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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I highly recommend John's newsletter. It is free!

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.