They tried. They really tried to rally the markets on Friday but the bad news was simply too widespread for buyers to handle. The GE news and Phillip Morris warning were only two of the headliners but there were plenty more that followed the same story line. The end of quarter window dressing turned into a strip show and traders in shorts watched as bulls lost the shirts off their backs.
The recovery possibilities took another series of hits on Friday with the results of warnings from GE, SBC, MO, DAL, WYE and PLCE. The semiconductor sector was hit again after TSM and United Semi announced cuts in capex spending. New downgrades hit AMCC, BRCM, CNXT, PMCS, TUNE, TXCC and VTSS. This set the tone for the day and it was ugly. Still the markets tried to rally off the opening dip and were somewhat successful until about 11:30 when the bottom fell out of the Dow. Once the support at 7900 and 7850 broke it was just a bet to see how far the red ink would run before the close. The final Q2 GDP numbers came in slightly higher than expected at 1.3% growth but nobody seemed to care. That is ancient history in the markets. More importantly was the negative growth rate for the current economy as reflected by the ECRI Weekly Leading Indicators. After suggesting a +2% growth rate back in early August the numbers have slowly declined to the -0.1% rate for last week. This, along with the multiple warnings from a very broad spectrum of companies, points to the very real possibility of a double dip in progress.
The final revision of the September Consumer Sentiment came in at 86.1, down -1.5 points from August and the lowest level since last November. The current conditions component fell to 95.8 with more respondents commenting on wealth fears than any time in the history of the survey. Even the great market crash in 1987 failed to worry consumers as much as the current economy. The expectations component fell to 79.9 on fears that jobs are not stable and layoffs could continue to worsen. This continued drop in confidence is causing analysts to reevaluate the outlook for more auto sales and new home sales. With jobs tight, confidence low and debt levels high there is not a lot of pent up demand. Those that can afford to buy toys and houses already have and those that cannot afford it don't count for future expectations. This predicts lowered spending habits over the next few months, not increased spending. The holiday retail buying binge may be sedate with unemployment at 5.9% and growing. At only 3.9% two years ago the money was flowing freely. It is time to pay the piper and with the market setting four year lows there are no savings accounts to draw on for spending cash.
The fund reporting companies said today that August was another month of net outflows but not nearly as bad as the -$50 billion in July. September has already gone on record as another outflow month. Small wonder when Lipper reported that only 62 of 8200 funds tracked were positive for the quarter. How long will the herd continue to keep funds in accounts that are negative quarter after quarter? After five weeks of losses the markets are right back to the closing lows from July and multiyear lows in come cases. Using the Art Cashin analogy, Jill and Jane Doe will open the paper this weekend and see that their 200% to 400% gains from the last four years have turned into losses instead and decide that bonds suddenly look like good investments until the economy recovers. That phone will ring on Monday at their fund headquarters and money will flow out again.
The talking heads were discussing tax loss selling on Friday. This is an October event because most funds have October year ends. They will add up their winners and losers and decide how much they can sell for a profit to offset the tax loss. In a perfect world they would sell a stock for a profit that had a good run and they felt had topped to offset losses on investments that failed and they sold for a loss. This minimizes the overall taxable event and prevents huge tax loss carry forwards. The problem this year is lack of winners. Who are they going to sell? While this may be a problem on the surface there may be more winners than you think.
Looking at a six-year chart as an example MMM was only $70, PG in the $40s, MO $20, JNJ $30, MSFT $25, Dell $10, AMGN $15, BGEN $20, ERTS $20, EBAY $20, ESRX $10, INTU $15, IBM $35, UTX $30, WMT $20, HD $15, QCOM $6. In fund years these prices were last week. With the fertile field of winners there should be lots of selling to offset losers. Unfortunately the majority of these stocks are key components to the major indexes. This means the Dow/Nasdaq may be very susceptible to October tax selling. It is one thing for the mutual funds to tell you they lost 25% more of your money and another thing to realize that it will take years to benefit from those losses on your taxes. Funds trying to escape more investor flight will be trying to mitigate those losses as much as possible. Will there be tax loss selling in October? You can bet on it!
The current quarter is almost certainly to go down as the worst quarter ever for the Dow. It is down over -16% with one day to go. The S&P dropped -23% during the 4Q of 1987 and is also down -16% already this quarter. It would have to drop below 762 on Monday to equal the 1987 record. The indexes closed at critical levels on Friday, 7701 for the Dow and 1199 for the Nasdaq. Each only one point from critical support. September has long been know as the setup month for October lows. It could not have occurred any more perfectly if you had been able to script it. The Dow is only 169 points from the July lows and the Nasdaq only 30 points above the lows for the year. With one day left in September a new low in October may only need to be a drop of a single point at the open on Tuesday if Monday follows Friday's pattern.
The economic calendar next week is crucial to the continued market movement. Monday starts with Personal Income/Spending and the Chicago PMI. If income/spending shrinks then fears of the double dip will increase. PMI is expected to drop from 54.9 to 53.0 but without a serious miss this report should be ignored. It is more watched for evidence of inflation than recession. Tuesday will focus on the ISM survey for September. Bulls had better hope the number comes in at the 50.6% forecast because a number under 50 is recessionary and we are very close to that trigger. Construction Spending will also be released. Wednesday has no releases and will continue to be a reaction day for the ISM. Thursday we get the non-manufacturing ISM and Factory Orders. Both of these could be very detrimental. Friday is the trump card with the September Payroll Report. If jobs decreased and it seems very unlikely that they didn't, then the July market lows, if not already broken, will be toast. This is the critical week for the month economically. This is the yardstick for the economy in precise terms. If orders are falling and jobs are being lost then the hand writing is on the wall.
The main point I got from last weeks news events was that CEOs seemed to be even more worried than in the past. Knowing that earnings are 2-3 weeks away and the end of quarter sales were not shaping up well, they were using very cautious terms to describe the outlook. John Chambers tripped over his tongue several times trying to be cautious in his presentation but get across the concern that companies had even less visibility than before. (translation = significantly fewer orders than expected) It appears to me that the economy hit a wall in August/September but nobody wants to admit it. Corporate America, economists and the Fed are all hoping that seasonal holiday buying will somehow rescue the economy from the double dip. Treasury bond yields are still dropping like a rock as investors go for value but corporate bonds are soaring as worries over corporate profits are increasing. The bond markets tend to lead the stock market and the economy and they are telling us that our economic troubles are not over.
Enter Very Passively, Exit Very Aggressively!
"A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss, that is what does the most damage to the wallet and the soul" - Jesse Livermore
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