Dude, Where's My Car?

Don't fear the reap ... o-man

In the not-so-distant future, we will probably hear a lot of folks uttering the title of my piece: "Dude, where's my car?" They won't be referring to the teen motion-picture comedy about foolish drug use and partying. Instead, they'll be asking because their cars have been repossessed.

But, hey, as Fed guv McTeer said, "If we all just go out and buy an SUV, we can prevent a recession." Thanks for sharing your brilliance with us, Mr. McTeer. The upcoming week should prove to be equally enlightening, as Fed governors and Mr. Bubblespan himself strap on their Stratocasters and go on tour.

Are there reasons to get excited? I beg to differ. Forget about the shenanigans of institutions jamming up TJX Companies (TJX | Quote | Chart | News | PowerRating), Lincare Holdings (LNCR | Quote | Chart | News | PowerRating), Tenet Healthcare (THC | Quote | Chart | News | PowerRating), and Abercrombie & Fitch (ANF | Quote | Chart | News | PowerRating) for the past few days, in order to make their quarter-end numbers a bit juicier.

Remember what they did to Merck (MRK | Quote | Chart | News | PowerRating) at the beginning of 2001, when the drug stocks were the momentum sector and the stocks you just had to own? If you don't remember, pull up a chart and check it out. When those boys are done squeezing every ounce of blood they can out of a stock or sector, they cast it away like a melted chocolate bar found in their pockets on a hot summer day.

In addition, the market decided midweek that it no longer wanted economic numbers that showed intense weakness (God knows, we've seen enough of those), but, rather, economic numbers showing an ever-so-slight bounce-back. As the pathological liar used to say, "Yeah, that's the ticket."

Certainly! If their agenda was to jam the Dow stocks higher, why wouldn't they try to change the game midstream? But wait! They also hammered the likes of Cisco (CSCO | Quote | Chart | News | PowerRating), Sun Micro (SUNW | Quote | Chart | News | PowerRating), JDS Uniphase (JDSU | Quote | Chart | News | PowerRating), Juniper (JNPR | Quote | Chart | News | PowerRating), Brocade (BRCD | Quote | Chart | News | PowerRating), etc., etc.

Whatever the big boys did this past week had absolutely nothing to do with the economy or fundamentals. It had to do with their bottom lines. Let's all join hands and pray to our respective gods that the quarter's end-games are now over.

The increased consumer-confidence number should be taken with as much seriousness as a Jennifer Lopez movie. Don't be fooled by the sudden jump up in any numbers relating to the psychological state of the average consumer. The reason? The average consumer is not that bright.

Let's review the facts: The average consumer has a negative savings rate (that means he spends more than he earns); the average consumer has a historically high level of credit-card debt; the average consumer still has 42% of his household net worth in the stock market; and — last, but not least — the average consumer is roughly two paychecks away from being homeless and is maxed out on credit.

Does anyone wonder why Congress passed the new bankruptcy legislation as quickly as it did? Isn't it amazing how our wonderful two-party system can agree on something that will immediately cast a safety net for the bottom lines of all its friends in the financial sector?

Interestingly, this week I heard a "guru" on CNBC tell us this: "Of course, the manufacturing sector is in a recession, but the manufacturing sector only comprises about 33% of this economy. … We think the consumer will pull us out of it." Au contraire! As I have stated many times before, the writing is clearly on the wall, as far as this is concerned.

First, the manufacturing sector is falling deeper into historical recessionary territory (as evidenced by the Chicago PMI report on Friday); and, perhaps, it has a slightly greater effect on the overall health and condition of the economy than the ill-advised perma-bullish guests on CNBC would like us to believe. Second, it is clear that the consumer is at the end of his financial rope. Making credit cheaper (what Mr. Greenspan is doing) is like giving Thorazine to a heroine addict.

With the stock market going up for the past 10 years and with economic expansion "unstoppable," it appeared as though the party would last forever, because the unrealized gains in household net worth from the stock market could provide a safety net for the irrational spending and debt levels. Undoubtedly, it will take a bit more time for consumers to change their spending habits of the past decade, as well as to understand that their Lucents (LU | Quote | Chart | News | PowerRating), WorldComs (WCOM | Quote | Chart | News | PowerRating), Ciscos (CSCO | Quote | Chart | News | PowerRating), Intels (INTC | Quote | Chart | News | PowerRating), General Electrics (GE | Quote | Chart | News | PowerRating), and AOL-Time Warners (AOL | Quote | Chart | News | PowerRating) won't return to their old highs anytime soon.

However, it's important to keep one eye on the past when attempting to anticipate the future.

In 1973, the economic news in the United States couldn't really get any worse than it was, and everything looked bleak. That period in ’73 marked the low of the stock market. Some people are trying to draw parallels between today's conditions and those of 1973, when it comes to the earnings picture and the sharp decline of the manufacturing sector.

Although these parallels appear to have merit on the surface, they could hardly be further from reality. Most of the problems that plagued the U.S. economy in 1973 were well-known events and situations that were out in the open for everyone to see and analyze. The potential problems for this 2001 economy are still largely unknown and are yet to unfold.

On an international level, the Japanese economy is in the midst of collapse. Without significant and material changes and restructuring of the Japanese financial system, Japan's economy will implode and bring down multiple smaller economies in adjacent countries. In addition, China, which is trying desperately to hold on to its World Trading Organization card, will be forced to devalue its currency, which will worsen the situation.

After consulting with a major currency trading firm last night, I think it's clear that the devaluation of the Japanese yen is not just a possibility, but is well under way. The implications this event will have on a global scale remain to be seen.

On the bullish side of the argument, we have:

1. Don't fight the Fed (rah, rah, rah!). I don't need to fight the Fed; the market is doing that already. I'll just go with the flow.

2. More-astute individuals point to the Fed's increase of the M3 money supply. This is fine and dandy, but with a decrease in commercial paper, the money-supply increase translates into a "no sale." Unless banks increase their lending, the money-supply increase will have no significance. In Japan, for instance, the interest rates have been virtually at zero percent for the past decade; however, owing to the fact that the banks have been lending less and less money over the years, Japan's economy has languished.

3. Well-respected strategists on Wall Street are upping their equity allocations, and investment advisors are maintaining their highest levels of equity allocations in history in their model portfolios. Enough reason to run into the cellar and bolt the door behind you! These guys are the products of the 26-year bull market in equities, and they have made their money being bullish. Do you think they want to lose their clients? Do you think they really know any more than the rest of us?

4. We hear that a "V”-type recovery is coming. Well, this is truly the biggest fallacy out there. With CEOs telling us that they have "no visibility" and that their financial situations are changing on a "week-to-week basis," do we really believe in a "V" recovery?

Considering the facts and opinions presented above, a considerable amount of caution is in order. Regardless of what the market does day to day, it is important to realize that there are still potentially damaging events lurking in the shadows. If I decide to trade the market from the long side, under no circumstances will I take a position home overnight. What if I miss that gap up the next day? Tough cookies. Gaps are for amateurs, anyway. In this environment, I don't depend on playing gaps to generate trading income.

Since there's a new quarter beginning next week, it will be interesting to see if the former "safe havens" will perhaps lose a little of their luster. I wouldn't be surprised to see the technology sector pose a bit of a recovery while money leaves the healthcare, energy, and retail sectors. The simple argument is this: Would you rather buy JDS at 18, CSCO at 15, and SUNW at 15 or would you rather buy ANF at 35, LNCR at 53, and THC at 44?

Interestingly, in the last 20 minutes of trading on Friday, I observed a huge sell-off in many defensive stocks. Could this have been early positioning for the trend of next week?

Unfortunately, I am not able to post charts this weekend, but I want to reference the following stocks for analysis:

Short Watch: Take a look at LNCR, THC, and Cardinal Health (CAH | Quote | Chart | News | PowerRating) in the healthcare field. These have all rallied back, due to the institutional cattle prod in the hind end at the end of the first quarter. In the retail sector, focus on TJX Companies (TJX | Quote | Chart | News | PowerRating), Target (TGT | Quote | Chart | News | PowerRating), ANF, and Jones Apparel (JNY | Quote | Chart | News | PowerRating). It appears that anyone who was going to commit money to these stocks is already in. They have gotten too much hype and have gone nowhere while institutions and insiders have been dumping. Many of these stocks are trading at five to 10 times book value, and double to triple their historical valuations. But beware: These stocks are not fast movers and may prove to be better positional shorts than intraday scalpers. Like I said a few days ago, determine your trading style and approach in this market environment, and evaluate your pain thresholds and "buy stop" areas very closely before you initiate any short positions.

Long Watch: Take a look at the Nasdaq-100 Index Trading Stock (QQQ | Quote | Chart | News | PowerRating) over 39.50 for a trade. Focus on JNPR, Corning (GLW | Quote | Chart | News | PowerRating), BRCD, and EMC Corporation (EMC | Quote | Chart | News | PowerRating), because they may be the first recipients of "bounce money" when the "safe havens" are dumped. But be careful, these techs are still extremely volatile, even though their share prices have dropped considerably.

Have a great weekend.

Goran