US Consumers Still Shopping

Black Friday in the U.S. still resulted in higher sales over last year. Sales were up by 3%. Online sales were up 1%.

Is there hope that the U.S. economy is still consumer-driven, despite all the housing debt problems?


The market already anticipated decent sales for Black Friday, between late October and November 18. However, the 25% appreciation is unconvincing. Volume has been shrinking on each day the consumer discretionary index rallied. There is still a 10% upside for XLY. After that, the sector may be vulnerable to a sell-off.

Christmas Rally?

I asked Don Vialoux if he thought the recent rally was convincing.

Question: Don, the DJIA’s rally looks suspicious. The volume has declined each time the index has gone up. Does this mean the index is base building? Is it vulnerable to a correction back to support lines @ 7,449?

Answer: Hi, Chrispycrunch. I would love to confirm that the November 20th lows set by most major North American equity indices was the bottom, but insufficient time has lapsed to make that call. Lots of volatility in both directions.

Equity markets continue to respond irrationally. Meanwhile, glimmers of hope continue to surface. Sector rotation with positive breakouts above base building patterns have occurred during the past few trading days.

The first sector to break was gold. Utilities started to break earlier this week. Infrastructure started to break yesterday. U.S. energy surprisingly is close to breaking out (e.g. XLE). On the other hand, credit conditions remain frozen in the U.S. The yield on 10 year U.S. Treasuries touched an all time low yesterday.

Best guess is that the November 20th lows likely will be tested in early December(possibly a 50% retracement of recent gains as tax loss selling pressures take hold). Chances of a year end rally are above average this year. Favourable anticipation of the U.S. regime change on January 20th will help the bulls. The annual re-balancing of balanced funds and pension plans late in December and early January will help equity markets.

The big question is, ” Will this next intermediate upside move be a recovery rally in a bear market or the start of new secular uptrend?”. At this stage, Tech Talk is leaning toward the former scenario. The charts will let us know. I have a hunch that “Timing the market” by playing intermediate swings lasting 2-8 months will become more important during the next few years.

http://www.timingthemarket.ca/techtalk/2008/11/27/tech-talk-for-thursday-november-27th-2008/#comment-1852

Bullish on Gold

The US Dollar is showing signs of fatigue and is beginning to roll over. This is a bullish signal for gold. Goldcorp, for example rallied by over 70% in the last 3 weeks.

Barrick Gold: reached the magic 38.2% Fibonacci line before retreating. If the stock is able to rally past this, it will act as a support @ $36.70.


The US Dollar may correct by up to 10%:


Don Vialoux Video on Gold @ ~ 7 min :
http://watch.bnn.ca/market-call/november-2008/market-call-november-24-2008/#clip115420

Is Citigroup Going Bankrupt?

Citigroup stock is trading very similarly to Bear Sterns. The market is rightfully concerned that the bank's asset/capital ratio is too high. It is running out of cash. Expect the stock to have a number of small but massive rallies. Longer term, the market is telling us that this bank will need to be rescued or merged with another.

What's the difference between C and GM?

Charts from Stockcharts.com

I Aspire to Be Like Peter Schiff

I aspire to write on ideas and observations with conviction. It is easy for a blogger to do this, when naysayers do not challenge you. Watch this video. Notice how the others laughed and mocked Schiff. Note how he reacted: he stuck to his call. That is admirable. I have nothing but admiration for people who stick with a call and do not bend it because others express doubt. I aspire to keep making gutsy calls.

Book Review: Greater Fool (Part 1 of 2)
Subtext: Invest in Canada?

With the U.S. markets on the decline, every buyer out there is asking if the same will hold true in Canada. For my own interests, I will focus on Garth Turner's discussion about Toronto. His arguments that Canadian real estate is not immune to what is going on around the world use some of these points:

Economic:

• Majority of exports is to the U.S.
  
• Majority of oil is exported to the U.S.
  

Consumer:

• Canadian personal savings rate is similar to U.S. personal savings rate
• 30% of condos in Toronto are investments (after 1989, owners rented condos at a loss)
  
• mortgage payments account for a substantial amount of consumer expenditures
  

Turner discusses the role of the dotcom bubble and 9/11 in the U.S. housing bubble effectively. He also discusses the role of demographics over the next 10 years, and environmental issues as factors that will influence the real estate market in the future. I did not, however, find the latter two arguments to be very effective. Nevertheless, for $16 this book is worthwhile reading for anyone who wants to buy real estate. After all, $16 is far less for a buyer than a single percentage drop in the price of a home.

Retrospective:
I previously visited the notion of a weaker real estate market back in June 2008. Since then, some things have changed for Canada:

• Commodity prices collapsed (See TCK, AA, ABX)
  
• Canadian dollar rallied
• GM/F collapsed in share price - there are rumors that 10% of the workforce will be cut
• Nortel cut jobs; its future is in doubt
  

From an international investor point of view, Canada represents 30% resources. This sector will rally about twice the rate of other sectors if the stock markets recover. It will also decline by twice the rate.

From a real estate perspective, the above factors are too great to ignore. The only positive is that the Canadian dollar is stronger. This should benefit the manufacturing sector.

So, let's simplify the investment strategy, because there are simply too many things to monitor (let alone the health of the U.S. markets).

Right now, trading is dominated by economics. Recession/"Depression", consumer spending, deflation, government debt, and government policy. If we roll up all of these factors, the gold sector comes to mind. It would appear to me that there will be numerous reasons to eventually buy into this sector. Note that gold producers will move more over the underlying commodity. My favorites are: Goldcorp, Barrick, and Kinross.

Stay tuned.

Another Long Idea (Part 2 of 2)
Think poor. Think saving money.

What does the consumer NOT do? The consumer will avoid expensive ticket items (cars, LCD TV's, electronics, computers, items over $1,000).

What DOES a consumer do? Go thrift. Eat burgers, shop discount.

Yumm. Cheese-burgers (not the expensive big macs):


A dollar can go a long way:
Walmart might be everywhere, but so will shoppers looking for one-stop low-cost shopping:




Time to go to fewer yoga classes and to wear sweats at home with yoga videos (SELL):

It is "The Great "De-leveraging" ... not "The Great Depression"

The media loves to compare current market conditions to the Great Depression that took place some 80 years ago. As I had written previously, it is the great deleveraging that is still going on that has created an immense level of uncertainty, taken money out of the stock market, and significantly lowered the valuation of homes globally.

Many unknowns still exist, which means I am unable to concisely provide a downside or upside target to the stock market based on fundamentals.

1) It is unknown how much hedge funds need to unwind their positions to meet investor redemption
2) It is not known if housing prices have leveled off, thus stabilizing the paper mortgage losses inflicted on banks

Here are some scary facts about the Great Depression:

• The stock market crashed in October 1929. By 1932 the stock market was at 20% of their value in 1929.
• 11,000/25,000 banks were insolvent
• Unemployment was 25-30% of workforce
• The great depression was global (it included Europe)
• No government intervention was made for the markets prior to this event
• After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.

Source: http://www.english.uiuc.edu/maps/depression/about.htm

Things are different because the wealth of nations is different:

• Rich middle-east nations hold global wealth (due to wealth earned from high oil prices)
• Asia (Japan and China) is cash rich
  

The U.S. accounted for a large percentage of world consumption. Now that it is shrinking, the other nations are suffering as well. The economic downturn is therefore still early part of the game.

The Solution

Government policy will be key to steering world economies out of the slump. This is unfortunate for investors, because policies take time to develop, implement and to work its way through the market.

Still Positive For Markets

Volatility has declined to 66.31 from its peak at 89.53 in October. Markets rallied this week even after touching the magic Oct 10, 2008 low. Expect markets to test this low again. We will revisit the indexes if this low is breached. On the positive side, the chances are just as good that resistance levels will also be tested.

North American Indexes Are Building A Base

According to Don Vialoux @ Tech Talk North American Indexes are showing signs of bottoming. This is indicated by indexes trading in a range, and volume declining. He draws a comparison to 1987 and present.

Full Article:
http://www.timingthemarket.ca/techtalk/2008/11/12/tech-talk-for-wednesday-november-12th-2008/

1987-8:

Present:

Job Losses a Concern

Personal Notes:
I briefly celebrating a top-5 position with an "elite" ranking on FSX Player, a stock trading game on Facebook, before falling to 8th for the week. I strongly recommend that even seasoned, experienced investors join the trading game. Investors may test trading strategies without real-world losses.

Now on to the Negativity:
The U.S. reported unemployment rose to 6.5%. The total job loss for 2008 is now 1.2 million. Both GM and Ford reported very poor results, and announced intentions to layoff staff. The theme for the economy remains unchanged. This ongoing theme might be hidden amongst all the headlines about bailouts and stimulus packages from other global nations.

The economic theme is as follows:

• The automobile market is experiencing a "depression-era" economic downturn, precipitated by but suffering more than the housing sector
  
• The financial sector will benefit from loosening liquidity in borrowing
  
• Housing is severely weak in the U.S. and its problems are only slowly showing up in other nations (Canada, Europe, China)
  

The unemployment report needs to be assessed. Growing job losses is now only beginning to feed into the consumer sector. I had already noted that semi-conductor/IT companies warned on weaker revenue last month. This leading indicator makes it no surprise that consumers will spend far less in the months ahead. Christmas is only one month away, but consumers have already been cutting back.

At this time, day traders would benefit most from a market moving in no particular direction. I continue to monitor and search for longer-term plays, as I prefer to hold a few quality companies/ETFs that will make money over an extended period of time.

Investor interested in products/sites I promote, or for my research report should email me at chrispycrunch [at] gmail [dot] com.

A Long Idea: Activision


Activision is displaying a technical signal. A rally to $14US is possible. The stock is trading relatively stronger to the S&P500 (not shown). Fundamentally, the company has a very good basket of products that will appeal to the consumer. The product success and mix is important for the company, because weakness in consumer spending in the next few months is expected.

Is the Stock Market Going Nowhere for 10-15 Years?

I have copied an article from the most recent ChartWatchers newsletter. It suggests the market will go nowhere for 10-15 years. Despite the negative argument that will be presented to you, the last few trading days have been positive.

My Counter-argument:

Is this at least a short-term positive trend? The Volatility Index has dropped, suggesting October's wild swings will not be repeated in the near term. In addition, a rally to at least the 200 day moving average may take place. I asked Don Vialoux, technical analyst for http://timingthemarket.ca/ about his thoughts on the matter. My concern was that stocks were rallying but the volume was not convincing. My argument was that the rally would not hold up. This was his response:

Technicals currently imply an intermediate recovery within a bear market. Reasonable technical targets are to 200 day moving averages. In most cases, a return to a 200 day moving average from current levels will provide an attractive return. Best guess based on current technical data on broadly based North American equity indices is that equity markets will continue to advance until near the end of January. The charts will help to fine tune the timing.

The Article:

ChartWatchers...The StockCharts.com Newsletter

Carl Swenlin | DecisionPoint

To access/subscribe to the source of this article, click on this link:

http://stockcharts.com/help/doku.php?id=support:chartwatchers

CHANGING WITH THE MARKET

When the market changes, we must change our tactics, strategies, and analysis techniques to accommodate the new market conditions. This is not a new idea, but it is one that is not very widely recognized, particularly when applied to the long-term. In recent writings I have emphasized that we are in a bear market, and that we must play by bear market rules. Overbought conditions will usually signal a price tops, and oversold conditions can often see prices slip lower to even more oversold conditions. When making these comments, my focus has been on the cyclical bull and bear markets. What I want to address in this article are the secular forces of which we must be aware.

On the chart below I have identified the five secular trends that have occurred in the last 80-plus years. First is the 1929-1932 Bear Market, which, although it was short, saw the market decline 90%. Next was a secular bull market that lasted from 1932 to 1966, which overlaps with the consolidation of the 1960s an 1970s. In the early 1980s another secular bull market began which peaked in 2000 (basis the S&P 500). Finally, we seem to have entered another consolidation phase that could last another 10 to 15 years.

I began my market studies in the early 1980s, before the big bull market took off, and I learned from the guys who learned all they knew from the market action of the 1960s and 1970s. Applying those rules to the new bull market was confusing, frustrating, and unprofitable. While I didn't participate in those markets, it is easy to imagine the bewilderment of those who, educated in the bull market of the 1920s, took the elevator all the way down to the basement starting in 1929.

The long bull market after the 1932 bottom was missed by most of those traumatized by the crash, but it trained a whole new group of analysts who learned that the market always goes up . . . until everything they knew was proven wrong by a 20-year consolidation. Finally, the battle cry of the 1980s and 1990s bull, "this time it's different," was learned well by those who ultimately ate the 50% decline of 2000-2002.

Unfortunately, it takes time to unlearn the lessons of the heady 1980s and 1990s, and we can still observe people using bogus valuation models that only work in bull markets. We still see people trying to pick bottoms, and we still see people who think that a stock is under valued because it is down 70%. By the time this current secular market phase is over, people will have learned all new rules, that will not apply to the next 20 years.

Whether or not I have correctly identified the current secular market phase as a consolidation remains to be seen, but I am certain that we are no longer operating on the rules of the last secular bull market.

Toronto Real Estate: Price Moderation in October

I have compiled some aggregate sales figures for Toronto Real Estate for the month of October. It is the same story. There is a flurry of active listings when comparing monthly and yearly figures. The total sold has fallen in most areas. Prices have mostly fallen

Monthly
Central - activity (# listings) up 14%, but total number sold is down 16.8%. Average prices up 1.6% but median prices down 5%
East - activity (# listings) up 2%, but total number sold is down 22%. Average prices up 1% and median prices up 3.5%
West - activity (# listings) up 3.5%, but total number sold is down 19%. Average prices down 7% and median prices down 9%
North - activity (# listings) up 2.4%, but total number sold is down 22%. Average prices down 5.9% and median prices down 0.7%


Yearly
Central - activity (# listings) up 65%, but total number sold is down 44%. Average prices down 9.2% but median prices down 17%
East - activity (# listings) up 21%, but total number sold is down 14%. Average prices down 3% but median prices up 0.5%
West - activity (# listings) up 28%, but total number sold is down 13.4%. Average prices down 7.8% and median prices up 1%
North - activity (# listings) up 48%, but total number sold is down 39%. Average prices down 7.2% and median prices down 4.5%

Why would prices be falling here? We see no major job losses and Toronto does not have direct exposure to the fallen commodities market. Supply is increasing because people are seeing the US housing bust storm headed our way. The Toronto stock market was also weak last month due to the falling commodities prices globally.

Just this past weekend I would stroll along various streets. There are literally 3-5 open houses on some blocks.

Summary Notes on TSG Stock Market Letter for the week ending Oct 31 2008

• Emerging Markets ETF was the surprise star performer rising more than 28%. That being said, Zanger recommended that it is best to avoid the market until the wild swings slow down which “could take months.”
• If the rally is to have any staying power we will need to see volume rise substantially in the next few days
• Read full article for some good charts on the US Real estate @ http://tradesystemguru.com/content/blogcategory/34/68/
• It came as no surprise that GDP fell 0.3% in Q3-08 but the one standout in the numbers was the significant 3.1% drop in personal consumption expenditures or consumer spending. It was the biggest PCE drop since February 1991. It should also surprise no one that this number will get worse in the coming quarters
• First American CoreLogic report recently revealed that nearly 20% of mortgage borrowers (on more than 7.5 million properties) owed more on their loans that their homes were worth. Another 2.1 million properties will enter negative equity territory if property prices decline another 5%, according to the report. As of the latest data, 266,000 mortgages are now defaulting every month in the U.S
• To sum up, the underlying premise of these bailouts is to stimulate a rapid reversal and return to the days of high prices and bloated valuations. But this will come at a cost – a fiat currency that has no real relationship to true value and rapidly rising inflation. As a best-case scenario, we risk years of anemic economic performance, a rapidly declining dollar combined with stagflation and eventual spike in interest rates as foreigners avoid dollar-denominated assets like the plague in search of those assets that are realistically priced. If it fails, we can expect a continuation of extreme levels of volatility as markets swing between periods of euphoria as new stimulative plans are announced and then depression as prices plummet and the realization hits home that the latest plan has failed.

October in Review

To summarize this past month, work stock markets sold off very sharply in October. This was the worst performance since October 1987. It is very important for investors to know what is most absolutely certain to occur next.

In the years ahead after 1987, a recession ensued in North America. In Canada, this was not fully felt until 1991 - 1995. Prior to the recession, the real estate market literally collapsed in 1989. World indexes did not perform well at that time either, most especially in Japan.

Today, it is eerie that the market is undergoing the same economic weaknesses, only it is a lot worse. News reports and analysts repeatedly describe the situation the market is in as "chartered territory." As an independent analyst who thrives on thinking otherwise, I have to agree.

The single word to describe the market problem is de-leveraging, but the problem is a two-step one. First, as we all know is the financial market de-leverage precipitated singularly by the collapse of the housing market in the U.S. and in Europe. Is Canada next? We'll see, but what has already happened (and what I have already written about) is that prices have fallen quite convincingly in Alberta and in Vancouver.

We are only now, today, facing the second problem: a recession. The word is an ugly one but simply describes two consecutive quarters of negative growth. That's just six months. So what's next?

Unfortunately, my analysis is no more positive from here. All leading indicators have suggested the recessionary forces are just beginning. Technology indexes have performed very poorly. See Semis.

The three horsemen of the economy who either led or dominated the economy over the past few years is sick. Housing, automobile, and financials. The cost two the economy will be job losses in this area. This will exasperate weakness in consumer spending.

Buy Stocks?

I am a consistent investor and I remain a value investor. The stock market has certainly become cheaper and the text book answer will be to buy stocks. The enemy, however, continues to be described by that one word: de-leveraging. Hedge funds will be selling into the rally, and only technical charts will indicate to investors when this "sell on the rally" phenomenon will end. A few stocks are becoming value plays, and I will provide an analysis in upcoming entries.

One stock I really like is Canon. I also foolishly like Sony because they have released a very nice digital SLR, but Canon is a more focused company in the photography and computer printing space. Both are consumer goods and might give a leading indicator as to the health of spending.



One more thing to note. I am/was featured as featured manager on the FSX Trader site this week. In addition, the two picks I made in the past two months performed very well. HED is a bear oil fund that I discussed when it was $13.19. It peaked at $45.46. HXD is a bear fund to the Toronto Stock Exchange. It was trending around $18.50 at the time of discussion and peaked at $38.25.