Testy Tuesday: Are We There Yet?

by: Philip Davis

Once again CNBC has gone too far!

The futures were doing very well, up almost 1% until CNBC put together the tag-team guest spot of Mohamed El-Erian, the notorious bond pusher from Pimpco and "Doctor Doom" himself - Nouriel Roubini in a classic bear and bigger bear face-off that was timed right into the EU’s lunch hour. Roubini’s new book is called "Crisis Economics" and there’s nothing like a crisis to chase people into the loving arms of PIMCO, where El-Erian gets the fees. It’s odd that there’s not even a simple disclosure statement from El-Erian to guide viewers like: "You know, I do well when the market does bad."

This same gloom and doom tag-team was touring America in September of 2008 (see "Roubini, El-Erian - ‘Things are Getting Worse‘") and we’re up about 20% since then but, to be fair, things did get worse first. The boys teamed up again this February (12th) and their predicition of an additonal 20% drop off the February lows (also brought to you by the fear-mongers at CNBC) was completely wrong at the time but the boys dusted themselves off and took this show on the road again as noted in this May 28th article pairing the two’s depressing outlook.

Things were getting better yesterday until Moody’s (the company Buffett owns a large stake in but has nothing to do with according to his testimony) downgraded Greece in the afternoon - something that was not at all unexpected but was treated as market-moving information on a slow news day. Does CNBC push doom and gloom for ratings or are they trying to help their bosses at GE water down the financial regulation bill by making it seem like the average investor is against it or are they just trying to keep Cramer and the Fast Money team from looking clueless? This is why we used to have laws that kept our news sources "fair and balanced" - the moment a news provider takes a side with one of their high profile shows or personalities - they then have a vested interest in making the prediction come true - how can that not color their future editorial positions?

As I said last week, Dr. Doom doesn’t have to be in on a conspiracy - He’s Doctor Doom! The media loves him because he is a predictable tool and he is happy to perform his little act on command like a one-trick pony because that one trick has gained him fame, fortune and, apparently, women - something few modern economists have ever achieved… As Paul Simon says:

He’s a one trick pony
One trick is all that horse can do
He does one trick only
It’s the principal source of his revenue

He’s a one trick pony
He either fails or he succeeds
He gives his testimony
Then he relaxes in the weeds
He’s got one trick to last a lifetime
But that’s all a pony needs

We had a different theme song in mind yesterday as I cautioned we were very likely to be rejected by our bounce levels on the first attempt and that it would be a "Take the Money and Run" day for our short-term bullish positions. Those levels, which I’ve been posting for a month, are Dow 10,250, S&P 1,100, Nas 2,260, NYSE 6,820 and Russell 666. Yesterday’s highs were Dow 10,328, S&P 500 1,105, Nas 2,278, NYSE 6,922 and Russell 662. The Russell was our only failed indicator but that saved us from staying bullish and, in fact, we actually flipped bearish at 10:36, when I said to Members "I’m for taking the downside hedges here, naked on DIA mattress play (Sept $105 puts, now $6 and good for a new entry) and I also like the TZA $6 calls at .70." Of course, it was only day-bearish - we killed those TZA calls already after getting a very nice sell-off thanks to Moody’s.

Just because you are generally bullish does not mean you can’t take advantage of bearish moves when they present themselves. As Pharmboy pointed out, we are in a string of about 29 out of 30 days in which the Dow moves more than 100 points in a day. In a day! Maybe I’m too old but we used to call that an active month! My conclusion at the end of trading yesterday was: "On the whole, I think that was a gap-fill and a healthy pullback but they sure did make it ugly-looking!" Nonetheless, we did put on our TZA disaster hedge (pays 900% if the Russell drops about 20%) as planned in the morning Alert on our test of Dow 10,250 and now we can relax again as we are very well-covered to the downside with cheap insurance (we elected to be naked bullish last week, rather than buy expensive insurance).

Keep in mind, we are right on track with the 5% Rule numbers we have been using all year and now we need to see the S&P crawl back up the series we predicted they would crawl down on May 5th (S&P was still at 1,170): 1,155, 1,114, 1,100, 1,073 and 1,045. I said at the time that I expected us to go back to at least 1,100 and if it holds, I would get downright bullish. We are certainly not "downright bullish" yet with just 25% of our portfolio invested in heavily hedged bullish positions but we’re hoping to be if all goes well this week. We fished for a bunch of bullish 500% to 1,000% gainers last week and I’ll be adding some more to that last if we can get over this hump but now it’s wait and see time at PSW…

Today is a very busy day with 10 major items on the Economic Calendar:
6:15 Fed’s Bullard: ‘Asset Bubbles and Monetary Policy’
7:45 ICSC Retail Store Sales
8:30 Import/Export Prices
8:30 Empire State Mfg Survey
8:55 Redbook Chain Store Sales
9:00 International Capital Flow
9:30 Hearing: Drilling Safety (XOM, CVX, COP, BP, RDS.A)
10:00 NAHB Housing Market Index
5:00 PM ABC Consumer Confidence Index
8:00 PM Obama delivers address on the Gulf oil spill

It’s 8:40 now and Bullard didn’t move the markets, ICSC Retail sales are down 0.7% for the week but still up 2.9% for the year, Import Prices were down only 0.6% vs. -1.2% expected and up 0.5% ex-energy and the June Empire Manufacturing Survey is pretty much in-line at 19.57, up from 19.11 in May while new orders are up at 17.53 vs. 14.3 last month. Pricing is still an issue and the deflationary slump continues as prices decline from 5.26 to 4.94 so our worry for Q2 earnings is going to continue to be margin pressures taking down earnings.

Margin pressure was the story on BBY, which dropped 6% on earnings this morning as net income only grew 1% on 2.8% more sales. So there is a price consumers will buy at - it’s just not necessarily a price that makes the seller any profits… The BOJ is working hard to keep the consumers in play by holding rates steady at 0.1% this morning and rolling out a 3 Trillion Yen lending program to small business. Unfortunately, 3 Trillion Yen is only $32.8Bn, even at these lousy exchange rates and analysts are skeptical, saying: "There is already an abundance of available liquidity, which has failed to translate into strong credit growth primarily because of sluggish demand."

[MERSARK]Asian markets were pretty much flat this morning, not knowing what to make of our crazy session yesterday and Europe was off to a rocking start until CNBC released the Doom Squad but they are still up over 0.5% coming into 9 am in New York. France and Germany may be taking their bonding a little too far, according to this photo, but it’s a good thing for Europe to have those two show a unified front. Huggy-kissy photo ops like this send a signal to those who are betting on the collapse of the Euro (Pimpco, of course!) that Mommy and Daddy are committed to working things out and it may be too early to start dividing up the furniture.

Meanwhile, Japan can’t stimulate their businesses, Germany’s ZEW Survey shows economic expectations dropping the most since October, 2008, Spanish banks are facing a credit crunch and the UK is cutting their growth forecast - so where else are you going to put your money other than US equities? Of course El-Erian would argue that it’s far better to buy low-yield bonds and pay him a fee to sit on them for you. In fact, the more you buy (driving down the rates), the more valuable his $1Tn worth of bonds becomes but I think I still prefer stocks thank you - many with dividends that pay far more than even risky bonds and we can mitigate our risks by hedging our positions while still giving ourselves room for significant upside in case the Doom Squad is wrong and the world doesn’t fall apart.

Like China and Japan and even the US, the Euro-Zone’s industrial production increased in April - up 9.5% from a year earlier. That data was the cause of the rally that was stomped out by the Doom Squad this morning but is not getting back on track now that the boys have had their say. Our EUO short position ($26) is going to be rockin’ this week and we’ll probably be done at $1.25, which will be about $23 but much nicer on our put play (probably 100% gain).

The Dow was at 9,500 and heading higher a year ago and we’re 10% stronger now so I maintain that my 10,700 target (1,145 on S&P 500) is a very fair value for equities coming into next month’s earnings. If we can escape margin issues, then we will have room to test the next 5% move up in our range but I’m perfectly happy if we drift along the low end for now, between 10,200 and 10,700 and that’s our hope for this week - to re-assert ourselves over our bounce levels, which will hopefully become a floor for a sustainable trading range going forward - not the V-shaped nonsense we had in March and April.

Great video if you haven’t seen it, by the way: "What Happens When BP Spills Coffee." Good warm-up for today’s hearings…