The Week Ahead 11/30/09


In the first half of the week, risk appetite roared back ahead of the Thanksgiving holiday in the US, erasing last week’s losses in the equity market. Good data, mildly positive FOMC minutes, strong corporate earnings and light volume kept investors from fretting over the reduction in the second Q3 US GDP reading (to +2.8% from +3.5). The FOMC minutes showed the Fed believes the continuing decline in the dollar is orderly and unemployment will remain elevated for an extended period of time

But the positive tone in the markets was sand blasted away by a storm blowing out of the Middle East. Dubai World’s surprise restructuring announced on Wednesday shook global markets in the latter half of the week on fears of a new contagion spreading through the world financial system. The Dubai story was used as cover for punishing what was perceived by some as a growing recklessness in credit and asset markets: Equity markets fell an average of 3% worldwide, the dollar strengthened rapidly, and commodities tumbled. After approaching $1,200 early in the week gold fell back to as low as $1,140 on Friday, and crude hit its lowest mark in six weeks. For the week, the DJIA lost 0.1%, the Nasdaq fell 0.4%, and the S&P 500 ended flat.

Early returns from Black Friday have been somewhat positive. With retailers going all out including some opening their doors on Thanksgiving day, anecdotal evidence appears to show foot traffic has improved over last year. I’m not convinced as traffic was down a sold 5% from last year in the heavily populated northeast.

Shares of the leading US banks have declined noticeably this week on a string of cautious commentary from various sources. S&P said it believes capital remains a negative to neutral factor for the majority of global banks. The FDIC published its Q3 troubled bank list, noting that 552 institutions are on the list, the highest amount since 1993. The FDIC said the balance in its deposit insurance fund turned negative for the first time since 1992. The FDIC’s Bair said US bank earnings remain weak and warned that she expects charge offs to increase in Q4. Also note that there were reports out of Washington that House Democrats were drafting a bill to impose a 0.25% Tobin Tax on certain financial transactions. Standard & Poor’s chimed in with a warning that nearly all of the world’s big banks lack sufficient capital to cover trading and investment exposure, risking further downgrades over the next 18 months unless they move swiftly to beef up their defenses.

I made the call two weeks ago that I thought the highs were in for the year on the financials and so far I’m right. It will be tough for them to put together more than a mild oversold bounce in my opinion between now and year end. Way too many headwinds.

Another major market event that folks aren’t really ready to pay attention to is the Israel/Iran conflict. Iran over the weekend said they are planning to build five more nuclear facilities, basically thumbing their nose to the West, but specifically Obama and the U.S.. Israeli rhetoric is getting more intense with every day that goes by. Many experts now believe that there is a 50% chance that Israel will bomb Iran sometime in the first quarter of 2010. What would that mean? Well we may not follow the story closely but it will effect us dramatically.

Iran has said that if Israel attacks, that they will immediately bomb the oil fields in Saudi Arabia, that would take out about 10,000 barrels of supply a day off the market and oil would shoot to roughly $300 a barrel. Think of it. The Straits of Hormuz would probably get blocked by Iran which would cut off  supply even further. I’m far from a geo-political Armageddonist but yeah, these things to keep me up at night from time to time. Remember how Dubai came out of nowhere? Forget about the pleasant banter about V or W recoveries, the market will just crash, plain and simple, it will also make the deleveraging that we saw in 2008 and early 2009 look like choir practice.

Here’s an interesting read/video on the subject.

Point is, we never know when an “event” will occur, invariably it happens when we’re sleeping and then it is too late. So always be hedged if you can, stops are important  intraday, but when an “event” occurs your position will most likely trade through the stop. It’s a great intention but you can get decimated anyway.

I can’t say enough how I do not trust this market, the complacency out there is mind numbing to me. This market is all light volume and fragile, other than unemployment being at disgraceful levels, there hasn’t been any seriously tragic news to upset the apple cart, hence S&P 1100 and the bears don’t want to start a ruckus without any bad news, but they are always there, waiting and at the ready. So let’s be careful and use our heads or it’s very possible that we can lose them.

I’m not posting any new names as it would be completely irresponsible with so much doubt and unanswered questions going into tomorrow. It’s impossible to make a judgement call on an anemic volume day(half day) like Friday. The real players will be back tomorrow.

What I will be watching for is a gap down, I think at this point that’s a strong possibility, and then a possible chance to make some smart buys. If tomorrow turns into Friday, but on a bigger scale, then it may offer up some good buy side opportunities. On the other side of the coin this may just be the negative catalyst that the bears have been waiting for to knock the stuffing out of this market until year end.

Also keep in mind that 90% of hedge funds have made their money for the year, they are pretty much done buying and if anything will take profits down the home stretch, so where will the buying come from?

Sorry for being vague, but that’s how I see it. Our longs could get stopped here, maybe not. I hope you had a great weekend and I will update tomorrow on the site if I am going long or short.

If you put a gun to head though, shorts that look interesting are: WFC, XHB, TOL, NAV, IYR, XLF

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