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Black Friday Redux

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The malls were busier on Friday than at any time in the 2008 holiday season. After monster declines in pre-holiday sales retailers were offering blowout door buster sales to liquidate merchandise as consumers redeemed their gift cards.

Market Statistics
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Friday was the lowest volume day of the year and market reporters were struggling to find something to report. Retailers and the after Christmas sales were the headline on every broadcast. Amazon was the bright spot with an announcement that the 2008 holiday season was their best ever. Amazon said it saw a 17% increase in orders for its busiest day. Amazon said customers ordered more than 6.3 million items on Dec-15th compared to its peak day in 2007 of 5.4 million items. Amazon said its peak shipping day saw 5.6 million packages hit the road compared to only 3.9 million on the biggest day in 2007. Amazon's best sellers included the Nintendo Wii game console, Samsung's 52-inch LCD HDTV and Apple's iPod Touch. Analysts claim Amazon may have gotten a boost from the bad weather during the last two weeks before Christmas. Shoppers may have decided to stay home and shop on the Internet instead of fighting the snow and ice storms to go to the mall. Amazon said the weight of GPS devices shipped weighed more than 151 Mini Cooper autos. The average Mini Cooper weighs around 2600 pounds so that means Amazon shipped nearly 400,000 pounds of GPS devices. I have stated before that I can't comprehend the scale required to ship 5.6 million packages in one day. Amazon has really perfected the art of mass merchandising. However, their press release did not mention anything about profit margins. The opening bounce in AMZN was quickly sold on fears their margins shrank significantly in order to compete with brick and mortar store specials and prices at other online retailers.

Unfortunately it was not so good for the rest of the retail sector. The MasterCard Spending Pulse survey for December showed that sales were down overall by -5.5%. This was the first time holiday sales have fallen in 40 years. Inside the sector, sales of luxury items were down -34.5%, electronics -26.7% and clothing -19.7% to highlight a few. Ecommerce sales were only off -2.3% overall and again showed shoppers were moving their buying habits from the mall to the PC. Retailers expect $47 billion in merchandise to be returned with the largest percentage of that in clothing. Retailers were trying to capture buyers headed to the malls to return clothing and redeem gift cards with sales of 50-70% off. Online retailers were blasting out millions of emails with the same door buster ads. Anything they don't want to carry into 2009 was being dumped below cost in most cases.

Oil prices rallied +2.28 to $37.65 on news from the UAE that they were going to cut production more than expected. The UAE is the 5th largest oil exporter and they notified buyers they would cut supplies of crude for February delivery by 10% to 15% depending on the grade. The Abu Dhabi National Oil Co (ADNOC) was expected to cut but not this drastically. The projected deliveries for February had already been lowered but ADNOC revised their projections leaving buyers scrambling for additional supplies. OPEC said they were going to cut by 2.2 mbpd on January 1st but so far Saudi Arabia had been the only country to actually advise buyers of the actual reductions by grade and delivery point. With the UAE joining forces with Saudi it is possible the market is starting to put more credence in the announced cut. We know for sure that everyone will NOT cut as agreed but getting 65% or even 75% of the announced cut would eventually be bullish for prices. OPEC president Chakib Khelil said the group might call another emergency meeting before March if prices extend their slide. Coming only 10 days after the Dec-17th meeting the announcement was purely political in an attempt to bolster prices.

The global recession is taking a toll on oil consumption. Japan, the 3rd largest oil consumer saw consumption fall -5.7% in the current year and is expected to fall another -5% in 2009. China Offshore (CNOOC) said it was likely to scale down or delay some projects since the current economics of oil made those projects unfeasible. U.S. crude inventories fell -3.1 million barrels last week but at current demand levels there are still 59 days of supply in the global market and OPEC likes to keep supplies closer to 50-52 days. That is an extra 600 million barrels of oil clogging up the market and it could take many months to erase that surplus.

There were no economic reports on Friday. Next week does have a couple reports that could move the markets. I doubt more bad news will have a material impact but any better than expected news could help to create some buying interest. On Tuesday we will get the Chicago Purchasing Managers Index or PMI for December. The index is not expected to decline much further below its reading of 33.8 in November and any rebound however slight would be bullish. Unfortunately I think the odds are slim. On Friday the Institute of Supply Management (ISM) report for December is expected to fall to 35.5 and another multi decade low. This is the national manufacturing index and the regional reports have been ugly. We could easily see another substantial decline in the ISM. Coming on the first trading day of 2009 it could set the stage for trading in early January. In November new orders declined to 20.4 and the lowest level since 1980. New orders have only fallen below 30 four times in the last 53 years. Next Friday's report could set some new 30 year lows in several components.

Economic Calendar
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GM rebounded +11% after its GMAC unit got permission to convert to a bank holding company and will be eligible for Treasury loans. GM has a 49% stake in GMAC. Giving GMAC a TARP lifeline will help the struggling financial company make more auto loans and boost the dealer financing program. This is a positive event for GM and would be the second lifeline in a week available to the automaker. Cerberus Capital, which owns Chrysler, owns 51% of GMAC. Under the deal to recognize GMAC as a bank holding company both automakers will have to cut back ownership to 10% for GM and 14.9% for Cerberus. This is inline with Federal rules to prevent companies from using ownership in a bank holding company to finance their failing businesses. GM will transfer its excess stake to a trustee approved by the Treasury and that trustee will sell that stake over the next three years in order to protect the value of the investment. Cerberus will distribute its excess stake directly to Cerberus investors. This has got to be killing Cerberus because for a long time they wanted to own all of GMAC. They had hoped to swap Chrysler to GM for GM's 49% stake in GMAC. Now they are seeing their own position broken up as well as GM's. Just being approved to be a bank holding company does not solve the loan problem. The Fed also is requiring GMAC to convert $30 billion in existing debt to stock and raise an additional $2 billion in capital on its own. So far GMAC has only raised $750 million in total from its parents GM and Cerberus. The equity swap/raise had to be completed by 11:59 PM on Friday.

Wal-Mart announced it was going to start selling the Apple iPhone this weekend at basically full price. The 8GB 3G phone will sell for $197 and the 16GB version for $297. Each comes with a 2-year service agreement with AT&T. Wal-Mart said its price match program would allow local stores to match the prices of any local competitor. There had been rumors that Wal-Mart would be selling a stripped down version for $97 as a new price point but that did not come true. Wal-Mart is known for low priced products but it still sells high dollar products as well. It appears they believe the iPhone has enough consumer appeal to keep the original price point at least for the foreseeable future.

The S&P is on track for the worst annual percentage drop since 1931 and the second worst year ever. To say 2008 was a bad year would be an understatement. If you chart all the bear markets over the last 50 years you get the list below. The average decline is 33% over a period of 13 months. The current bear market ranks as the worst in the last 50 years with the two closest comparisons having declines in the 48-49% range. That could suggest we are at a level where a rebound could begin. With the average months of duration at 13 months we are right there again. There is nothing in history to assure us the end is in sight but we are running out of negative news. How much more negative can we get than losing half our investment banks and ten of the largest financial companies in the US? Fund failures, scams and hundreds of billions in hedge fund withdrawals have crippled the confidence in the fund system but there is still plenty of cash on the sidelines waiting for the all clear signal.

Bear Markets
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Stock mutual funds saw $15.5 billion in outflows in the week ended on Wednesday according to TrimTabs Investment Research. This is the time of year when cash is supposed to flow into mutual funds not out of them. I fear there will be an even larger withdrawal once we exit the 2008 tax year.

As we head into the last three trading days of 2008 the Dow struggled to move off support at 8400. The volume was by far the lowest of the year at only 2.3 billion shares across all markets. This was only one third of Wednesday's anemic volume and one fifth of a normal trading day. The market could have closed at 10:AM and nobody would have noticed. The Dow gained +47 points and far less than what you would normally see in a year-end rally period. The Dow chart is negative and I fully expect 8400 to break next week. I continue to expect a retest of 8000 or possibly a retest of 7500.

Dow Chart
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The Nasdaq chart is not any better with a struggle to hold over support at 1500. The Nasdaq is typically the beneficiary of year-end money as retail traders place their bets for the coming year. Unfortunately the boom in the Nasdaq ended the prior week with the retest of resistance at 1600. There has been no interest in techs since the 17th and bad news continues to flow from the chip sector. Hardly a day goes by without some news of lower earnings and lower sales in 2009. Morgan Stanley's semiconductor analyst sees earnings for chip companies in 2009 to be down -78% and chip stocks to be down -15% to -30% from today's levels. An analyst with Canaccord Adams is predicting 2009 PC sales will fall another -10% to -15% and far more than the consensus estimate of -6%. I know smart investors are supposed to buy when nobody else will but I think there is more pain to come. Remember, Q4 is supposed to be the best quarter for tech earnings and Q1 is normally the worst. The retail numbers for December for consumer electronics were down -26.7%. If they were down this much in a bullish month how bad are sales going to be in Q1 when consumers are faced with paying the holiday bills and fighting to keep their jobs. Falling home prices have crippled the consumer and they can no longer use their homes for ATMs. This is going to continue to weigh on the consumer electronics and PC sectors. Real support is still 1400 and we could see that over the next two weeks.

Nasdaq Chart
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The SPX revisited support at 860 again last week and the bounce was minimal. I believe that support will break over the next two weeks. So many of the S&P stocks are now under $10 and quite a few under $5 there are many funds that cannot invest in those stocks because of share price limits. Those that can invest in low priced stocks almost always have position limits for number of shares. Even it they wanted to buy more they can't. That means any year-end retirement contributions will probably find their way into blue chip stocks if they are not met by withdrawals the first week in January. S&P 860 is support followed by 815 then 750.

SPX Chart
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The Russell 2000 remains the lone chart with any kind of bullish bias. The uptrend still has not broken but the Russell still lost -2% for the week. The chart looks heavy to me and ready to break to the downside like the Dow and Nasdaq. Fund managers will probably try to window dress the Russell into year-end but I suspect January will see support at 450 or lower retested.

Russell 2000 Chart
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Even though I am expecting a support retest over the next two weeks I am not expecting the November lows to be broken. I believe the bottom is in but it could be sometime before a new bull market appears. I cannot imagine what news could break that would push the markets to new lows. This has been the worst bear market in 50 years and the worst year for the S&P since 1931. Valuations are a fraction of what they were since 9/11 and there are many good companies to buy. Unfortunately until we get some visibility on a rebound in future earnings those valuations could go even lower. Earnings for Q4 are going to be horrific and Q1 may be even worse. A year ago ABN Amro was purchased by RBS for $100 billion with help from STD, BAC and Fortis. Very few people have even heard of ABN Amro. A year later in November 2008 for the same $100 billion you could buy Barclays, Deutsche Bank, Merrill Lynch, Goldman Sachs, Morgan Stanley and Citigroup. Not individually, you could buy the entire group for $100 billion. Even though those valuations have risen slightly many analysts would tell you that is still not a good deal. Citigroup at $6 is still being shorted by many analysts on fears they have billions more in write-downs to confess.

The challenge for 2009 is still the credit crisis. Until banks begin making loans the entire system is going to remain stagnant along with the equity markets. Obama is expected to ride into office on a white horse and rescue the economy from its current state of gridlock. His infrastructure stimulus may do that but not in January or February and maybe not even in 2009. Infrastructure is a long-term stimulus program not an immediate fix. The Obama inauguration event is another hindrance to the markets. The press keeps reporting that 2-4 million people could show up in Washington for the event. This is a terrorist target of incredible proportions. Security is going to be extremely tight but protecting more than 2 million people on foot from terrorists who don't care if they die is a tall order. The worry about a potential terrorist event could weigh on the markets until Jan 21st.

I believe 95% of investors are waiting with money burning a hole in their account for an all clear signal from the Fed, Treasury, financial sector and the market. Once it appears a credible rebound has begun we could see a rapid recovery. Unfortunately that could be spring before we see the blooms from the seeds planted by the Treasury and the Fed. The economy has a long way to go before it is healthy again. Over the last two years we have seen 148,000 retail stores close or announce their plans to close. They employed 650,000 workers. This is a direct result of the crash in the housing sector. Consumers accustomed to writing a check on their rapidly rising home equity were suddenly cut off as their equity accounts went negative. This is not something that can be corrected over the next couple of months. This will take a long time to rebuild that equity and remove the payment burden from the consumer. This is prompting most analysts to predict a flat and choppy equity market for 2009. Most feel the markets will close higher but the gains will be limited. Let's hope they are wrong.

Somewhere in the future is a magic domino. Once that domino falls in the right direction it will trigger a chain reaction of improvements in the economy and that will trigger a new bull market. Today we don't know what that domino represents but rest assured it is out there. We may not recognize it when it falls but we will be able to look back months later and instantly see what it was. I believe the current market is a buying opportunity we have not seen in decades. Unfortunately there is no green light that will suddenly appear on the floor of the NYSE. There is no bell that will ring and tell us the new bull market has started. There is no starter pistol firing in full view of television news reporters. We have to be proactive in seeking out value and potential in the current market.

Today investors are like gardeners. We need to be planting investment seeds in hopes of future fruit. Like a gardener those seeds could take weeks or even months before they sprout. The ground above them may seem bleak and barren as the winter snow and ice keeps the seeds dormant. Eventually the sun will shine on the market and our seeds will grow. I have absolutely NO DOUBT that a couple years from now we will look back and be very thankful we planted those investment seeds. They will probably grow with astonishing speed once sprouted because the trillions in worldwide government stimulus will eventually produce massive inflation. It always happens that way. Given the magnitude of the stimulus it would be nearly impossible for inflation not to occur. That makes investments today in hard commodities like steel, copper, oil, etc, that are denominated in dollars, especially suitable for large gains in years to come. China and India have seen their massive economic growth slow significantly but they are still growing. Once the recession is over they will explode once again. Emerging markets today may be out of favor but their sheer masses of people guarantees they will rebound in the future. ETFs on the various emerging markets will prosper.

This has been a tough year to be in the newsletter business. Every week brought new and unbelievable occurrences. It is extremely hard to even imagine the news events of the last twelve months much less realize they actually happened. For long only traders it has been horrendous. 401Ks are now 201Ks or so the punch line goes. It may be funny for market reporters to repeat that each week but it is not funny for the men and women who actually suffered through it and saw their life savings depleted. I will tell you today that the future is bright. It may not be bright for early 2009 but it will be bright for 2010 and later. Do not despair and take your money out of your stock investments. Continue to make those routine contributions and you will be rewarded. This is the greatest buying opportunity in decades and you get to participate and profit from it.

ONLY THREE DAYS LEFT - If you have not taken advantage of our year-end renewal special yet I suggest you do so quickly. We were not able to get as many DVDs as we wanted and are cutting off the special a lot sooner than in prior years. When we run out of DVDs the renewal page will be taken down. This is the cheapest rate for the entire year and includes $250 in free gifts.

You get not ONE but FOUR DVDs worth over $200!

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Everybody gets TWO mouse pad calendars. These are very worthwhile even if you don't trade options. For an entire year you never have to look for a calendar because it is always under your mouse. Market holidays, FOMC meetings, Crude expirations and of course option expiration dates.

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Everyone gets this entire package with their subscription!

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Jim Brown

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