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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (20578)	1/6/2005 12:31:38 PM
From: mishedlo	Respond to of 116555

RodgerRafters Fearless forecast for January In the Fearless Forecast thread, I said this about the month of January: 10) The US stock market starts down on disappointing retail numbers in early January, continues down on disappointing housing numbers and economic reports in late January. While there has been plenty of media spin trying to make the retail picture sound rosy, the truth is that it was a bad quarter for retail. In particular, companies that sold durables or targeted middle and low end consumers got squeezed along with their customers. Almost across the board, these companies are reporting same store sales that are losing ground to inflation. What isn't being reported is the pricing pressure most have them have been under that will mean lower margins when they report earnings. At the end of the year, I took losses on the short positions that were the biggest losers to balance out the gains I'd taken during the year. At the start of this year, I moved into new retail shorts expecting to see bad numbers early in the month and later when they report earnings. I went looking for companies that were destined for bankruptcy in the near future, but didn't find any shortable stocks, probably because 2004 was such an easy year to sell junk bonds. Overstressed pension funds (like GM's) are desperate to show short term gains so that that they won't drag their companies down. Consequently they've been buy anything that promises a decent yield, regardless of risk. I did pick out some companies with high debt to equity ratios that were in bad businesses for the quarter: TWTR & RVI. I also went short on both KMRT and S (who'll get hitched this year), because they had big run ups in 2004, sold the wrong kinds of goods to the wrong kinds of customers this holiday season, and because mergers usually mean that the two companies have a lot of skeletons in their closets. Finally, I also shorted GM and F because I felt they had short term retail related risks, as well as other serious problems. RSH would have been my best pick for a retail short, but that's the main one I covered for losses at the end of the year, and I'll have to wait until February to go short again. So far the retail part of the plan has gone OK, although I might have done better focusing on homebuilders. They are more volatile and have been down more with the market. The Census Bureau's retail sales numbers are released on the 13th. The jobs data comes out tomorrow, and it should be ugly. Everything we've been seeing about construction and manufacturing suggests slowdowns and job cuts. The survey uses data from mid month, so it really reflects the last part of November and the first part of December, which were bad. I think we'll see a drop in the dollar and a bigger drop in the indices on the data. Nevertheless, there will still be rallies. A strange thing about this market over the past few months is that it tends to rally after bad news and fall after good news. I intend to take a few profits if there is a significant drop Friday morning. In December I described how the Fed had been pumping money into the system, mostly by purchasing longer term treasuries. That had kept rates suppressed and had also caused a steep rise in the money supply. I predicted that they'd be more hawkish at their December meeting and set a tighter monetary policy. The statement they released didn't show any change, but the minutes that came out this week showed much more concern about inflation. More importantly, they've been holding reserve credit steady for the past several weeks and have been going easy on permanent injections. While the recent economic news has been bad and should get worse, I'm guessing we won't see a return to the easy money injections until the next meeting Feb 1 & 2. If so, January could end up looking like like July (straight down). While I don't think the Fed wants to see a total meltdown (yet), I think they might be curious to see what will happen in a modest sized selloff before they create a bounce. (Sidenote: Quickly trying to eyeball January Max-Pain on the Qs I get something like 37, which would be about a 5% drop over the next 2 weeks.) It's time for me to shift focus to the homebuilders and that's where I'm putting most of my research time right now. MDC will be the first big builder to report earnings (January 12th after the close), but they've got some good momentum going and a relatively easy comparison to make with Q4 2003. Many of the others will have very difficult comparisons to make because of slow Nov-Dec numbers this year and big numbers last Nov-Dec and this July-Sept. Some other builders report on around the 18th and starts and permits are released the 19th. I'll devote a post to my builder research soon.