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8JUN10 Daily Deal: Money Talks

|Includes: SPDR S&P 500 Trust ETF (SPY), SPY

....BS Walks

 We have Ben ‘Helicopter’ Bernanke come out swinging with a “moderate paced” recovery and Small Business Confidence increased in May to 92.2 from 90.6. These two data points taken together should tell you that six months from now, this will all be just a bad dream. Talk is cheap. Are any more than just 1% of responding small business owners planning on hiring any time soon? And is Ben ready to say anything other than unemployment is likely to “stay high for awhile”? The answer to both is a resounding no!

Meanwhile, back in the real world:

The spread between Spanish and German bonds just widened another 10 basis points to 213. Credit default swaps on EU banks/insurers just climbed another 14 basis points to 208. By the way, the Spanish Finance Minister openly admits that Spanish banks need another 5% of GDP through 2013 just to stay in business. That’s a cool 50 Billion Euros.

All Bernanke can say about American unemployment is that he’s “concerned”.

We’re losing 400K jobs a month and building 40K private sector jobs in a “good” month

Fitch is already squawking about the UK facing a “formidable” task in managing its budget deficit and debt service. PM Cameron is quick to point out that the Labor Party has screwed to country and that the budget squeeze “will affect every single person in our country”.

The EU is making noise about punishing sovereign budget offenders in an effort to impose fiscal discipline, Geitner and Obama be damned.

Speaking of Timmmay and Obama’s European consumer growth pleas, they’ve realized they are barking up the wrong tree and have set their sites on Asia to create a market for the US exports. Treasury Undersecretary Lael Brainard said in a speech today in San Francisco, “Recent economic volatility in Europe has underscored the continued need for the G-20 to work together to secure the global recovery.”, Trade surplus nations, “many of them in Asia, will need to do more to bolster internal demand”.

And the biggest black swan of them all, Housing. Housing sales, as predicted, didn’t do so hot in April to the tune of newly signed contracts dropping 10% in May from April. Looks like all the housing tax credit achieved was front load housing demand into the first few months of the year.

So what? Let’s now review the shoes left to drop:

Japan, after the UK, may be the next sovereign debt issuer to fall under the ratings agency microscope.

China’s economy will slow down as the PRC government seeks to tamp down the housing bubble. The Chinese markets, as any idiot knows, are well into bear market territory. When their housing bubble pops, think about how it affected us and apply the consequences accordingly.

The spectre of deflation now haunts the US. As foreign economies tighten their belts, our exports have no where to go. Factor in a very strong dollar. Price drops are imminent. This will take a big slice out of the corporate top line thus affecting the bottomline. Unemployment has no chance of recovering in this situation.

So where’s the good news? The good news is that these shoes will keep dropping through the summer. However, with the strong purchasing power of the dollar, and the omnipotent power of the fed printing press, another stimulus may be in the works. With cheap money and contagious hope among small business owners, Ben, Timmay and the President just might achieve tricking small business into productive activity. Easy and strong dollars may prove just what the doctor ordered to bring back the American consumer’s appetite. Manufacturing is continuing expansion through May, so job creation may not be screwed afterall.


How to play this?

I still think the market will continue its drop though the S&P at 1000. This may be achieved in June. It’s more likely in July. I also think that beginning at the end of this month, after the European situation is clear, the market will become more sensitive to manufacturing expansion and consumer sentiment than sovereign debt markets. I feel the best way to play the current situation is simply to sit back in cash and wait out a bottom.. The time to go short or purchase puts was nearly a month ago. But, when the market does bottom, be it a close at 1040 or 1000, I’m going bottom fishing for consumer discretionaries, oil and housing related stocks unjustifiably kicked in the Jacobs compared to the rest of the market. Remember, the key is continued manufacturing expansion accompanied by growing consumer sentiment which will lead retail sales growth More to follow.


Disclosure: short NFLX, SPX, long BP