Davis's Wednesday Outlook

Includes: DIA, QQQ, SPY
by: Philip Davis

We are just waiting for the Fed today.

Professional bond-broker Greenspan jumped the gun today with a well-timed attack from Berlin where the former Fed chief (the one who people respect) said this morning: "I believe the probability of a recession is at least 50 percent, but up to now there are few signs that we are already in one," Greenspan said in an interview with weekly newspaper Die Zeit published in German. "In my opinion, it will probably happen but the facts suggest we are not there yet."

Asked whether central bankers and financial policymakers could head off a U.S. recession, Greenspan said: "Probably not. Global economic influences today are stronger than almost anything that monetary or fiscal policy can counter them with."

Gee thanks Alan - when you’re done killing our economy I have a puppy you can strangle too!

Greenspan has indeed done a complete 180 since becoming a bond pimp. After spending 20 years telling Congress the Fed had things under control, on Oct 16th he told Fox Business news that the Fed is NOT necessary (6:30 on the video) and intimates that we would, in fact, be better off going back to a gold standard or else we are doomed to ever spiraling inflation. Right at the end of the clip, Greenspan states that the nation did very well from 1870 to 1914 with the international gold standard. For more on this, you can read my sadly prescient March article "Are We Heading for an Economic Tornado."

Asia did not know Greenspan was going to rain on Bernanke’s charade today but they took the time to sell off anyway, despite what seemed to be an encouraging US session yesterday (of course (NASDAQ:YHOO) bummed everyone out last night). Japan gave back 1% in a very rocky session while Hong Kong fell 638 points, saved only by the bell after giving up a week’s worth of gains and not looking too healthy on a monthly chart.

As I mentioned on Monday, (NYSE:HMC) officially reported yesterday a 38% rise in net profit led by very strong exports. Overall industrial output in Japan EXPANDED 1.4%, slower than expected but far from what Goldman’s Chicken Little report would have had us believe. There were legitimate issues with bank earnings and China’s massive snow storm (which I also predicted as a byproduct of global warming) is so severe that it is taking down growth expectations for the year.

Linus Yip, strategist at First Shanghai Securities in Hong Kong, said the outlook for Shanghai-listed shares was uncertain in the wake of monetary-policy tightening by the country’s central bank, as well as the severe snowfall in several parts of the country, which has led to the disruption of power generation and transportation services and forced several manufacturing plants to shut down temporarily. The weakened outlook for Shanghai-listed shares added to the "uncertainty especially for the H shares in Hong Kong," he said.

Europe is reeling from a $4Bn loss from UBS as well as a 42% drop in net at BNP Paribas. Despite very strong export numbers from the Japanese car makers they dissed on Monday, Goldman continued to be fabulously wrong by downgrading Michelin and Volkswagen this morning. Not at all surprisingly, French and Italian consumer confidence hit a 20-year low and EU markets are off about a half a point as they trade at the very dangerous disadvantage of closing before this afternoon’s Fed announcement.

This is all just another check in the plus column to my theory that the US remains the least sucky place for investors to put their money. To that end, according to the WSJ, Chinese regulators are expected to sign a deal with the SEC that will allow banks in China to develop U.S. stock mutual funds for their clients. Currently just $3.7Bn of the Chinese people’s $2.4 Trillion is invested overseas, the movement of just 5% of that money to the US would wipe out all the writedowns taken to date by the financials.

HSBC Holdings PLC estimates QDII products worth over $50 billion have already been approved — not far off the roughly $66 billion earmarked for overseas allocation by Beijing’s much-watched sovereign fund China Investment Corp., which last year bought into Blackstone Group Ltd. and Morgan Stanley. The sky may be falling but it could soon be raining Yuan - Hallejn!

20 of the 24 S&P Technology companies have had a beat so far and our banks have written off substantial portions of their loan portfolios down to ZERO, the assumption that they will recover NONE of the money they loaned against homes. Unless those banks are going to be asked to chip in some more money, things can’t get any worse but that’s exactly what may happen as the FBI (acting under WHOSE orders one might wonder) has opened criminal investigations into 14 (so far) sub-prime lenders, following the lead set by NY’s Andrew Cuomo that we noted would be a much bigger deal back in December.

"The question of fraud goes to the entire process—where the loans were created, whether there was fraud in their creation, or misrepresentation as to the quality of the loans in the sales process," as they moved through the chain, says the source. "A key question is what information (loan originators or securitizers) had about the quality of the loans, and whether that was consistent with statements they made to others."

Another issue is the valuations the banks that currently hold many of the mortgage-backed securities are using to record them on their books. Investigators are examining closely whether they are being properly valued, including whether the assumptions being used in the banks’ valuation models are giving realistic estimates of their current worth.

Investigators would not disclose the companies that are being probed. New Century Financial (NEWCQ), the mortgage broker that filed for Chapter 11 bankruptcy in April, 2007, is one industry player that has reported in SEC filings that it faces a criminal probe. In March it announced that it was under investigation by the U.S. Attorney from the Central District of California. And in a press release on Mar. 28, 2007, Beazer Homes USA (BZH) said it was cooperating with a document request by the U.S. Attorney.

Woo-eeee, this is going to be fun!

Former Federal Prosecutor, Jacob Frenkel points out: "As we saw in the corporate fraud cases, companies have an incentive to resolve these investigations; that may include the sacrifice of corporate personnel. People often forget in the early stages of an investigation, their interests and those of a company can diverge. Companies can settle. They don’t go to jail, people do."

GDP numbers came in weak with Q4 preliminary numbers at 0.6% but ADP jobs numbers were surprisingly strong and I’m still rooting for a somewhat restrained .25 cut today. Hopefully we’ll get a little sell off so we can work our DIA puts into a bit of a strangle as we could go up or down 300 points this afternoon (or both!). BA had a nice beat and raised guidance but no one seems to care and I doubt anything that happens ahead of the Fed will carry much meaning today.

It’s going to be a wild day - be careful out there!