Traders are reacting to this morning’s adjusted GDP report which shows slower growth than originally reported…
Gross domestic product, the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 1.6% from April to June, the Commerce Department said Frid
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If you think the worst is behind us when it comes to the Eurpean debt crisis, Think Again!
Yesterday there were more riots in the streets of Athens as labor unions violently opposed a new proposal that would raise the retirement age and cut payments to pension recipients. It’s understandable that citizens would be discouraged at losing generous benefits that had been promised for years, but one has to stop and think about how realistic these promises have been.
Whether Greece is able to fulfill the labor union’s expectation of generous payday and retirement benefits or not, the international investing community continues to expect high levels of risk. The risk of a Greece or Spain default is a very serious issue with global repercussions. Many European banks have significant exposure to Greek and Spanish sovereign debt, and even the expectation of a default can cause illiquidity as banks refuse to lend to each other and capital ratios are unable to be met.
As a trader in primarily US based companies, the European debt situation is still a major concern. US markets are increasingly keying off of international events including Austerity programs, Chinese economic reports, and trends in emerging markets. As correlations between geographical regions increase, I am finding few places where long-term investments make sense right now. There is just too much risk of loss.
So at this point, the best course of action continues to be one of defense. Consider holding elevated levels of cash in your account. If you are comfortable shorting stocks and understand the risk, there are plenty of negative fundamental and technical situations that can be capitalized on. IRA accounts can consider buying puts or inverse ETFs.
There will eventually be opportunities to buy equities with high levels of conviction. But today’s market allows for very little confidence and requires patience and risk management regardless of your time horizon and risk tolerance.
Market’s are off sharply Tuesday as investors grapple with numerous economic and political crosswinds. This morning, traders were greeted with a weaker-than-expected Consumer Confidence report. The index dropped to 52.9 in June and the May figure was revised lower to 62.7. According to Bloomberg, this index would need to come in above 90 to truly indicate that the economic rebound was on solid footing.
Reuters blames the weakness on two primary factors. First, the labor market continues to be soft and consumers are concerned with the employment situation. Those who have jobs may very well be choosing not to make discretionary purchases and instead build up a savings account in case their employment situation changes. Obviously those who do not have jobs are even more focused on reining in spending.
The second issue is the European overhang. While most US consumers don’t actually see significant changes in their lifestyle as a direct result of the European uncertainty, the thought of heavily indebted governments defaulting on sovereign debt is very concerning – especially considering the massive debt the US is currently building.
Additional factors include the real estate market which was artificially propped up by stimulus programs but now appears to be under pressure once again. If consumers feel that their home value is declining, they are less likely to make large purchases – especially home repairs or remodel projects because there is less justification that these improvements are an “investment.”
Finally, the declining stock market has a very real effect on sentiment. As consumer see the value of 401(k) holdings, IRA accounts, and traditional investment portfolios decline, it sends a very disturbing negative wealth message.
The end result will likely be contracting multiples on equities and a flight to quality. Pursuing a conservative investment strategy appears to be the best approach for today and holding significant amounts of cash and potentially inverse ETF positions can help to offset losses in traditional investments.
Note: Below is a guest post courtesy of Michael Trinkle. Michael represents ForexTraders.com ~ ForexTraders.com is an educational/informative resource center for the currency exchange market. We help people learn, analyze and execute forex trading by providing them with the necessary tools and information needed to be successful.
Enjoy,
ZDS
Lately, almost every financial news network has market analysts talking about the currency markets. At the moment the future of the Euro Dollar is the number one debate. Some say that the European Union needs to exist for efficient trade to take place more freely throughout the E.U. Others have suggested that Greece and the other countries in trouble default on their debt and start anew, without being part of the E.U. If you are a trader looking to play the Euro currency without buying the EUR/USD pair, a good exchange traded fund that will allow you to do this is the Currency Shares Euro Trust, ticker symbol (FXE).
The FXE trades on all the major electronic exchanges. With an average three month volume of over 1.5 million shares traded daily there is more then enough liquidity for traders to trade large orders of this product intraday. The FXE will mimic the price movements of the EUR/USD pair that forex traders would trade, so if as an investor you feel that the Euro will rise buying shares of this ETF will allow you to profit from its appreciation. Likewise if the Euro Falls the ETF will lose value.
At the moment the FXE has been trading between a high of 125.66 and a low of 121.27 over the past week. As you can see by the charts the Euro has been depreciating against the U.S. Dollar since the beginning of the year. In the past month the Greek debt crisis has led to a steeper selloff, bringing more uncertainty into all financial markets.
Traders should be watching the charts in the next few weeks to see if the Euro will regain its footing or fall further. The increased volume that you can see in the histogram on the bottom of the chart indicates that more people have been trading this ETF in the past few weeks. If Greece, Spain and Portugal announce that they are still having debt issues, the Euro and the FXE will fall further.
There is no support below the 121.27 mark that we tested on May 18th, so a price break below that level on higher volume will indicate another leg down for the price of the Euro. The overall trend has been down since the beginning of the year, making it more probable that we will continue lower. There would need to be a major news story about the Germans backing the future of the European Union and Euro as a currency for it to start to appreciate. The German economy and its strong GDP is the driving force the holds the E.U. together. Germany has the biggest economy in Europe and since they are the most financially stable, they will have to help the other countries with loans to cover their budget shortfalls.
It is never easy for politicians to get their citizens to lend money to other countries that simply do not try and get their budgets under control. Greece is in the process of trying to change their socialistic style of government. As we all can see from the riots on television, this is not going to be an easy transition. If the various governments that comprise the E.U. can get their debt under control before they ask for money to bail them out the Euro has a chance to survive. If we as investors see little progress being made, they Euro will continue to fall. As a trader the best way to profit from the falling price of the Euro is to initiate a short position using the FXE exchange traded fund.
Friday’s dismal retail sales report was largely overlooked as the market continued it’s oversold bounce. But despite the strength in the broad averages, the fundamental data in the report was concerning for both business owners in the retail sector as well as investors who have bid prices of retail stocks significantly higher over the past few quarters.
The big decline cast new doubts about the strength of the economic recovery. Consumer spending accounts for 70 percent of total economic activity. Economists are concerned that households will start trimming outlays as they continued to be battered by high unemployment and a swoon in stock prices. ~AP
Certain retail stocks have already begun to price in a slowdown in retail sales… For instance, Abercrombie & Fitch (ANF) has already lost 30% of its market value from its high in April. Still, other expensive apparel companies such as Lululemon Athletica (LULU) are still trading near their highs and appear to be vulnerable.
The decline in May sales reached 1.2% which was the largest decline since September and the first significant piece of negative news for retailers. I would be more inclined to sell (or short) any rallies in the retail sector. Investors will likely place a lower multiple on these stocks given the uncertainty ahead and the significant risk the that US consumer will continue to pinch pennies and reduce spending.
For any remaining employment optimists, the comments out of Washington from Ben Bernanke are certainly troubling. Last night the Federal Reserve Chairman sat down with Sam Donaldson (ABC) to discuss the state of the US economy. His words were less than encouraging:
The unemployment rate is still going to be high for a while, and that means that a lot of people are going to be under financial stress
Last week, the employment report was released and was quite a disappointment to most traders. While government hiring increased as a result of new census workers coming online, the private sector is still struggling to create new jobs. Since each new government job must be funded by taxpayer revenues or additional borrowing, the number of new census workers isn’t exactly a benefit to the system as a whole.
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Optimists might point to the declining unemployment rate as evidence that the picture is brightening. But the actual decline in unemployment is more a result of a smaller workforce as the statisticians reduced the denominator of “employable workers.” This is much more of a statistical magic trick than a true improvement in the employment picture.
Last night, Bernanke also seemed to be hedging his words carefully and possibly hinting at an impending rate increase – which would likely constrain growth:
The Fed chief reiterated yesterday that the central bank’s “extended period” of a record low interbank lending rate is conditioned on high unemployment, low inflation and stable price expectations.
“We have right now a very accommodative, very easy monetary policy,” Bernanke said. “We can’t wait until unemployment is where we’d like it to be” or inflation gets “out of control” to tighten credit, he said.
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So at this point it appears the market fear is pricing in an increasing possibility of a double dip recession – which would be very difficult to endure given the high level of government debt and the relatively high level of unemployment heading into this period.
Investors should continue to be cautious, employ strict risk control measures, and be willing to hold cash positions. The market continues to be very turbulent and long-only investors are likely to have much better prices for buying a bit farther down the road.
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This morning’s unemployment report is being viewed as a positive data point with the number of initial claims dropping by 10,000. However, with the total adjusted number checking in at 453,000, a 10k drop is not really a significant decline. Analysts had been expecting the number to drop more and hit 450,000 for the month.
Unemployment has been an important issue, and one that has been difficult to tackle. Despite many stimulus projects aimed at improving the unemployment picture, workers are still finding it challenging to find jobs. This from a Reuters report on the data:
Although the economy has now grown for three straight quarters following the worst downturn since the 1930s and the recovery is broadening, stubbornly high unemployment is eroding President Barack Obama’s popularity… While other indicators support views the labor market recovery is firming, claims for jobless benefits remain above levels usually associated with sustainable employment growth.
While the jobless report is helpful in determining the state of employment in the US, most eyes will be turned to the more popular Employment Report which will be released tomorrow. The expectation is for non-farm payrolls to have increased 513,000 in May – much of which is due to the census hiring.
Employment is an important part of any economic recovery because it directly affects the well being and sustainability of the population. While the US could experience nominal GDP growth as an eventual product of stimulus spending, without a sustained resurgence of private jobs, the recovery will quickly run into substantial challenges.
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According to Bespoke, Tuesday’s market action was the second worst start to June in the last 50 years.
Only the first trading day of June 2002 was worse with a decline of 2.48%. Below we highlight all first days of June that have been down over the last 50 years. We also provide the index’s performance through the end of the month. For Junes that have started the month down, the S&P has averaged a rest-of-month decline of 0.53%.
Take a look at the table and you will see the closest two data points led to some very rough returns.
Considering the fact that we just completed the worst May in 50 years, it is clear that the market is vulnerable and investors (professional and retail alike) are pairing back their risk exposure and looking for safety.
Consumers remain under pressure and if inflation and/or unemployment statistics begin to tick higher, the pain will be felt not just on Wall Street but more importantly on Main Street. Investors should be looking for defensive businesses that can survive and even thrive in a weak environment for consumers. Direct payday lenders like First Cash Financial (FCFS) and Cash America (CSH) may be worth watching as they have backed off in recent months but are fundamentally still relatively strong.
From time to time, I allow readers to send me a guest post on timely subjects. With the potential for rising inflation, investors should consider precious metals as a hedge for the purchasing power of their portfolio. You can find more from Bob Kirtley at Gold-Prices.biz…
We will kick off with a review of the charts for gold, silver and the gold bugs index, the HUI, in an attempt to see where we are now and just where we might go from here. However, to put the charts into context we need to take into consideration the surrounding political, economic and investment landscape. These are volatile times with the financial markets in turmoil as what were perceived to be sound and secure governments now toil under the strain of their own excesses. The borrow and spend philosophies are coming back like a bad penny, to haunt not just those who caused this mess, but also for the rest of us, who are expected to clear it up. The follies vary from mis-management to corruption, resulting in people taking to the street to protest the latest craze of austerity and belt tightening.
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Society, in general, has high expectations in terms of their standard of living and the mere thought of it heading lower is not acceptable to them. Take state pensions, for example, millions of people are expecting it to be there for them when they retire, however, the pensions cupboard is empty and therefore the concept of sitting back as the cheques roll in is well and truly dead in the water. We need to start protecting ourselves now, don’t wait, make it the number one priority to put your independence at the top of your ‘To Do’ list.
Taking a quick look at the above gold chart we can see that the sell off in gold prices of $60.00/oz has now steadied and gold appears to be set to continue its rally. Note both the 50 day and the 200 day moving averages are climbing gently in support. The RSI has turned north and the STO has just made a crossover, which is usually a positive sign.
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Next we have the HUI which is making steady progress despite the volatility and is now perched just above the 200dma. Looking at the technical indicators we can see the RSI has turned north just above the ‘30? level and that the STO has also turned up having dipped below ‘20?, again all positive for the gold and silver mining producers.
Turning to silver we can see that the pull back looks to have run its course so we are looking for silver prices to head to higher ground. The technical indicators are now out of the overbought zone thus reducing the selling pressure on silver and allowing it the space to resume its advance.
In conclusion we are of the opinion that the precious metals should once again be bought, gold, silver and their associated stocks. As a word of warning though, its still not clear to us whether or not the stocks will go down in the face of a broader market sell off should it occur. So go gently and make your acquisitions on a ‘layered’ basis. Finally, we are considering the purchase of a number of options trades which should be profitable during the next move up, which we believe to be imminent.
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The last few weeks have been difficult for many retail stocks – and particularly challenging for investors in the recent IPO of Express Inc. (EXPR). After being offered to the public at $17.00 per share, the stock has lost about 15% of its value and hit a new low in light trading this morning. Express is a specialty apparel chain with 573 retail locations spread across the United States. Originally a part of Limited Brands (LTD), the majority of the company was purchased by Golden Gate Private Equity Inc. in 2007. The IPO is the first step for the private equity company to cash in on its 3-year investment.
The IPO was managed by Merrill Lynch / Bank of America (BAC) and Goldman Sachs (GS). With such a diverse retail and institutional platform, one would have expected the shares to be placed in the hands of long-term investors and priced at a discount to allow for an initial increase in the share price. But the environment for retail stocks has been extremely difficult and institutional investors have been offloading risk at a steady pace this month. At this point it seems that the selling shareholders got the better end of the deal – liquidating part of their position at $17.00 per share.
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According to the terms of the prospectus, there were roughly 16 million shares sold to the public of which 10.5 million were primary (sold by the company to raise capital) and 5.5 million were sold by private shareholders. However, when looking more carefully at the deal, this statistic is a little misleading…
Express essentially DID receive $170 million in proceeds from the deal which it used to reduce outstanding debt. However, it should be noted that the outstanding debt is actually owed to several subsidiaries of the private equity firm that purchased the brand in 2007. So after passing briefly through Express’s balance sheet, the funds will then be distributed to the selling shareholders in the form of a debt repayment. Express will be left with $368 million in long-term debt and roughly $67 million in cash. The pro-forma balance sheet has stockholders equity at $89 million – which implies a 413% debt to equity ratio – not exactly a solid balance sheet.
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But despite the shaky circumstances with which this stock began its publicly traded days, I expect EXPR to find a floor near $14 and begin to trade higher. One of the primary reasons is because only a small portion of the stock was actually liquidated in the IPO transaction. Sixteen million shares were sold to the public, but the number of shares outstanding is closer to 89 million. That means Limited Brands and Golden Gate Private Equity still hold the majority of the stock and will see the market value of their investment rise and fall with the fortunes of the stock.
Once a private equity firm has begun to liquidate its position, they usually don’t wait too long to follow up by selling the remaining shares. With the negative reaction to EXPR’s stock there is even more of an incentive for the company to find a “graceful” way of exiting this position. So it may sound counter intuitive, but one of the best ways for Golden Gate to liquidate the rest of its position is for the company to step in and support the price of EXPR – and if they are going to take this action they need to act quickly!
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Supporting the stock at this time when the market is attempting to rebound will be key. If EXPR begins to trade back towards the $17.00 IPO price and holds a stable pattern, then Golden Gate stands a better chance of selling its remaining shares in a secondary offering. But if the stock is allowed to fall from here, there will likely be no market for quite some time. So the stakes are high and the amount of capital at risk is not trivial.
It may be a little too cute on the trading side, but with retail names showing some relative strength over the past few days, I expect EXPR to be good for a trade higher. The potential return is somewhere in the neighborhood of 10% to 12%. But this can be painted against a relatively low-risk backdrop. If I were to enter the trade later this week, I would place a stop just below $14.75 or so – exiting the trade if the rebound in EXPR doesn’t take place immediately. Setting up a short-term trade in an improving market with capped risk is one of the better ways to play a short-term rebound and I think the general negative sentiment in the retail area could be temporarily lifted as the illusion of financial stability comes back into this market.
FD: Author does not have a position in any stocks mentioned in this article.
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