jobless Claims Leap to 626,000

Ouch! The moving average jumped higher also. This is probably going to kill stocks because it is so unexpected. But there is also a glimmer of good news. Productivity remains high. On the other hand, hours worked in non-farm activity continues to fall. It is also troubling to realize that job losses are no longer centered in housing, construction, and financial sectors. We are seeing more and more job losses in all other sectors of the economy, including even technology and pharmaceutical industries.

Walmart Announcement Socks Stock Futures

Despite better-than-expected January sales figures, another announcement this morning from Walmart sent stock index futures south. Walmart announced that it will no longer provide monthly sales forecast guidance, spooking traders in pre-market activity. This is worrisome, given that Walmart apparently sees trouble ahead. As the world's retail discounting goliath, when Walmart sees trouble, it gets the market's attention. Personally, I think this announcement will have only temporary, short-term impact.

In related news, however, other retail sales reports from other retailers, including both Macy's and Target, have been generally better than expected. Sales results for January have been better than the terrible expectations, almost across the board.

S&P 500 Nearing the Half Way Point

I was stunned to learn that the S&P 500 index has declined nearly 50% since its high in 2007. As we approach that ominous benchmark, it seems that the world has been transformed since that time. We face a very different world now. What an amazing change we have seen since those heady days during the past 18 months or so!

Most Markets Quiet, But Gold Shows Renewed Vigor

While stock index, grain, and treasury futures have been fairly quite in overnight trading, gold has once again shown some strength, after retracing somewhat over the previous few days. Currencies have also demonstrated some modest volatility. Is this the beginning of the next rise for gold?

10-Year Treasuries Rise on Employment Concerns

Bloomberg is reporting the following today:

Ten-year Treasuries rose, snapping a two-day decline, on speculation a government report today will show U.S. job losses are mounting.

The bonds climbed in advance of a report that’s expected to show half a million Americans lost their jobs in January, pushing the number of jobless claims to the highest since records began in 1967.

The report “is going to be ugly, so clearly the market is positioning for that, giving us a firmer Treasury market than in the last day or so,” said Olando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. “Once you get the payrolls out of the way the market will restart focusing on supply, which is a major issue.”

Here is the full Bloomberg story.

10-year treasury futures overnight have been relatively subdued, but the 30-year futures have shown some modest activity.

Sober Assessment of Housing Market by Banker With Good Track Record

Bloomberg has an article this morning about a very sober assessment by John Talbott, a former investment banker for Goldman Sachs.
Here are some excerpts:

Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it.
Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts.

Here is the full story.

Buy Canadian!

Buy the loonie! Today at least! This was one of the opportunities I uncovered by using my timer alarm to scan frequently for opportunities.

Good Grief! Fast Trigger Finger Required!

Trade now. Write later!

Another Treasury Reversal

Wow! What a day! Volatility in the treasury futures!

Keeping Pace With Momentum

Until recently, I had software installed on my computer that would ring with a siren every few minutes. It uses a literal siren sound like a fire engine. The purpose of this timer was to remind me to check all my charts so that I could stay on top of changing market conditions as they evolve throughout the day. One way that I ensure consistent earnings is by constantly scanning for emerging signs of new momentum. This is, after all, a profession, not a hobby!

As a trader, existing positions can often become a distraction from other emerging trade opportunities elsewhere. It seems that as traders, we often miss good opportunities because we are so absorbed with a different one. This alarm helps me to be mentally alert and to quickly locate new opportunities as they emerge. I have written elsewhere on this blog of the danger of opportunity cost/loss.

Recently, Tradestation updated its software and added some timer alarms, so I no longer need the separate software. I have a timer set in Tradstation that activates an alarm at regular intervals to remind me to quickly scan all my charts. I follow about 20 futures instruments, so even if I have a position in one instrument, I frequently scan all of them so that when a breakout occurs, I can quickly find and assess each one. It is mentally exhausting, but is necessary to keep skin in the game. Who ever said this business was easy?

Surprise Sharp Reversal in Treasuries

One of the reasons that I prefer trading treasuries above all other futures contracts is that sharp reversals aren't the norm. Obviously, that is not always the case, as this chart shows. This chart pattern has manifested itself just minutes following my last one.

One person I know who works on the floor of the Chicago bond pits reported to me that many of the hedge funds and large bond mutual funds are liquidating long positions in bonds, and have been since the peak a few weeks ago. Thus, in a downtrend, we should expect that strong heaves of buying may be met with even stronger spasms of selling as those dry heaves run out of steam. Still, I am very aware of the power of the Fed to move markets, so their threat to intervene and buy long-term treasuries is always something I try to keep in mind. One of the rules I live by, as a trader, is this one: "Don't fight the Fed."

ADP Unemployment: -522,000 in January

I'm sure glad they consider this to be a lagging indicator! We should keep in mind that the ADP figure includes only private sector employment. Fortunately, January is typically the worst month for job cuts, too, so perhaps the worst may be over. Many companies are reluctant to lay off workers during the Holidays, so they delay job cuts until January. The risk, however, is that one round of lay-offs lead to lower consumption in the macroeconomic perspective, and new rounds of lay-offs in future months in a downward spiral.

Momentum With Treasuries Today

Treasury futures have shown the only significant momentum this morning, reversing some of yesterday's price decline. I see no other futures instrument that shows and significant momentum overnight.

Grains Rebound Strongly in Early Evening Trading

Prices have rebounded strongly in evening trading on stronger economic prospects bouyed by higher stock markets. One interesting aspect of the financial markets is that the grain futures market closes at 1:15 pm CST, but the stock markets don't close until nearly two hours later at 3:00 pm CST. In a case like today, in which the stock market rallies strongly after the close of grain trading, it tends to set up the grain markets for a rally when it reopens later, on the hopes that an economic revival will result in increased demand for grain products. This phenomenon also exists at times to some degree in the mornings, because the grain market is closed from 6:00 am to 9:30 am CST, while stock index futures continue to trade throughout this period, including the stock market open at 8:30 am CST. Strong momentum in stocks often bleeds into the grain markets when they open again at 9:30 am.

From Reuters this evening (the reference here to "Wednesday" is written to be released in Asia, where it is already Wednesday morning):

U.S. soybean, corn and wheat futures rose on Wednesday, as stronger U.S. home sales data buoyed stock markets and firmed crude oil prices.

Stocks Rally Into Close

Stock futures were able to break out of the doldrums and move higher. We remain in a very tight range, once again bouncing higher off support near the November lows.

Grains Turn Bearish

Grain futures have dropped more today than any day in nearly two months. This intraday chart for corn is typical for all the grain futures today.

Stocks Struggle to Stay Positive

The Russell 2000 has now dropped into the red. The S&P 500 is straddling the flat line, and the Dow is barely positive. With such erratic conditions, its not worth trying to trade stocks today.

Russell 2000 -- the leading indicator for stocks, both upside and downside (yesterday's close is the purple line)
S&P 500 -- flat, but about to go negative?
Dow -- still positive

Gold Loses Some of Its Luster

Gold has dropped nearly $35/oz. in the past few days. The bull market continues, however. I will be looking to buy again when the market appears to find a bottom.

Despite this, I noticed that gold failed to reach the upper trend line on the daily chart (not shown) before reversing downward. This suggests to me that the yellow metal is possibly losing its momentum. If stocks and the Dollar rally together, gold will probably be a victim. (Surprisingly, the Dollar is down today, which usually causes gold to rally. There are always surprises in the futures markets.) Perhaps the news today that the U.S. Senate may reach a more balanced accord on economic stimulus between Republicans and Democrats is humbling gold's recent bullish character. Is gold losing its luster?

Trading Soybeans With Smaller Margins, Limited Risk

A few traders have indicated to me that since soybeans are the most volatile of the grains, the potential risks and losses are too much for their risk profile. However, I've noticed that soybean oil and soybean meal can also be traded with a smaller margin and more limited risk. Both futures have margin requirements that are about half that of the soybean contract. The down side is that both also tend to have less liquidity than the intact bean.

I've also noticed another interesting phenomenon. I've noticed that when I intend to sell, it is most profitable to sell soybean oil. When I wish to buy, on the other hand, it is best to buy soybean meal. Meal tends to move higher, faster than the oil. Oil tends to move lower at a faster pace than the meal. Shown here are the daily charts for both. Also, the chart for soybean meal tends to more closely match that of the chart for the soybean contract.

Soybean Meal -- Moves Higher at a Faster Pace

Soybean Oil -- Moves Lower at a Faster Pace

Stocks Swing to Black on Positive Housing Data, Pharma Profits

Good News on the housing front! Pending home sales rose 6.3% during January. Howing the number of existing homes that have been vacated due to foreclosure also rose to a record 19 million. Still, the surprise to the upside in pending home sales was enough to move stocks weakly into positive territory! Positive earnings from drug makers has also helped to fuel some optimism this morning.

Treasuries Tumble

The picture says it all today! More of a challenge by the bond vigilantes to the fortitude of the Fed! The size of the supply is apparently the greatest factor influencing the rising interest rates, as investors are demanding a higher interest rate to compensate for the increased risk. If America is going to borrow their way to prosperity, they're going to pay through the gills!

Dow Chemical, Motorola Earnings Rock Stocks

Bad earnings reports are pressuring stocks once again overnight, but only modestly. The S&P Index Services is now expected to report the first negative earnings report in its history. Losses at Motorola and Dow Chemical both rocked the market overnight. Perhaps the weakness of the dip is suggestive of a rally when the market opens.

Stocks Move Back to Black

The S&P 500 and Russell 2000 have erased all losses for the day and moved back into positive territory once again. At this rate, the Dow may also end higher for the day.

Trading Perspective From John Mauldin

An excerpt from John Mauldin's most recent newsletter:

Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index.

Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back. Hope is not a viable investment strategy...

The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a stock or a commodity position.

Here is John's full newsletter.

In his latest newsletter, John mentions and discusses software that combines both fundamental and technical analysis in a single software platform. This is rare in his newsletter. I am not familiar with the sytem, so I neither endorse nor discourage it. However, when John mentions "Barry's system" in the above quote, this trading software/system is what he is referring to. I mention this only as an explanation of the above quote, not as an endorsement. In his complete newsletter, Mauldin has a more complete explanation of how the system works, a special introductory rate for his subscribers, and a link to take advantage of the offer.

"Not the Time for Profits" - Pres. Obama

Pres. Barack Obama today mentioned that these are not times for businesses on Wall Street to make profits. What a stunning statement! Was this a freudian slip or a reflection of his true attitude toward business? I hope it was a slip of the tongue, but one certainly must wonder if it was a freudian slip that is based upon his deep-seated attitudes. Wow!

Stocks Rebound, Collapse on New Job Cut Announcements

Stocks put in a bottom, rebounded to positive territory, and have now collapsed again on new large job cut announcements from Macy's and Morgan Stanley. Macy's also announced that it would cut its dividends and make a tender offer to retire some of its debt load, an action that is interpreted as bearish. Morgan Stanley is cutting 3-4% of its staff.

Stock Index Futures Slide Lower

Stock futures during overnight trading in Asia and Europe have continued to slide lower. This surprises me, since I expected the stock market bulls to successfully defend the Dow 8000 support level. However, the data is so negative, and there is so little news that can provide upward momentum, that the Dow futures, trading more than 100 points lower than Friday's close, are suggestive of further weakness ahead during the day session. We are close to testing the November lows for the Dow. Another terrible and disappointing jobs report this Friday would be a tipping point one direction or the other.

Fed Fights Back Against Bond Vigilantes

I haven't seen the data, but in an environment in while investors have been selling U.S. treasuries, it appears that the Fed's verbal intervention last Tuesday may be having an impact. Interest rates overnight have been moving lower, even on long-term treasury futures, including both the 10-year and 30-year. The charts show increasing treasury purchases and higher prices, despite a "debacle" in treasury purchases according to a fellow blogger who is a bond specialist. He suggested that last week's treasury auctions were a debacle because of weak demand. How, then, are they so strongly higher overnight?

Opinions Mixed in Davos on "Bad Bank"

From Bloomberg:

Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.
Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week...
Whether a bad bank would accelerate an end to the financial crisis split delegates attending the Davos talks. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said such an operation would help if “executed well.” Billionaire investor George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend.”

Here is the full story.

It should be noted that Dimon's bank would benefit from being able to rid itself of toxic assets by disposing them through the bad bank. I suppose, then, that so would Dimon.