Davis's Monday Outlook

Includes: DIA, QQQ, SPY
by: Philip Davis

Goldman Sachs, who have been very busy talking the economy into the tank since Thanksgiving, have now turned their sites on Japan as they issue a research report that says: "Japan’s economy may be already in recession in the current quarter because of weaker exports and sluggish consumption."

Shenanigans! I am officially calling shenanigans on these jokers!

First of all, we’ve known Japan’s indicators were weak for months now, it’s the timing of this call that is highly suspect, engineered to once again drop Asia ahead of the US market’s week. Also, their premise is NOT JUST FLAWED, IT’S A LIE, as five of 11 of Japan’s key indicators were declining in the latest report and Goldman makes this seem surprising but, if they had read our November 7th column, they would have known that ALL TEN preliminary economic indicators (we don’t know what happened to the 11th) were declining.

At the time, Tetsuro Okada, senior economist at Japan Research Institute, told us: "It’s very likely that the economic-growth rate in Japan will worsen during the October-December period, compared with that in July-September." So Goldman’s timing is either manipulative or they are simply pathetically slow at identifying critical data, either way we have to question their authority. Goldman also says that factor THEY NOW SEE are "a slowdown in the growth of exports to China (yet TM and HMC are setting export records) and a tumble in housing investment (already noted in November) after the government tightened construction rules."

I’m sorry Goldman, but unless Godzilla is marching on Tokyo I just don’t see Japan’s ISM going lower than the 0 (out of 100) it’s been at since November and the Nikkei already dropped 25% since July and I think you are trying to get blood from a stone here - everybody but the sheep who follow your calls already knew Japan had troubles and now it is very, very obvious you are trying to force a bottom!

What are Goldman’s bets on Japan, on the dollar, on the yen? Where is the disclosure to accompany these research reports? When a trading house as large as GS is allowed to make the market by blasting well-timed press releases at will that can decimate global markets, REGULATIONS ARE NOT JUST DESIRABLE, THEY ARE NECESSARY. It is ridiculous that we, the investing public, allow this to continue. It is shameful that our government (populated with ex-GS executives) turns a blind eye to this massive conflict of interest.

Former FDIC head Bill Seidman has also declared shenanigans on all these doomsday predictions about the finance industry: "The banks are not in anywhere near the trouble they were in when I was at the FDIC, the handful of banks the FDIC regards as troubled today don’t include any big ones." Brookings fellow Robert E. Litan has done numerous studies of the U.S. financial system and says the banks are in far better shape than the dire assessments suggest: "Strip out the losses and Citi could make close to $10 billion a quarter,” Litan said.

"And this is nothing like the Japanese situation,” Litan said. “In that case, the banks sat on their losses and were unable to make loans. That’s just not where we are now.” Instead of just moaning about how much some institutions have lost, everyone also should be applauding that the potential losses are being recognized and new capital is being raised.

While I feel there is PLENTY wrong with our economy and PLENTY to be worried about, there is NO evidence to suggest that we should be pulling back to 2006 levels, effectively negating 2 years of booming global growth as if it never happened. This is a ridiculous overreaction to a slowdown, nothing more than a tantrum being thrown by children who have finally been told they are eating too much candy at Halloween. There is still plenty of candy, you just can’t gorge on it non-stop - it’s simply not healthy!

Unfortunately, strangers with candy took over the government back in the the 70s and they’ve been stuffing us ever since, so it’s going to be one hell of a withdrawal for the American people and the bloated banking institution that seems to have forgotten that double-digit p/e’s were the exception, not the rule in the financials for most of the market’s history. Other cyclical industries with bloated p/e’s are Energy, Commodities and Homebuilders, the builders have already reclaimed single-digit status but our other three cyclicals are still in for a rude awakening as the market adjusts.

Asian markets adjusted lower this morning with the Hang Seng and the Nikkei each dropping 4% as investors hardly need Goldman to push them out of emerging markets but it’s Europe that’s taking the brunt of it on currency concerns. "Currency weakness will likely be more centered on emerging-market European currencies as current-account deficits dwarf those in other emerging-market regions," said Lawrence Goodman, a currency strategist with Bank of America in New York. At the top of the list of European currencies deemed vulnerable are the Polish zloty, Hungarian forint and Romanian leu. Other currencies at risk are the Turkish lira, South African rand and Icelandic krona, analysts say.

I think the time may be right for the USA to reclaim the position that I correctly predicted for us way back in August, when I laid out my case that America was actually going to be "the least sucky place to put your money in the second half of ‘07." Can we continue to suck less in ‘08 (I can picture the campaign posters now!)? We’ll get the President’s take on that tonight when he delivers the state of the Union address, just one day ahead of the Fed meeting - this is so exciting!

Europe had a nasty open but the DAX is recovering, but still pathetic at 6,748 and we need that 6,800 line by the close in order to not have to throw in the towel on technicals. The SocGen saga continues and rogue trader Kerviel’s lawyers are claiming the bank IS usuing him as a scapegoat, so this will stay ugly for quite a while… More than anything else, Europe is panicking over US weakness while we are panicking over weakness in Europe and Asia and NO ONE is taking a leadership role other than Trichet, who is ignored by the US media, limiting his effectiveness.

Our futures were way down early in the morning and are improving into the open so we’ll have to play today by ear but I see lots of opportunities, including MCD just put in a nice report and is suffering for it so we’ll be looking at them first thing. X is shaping up to be a nice short coming into earnings - more on that later…

The CEO of LNY has offered to buy back the company, I just don’t get how you can not like casual dining in this environment.

Things are not so bad out there, certainly not as bad as GS would have you believe!