The Spear Report
Spear Report Thanksgiving Holiday Edition
Executive Summary
Reports released by the government this week were unpleasant, to say the least. Yet for the most part the market ignored the news and extended the rally. With individual investors at the wheel during the holiday week and low daily volume, the last few days really don't say much about what direction the market is headed. Once institutional investors start trading again on Monday, we will have a much better feel for the direction the market will take. Furthermore, much of the rally may be due to short covering. As Gregory Spear said in Monday's chat "I don't trust that this is more than very temporary short covering. That's what the traders on the floor were saying - most of the paper coming through was covering."( Because TSR uses a disciplined mechanical system, they are now invested long 200% in spite of their bearishness, that is something people need realize, they are PRAGMATIST as one will see from their triggers at bottom of page--Max)
The Government dropped four bombshells this week - Unemployment claims rose, Consumer Spending fell, Factory order were down, and Home sales fell to an 18 year low. These four reports painted a bleak picture of the economy. Despite efforts by President-elect Obama to instill confidence, the fact of the matter is the best laid plans will still take time to restore the economy to a sustainable level.
Unemployment:
The four-week-average unemployment rate is at its highest level since the beginning of 1983 at 518,000. As a percentage, unemployment has reached 6.5%. This seems to come as no surprise when we hear reports of store closings, financial institutions going bankrupt, and businesses putting a freeze on new hiring. An example of some of the damage done by the credit crisis, it is estimated that 3 million jobs have been lost due to the housing slump. These jobs run the gambit from construction, suppliers, real estate agencies, etc.
With less money in their pockets, 401k's, and under their mattresses, consumers are spending less, in turn shrinking the GDP of our consumer-driven economy. The government reported that from July to September, GDP shrank by 0.5%. IHS Global Insight economist Nariman Behravesh expects GDP for the current quarter to contract by 4%.
In an attempt to create job growth, President-elect Obama will be working with Congress to create a stimulus package that will focus on infrastructure and clean energy. The plan is to create 2.5 million jobs to help revive the economy, much like President Roosevelt did during the Great Depression. With nearly one million jobs lost this year alone, and as many as two million expected to be lost next year, Obama's plan will be desperately needed.
Consumer Spending:
With Black Friday upon us, retailers are doing all they can to increase sales. For some retailers, this is their last stand. Weak sales could lead to Chapter 11 or Bankruptcy filings. Not to put pressure on the retailers, but the government reported that consumer spending fell by 1% in October, the fourth straight month of declines. October's decline happened to be the biggest in over seven years, giving us further proof that we are in a recession. To make matters worse, a survey by Reuters/University of Michigan showed consumer confidence for November fell to 55.3; its lowest level since 1980.
Factory Orders:
Another indicator of a slowing economy is durable goods. When factory orders for machinery and other big equipment declines, it signals a decrease in demand for goods, leading to a decline in GDP, an increase in unemployment, and a possible recession, depending on the degree of damage. The government reported a drop in orders for durable goods of 6.2%, a number greater than economists had predicted. A decrease in the demand for cars and airplanes has also hurt companies such as Ford, GM, Chrysler and Boeing. A government bailout of the Big Three automakers may preserve jobs, but unless the companies change their management and become more competitive with foreign producers such Toyota, a bailout will do little good in the long run. The damage being done by the current crisis in Detriot may be too much to repair. No bailout can save a company that just can't sell cars, and people won't want to buy cars from a company near bankruptcy.
Home Sales:
The government reported new home sales for October hit an 18 year low. Meanwhile, the median price of a new home fell to $218,000, a price not seen since 2004. Inventory levels on unsold homes reached 11.1 months; the amount of time it would likely take to sell the entire current inventory of unsold homes. Mortgage defaults, tighter lending, and rising unemployment are some factors putting pressure on the housing industry. Home builders such as D.R. Horton are cutting back new home construction to deal with rising inventories, while reporting large quarterly losses. Astonishingly, sares of homebuilders are leading this rally – demonstrating conclusively that psychology, that is, hope generated by government plans for mortgage relief, are in control, a situation not likely to last.
Existing home sales have not been spared from the downturn either. Sales fell 3.1% in October while the median price fell 11.3% from a year ago to $183,000. A survey by the National Association of home Builders showed that builder confidence on a scale of 50 was 9, its lowest level ever.
Some Good News:
The government has announced more handouts. This time it is Main Street that will benefit. The government announced Tuesday it will make up to $800 billion available for mortgage lending, credit cards, auto loans and small business loans. The plan is to help unfreeze these markets, with $200 billion already pledged to buy debt backed by credit cards, auto loans, etc.
In the spirit of the holidays, the Fed said it will buy $500 billion of the toxic mortgage-backed securities that are guaranteed by Freddie Mac and Fannie Mae, and will also buy $100 billion worth of mortgages directly from the two companies and the Federal Home Loan Banks. The government's latest effort is an attempt to lower the price of mortgages and make home loans easier, in turn reviving the housing industry.
This is an effort to forestall the next leg of the financial crisis that we've been predicting, massive credit-card defaults. We doubt that it will prove effective because of the scale of the crisis.
Rally
Although the emotion from the current rally may make it tempting to climb back into the market, the recent economic news does not support this. A popular question in our last SpearChat was, how far will the rally go? It's tough to say. DOW 8900 is one target, but there are others. We also have 5800 on the downside as a potential target. We are pretty confident that the rally won't go far, but there is one thing that does makes us uneasy about this prediction. As Gregory Spear said in Monday's chat, "My only hesitation about going full short is the remarkable unanimity among talking heads that we are a long way from a bottom. It is hard to believe that that many people who are always wrong can be right for a change."
In The Spear Report Professional edition, we give daily suggestions on market direction, along with short-term targets that have been remarkably accurate. If you are not a "Pro" subscriber, please log-out by clicking the log-out button at the top of the page and go to:
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TSR Timing Model
Our timing model is a purely mechanical system that follows the momentum of the NASDAQ Composite index. The table below shows the triggers that would cause the investment level to change. Please note that our Model Portfolios are not affected by the Timing Model. The Models are always 100% invested.
Last Changes: On 11/26/2008, the Timing Model went from +125% invested to +200%.
Current level is +200% invested.
Triggers for Increases or Decreases in Model's Investment Level Investment Level will go to:
First Upside Trigger: A new close at or above Nasdaq 1567.5 Maximum level is +200%
Second Upside Trigger: A new close at or above Nasdaq 1606.4 Maximum level is +200%
Downside Reversal Trigger: A closing price in the Nasdaq that is 6% below the highest intraday level since 11/25/2008. Note that this trigger cannot be anticipated as new highs in the market would continue to raise this reversal trigger. In the event of a reversal, the Model will decrease its investment level to -25% invested. Each additional 3% decrease in the Nasdaq would cause the model to decrease its investment level in 25 percentage point increments. -25%
Chat With The Pros!
When:
Monday, December 1, 2008
Where:
Log-on at spearreport.com
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