Wall Street Strategies'  Instablog

• Not a lot of action
  
• Not a lot of tension
  
• Not a lot of anything
  

This market has been dragging today as investors grapple with the speed and velocity of a rally that gets stronger on bad news. There is a little bit of consolidation but not the kind one would expect after such a sharp spark. If the Dow Jones Industrial Average was off 100-points it wouldn't raise any red flags. Be that as it may, the market hints at a last minute rally into the close. Why not? One thing is for sure, sellers aren't selling even if buyers need to chase big moves. The motivations for buyers are pretty clear....this train has left the station. Although there have been periodic scares for the market, the fact is that most holders of stocks at this point are stubborn or greedy, but they aren't sellers. In fact, I think that the few times the market hinted at a full-blown reversal to the downside it was investors mostly late to the game that blinked.

Of course, the market is getting its cues from a variety of sources, and I think the fact there wasn't a sell-off on Friday set the tone for yesterday's move, which of course got a big boost from the G-20 communiqué. It was great news to equity investors that easy money will continue to flood the system and at some point, it may even reach Main Street.

In the meantime, a slight nudge in small business optimism couldn't provide a spark for the stock market. One thing that doesn't bode well is breadth:

• * Advancers: 998
• * Decliners: 1,983
  
  

There was disturbing news from Electronic Arts (ERTS) and Sprint (S) as both companies announced additional job layoffs. So add another 1,500 and 2,500 names, respectively, to the list of victims of this recession. If it makes anyone feel better the share prices of both companies are lower today.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.
 

"I hope that as the largest economy in the world and an issuing country of a major reserve currency the United States will effectively discharge its responsibilities."

It seems like every time a leader of a foreign nation calls out America our stock market goes higher. I can assure you it's not a sign that investors are rallying around the flag. On the contrary, it's a sign that while our nation is in the midst of a Main Street economic crisis, investors are betting against the flag, against the nation, and against the notion that somehow the United States can snap out of it. So, multinational stocks are higher, lifting the broad market. However, the message is clear. I don't think that U.S. investors are convinced the powers that be are effectively discharging responsibilities. Instead of wallowing investors are finding ways to capitalize. Let's face it, Nero had the pleasure of fiddling alone while Rome burned; these days the populous wants to fiddle along with the masters of our universe. Of course, most people aren't in the mix as far as the market is concerned as they are on the outside looking in, some by design and others because they are trying to douse that fire. Volume is problematic to be sure, but it has been all year long. That, among many other things, has kept investors at bay but as dubious as this rally might be you have to take advantage.

"With all its alluring promise that someone else will guarantee for the rainy day, social security can never replace the program that man's future welfare is, after all, a matter of individual responsibility." - Harold Stonier

As the nation shifts to a society where people are told that it's their right to have someone else pay for their healthcare, I sense the development of a new social underclass. In the "new normal" people that always worked are being lulled into giving up. In the new normal, small businesses are expected to match the ability of large business and pay for healthcare insurance even as they are paying taxes for being rich. This effectively dampens the entrepreneurial spirit. But more and more the nation is being told don't worry about a rainy day someone else will pay for social security, healthcare, your mortgage or rent, and your food. Could this be what the Premier of China is really concerned about, the fact that as they try to awaken the entrepreneurial spirit (right now there is record bank lending in China) just as we are demonizing businesses and telling them to prepare for an onslaught of regulations, rule changes and taxes? China, like Saudi Arabia, understand all too well the notion of keeping the goose that laid the golden egg alive but now the goose is destroying itself. Despite it all, the stock market continues to rally because it's more of a bet on the rest of the world than the United States.

"Liberty means responsibility. That is why most men dread it."- George Bernard Shaw

This is a strange time indeed. Each week someone from a different part of the world openly challenges America. Last week it was a high-ranking Indian official explaining the purchase of 200 tons of gold by saying our economy has collapsed. If this were some ant like Hugo Chavez it wouldn't be a big deal, but these are the hottest economies in the world and they're calling us out because we are going the wrong way.

The Market

Blue chip names helped to power the Dow Jones Industrial Average and S&P 500 higher than the NASDAQ Composite yesterday as investors picked more quality names. The Dow actually broke out to a new 2009 high point. Although volume was lackluster there could be a sense the train is leaving the station. There have been two 200-point sessions in the last three sessions. It's bewildering in so many ways, and yet cannot be denied in the near-term.

One of the more interesting aspects of yesterday's session was the action in retailers. Deep discounters like Family Dollar (FDO) and high-end retailers like Nordstrom's (JWN) enjoyed solid sessions as did most of the sector. I understand spin and the game of expectations that often drive the share prices of underperformers higher, and great companies lower, but this is something. New high for the Retail Index!

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.

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This past weekend was one for reflection as once again the wait for the most important piece of monthly economic data yielded as many questions as answers. There were those silver linings of temporary jobs and such, but to borrow a word "sobering" reflects the jobs situation in America. Frightening maybe best describes the situation for those unemployed as the only lifeline they've received thus far is an extension of unemployment benefits. I can say for certain there will come a point when people lose faith and become accustomed to those unemployment checks, especially if their skills are antiquated in the digital world. (I wonder why the government isn't using funds to retrain people to be more competitive so they can reenter the workforce with dignity and power to earn better wages. Teach a man to fish as the old proverb goes makes for smart public policy.) Without a doubt the most glaring trend in the report is unemployment when it includes the marginally attached. The marginally attached component of the job market includes people that looked for a job over the past 12-months but not in the last four weeks. This number leaped to 2.4 million from 736,000 as 808,000 said they were simply too discouraged. Couple this number with the official unemployment rate and you get 17.5% unemployment. Moreover, there are 9.3 million people working part-time that would like full-time work. The 17.5% unemployed with marginal added is a record, eclipsing the previous record of 17.1% established in December 1982. It's easy to understand why people are discouraged as long-term unemployment (27 weeks+) stands at 5.6 million. The situation makes it difficult to buy into the notion of a jobless recovery, but more than that it suggests there will be a new underclass in America of people that could see an eventual recovery happen without them. I don't think it will be consolation for them that Wall Street executives are making fewer billions. But, their despondency is stoking anxiety among those gainfully employed. A serious problem. Consumer Credit Consumer credit was down again for the eighth month in a row, decreasing $14.8 billion in the month of September. Consensus called for a decline of $10.0 billion. Year over year the 4.8% decline was the steepest since June 1944. Revolving credit (credit cards): decreased $9.9 billion or 10% year over year, the biggest decline ever on record (started being followed in 1968). Part of the declining credit card credit is the shift to debit by consumers, but there has been a huge decrease in offers for new cards. Take for instance in 3Q09; there were 391.0 million direct mail offers of credit cards down from 1.3 billion or 71% a year earlier. Industry watchers say part of this goes beyond the economy and to the new CARD act that has put certain limitations on the industry. As a result, only 6% of the offers were for fixed rate terms which need 45 days notice to make adjustments. Non- revolving credit: decreased $4.9 billion or 3.8% year over year and 3.7% quarter over quarter. This number was a real shocker as some of those "cash for clunker" deals should have appeared in this report. Summation Just consider what these numbers are saying; this is the steepest decline in consumer credit since World War II when the nation was fighting the ultimate battle against Nazi Germany. I get that individual households are repairing their own balance sheets but what I don't get is I also know there are budding entrepreneurs, potential homeowners and others that need/want credit. At a time when banks are sitting on trillions of dollars it's almost criminal that consumer credit is plunging at such an alarming rate. Some bank analysts will say this is actually great, why should banks take a risk. But, at some point banks must lend to make a return on the cash they are sitting on unless they can prop trade the market like Goldman Sachs (GS). Much has been made about the Great Depression, stimulus, social programs, and government spending but it was World War II that pulled the nation out of an economic slump. Not only did demand for materials and supplies to fight the war spark economic activity, but it united the nation. During this economic crisis the nation is fractured and the wound is only getting deeper. The spirit of unity that could be the intangible linchpin to a sustained turn in the economy isn't visible. The Market The uptrend is still intact but key indices are in double-top territory and could be on the verge of a big breakout or a substantial pullback.

Employment has been in the spotlight all this week, with the Bureau of Labor Statistics' employment report (a.k.a. the "big one") coming out on Friday. We all know more six digit job losses are in store for months to come, so even if it's "less bad" than the previous month there's not going to be anything to cheer about. The staffing sector for instance has had a disappointing earnings season. Robert Half (RHI), TrueBlue (TBI), MPS Group (MPS), and Kforce (KFRC) all reported soft third quarter sales, most of them decreasing from the second quarter or falling short of consensus. For Robert Half for instance, in all five of its major segments year over year comparisons weren't even "less bad", they were basically the same as the second quarter. Not only were the third quarter results lackluster, but check out their guidance for the fourth quarter:

* RHI: $675.0 million - $725.0 million (down from $726.0 million in the third quarter)
* KFRC: $216.0 million - $221.0 million (down from $228.0 million in the third quarter)
* TBI: $240.0 million - $250.0 million (down from $285.0 million in the third quarter)

Although there's a little bit of seasonality built into the guidance, the fact remains that these companies are expecting to get fewer people hired than they did in the third quarter. That includes slow trends that they saw continuing through the end of the third quarter and into October. These types of announcements can give a little bit of insight into employment for the months ahead, and to some extent could be seen as a leading indicator. Back in the tech bubble days, Robert Half shares seemed to fall ahead of the actual unemployment rate, and also troughed before the peak unemployment.

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It's a little early to become giddy but a year ahead of mid-term elections Wall Street was all abuzz at the possibilities (until the Fed stepped into the picture). In fact, stocks came out of the gate yesterday partying like it was 1994. That's right, there was a flashback to that fateful year that saw Republicans take control of Congress for the first time since 1952. What sparked all of this reminiscing? The elections on Tuesday were a shot across the bow of the White House that matched the screaming intensity of attendees of town hall meetings and tea parties this past summer. Nancy Pelosi said that the movement was AstroTurf, but I have to tell you I've played football on that stuff and it burns like you-know-what when you slide across it. If the massive shift in voter preference is indicative of what to expect next year it could be a bloodbath for the Democrats and the dawn of a massive multi-year rally for the stock market.

The number one song in 1994 was "The Sign" by Ace of Base; the lyrics of that song underscore the feeling among business and the stock market.

"I saw the sign and it opened up my eyes
I saw the sign
Life is demanding without understanding
I saw the sign and it opened up my eyes
I saw the sign"

Investors opened their eyes yesterday and saw the possibilities that maybe the power grab gets shot down, and if the mistakes Bill and Hillary made by not listening to the public happen again, next year could see sweeping changes in Congress. Going back to 1994, it saw the Republican revolution as the GOP gained a net 54 seats in the House and eight in the Senate. Prior to this shocking development were the 1993 elections that saw Republicans win mayors offices in Los Angeles and New York, and saw Christine Todd Whitman become governor of New Jersey. To explain how dramatic these developments were consider the following:

• First GOP majority on Congress since 1952
• The GOP control of 20 state legislatures most in 50 years
• Majority of governors' office first time since 1972

The stock market reacted by rallying to 11,500 on the Dow Jones Industrial Average from 3,800.0 over the next five-years after the GOP sweep. I'm not saying that the GOP is the answer for the stock market with respect to new ideas or discipline but something has to derail the runaway train looking to rumble through the business community.

It's not just a campaign against big businesses but also the notion of free markets that have no ceilings on success or income. The attempt to yoke American businesses of all shapes and sizes in an attempt control wages and redistribute wealth is transparent and lethal. Like I said, we are a long way from 2010 mid-term elections and this week's election results could actually hasten the game plan, although these guys are already moving at the speed of light.

If you are an investor you must long for the days when gridlock came to Washington, DC as President Clinton's ambitious agenda was met with fresh face Republicans looking to change the world.

Current Angst Intensifying

The ISM Services report was a disappointment as employment actually declined unlike the same survey on manufacturing that enjoyed a massive increase. The decreasing jobs number mitigated growth in other areas where there is economic expansion. For some reason, ISM readings on the service economy aren't given the same credence as readings on manufacturing. This report ahead of Friday's employment data has added another layer of anxiety.

Then there's the Fed...

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period." -Federal Reserve

I'm not sure whose inflation expectations the Fed is talking about because many smart people are gearing up for the mother of all inflation tsunamis. As for the "extended period" I think that we could be looking at the Fed holding rates at current levels into 2011. With that in mind, I've always said that the stock market is selfish as it will take advantage of low rates until you know what hits the proverbial fan. The Fed talked again about winding down a couple of programs but they aren't budging on rates, and to a large extent it's unnerving. Is the economy still that awful even though supposedly the recession ended this past summer?

I've always said check out the market the day after and FOMC gathering ends for a better read on how the Street felt/feels.

Initial Jobless Claims

Initial claims fell again last week to 512,000 from 532,000. The result was better than the 523,000 result the Street was expecting. Meanwhile, people receiving unemployment insurance dropped to 5.75 million from 5.82 million. Generally one could say jobless claims above 500,000 indicates a country in crisis mode, but at least we can say for sure that the number is dropping consistently, albeit gradually. We are now at the lowest level of jobless claims since the first week of January.

Thoughts from the WSS Research Desk

Brian Sozzi

The October same-store sales results are in, and the verdict, at least from my perspective, is that the holiday season is going to be stronger than forecasted for some and dour for others. It's as simple as that. Consumers, contending with a rising headline unemployment rate, maxed out credit cards from splurges made in 2007 (did we need the extra Coach bag?), higher interest payments on those cards, and sluggish income growth, will be very discerning in their purchase habits this holiday season. If a company has the correct product in the stores, such as skinny jeans and leather motorcycle jackets at specialty retailers, or a cold weather puffer jacket for a great value at Target (TGT), the items will sell. Chasing product will be the name of the game as department stores have placed very cautious upfront orders, specialty retailers are maintaining inventory down anywhere from 10.0%-20.0% year over year (don't read too much into the "lost sales opportunities notion; consumers will migrate online to obtain the products from their favorite stores), and discounters focus on reducing the price of the stuff they have sitting in the warehouse to lure in customer traffic. Basically, a very competitive holiday season for consumer dollars is forthcoming, and one highlighted by fewer markdowns and the arrival of clever promotional strategies to move product (buy one get one free, free shipping, etc.).

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David Silver

• Toyota Motor Company (TM) unexpectedly reported a quarterly profit for the current quarter and trimmed its loss expectations for the full year. The Company said that government incentives around the world for more fuel efficient vehicles helped boost sales in struggling areas of Western Europe and the US.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.