Gotcha! Suckers....

Market Commentary:

Stocks were slammed hard today as a surprisingly poor retail sales report confirmed that optimism has been overdone.

And that Ladies and Gentlemen is how it works. Suck them in and slam the trap door. I want you to remember this day because it is a great lesson of how traps are set up and executed.

What a masterful job by program traders, the Fed, Geithner and let’s not forget to thank the media for fanning the flames of greed, rather than caution to get the herd to move into the trap. It is a sure fire formula and works every time. Now you know why they say “let the buyer beware”.

They knew exactly how far to push the market to suck in the momentum buyers. In just three short days the more volatile indexes (Russell, Nasdaq) are now approaching the price point where many of the momentum indicators turned positive. Now what are they going to do?

Just when it looked like risk was becoming lowered, risk actually was becoming greater because investors became more blinded to it.

We are psychologically programmed to take on more risk at just the time when we should be protecting ourselves. As I have said this isn’t about market timing, it’s about managing risk.

It is about preserving your capital in one of the greatest bear markets of all time, with Federal Reserve and Treasury officials who continue to deceive and play the public as suckers. Investors are very vulnerable right now because they don’t know what to believe – the truth is being hidden.

I had to laugh yesterday. The Fed has Alan Greenspan out there spinning that housing is on the road to recovery and on the very same day, the housing report showed that housing prices plunged the most on record in the first quarter.

Today, it was announced that the number of U.S. households faced with losing their homes to foreclosure jumped 32 percent in April, affecting 1 in 374 housing units---a record rate!

“ This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. Bank repossessions are likely to spike in coming months as these loans move through the foreclosure process.”

http://www.marketwatch.com/story/us-foreclosures-reach-record-rate-in-april

Ask yourself what is going to happen to the housing inventory supply if bank repossessions spike in the coming months. By the way, home mortgage applications fell in April too!

Where is this housing bottom? It isn’t just the US. Housing worldwide continues to plummet. Remember globalization. US banks own a piece of the action around the world. Asia, Europe, even housing prices in the Middle East are getting whacked.

Where is the economic recovery going to come from if housing prices continues to plummet? This is the issue. It has been the issue for the last few years and until home prices quit falling, it is premature to think we are out of the woods. It is not about home sales it is about home prices!

Today it was announced that retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is cutting deep into consumers who worry about their jobs.

Declines in sales were broad based but led by electronics & appliance stores, down 2.8 percent; gasoline stations, down 2.3 percent; and food & beverage stores, down 1.0 percent.

http://www.bloomberg.com/markets/ecalendar/index.html

Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. It looks like we need a lot more fertilizer for our green shoots. They’re wilting!

I hate to be so bearish, but I have a job to do and that’s to help protect your capital in the most deceptive market of our lifetime. Trying to keep our ships off the rocks is no easy task in the kind of fog bank and manipulations we see these days.

Let’s put this into a technical perspective.

As our intermediate-term indicators forewarned, cyclical pressures are now bearing down into May.

The selling today was severe. What this chart shows us is that there is strong resistance at January’s highs and that the top of the trading channel has been reached. This is also at the top of the Bollinger Band line and also under the 200-day moving averages.

This is where we would expect selling to develop, especially with poor economic reports. The Russell 2000 has fallen 7.6% this week and it is only Wednesday!

There are of course those who see this as a buying opportunity. It is not. I am not saying that the market can’t bounce here. In fact, the S&P 500 closed at support at the daily middle Bollinger Band line – it has not closed below 50 percent on the 14-day RSI value, so the bulls may try and rally the troops here.

We will probably have Ben Bernanke and Timothy Geithner all giving speeches tomorrow that they see a green shoot over here or over there and of course the media will interview a host of bullish mutual fund managers at what a great buying opportunity this is.

However, notice how the 14-day RSI values are lining up.

DOW 30 = 54
NYSE = 54
S&P 500 = 53
OTC Composite = 49
Nasdaq 100 = 47
Russell 2000 = 48

RSI values dropping below 50 are indicating that investors are purging risk and confirm that market leadership is turning bearish. This isn’t a bullish sign.

The probabilities now favor a retest of the bottom of the trading channel between now and July. If this selling morphs into a panic it may not take that long as no one wants to get caught holding the bag. You have to believe that sell stops are carefully placed under each minor support, so further selling triggers more selling in a domino effect.

Yet what makes this treacherous is that there is support on the monthly ranges, so this configuration is likely to create a fierce whipsaw effect as the market attempts to prove whether a long-term bottom has been achieved or not.

10 more reasons why you should not buy now

Market Commentary:

Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair. I would rather avoid any dashing if possible.

Yesterday, I gave you 10 reasons why we are not likely in a bull market. Here are 10 more reasons why you should think very carefully before chasing the herd.

1) According to Stockcharts.com 92.14% of stocks on the NYSE are trading above their 50-day moving average. A reading that high has proven to be the peak in the stock market over the last eight years. In the chart below notice what happens to stock prices when this indicator spikes either high or low on the chart:

2) Fannie Mae lost $4.09 a share and is asking for another $19 billion more from the government. They see losses continuing and 2009 will be worse than 2008. They see home prices declining 7-12% in 2009. Real estate values are still deflating. Home prices in the U.S. dropped the most on record in the first quarter from a year earlier. The overhang of unsold properties on the US market is still near a record 11 months.

3) February Unemployment figures were revised down from -651k to -681k (-30,000) and March was revised from -663k to -699k (-36,000). Here's the problem - to have a healthy economic recovery you need to gain about 300,000 jobs a month.

http://market-ticker.denninger.net/authors/2-Karl-Denninger/P2.html

4) Banks are still maintaining tight guidelines. “In fact, the weekly Fed data are now flagging the most intense declines in bank lending to households and businesses ever recorded.”

http://finance.yahoo.com/tech-ticker/article/244597/Merrill's-Rosenberg-Goodbye-Thank-You-Yes-It's-Just-a-Sucker's-Rally?tickers=xlf,dia,spy,%5Eixic?sec=topStories&pos=9&asset=&ccode=

5) China is fast slipping into deflation. China’s PPI fell 6.6% in April, the fourth monthly decline and the steepest (PPI fell an average of 4.6% in Q109) suggesting further pressure on consumer prices ahead. China's CPI fell 1.5% y/y in April, the third consecutive decline (CPI fell 1.2% y/y in March and 1.6% y/y in Feb).

http://blogs.wsj.com/economics/2009/03/10/economists-react-china-in-deflation/

6) Regression analysis shows that major troughs brought declines in excess of 50% below trend. We are 79 points above the regression line.

http://www.dshort.com/articles/2009/regression-to-trend.html

7) Middle East (Gulf countries) were “informed on the quiet that Federal Reserve Governor Ben Bernanke had been premature in his optimistic forecast of slightly positive growth in the second half of this year” and not to expect an US recovery before 2011.

http://www.debka.com/headline.php?hid=6062

8) Gasoline prices have surged nearly 9% over the past two weeks. $3 gasoline this summer is going to put the hurt back on.

9) The stocks up the most in this rally have the worst fundamentals. The “dash for trash” is stocks most heavily shorted, suggesting most of the buying has been short covering.

10) Market leadership (Technology) is looking toppy and beginning to lose dominance.

Be patient.

Intra day update

we haven't seen a mostly negative tick day during the first 90min of trading. Looking for a choppy trading day. with prices moving to the down side. Stochastics on 15,30 and 60 are indicating a bounce. short on 5 min overbought once stochastic gives a short signal.

10 reasons why you shouldn't buy now

Market Commentary:

As I have said before and I repeat it again, I am looking at the risk side of the equation. I have no intention to only focus on the negatives but it only takes a small dose of overconfidence to wipe you out if this turns out to be another sucker’s rally.

As we come into the second week of May, seasonality factors are now shifting negative. It is absolutely true that a number of trend following tools have turned positive over the last few weeks but you must understand we saw the same thing happen in the bear market rallies of 2001 and 2002, which ultimately turned out to be sucker rallies, followed by lower lows.

We know that bear markets are notorious for sucker rallies. The greater the bear market, the greater the rebound … and the greater the trap.

Look at the stock market like a jumper with bungee cords tied to a person’s ankles whose initial fall is followed by recoil. The greater the fall, the greater the rebound but after this initial recoil occurs, the jumper experiences another free fall. Given the volatility of these wild swings, we don’t want to minimize the risk of what another down wave could mean to you.

There just isn’t enough evidence that says this roller coaster is now going to go off the rails and defy gravity for much longer.

Here are ten reasons from both a technical and fundamental perspective, why I am not ready to embrace the bulls.

1) The majority of the major market indexes are not trending above their 200-day moving averages. Bear market rallies are notorious for rallying to their 200-day moving averages and then topping out.

2) None of the indexes are above their monthly middle Bollinger Band lines. Bear markets trend below the monthly middle Bollinger Band line and bull markets ride above it. This market is still trending in the lower part of the Bollinger Band channel for all the indexes, including the Nasdaq 100!

3) The 50-day moving average is discounted and trading below the 200-day moving average. In sustainable bull markets, the 50-day moving average will trend above the 200-day moving average. In bear markets, the 50-day moving average will trend below the 200-day moving average for the S&P 500 index.

4) The S&P 500 is still trending below its 10-month simple moving average on a closing basis. In a study by the Journal of Wealth Management this tool would have kept you out of all the bear markets since 1900 including the Great Depression and you would have caught all the bull markets. We are still below this threshold.

5) We still have a left translation verses a right translation. A left translation has a pattern of lower lows and lower highs from on intermediate term cycle low to the next. The majority of the indexes have not taken out their January highs and we still don’t know where the next intermediate-term down leg will settle.

6) Cycles point to a peak in May, with a down leg to about July 17th or so. This traditional cycle peaks this week. My proprietary indicator, the Fidelity Select Family Stochastic Oscillator, is at %K 96 and %D 95. Weekly stochastics are cresting. Daily stochastics are now negative.

7) The slope of growth in the money supply is dropping like a rock. M2 has been falling steadily and last week fell from 2.4 to .7 – that less than 1% folks. Volume on this rally has been subpar. In a bull market volume rises on rallies and declines on bad days, but what we are seeing is volume rises on bad days and falls on advancing days.

8) The P/E ratios for the S&P 500 companies are off the charts! The P/E ratio for the Nasdaq 100 is 65.51 times earnings. Check out the links:

http://www.bullandbearwise.com/SPEarningsChart.asp

http://www.bullandbearwise.com/NASDAQ100RealPE.asp

9) Sentiment readings are way too bullish now with the NYSE Bullish Percent Index showing 75% bulls.

10) Corporate insiders are aggressively selling into this rally, not buying on the dips.

We have seen the worst three-quarter economic performance in the last 70 years. I think there is a danger in getting overly optimistic. The higher the market gets ahead of itself, the greater the risk of a big adjustment.

Remain cautious as the probabilities of a retest are very high.

Intra day outlook

As indicated earlier, internal was mixed to lower. and price chopped to the down side.

Internal has been mostly mixed to lower.
Looking for a choppy day today. good for shorting rallies when 5 mins gets overbought

Don't get too excited about the jobs number

Friday’s unemployment report is another case of “better than expected” – the blood is still flowing out of the patient, but at a slower rate. In other words the US economy is still very sick and on the losing side, but there is hope that it can be kept alive until the loss of blood is stopped and new blood can be pumped in.

Really, that is what it is like. Instead of job losses meeting or exceeding expectations of -600,000 they only fell by -539,000 … better than the experts expected (let’s cheer) --- but still very bad news. This marks the sixteenth consecutive month of job declines in the US.

Take a look at the chart:

Even though the stock market may not be showing it, there is a problem. No one is hiring. These monthly job losses are massive, even if they are “better than expected”. And with little to no hiring, the total number of unemployed continues to increase at over a million people every other month!

And while there may be a lot of flexibility in jiggering the unemployment report one way or the other by government jobs and estimated hiring, the fact that the official government statistics now show unemployment rising to 9% is a startling admission. (Most know that real unemployment is as much as 50% more than the government’s numbers – some say as high as 15%).

The sad thing for those without jobs (but fortunate thing for the official unemployment statistics) is that after being on the unemployment rolls for a number of months the unfortunate are dropped from the rolls AND dropped from the unemployment statistics. They are only considered “unemployed” for as long as the unemployment checks continue. Once the unemployment checks stop, then they are no longer unemployed – I guess they then become numbered in the unnumbered homeless category.

Here another big problem: the government’s budgeted forecast for deficit spending was based on an eventual unemployment rate of 8.1%. We are already officially at 9% and the huge drop off from the bankrupt automakers hasn’t even hit the rolls yet. By the year’s end the unemployment rate, even the official one, will easily be in excess of 10%.

Deficit spending will be “worse than expected”, if anyone cares.

The bank stress tests were also predicated on a similar single-digit “worst case” percentage for unemployment. In addition, the tests were also predicated on worst case declines in housing prices around -20%. We have exceeded the worst case even before the “soft” stress test results were announced this week.

This suggests to me that the bank stress test results were likely a “best case” scenario for the banks, not a “worst case.” At least the stress test results are finally water under the bridge.

The positive for the banks is that this recent rally is a welcome price point. It allows the banks an opportunity to raise the additional capital they need with new offerings so they can climb out of the stress test “bad” column – pretty convenient, huh? What happens after the banks have raised the new capital?

Another interesting statistic gleaned this week is that the nation’s savings rate is climbing, more than any time in recent history. What do you make of the fact that unemployment is rising by huge leaps and bounds and yet the savings rate of Americans is growing by similar leaps and bounds?

It’s simple – people are hunkering down and banks aren’t willing to give any of them credit for automobile loans, home purchases, education, etc. Therefore, what little money they have left after making debt payments is being put into the piggy bank – saving for a rainy day. When you’re nervous, you don’t spend.

But you might say, wait a minute – investor sentiment is up, why the disconnect?

Because the recent stock market rally is clear news individuals cannot ignore. They think to themselves that while they are not doing well, somebody must be doing better somewhere because the stock market is going up.

Don’t you get sucked into this thinking “trap”.

I hope for a better tomorrow, just like most of you. But hope and reality are often far apart. The reality is that consumer armament for an economic recovery just does not exist. And the reality is that if the consumer is not prepared and willing to employ his own deficit spending and able to get credit to do so, then excess widgets will continue to sit on the shelves of the stores and the manufacturers are going to have to make less of them.

I like the term that Greenspan used a few years ago, “irrational exuberance”. That is what is going on in the stock market – but it won’t last long. When the reality of projected and actual earnings cannot compete with the climb in the speculated growth of stock prices an adjustment will be made. And that adjustment is likely to be painful.

On the other hand, we could all become traders rather than investors and ignore the economic indicators – I know many of you are anxious to do something. In fact, I may participate to a degree in this type of trading going forward. I just don’t want you to interpret such recommendations as confidence in the US economy – it’s not the same.

Despite being anxious to participate in the stock market again, you must surely realize that the probability of entering the market today and realizing profits in the near future is small.

Be patient. A pull-back is long overdue. There is plenty of time and opportunity ahead.

Intra day update

Short triggered, remember, stop is today's high















taking a short on the S&P if price break below trend line with a stop at today's high














Unlike yesterday. Today's tick has been in positive territory all day despite the morning pullback. would avoid trading the short side today.

Supply/Demand for stocks

10:16:

The supply and demand picture is bearish fro the stock market. Supply has picked up due to the need of banks to recapitalize, while demand appears weak given light M&A activity. Money is being deployed into the stock market, as it appears investors are taking risk, but weekly mutual fund flow numbers do not appear excessive, and buy back activity light. Note the following drivers of supply:

· Equity issuance is likely to be a burden this month. Before the settlement of Simon Property (SPG), MS, and WFC, about $4.7 bln in new issue had been priced. When MS and WFC are included, the number rises about $11 bln to $15.7 bln. Assuming that BAC sells $11 bln in stock as expected, the number will reach about $27 bln. There are also a few smaller secondary deals which need to be included. DSX, LLC, and DNDN are a few names. No accounting is made for any regional bank issuance needs. It looks like secondary issue will easily exceed March’s level of $16.7 bln and be the largest since September 1997 when $32.8 bln was sold. The recent high in secondary issue occurred in October 2008 when $25 bln was brought to market. IPO sales will be small this month and only add marginally to the overall supply picture. IPO’s are not the story.

· M&A activity is running light. M&A announcements have totaled $27.6 bln month to date. This compares to a May 2008 total of $139.3 bln and an April 2009 total of $51.2 bln. Recently the takeover premium has eased. It is down to 31.63% month to date compared to a February, March, and April average of 60.7%. M&A has been weak despite improved conditions in the credit markets and signs of stronger economic growth. M&A needs to pick up to support the market and confirm stocks still have value after their spring rally.

The graphic displays the difference between M&A announcements and new issue. The data is smoothed to highlight the trend. Notice that equity prices tend to rally when M&A activity is strong relative to new issue, and the S&P 500 tends to decline when new issue is strong to M&A activity. The relationship is not perfect, but there is a growing divergence with stock prices rising and supply increasing on a relative basis. The last data point on supply assumes no change in M&A into month end and estimated supply of $27 bln in new issuance.

Gold is starting to run

The GOLD PRICE climbed another US$4.50 today and closed at US$915. This is good, this is strong, this is upward, but this is not yet a close above $920, which is needed to confirm what silver did today.

The SILVER PRICE rose 32 cents to close on the Comex at 14.012. I like this. It's just what silver needed, but no one seems to be paying attention. No headlines appear touting "Silver the Invincible." I like that even better.

In the market after the Comex close at 12:30 Central Daylight Time both metals trended down. Right now they stand at 910.40 and 13.895. That's okay, really, as long as the gold price holds above 906 and the silver price above 13.80. However, it shows that even veteran traders don't quite trust this rise, mainly because they've seen the gold price beaten back at 920 before. Thus a close above that mark will make believers out of them, and they will reverse position.

If I were the Nice Government Men tomorrow would be about the day I would smack the gold market hard, while doubt rages around the 920.00 hurdle. If they fail to contain gold and it does close above 920.00, twill run long and hard. Notice closely that the GOLD/SILVER RATIO dropped again today, a sign that augurs well for this rally.

The US DOLLAR INDEX continued to slide today, falling 0.132 at 83.845. Lo! How are the mighty fallen! and will fall further. STOCKS today took a breather. The Dow dropped 102.43 to 8,409.85 and the S&P shaved off 12.14 to land at 907.39. Still rallying, still destined to top around 9,000 - 9,400, I'd say.

I haven't mentioned it in a while, but if y'all have been watching the Dow in Gold Dollars lately you've noticed that it couldn't get thru or even near G$200.00 (9.675 troy ounces). Today the DiG$ dropped to G$190.00 (9.191 ounces). Rally has probably ended there, and gold will now begin to outperform stocks again.

Intra day outlook

I must say that breadth was actually quite OK for such a big down day on the NYSE. The Nasdaq didn’t fare as well. And volume was off the charts. The Nasdaq hasn’t seen so much volume since Nov. 20, which was the low for that period as the high volume that occurred today tends to come at reversals.

What you need to know is the positives first: down volume on the Nasdaq was not quite 90%, the Utilities were green all day, and new lows did not expand (that surprised me a lot).
On the negative side, the market has finally come to a critical point in time. The reason is that the McClellan Summation Index for the Nasdaq ticked down today for the first time since the lows. As you may recall, it has threatened to do so several times but each time the market rallied the very next day. This doesn’t mean it can’t rally tomorrow, but it does mean that it better be a fabulous rally because at this point any down day ought to roll it over.
The next item on the agenda is the Philadelphia Semiconductor Sector Index (SOXX). I have harped away about it, but it is sitting right at an uptrend line.
The ratio of the Philadelphia Semiconductor Sector Index (SOXX) to the Nasdaq is right back at that same uptrend line. A break of the ratio line (and the uptrend in the SOXX itself for that matter) should be considered negative.

Did I have any good news? Sure, the Nasdaq’s decline managed to get it right down to the lower channel line. Oh, it has some wiggle room down to say 1700 but for all intents it’s basically there.
This makes tomorrow a pretty important day. The Employment number will come out in the morning, which surely will move the market one way or the other -- and I couldn’t even guess how it will turn out -- but what I do know is that if the uptrend on the SOXX is broken and that channel on the Nasdaq and Nasdaq volume is negative on the day (more declining volume than advancing volume), it will mark the beginning of the long-awaited correction I forecast weeks ago.

It is still hard for me to imagine this market will roll over easily so I wouldn’t be surprised if buyers step in at some point tomorrow. Keep in mind that next Friday is options expiration so there will likely be some volatility in the next week.

Market takes a breath

The Fed announced that 10 out of the 19 banks failed the bank stress test and need to raise a combined $74 billion. As expected, Geithner said no bank was in danger of insolvency. Everything is rosy, nothing to worry about. Banks are just fine. No surprise here!

Meanwhile…

Yesterday, I pointed out that both the daily and the weekly stochastics were extremely extended in the 90%+ range. Short cycles turned negative today, especially in the Nasdaq Composite and the Nasdaq 100. This is a warning shot.

Here is another warning sign of the danger of getting too enamored with the stock market here in May.

Contrarians have long known that when the public gets too bullish or too bearish, watch out for traps.

As you can see from this Stockcharts.com chart, bullish sentiment for the S&P 500 is now near 74%.

When the majority of investors line up on one side, watch out. As you can see, these sentiment readings are not linear, they’re cyclical and when they get out on the limb this high, predators go in for the kill.

Let’s me point out a couple of other issues on my radar screen.

I don’t know if you have been looking at government long-term bonds but they have been falling like a rock. All of this spin by the Fed of a recovery in the next few months has been motivating investors to sell their positions in government bonds.

In February, the long bond essentially offered nearly a zero return but carried a huge amount of downside market risk. The Fed promised to support the long bond in its “Quantitative Easing”.

In truth, they haven’t been able to keep the long bond stable.

This poses a big problem for the Fed because a fall in government bond prices means a rise in yields. A rise in yields means a rise in mortgage rates, which means more and more people will not be able to qualify or refinance their homes.

The Fed has lost control of the long-term yields. The only way for long-term yields to come down is for fear to return to prompt investors out of the stock market and back into bonds.

This means that mortgage rates are now going up, so here again the idea of a housing recovery is an illusion, especially if mortgage rates start climbing again. This isn’t good news for housing prices as it cuts into demand.

The political spin of an immediately recovery has produced another effect and that is rising crude oil prices, which reached a high today of $58.57.

If gasoline prices rise this summer, it demands more out of people’s budgets and also undercuts economic growth in the summer months.

$60 crude oil is way better than $140 oil, but rising oil prices is anti-growth for most companies and undercuts the whole notion of an economic recovery should crude prices climb to $70 or $80 this summer. A $12 or $18 rise in crude oil is not out of reach, especially if the Fed keeps fanning a robust recovery is before us.

From my experience this is one of the biggest reasons why the summer months tend to do poorly – because energy costs tend to rise in the summer.

The key point I want to drive home is that prices move in cycles. Investors anticipate and then adjust. We reach extremes that have to be corrected. When the Fed pushes to hard in one direction, problems crop up in bonds and crude oil that threatens to derail growth, so we get this breathing effect.

The market needs to exhale in extreme market conditions, so look forward and not backward. What has happened has happened. Don’t assume that what has happened will continue without an adjustment. It just doesn’t work that way.

Keep your eye on the 14-day RSI values on the daily charts. A breach below 50% is confirmation that the intermediate-term cycle is rolling down.

Remain defensive.

Intra day outlook

Haven't seen tick this negative for awhile. this could be the start of a correction for the weeks ahead. Sell in May and go away...

Talk about buying the rumor and selling the news. Today is a great example. Traders taking profit right before the Gov't release the stress test.
Internal is on the down side. lets see how we close today. we've seen late day rallies in to the close. maybe we'll get a bigger sell off today. Nasdaq has been lagging for 2 days now. Doesn't look good for the market since tech has been the leader during this 7 week rally.

We are going to starting posting out our automated Euro/dollar trades. we are currently short @ 1.34119 with stop at 1.34170

below is the profit curve from Dec of 08 to today trading 4 lots/contract of the eurusd.

13:03: A few words on Retail

Quickly on Retail

The ICSC said that April same store sales rose 0.7% y/y. This was short of the outlook for 1% and disappointing given the Easter date shift. The ICSC said that Easter accounting for a positive 300 bp shift. Weather was also favorable, but is harder to quantify. Given the weather and Easter shift, sales were soft, and consistent with cautious consumer spending. WMT seemed to perform the best which is a sign of underlying economic weakness. Consumers are still looking for value. As the graphic highlights, sales trends are improving. Specialty stores are showing the greatest improving. Department stores are lagging and discount sales are pretty sales. A few store comments are provided below to give a flavor of sales.

· JCP reports April sales down 6.6% compared to the 9% and 12% guidance. Jewelry remained the weakest category. The best performing items were apparel. May sales were expected to fall 9-12%. The strongest region was the Southwest. The central region was the weakest. Difficult comparisons were noted.

· TGT said that April sales were in line. Higher transaction volumes were off set by a similar decrease in transaction size. EPS were said to be ahead of estimate driven by fewer mark downs, favorable mark ups, favorable SG&A performance, and modestly better than expected sales. Sales were strongest in non-discretionary categories such as food, health care, and beauty. Toys, entertainment and stationary holiday were also strong due to the shift in Easter. Home and apparel declined at a high single digit rate. Weaker than average performance was reported in the garden and women’s apparel segments. By region, the Northeast (NY, NH, and MA) and upper Midwest (MN IA, SD, and ND) performed best. The south and west were weak with GA, FL, AZ, southern CA, and parts of TX weak.

· WMT said that comparable sales for the March to April period 2.9% helped by stronger traffic and strength in discretionary items. The combined March/April analysis highlights the importance of Easter in sales results. Grocery, health and wellness, hard lines and entertainment and home had positive comps. Apparel was negative. Comp store traffic was positive for the 7^th month in a row at WMT U.S. Internationally, WMT said that comp sales were higher In the U.K, Mexico, Canada, Brazil, and Japan but lower in China. The comment on China is surprising given all the talk about strong domestic demand and a global recovery.

5/7/09

12:02: Bond auction had a bid to cover of 2.14. Indirect took a healthy 33%. The high yield 4.288%, which was well above the 4.19% expectations. Very sloppy. The market bid well below the market in terms of price. The tail was about 10 bps.

11:06: Stress test results due at 4:00 CT today.

10:16: There is talk of a large asset allocation trade by real money selling S&P’s and buying 10 year futures.

9:37:

CP outstanding is weak and consistent with soft growth.

Outstandings
Weekly (Wednesday), seasonally adjusted

9:02: The Fed chairman has been making statements on the stress tests. I don’t think the color is dramatic. I would say that he focuses on liquidity, risk and compensation in the comments.

Intra day outlook

tick is moving in a similar fasion
as yesterday. Looking for choppy
trading while drifting lower

Don't believe in the Fed

Market Commentary:

Investors took some profits today and postured ahead of Thursday’s bank stress test results and an expected poor jobs report due out on Friday. The Fed was out stumping today reassuring everyone that a recovery was just around the corner. Excuse me if I am a bit skeptical of their rosy assessment.

I am just about convinced that the Fed is a very good contrarian indicator. The harder they try to convince, the more we need to be on the look out.

I hope you understand I am trying to do right by you and that I deeply care about giving you good advice. My judgment is not always right and I fully acknowledge I have biases – as you well know.

I get a bit wacky in my ranting and railing, especially when it comes to what I see as outright market manipulation and deception.

There are people out to steal your money. Deception has always been part of this game and if you never figure this out, you’ll never be able to get your assets to work for you. You’ll lose your wealth to those out to steal it from you, who work by a whole different set of rules than you may have.

Ben Bernanke spoke today, attempting to reinforce the idea that the economic trough is in and to expect positive growth by the end of the year.

" We are hopeful that the very sharp decline we saw beginning last fall through early this year will moderate considerably in the near term and we will see positive growth by the end of the year," Bernanke said to the Joint Economic Committee.

Should we believe him? I am not ready to trust this guy.

Bernanke has consistently erred on the sunny side in this recession. Two years ago he downplayed the risk of housing and the threat it posed to the economy. He knew what was coming down.

As late as June 2008, he fostered the idea along with Henry Paulson that the U.S. was heading for a “soft landing” and would avoid recession. Hey, the economy is healthy, remember that?

“ Several months later, the slump was acknowledged to have started in January 2008, but we were supposed to see renewed growth by mid-2009, with unemployment peaking in the eight-to-nine percent range. A quick “shovel-ready” stimulus bag was supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009. Today, the consensus is for a mid-2010 recovery, with unemployment peaking at just over 10 percent. Clearly, the mainstream has struggled to catch up to reality for well over one year. What are the chances that they finally have it right this time?” Seeking Alpha

Had you taken the bait on any of these rosy forecasts by the Fed, you would have been caught in a bear market trap.

Here is what I see wrong with this rosy scenario.

1) The money supply is dropping. Check it out for yourself.

So why is the money supply dropping and how is this going to create a robust recovery?

2) Housing prices are still falling. Check out this article from Business Week which points out that housing prices could fall another 10%.

Yes, pending homes sales are rising (lots of short sales and foreclosure distress sales), but it is falling housing prices that create bankruptcy and bank losses. How will another 10% drop in housing prices create a robust recovery in the next six months?

3) Unemployment is still accelerating to the upside and is expected to climb over 10% or higher in 2010. Outside of the good old USA, unemployment is now 15% to 20%, comparable to the Great Depression figures. If more and more people are still losing their jobs at this steady pace, why should we believe the consumer is going to turn this economy around soon with robust buying again?

4) Keep an eye on what the professionals are doing, i.e., insiders and CEO’s. This article tells us short interest for the financial sector is rapidly jumping. Given poor volume and rising short interest, going into May isn’t exactly a bullish signal.

The stock market is not out of the woods as our long-term indicators have shown.

I think the biggest danger is getting sucked into the Fed’s web, jumping too early and getting caught in a stampede out of the market when the herd realizes they are being set up again. I know that may be a skeptic’s way of looking at things, but I think we need to be skeptical as long as long-term indicators remain negative.

The stock market anticipates and then it adjusts to reality – for every action, there follows a reaction. I don’t know why we should expect something different right now.

GMAC slides:

Euro/USD update

News paper reports that the FIAT takeover of GM"s European operations may result in 18,000 job losses has taken its toll on the single currency. Reuters News reported on an article published by German newspaper FA that cites internal documents that FIAT plans to close all 10 OPEL manufacturing plants between 2011 and 2016 including partial or full closures of parts manufacturing in Germany and Austria, as well as Italian and British plants. EUR/USD has slipped down to fresh US session lows at 1.3318, with traders focusing on Thursday"s ECB meeting in light of these fresh reports.

US equity markets are down 0.5/1.4% amidst concern that Bernanke"s comments that the banking sector remains vulnerable to a relapse means that the delayed stress test report may have more bad news in it than has already been leaked. Add to that ECB speaker Nowotny"s comments this morning that deflation is a greater risk than inflation in the near term puts the ECB front and centre in the global effort to sustain the nascent bout of confidence that has buoyed equity markets. Oversold hourly Bollinger bands between 1.3325 and 1.3300 suggest the next 20 pips should prove supportive, but price action is heavy, and EUR/USD has been defying gravity for some time.

Some Sober Economic News

The restructuring of the auto sector risks delaying the economic recovery. The fact that GM will shut down plants this summer and faces streamlining is no surprise to the trade. A potential bankruptcy is on the horizon and may add risk more production cut backs, but the situation is well known. Likewise, Chrysler’s retrenchment and bankruptcy has been discussed. However, it should be noted that AKS (AK Steel) lowered its profit forecast. It made the following statements:

· It said that Q2 shipments of steel would be closer to 725,000 tons than the original 800,000 ton estimate.

· Average price per tone would decrease 3% to 4% sequentially in Q2.

· It would post an operating loss of $75 to $80 mln compared to a prior forecast of $50 mln.

· AKS is not only impacted directly by GM and Chrysler, but also suppliers who will see lower output levels.

The news is a reminder that the auto sector will remain a drag on the economy through the summer, and an economic recovery will be slow to develop until structural issues are corrected. The auto industry’s move toward health is complicated by government and union intervention. If AKS is impact, other suppliers and related businesses will also be affected.

Looking to housing, DHI (DR Horton) said that the industry faces many challenges which are cooling the enthusiasm toward the recovery in the housing market. DHI indicated:

· DHI continues to reduce inventory on both a dollar and volume basis.

· Las Vegas was the weakest area, and Phoenix continues to decline. D.C. also remains weak. Conditions have stabilized in California, Texas, Chicago, Minneapolis, and New Jersey.

· Said that speculative homes are being built, but at lower costs. DHI is focusing more at supplying smaller homes which are attractive to first time buyers. It is also pricing to compete with foreclosures.

DHI indicates that foreclosures present ample housing supply and are holding back the housing market from a full recovery. The excesses need to be clear to put the housing sector on firmer footing. A removal of foreclosures will also raise home prices and improve consumer wealth.

Thinking about Labor

The market is going to focus closely on employment data over the next few days. ISM data points to falling labor demand and a contraction in payrolls, but the drop should moderate from recent months. The market will take a look at ADP data today for clarification. The market is looking for the ADP report to show a 645,000 drop in private sector payrolls. The ADP - BLS payroll relationship can be loose, and the ISM employment numbers are pointing to a contraction in total payrolls of about 465,000. Besides the ADP report, the market may take a look at Challenger numbers. Layoffs have surged in recent months, but are showing signs of peaking. Hiring intentions are depressed, and have not changed materially in recent months. There should be a continuation of the recent trend within the April data. Hiring will remain downbeat, but layoff intentions will continue to fall. The auto industry is the main risk to the outlook for labor market stability as GM and Chrysler are restructuring and closing plants.

The table below displays the trend in Challenger layoff and hiring intentions for the month of April. The change in payrolls and the unemployment rate are included. There is limited relationship between the Challenger data and the BLS numbers on a month to month basis, but the table provides a reference point for today’s data.

The ISM employment indices suggest the worst for the labor market is behind. However, demand remains historically depressed. The ISM numbers tend to lead shifts in the unemployment rate. Notice that the ISM indices worked higher in the 2001 to 2003 period prior to a peak in the unemployment rate. This is a sign the employment report is a lagging indicator of labor market conditions. It looks like the unemployment rate falls when the employment indices rise above 50 and rises when the employment indices fall below 50 – roughly speaking.