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12272010 December 27, 2010

Posted by easterntiger in economy, financial, markets, oil, stocks.
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Weather Report  12272010

Current Positions  (Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) up to 20%  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 12/24   +6.82, +16.13, +23.33, -14.95

(3wks ago/2wks ago/1 wk ago/this week)

Do you believe in Santa?

Then, why should you be expected to believe in the annual ‘Santa rally’ in stocks?

Year after year, the final push from mid- or late-year lows toward the end of the year is termed the ‘Santa rally’.

More likely, it’s fueled by some buying ahead of anticipation of December & January bonuses being used for asset purchases, or, in the case of this year, outright short-term purchases by broker-dealers with loans from the Fed, as
a ‘brace’ under the market.  This one, like the rest, are meant to create an optimistic mood into the end of the year.  Happy consumers are likely to be happy spenders, right into the crux of the holiday/retail buying season.

The overall effect is more psychological than anything else.

Cautiously, before you accept any sound bites which encourage your optimism, you must start with at least one question.   How much borrowed money from the Fed does it take to keep our markets suspended with the appearance of stability?

A continuation of this uptrend into the first of the year might offer short-term opportunity.  A reversal back to previous levels should raise suspicion of the upswing that began in September, paused in November and completed last week.  One of my indicators shows most likely flattening, which would include either slight upside progress or slight downside retreats.

This last advance has followed earlier patterns, extremely small gains on a daily & weekly basis (the S&P100 has risen by an average of about 0.75 points/day since early September).  Unfortunately, in earlier patterns, such small advances have come ahead of occurrences of sudden negative momentum which erased weeks or months of gains in mere days.  Nevertheless, having finally broken the April highs and out of the narrow ranges bounded by S&P 1220 and Dow 11200, by roughly 3% each, these extensions by themselves do not represent a solid bullish case, unless further stained by using 1220 and 11200, previous ceilings, as floors for the next advance.   If this occurs, I will take safe, short term positions in the C, I and S equity funds.

A near panic rise in interest rates has been in effect since just after the Fed’s latest push to actually ‘lower’ rates when it began quantitative easing, phase 2 (QE2) in September.  So, while the Fed was attempting to inspire confidence and influence lower rates, the opposite reaction actually anticipates the impact downstream, the introduction of inflationary pressure in a number of sectors due to the weakened dollar and rising prices of imported goods and commodities.

Repeated reference to the high cash positions of corporations has created anticipation of new hiring in retailing, accounting, health care, consulting, telecommunications and defense-related industries.  This anticipation has placed upward pressure on interest rates, with a the projection that the Fed will raise short term rates in January.    This forces the near term downward pressure on the F fund.

However, the small losses in smaller F fund positions would be far offset by sudden and large gains in the event of a sudden stock downturn.

You must continuously make the connection between the appearance of healthy markets and the $75b per month in funding from the Fed to broker/dealer companies, who are essentially being paid to buy stocks, temporarily, to hold their prices in these upper ranges.  In other words, when you hear that ‘the Dow is up 12% year to date’, you must ask ‘from what‘?

You must also question the stability or longevity of any so-called, broad based economic recovery when pension plans in many cities and states are struggling with funding inadequacies, with varied levels of success. New York City plans to put $8.3 billion into its pension fund next year, twice what it paid five years ago. Maryland is considering a proposal to raise the retirement age to 62 for all public workers with fewer than five years of service.  Illinois keeps borrowing money to invest inits pension funds, gambling that the funds’ investments will earn enough to pay back the debt with interest. New Jersey simply decided not to pay the $3.1 billion that was due its pension plan this year. Colorado, Minnesota and South Dakota have all taken the unusual step of reducing the benefits they pay their current retirees by cutting cost-of-living increases; retirees in all three states are suing.  The town of Prichard, Alabama has recently stopped paying pensions to their retirees altogether.  This is expected to happen in other locations as more municipalities find that reduced tax revenues, reduced consumer spending and external capital investment leads to uncertain budgetary positions.

Just as in housing, autos, or any other consumer based spending, which represent the bulk of the economy, there must be enough sources to create stable or rising personal income not offset by increasing obligations, in order to result in a stable economy, even as corporate balance sheets appear healthy.  This means nothing if the corporations do not hire or invest in expansion.

So, just where are the areas of the economy that are producing more favorable numbers or announcements?   The most stable component of the economy is the services sector, fed not only by our purchases of haircuts and auto repairs, but interest on debt and other forms of “economic rent.”

But, did someone say that there was a recovery underway? On a basis, not yet updated officially, gross domestic product/GDP, is back to pre-recession levels.  Never mind the 6 million jobs lost, additional 10 million underemployed and record 42 million on federal food assistance.

Well, let’s look at some real numbers, even before we add in 2010.

Almost 400 retailers have closed over 20,000 retail stores in 2008 & 2009.   Here ‘s the breakdown.

In 2008, 35 retailers closed 4,321 stores. Below are listed the number of stores and the retailer name by order of the largest number of store closings.

384 Bombay (all stores); 378 Movie Gallery; 371 Linens ‘N Things (all stores); 356 KB Toys; 184 Sharper Image; 181 Rite Aid; 173 Steve & Barry’s (all stores); 160 Wilson Leather; 154 Pacific Sunwear / PacSun; 149 Mervyn’s (all stores); 140 Dell; 140 Footlocker; 126 Office Depot; 125 Sprint/Nextel; 120 Friedmans; 117 Ann Taylor; 112 Office Depot; 105 Zales; 103 CompUSA (all stores); 100 Fashion Bug; 98 Disney; 85 GAP; 78 Club Libby Lu Saks (all stores); 78 Talbots Kids/Mens; 54 Sigrid Olsen; 41 Sergio Rossi; 40 Lane Bryant; 31 Pep Boys; 29 Eddie Bauer; 26 Dillards; 25 Pier 1; 20 Cache; 15 Home Depot; 12 Ethan Allen; 11 Macy’s

As bad as 2008 was for retailers, 2009 produced almost four times as many store closings by more than six times as many retailers.

A total of 255 retailers closed 16,232 stores, producing the common sight of “For Lease” and “Going Out of Business” signs in every mall and downtown across the US. (only stores with 10 or more closings listed)

2,639 General Motors; 960 Blockbuster; 789 Chrysler; 567 Circuit City; 461 KB Toys; 450 Movie Gallery (Game Crazy, Hollywood Video); 365 Ritz Camera; 273 Starbucks; 287 Goody’s; 265 Jones Apparel Group (2009 & 2010); 240 Waldenbooks; 224 Foot Locker; 191 Zale Corporation; 175 Van Heusen; 163 Ann Taylor (by 2010); 162 Charming Shoppes; 161 InkStop; 160 Family Dollar; 150 Popeye’s (AFC Enterprises); 135 S&K Famous Brands Inc.;130 Advance America; 129 Boater’s World; 125 F.Y.E. (Trans World Entertainment); 121 Eddie Bauer; 118 Office Depot; 117 Rite Aid; 104 Finlay Enterprises; 102 Payless Shoes; 100 Albertsons; 100 Gap, Inc.; 98 Club Libby Lu (Saks); 85 NextCen Brands (Great American Cookies, MagieMoo’s, Marble Slab Creamery, Pretzelmaker); 84 Payless Shoes; 84 Samsonite; 81 Saab Dealerships; 77 Game Stop; 75 J. Jill; 75 Signet Jewelers; 70 Famous Footwear (Brown Shoe Co.); 60 Arby’s; 60 Collective Brands; 60 Dominos; 59 Advance Auto Parts; 59 Ruby Tuesday; 58 Gottschalks; 56 Smith & Hawken; 53 Rex Appliance & Electronics; 50 B Dalton; 50 Pacific Sunwear; 50 Select Comfort; 50 Supervalu; 50 New York & Co. (over the next five years); 48 Home Depot (Expo, YardBIRDS, Design Center, HDBath); 48 Ultra; 46 Anchor Blue; 45 Cato; 44 Check ‘n Go; 43 Destination Maternity; 40 Justice; 40 Kirkland’s; 40 Tween Brands (Limited Two, Justince); 38 Bruno’s; 34 Bachrach; 32 Big 10 Tires;31 Pier One; 30 Big Lots; 30 Jo-Ann Stores; 29 Basha’s Supermarket; 29 Ruehl (Abercrombie & Fitch); 28 Kmart; 28 Yankee Candle; 26 Cost Plus; 25 Chico’s FAS; 25 Dress Barn; 25 Finish Line; 25 Fred’s; 25 Luby’s; 24 Blue Tulip Gift Shops; 24 Cashland; 24 Sears; 23 Sportsman’s Warehouse; 22 AFC Enterprises; 21 Papa John’s; 21 ZGallerie; 20 Baja Fresh Mexican Grill; 20 Man Alive (Finish Line); 20 Oneida Ltd.; 20 Pumpkin Patch; 20 Wendy’s; 20 Wet Seal; 19 Snyder’s Drug Stores, Inc.; 18 Black Angus; 18 O’Reilly Automotive; 16 Filene’s Basement; 16 Iridesse (Tiffany & Co.); 16 Men’s Wearhouse; 16 Shoe Carnival; 16 Talbot’s; 16 Williams-Sonoma; 15 Tim Horton’s; 15 West Marine; 14 Whataburger; 13 OfficeMax; 13 Stein Mart; 12 Bealls; 12 Kira Plastinina; 11 99 Cent Only Stores; 11 Better Bedding Shops, Inc.; 11 Jimmy’Z (Aeropostale); 11 Macy’s; 11 Pamida; 10 Casual Male; 10 Holcomb’s Education Resource; 10 Bassett Home Furnishings; 10 Dollar General; 10 E&J’s Shoes; 10 P.F. Chang’s Pei Wei Restaurants; 10 U.S. Cellular;

The markets might very well maintain this appearance of stability for the remainder of the Fed’s quantitative easing II program(QE2), for another 6 months or so.  There might also be a calm, positive period leading into the end of the federal budget continuing resolution, just passed into effect before the holiday break.

For our next hurdles, look only to Ireland, Italy, Greece, Spain, Portugal and the United Kingdom, who are dealing with their own budget issues, including massive tuition hikes, cuts to pensions, pay and staff numbers for public sector workers who are bearing the initial brunt of austerity measures.  At the expiration of the Fed’s QE2 this spring, a very serious discussion of the collision of the current budget and the federal debt ceiling will have to be made.  March to May portends to be a very tumultuous period.

Oil prices are now at a 27-month high and are back in price discovery mode after consolidating between $87 and $90 for almost three weeks. The theme underlying these price advances in all risk assets, not just crude, is general economic optimism. U.S. data is becoming more constructive, the European sovereign debt situation seems to be under control, and emerging markets continue to grow robustly. With regard to crude oil specifically, inventories have begun to draw down rapidly as demand surges ahead of supply and OPEC refrains from increasing its production significantly. Incidentally, U.S. pump prices surpassed $3 last week, the first time in history that
retail prices are over $3 during Christmas. Notice that this time around there is very little outrage as consumers are resigned to the new price paradigm.  A ‘drip’ of bitter medicine is much better than a ‘gulp’.

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