Thursday was the second 900-point swing for the Dow in the last month. Unfortunately neither rally held its gains and only gave sellers a perfect entry point.
The most important economic report on Friday was the Retail Sales for October. Retail sales fell -2.8% and that was the biggest one-month drop since 1947. The majority of the decline was auto sales and falling gasoline prices but overall sales were still very weak and accelerating to the downside as shown in the chart below. Typically the monthly retail sales numbers are volatile but you can see a definite trend has developed. Declines of more than 1% were seen in furniture stores, electronics and appliance stores, nonstore retailers, sporting goods and hobby stores, apparel stores and department stores. Only drug stores and restaurants posted minimal gains. The sectors hardest hit were auto dealers, which saw declines of -20% and furniture stores with a -10% drop. The month over month headline decline was -2.8% but the year over year decline was even worse with a -4.1% decline and the biggest drop since the 1960s. Retailers are expecting the worst holiday shopping season in over 20 years.
Retail Sales Chart
The first Consumer Sentiment report for November came in slightly better than expected at 57.9 compared to consensus estimates of 56.0. This minor improvement is nothing more than a decimal rounding factor in the larger picture. The minor gain came from a +3 point uptick in the present conditions component likely caused by rapidly falling gasoline prices. Sentiment remains near 28-year lows and as we saw in the retail sales the consumer is AWOL. They have entered hoard mode and saving any cash for the future crisis. We are seeing almost daily comments comparing the current crisis with the great depression of the 1930s and consumers are buying groceries and guns. Literally, gun sales since the election have gone up more than 50% to as much as 300% in some areas. Buyers claim they are concerned about protecting themselves if the crisis continued to spiral downward and because they are afraid of attempts by the new administration to ban guns.
Part of the weak sentiment problem is the rising jobless claims. They hit a new cycle high of 516,000 last week. This is clear evidence of rapidly increasing recession pressures. Hardly a week goes by without a dozen additional companies announcing thousands of layoffs. You can see how rapidly the jobless claims have accelerated over the last several months and this is a post 9/11 high and very close to a 20-year high. If claims remain over 500,000 we are likely to see a substantial deterioration in the nonfarm payrolls for November. Continuing claims are also setting multi-year highs at 3.897 million workers still on unemployment. That is the highest level since 1983 and it only counts those who still have unemployment benefits left. Those who have exhausted their benefits are kicked off the rolls even though they still don't have jobs. Analysts believe that more than five million people are out of work. This is a major problem for sentiment, retail sales and home foreclosures.
Unemployment Claims Chart
The Import and Export Prices report for October showed import prices fell -4.7% for the biggest drop on record and much lower than analysts expected. This follows a -3.3% decline in the prior month. The drop in prices is led by the fall in crude prices, which fell -16.7% in October. The drop in import prices shows how quickly the rest of the world has seized up as economies fell into recession. The chart below shows how much prices had risen over the last five years and the sharp decline has quickly deflated inflation fears but there is still plenty of fat in the system.
Import Prices Five Year Chart
Next week has a busy economic calendar and PPI, CPI, FOMC minutes, Philly Fed and Industrial Production will be the highlights. The PPI/CPI should be lower impact than normal since prices have collapsed with the recession and lower oil prices. The Philly Fed and Industrial production will tell us if the manufacturing conditions are still deteriorating. The FOMC minutes will tell us what the Fed was thinking when they cut rates at the October meeting. This will give analysts an indication of what to expect at the Dec-16th Fed meeting. The rest of the reports are filler or repeats of what we have seen over the last 60-days. The markets are not really paying attention to the weekly reports with volatility and liquidation the current controlling factor.
Retailers have been making news for weeks and Friday was no different. A survey by the American Research Group showed shoppers are planning on spending 50% less in the coming holidays than they did in 2007. This is an annual survey started in 1985. The previous record for a decline in spending plans was a -6% decline in both 2003 and 2005. This is being called the worst holiday shopping season in a lifetime. On Friday Abercrombie & Fitch and JC Penny both reported earnings that fell by about half. They both gave forecasts for the rest of 2008 that were substantially below analyst expectations. Profits for JC Penny fell -52% due to low mall traffic and lower consumer spending. JCP same store sales were expected to drop as much as -9% in Q4. ANF saw profits fall -46% and said same store sales could be down as much as 26% in Q4. Earlier last week Kohl's saw profits fall -17% and Nordstrom saw a -57% drop. Best Buy's comments earlier in the week they were seeing a "seismic change in consumer spending" were echoed by those retailers reporting on Friday. Even Wal-Mart warned that Q4 earnings would suffer even though they were becoming the outlet of last resort by cash strapped shoppers. You may remember I wrote several times in these pages back in August recommending a short in ANF ($54) because of falling store traffic. ANF closed at $17.79 on Friday.
Nokia (NOK) started the markets off on the wrong foot on Friday when it lowered its estimates for mobile phones to 330 million in Q4 and 1.24 billion for the year, down from 1.26 billion units. Nokia also said mobile device volumes in 2009 would be less than 2008. Nokia said it still expected to maintain its market share but that percentage share would be of a smaller market. Shares in Nokia fell (-11%) as well as phone makers AAPL and RIMM and mobile chipmakers QCOM and TXN. It was another nail in the tech coffin as another sector bit the dust.
Sun Microsystems (JAVA) helped add to the tech weakness when is said they could cut 5,000 to 6,000 jobs as a result of the global slowdown. Sun said it would take a charge of $600 million related to the layoffs. Sun announced another 2,500 job cuts in May of this year. Sun reported earnings two weeks ago that were actually a loss of -2.24 per share or $1.68 billion. Sun said it would be more vulnerable to any global slowdown because it deals with large corporate customers. Sun said it was going to breakup its software division into three groups, Applications, Systems and Cloud Computing. Sun (JAVA) closed flat for the day but it did manage to hold its +15% spike from Thursday.
Citigroup (Nyse:C) reportedly began its big layoff program on Friday with 10,000 to 15,000 jobs expected to be cut. Citi closed under $10 on Thursday for the first time since the early 1990s and was unable to break over that level on Friday. Citi has lost more than $20 billion in 2008 and the year isn't over yet. Citi has 352,000 employees and they are openly targeting a reduction to 290,000 by early 2009. That suggests a lot more than 15,000 are going to be getting pink slips over the next four months. Citi managers were also instructed to cut their budgets for employee compensation by 25% for 2009. Citi is going to hold a "town hall" meeting on Monday to discuss with employees the strategy for moving forward. Citi also said it was raising the interest rates on 20% of its 54 million credit card accounts by +3%. Citi has been unable to securitize its credit card receivables since the banking crisis began and needs to raise the interest rates to offset the loss of the securitization fees and to make the accounts more profitable if they have to keep them on their books permanently. Citi hit a low of $8.27 on Thursday.
Activision's World of Warcraft or WOW as players call it released its newest version on Friday. It is expected to generate $100 million in revenue in the first 24 hours and $1 billion over the next 12 months. I have three adult sons addicted to this game along with more than eleven million others around the world faithfully paying their monthly subscription fee. The news of the release did not prevent Merrill Lynch from downgrading Activision (ATVI), Electronic Arts (ERTS) and reiterating an under perform on THQ Inc (THQI). Merrill said recent data points showed negative shopping trends for video games in November although it was still expected to be once of the strongest sectors. Given Activision's WOW plus the Guitar Hero series I question whether Activision should be in this group.
The world's largest mutual fund company, Fidelity, said it was going to cut another 1,700 jobs on top of the 1,300 already announced. That would equate to 7% of Fidelity's staff. Fidelity said they were seeing record withdrawals from their funds. Fidelity is not the only fund in trouble. Charles Biderman of TrimTabs.com was on CNBC on Friday and said 350 hedge funds had closed in the first six months of 2008 and that was before the bear market correction began in July. He did not agree with estimates earlier in the week that a third of hedge funds would close but he said there would be quite a few. Investors withdrew $100 billion from hedge funds in September. As of last week numbers over $40 billion had been withdrawn in October. He felt the number would rise significantly when all the numbers finally came in. He said funds of funds, funds that invest only in other funds, saw withdrawals of $38 billion so far in November. He said hedge funds were stockpiling cash with expectations of $250 billion in further withdrawals over the next 3-6 months. Biderman downplayed the Nov-15th notice date for hedge fund withdrawals. He said funds were in close contact with their investors and have known for sometime what kind of withdrawals to expect through year end.
Late after the close on Friday (8:PM) Freddie Mac (FRE) said it lost $25.3 billion or $19.44 per share in Q3 and asked for an immediate injection of $13.8 billion in government aid. You may remember the initial Fannie/Freddie bailout package was $200 billion "if they ever need it but I doubt it" quote from Hank Paulson. Surprise! Freddie needs $14 billion ASAP. Fannie Mae (FNM) reported a $29 billion loss on Monday and said it "may" have to tap the government's bailout money in coming months. The Freddie request for an immediate injection of funds could sour financial markets again next week.
Friday was another ugly day in the markets. The Dow opened down and quickly sank to -393 at 8,472. The afternoon rebound took it back up +451 points from the low to 8,923 and +58 for the day. Contrary to Thursday's closing ramp sellers hit the bounce and quickly knocked off -400 points to close down -337 for the day. On a day when reporters were talking about traders not wanting to go home short ahead of the G20 meeting this weekend the closing sell off was very unexpected. The Dow tried several times to break through 8900 and was rebuffed every time. That level has appeared as strong resistance and I fear we are in trouble for next week. Support on the Dow is 8000 and Thursday's retest of that level was seen by some as a textbook triple bottom formation. I would love for it to be bottom in any form but the selling remains too strong and there is no confirmation from the other indexes. The S&P-500 looks worse than the Dow with a lower low and lower highs.
The Nasdaq is more bearish than the Dow with a series of lower lows and lower highs. The Nasdaq closed under 1500 on Wednesday, traded as low as 1428 on Thursday and was very lackluster during Friday's attempted rebound. The news from Nokia, downgrades on chip stocks and warnings from Intel, Cisco and Dell appear to have sealed the fate of the tech index. The next material support is well below at 1250.
I knew the afternoon bounce on Friday was going to fail when the Dow went positive and the Russell was still down -15 points. I mentioned it in the Market Monitor at the time that the big cap rally could not last if the small caps were still being sold. The Russell lost -34 points for the day or -7.1% and was the biggest loser of the major indexes. The Nasdaq lost -5%, SPX -4.2% and Dow -3.8%. At twice the percentage loss of the Dow the picture is pretty clear. Fund managers were not only avoiding small caps on Friday but selling them hard. This suggests the broader markets are going lower. I doubt it was just a case of some fund bailing to raise cash for redemptions but that is always possible. For next week we definitely need to watch the Russell for market direction. If the weakness continues we should remain flat or short until the Russell finds some buyers. Russell 350 is the next material support level and the Russell closed at 456 on Friday.
Russell 2000 Chart
I think traders have been holding their breath for a month now in expectations of a retest of the October lows. We got that retest and the rebound was crushed. That is not what traders were hoping for and I think real fear is starting to permeate the market. Fear that the October 10th lows are not going to hold and fear that the trillions in bailouts and stimulus is not going to rescue the U.S. and global economies from a severe recession and maybe even a depression. I get a lot of email from readers and I received several articles last week comparing the current economic setup with that before the great depression. Some are calling this the greater depression. While I don't subscribe to those beliefs the continued selling in the banks, the lack of financing for cars, homes, inventory, buildings, deals, debt, etc is becoming very worrisome. Something needs to change for the better soon and I don't see it on the horizon. I think the market is seeing the same void and beginning to make plans for some lower lows ahead. I would be careful about new longs here even though many people are making a living out of beating the "stocks are cheap" drum. They are cheap and if you don't mind holding for a couple years there are some real bargains. One-sixth of the S&P-500 is now under $10. Historically it is normally less than 2%. Cheap can get cheaper and while I want to buy the dips I am starting to become more cautious than I was just a couple days ago. At this level a real oversold bounce could last days and we are not seeing it. When something really does happen that signals a bottom the rebound is going to be explosive. Today I just don't know what that event will be. We have seen plenty of events that could have triggered a lasting rally and to date they have all fizzled. With every failed rally the bulls become less aggressive and the bears more aggressive. That is not a sign of a potential market rally in our future. You never know when a $14 billion Freddie Mac bombshell will turn up at 8:PM on a Friday or any other day for that matter. Be careful.