Monday Morning Outlook

by: Philip Davis

We are not off to a good start Monday.

Asia is way off with the Hang Seng dropping 3.5%, down 967 points and looking like a total disaster at this point. The Hang Seng is off 12% from the Pearl Harbor Day high of 29,962 with just one up day in 8 sessions. On the bright side, they’ve filled the post Thanksgiving gap that rocketed the index to those record highs on the same madness that moved our markets. The Nikkei dropped 1.7%, down 264 points, looking equally pathetic over the past week and down Just 5.3% from December 7th but down 16.7% from their double top for the year at 18,300.

In the longer view, the Nikkei is just off it’s 2-year low of 14,000 and seems destined to test it, which would be a neat 40% retrace of their 10,000-point run since May of ‘03. The Hang Seng is up 23,600 points over that same time-frame so we don’t even want to consider the implications of a 40% retrace over there but we kind of have to because their 2-year low is way down at 16,000, 50% off the top! Needless to say, I think I’ll hold onto those (NYSEARCA:FXI) puts for a bit longer, just in case…

This is a chart of the DJ World Index - NOT very encouraging as we just broke 297, which is the 5% rule if you throw out the silly, Fed-induced spikes!

We’re going to have to keep an eye on the DAX, which only slightly off a 7-time test of 8,100, which is starting to look less like consolidation and more like a top and the FTSE, which is more clearly on the way down, now off 6% from it’s much tested high of 7,100. The two year low of the FTSE is 5,600, 21% off the top and the DAX was way down at 5,300 back in June of ‘06, 35% off the high.

So that’s the Hang Seng off 12%, the Nikkei off 16.7%, the FTSE off 21% and the DAX holding us up just below the 5% rule. If I were a betting man (and I am) I’d be keeping my eye on that DAX as a leading indicator for the global markets - if they break down from here (and it looks like they are) we could be looking at a pretty nasty correction all around. The DAX bounced off the 2.5% rule at 7,897 on Friday and did the obligatory 20% retrace back to 7,950 at the close but they gapped down below the mark this morning and show no sign of turning back up on their own. We need to see the DAX back over 7,900 to avoid Europe following us downward.

It’s all up to the US markets to turn this thing around and, as I mentioned on Thursday when we looked at the week ahead, I’m just not sure that’s going to happen. It’s a low-volume, pre-holiday week so anything can happen and we’ll be thrilled to get a rally to sell Jan callers into but I’m not going to count on it. The best chance for the bulls to get something going is GS earnings tomorrow morning but I don’t see a real upside there as we already know they are bullet-proof so anything but a flawless performance will be disappointing and GS has now been set so far away from their competition that I doubt even great results from them will move the sector - as many of Goldman’s gains have come at the expense of their competitors.

Retail sales seem a little disappointing but that’s what I’m hearing, I have no hard evidence yet. CNBC says consumer spending is "planned" to be up 6% and perhaps it’s just the fact that Xmas isn’t until next Monday that everyone is taking their time this year. That 6% number is off 19% from October estimates and what I found most interesting was this: "An American who believes his home price will decrease in the next 12 months will spend 23% less, or $110, this holiday season than the average American. Fortunately, most Americans don’t believe their home prices will decline." Holy cow - we are still in deep denial aren’t we?!?

Denial is not a strong enough word for what I see here - ONLY 13% of those polled thought their home value would decrease next year! Only 2% of those surveyed believe it is possible for their wages to go down and 56% expect an average raise of 5.3%, expectations that are down from 7.3% expected last March but these same poor people think cost of living will only go up 6.4% - so they know they are losing ground but they don’t think it’s by that much.

Gasoline is averaging $2.99 a gallon nationwide, up .70 from this time last year. That costs US consumers about $400M a day right there, that’s about $4 per day per US household. Wheat just jumped over $10 a bushel this morning, up over 100% for the year and you can just imagine the impact this is having on the global economy where 3Bn people spend 60% of their earnings on food just to stay alive. Even in the US - home of the Whopper, food prices are starting to hurt and 1 in 9 people said they will be cutting back on "high-priced coffee purchases." This should give SBUX the final bottom we’ve been looking for so we’ll make a play on them today or tomorrow.

Only 22% of the people rated the economy good and 4% rated it excellent (they really shouldn’t let Kudlow vote 100 times) and Moody’s doesn’t seem to agree as they warned late Friday that AAA ratings of four leading bond insurers could be downgraded after the agency re-evaluated the companies’ exposure to potential subprime mortgage losses. The AAA ratings of Financial Guaranty Insurance Company, which is partly held by Blackstone, and XL Capital Assurance, a unit of Security Capital, were placed on review for possible downgrade. The AAA ratings of MBIA and CIFG Guaranty were affirmed, but the rating outlooks changed to negative.

Citigroup downgraded ratings of Capital One (NYSE:COF), Radian Group (NYSE:RDN), Countrywide Financial (CFC) and MGIC Investment Corp. (NASDAQ:MGIC) "We expect consumer lenders and insurers to face further credit challenges as home prices decline 3% to 5% in each of the next two years, mortgage rates reset and the macro economy slows. Moreover, tightening lending standards and underwriting practices should initially compound the problems, making it generally more difficult for consumer lenders to grow out of the downturn," the bank said. Gee, let’s hope all those optimistic homeowners don’t read this before they go shopping this week!

The Empire Manufacturing Index came in at 10.3, down 62% from 27.7 in November - that’s not good either!

Oil prices were down until, right at the NYMEX open, MEND (the rent-a-rebel group in Nigeria) issued this holiday proclamation: " We call on all genuine militant groups to unite and cripple the oil industry in Nigeria once and for all and stand strong to face a common enemy. The time has come for all breakaway factions to come together and wage war of a different kind in 2008.” This is simply amazing timing as we were just discussing this weekend that the NYMEX traders were under a lot of pressure to dump 85M barrels of January crude contracts over the next 3 days and we were wondering how they were going to find buyers and presto, right at the open they get bailed out by MEND.

Expect heavy selling of oil at the open, despite this news, as the contracts close on Wednesday and. as it says in the Bible, "It is easier for a camel to pass through the eye of a needle than for even 1/2 of the 115,000 open contracts to be delivered to Cushing in January, so we know what a scam that is!"

We’re still at the top of my 13,000 to 13,300 range that I predicted way back at November expirations so I really don’t see what all the fuss is about. IF we hold 13,300 this week it will be bullish and IF we hold 13,000 we will have completed at least 1/2 of what I consider a healthy consolidation and we’ll be coming off the holidays in a buying sort of mood. Just a little less denial and a little more acceptance so we can work through our grieving process and everything will be all right - I hope!