It Puzzle Time Boys And Girls.
Each week we try and figure out what the market is going to do. We do this because we know that 70% of our core holding equities' prices are driven by the direction of the market. We also do this to look for short term trade opportunities be they index bets or options or volatility changes. In essence if we do a good job of building our puzzle, the better the art is in that puzzle.
So how does one build a puzzle with at least 650 pieces? (Ok, it's a guess, but we have 500 stocks in the S & P 500 and about 150 economic data points.) Well just like those stormy or wintery afternoon when you pull the old puzzles off the shelf, how do you build a puzzle? Yeah, we start with the straight edge pieces. That is how we "frame" the puzzle.
When we are talking about the market, the straight pieces are the economic data points that come into play this week or have come into play in recent weeks. Some other straight edged pieces might include what influential companies might be reporting earnings that week. Once you have those edged pieces separated from all the other pieces, you can begin to frame the puzzle.
Now we know some of you are skeptical at this point because you could argue that an act of God, or a geopolitical blunder or an unannounced development in the market will throw all your hard work down the toilette. Those thinking that would be absolutely correct. Think of it as you working on your puzzle and the cat jumps up knocks over your freshly poured glass of 2006 Patz & Hall Chardonnay Dutton Ranch all over your half way finished puzzle. Yeah it happens, but you remember where the pieces go and you can quickly recover better than having a glass of mud poured into your puzzle box.
So let's sort the straight edge pieces for this short week. It's easy we will help. First find a source of information. Most websites have this stuff for free. We use Barron's (which is not free), but can also find it in the Schwab site and on Morningstar.com.
Today the Eurozone announced its GDP figure and it is the lowest in two years. That is a big straight edge put it aside in the bottom part of the puzzle as that news is going to make it tough to have an up market tomorrow.
Tuesday of this week we have Australia announcing monetary policy (think interest rates) that could have an impact on the market as it is a gauge of Australia's expectation for the whole of Asia. Put that one aside as it could drive the market up or down based upon the results.
Tuesday here in the states, we have the non manufacturing portion of the ISM report. This covers the service sector. Now last month the new order segment of this index was down and the back order segment was softening. Put this piece at the bottom as the consensus indicates and drop to 51 (remember anything below 50 mean contraction). We think we will be lucky to see 50. If we do not hit 50 Mr. Market will give up at least 1-2%. Remember the ISM manufacturing report came in lower than expected and just barely stayed above 50.
Tuesday will also see a manufacturing report out of Germany. Germany is important because it is the workhorse of the Eurozone. It is worth noting that Merkel's ruling party took a major hit in regional elections on Friday. If her party wants to stay relevant, she needs to start listening to her constituents. Her constituents want her to stop bailing out Greece, Italy, Portugal. That has all the indications of Germany pulling out of the Euro. That is why the data points coming out of Germany have to be watched. They are straight pieces. Put this one to the bottom as the GDP figure in Europe as we mentioned came in very weak. It would be hard to imagine a weak Eurozone GDP with a strong German manufacturing base.
On Wednesday, Canada will announce their monetary policy and their economy has been fairly hot so they could raise interest rates. We don't think so, but put the piece to the side.
We will also get a merchandise trade report and industrial production report out of Germany on Wednesday. Again a straight piece and we should put this towards the bottom of the puzzle. The UK will also report industrial production and if you remember they had a horrid GDP report about a week ago. Put it on the bottom of the puzzle. We will also have Australia reporting their GDP which might not be as strong as recent quarters, but should be vibrant. Put it at the top of the puzzle.
Wednesday we will see how mortgage applications are shaping up. This number may come in strong, but unfortunately we think it will be goosed by refi activity so this piece should be on the side as any marginal bad news is already in the puzzle (priced into the market.)
The new Beige Book comes out on Wednesday. It is the no nonsense report from the 12 Federal Reserve Districts about the overall economy. We do not expect too many surprises out of this report, but it is a large straight piece. Put it to the side.
Another straight piece we can almost assuredly put on the bottom will be a speech by John Williams the bearest of bearest economists who will be speaking at an event in Seattle on Wednesday. It will be after the market closes, but we can not expect his to say anything positive. The problem is, he is right more than he is wrong.
Thursday long before our market opening we will have the Bank of England announces their interest rate changes if any. They really have no where to go. Their economy is worse than ours and their rate is at 5bps (5 basis points aka .005%). Same with the European Central Bank. No changes and they will keep their rate at 1.5%. These pieces go to the side.
Thursday we have the ever confusing International Trade Balance report. It is a tricky one to read and interpret, but the simple explanation is if the trade balance (which is usually a deficit number) drop, thus increasing the deficit, the weaker the dollar. In other words we want to export more and import less. Look for this report on Thursday to improve. Put it at the top of the puzzle. We think this because everything we are reading says we are importing less oil and the price of oil is off its highs.
Another straight piece on Thursday is the consumer credit report. We have seen this number exploded in June as people were buying cars. With Boehner and The President telling everyone the sky is falling in late July and August we think this puzzle piece will have to go to the bottom of the puzzle. Look for a lest than expected (6 billion is the guess) number below 5 billion.
Then we have two speeches on Thursday. Bernanke will speak to The Minnesota Economic Club and president Obama was granted permission to address the nation after being told Wednesday won't work and then changing the time form 8:00 PM to 7:00 PM EST. All President know you don't address the nation the night of the new football season during a game. All of Wall Street will be listening carefully to the speech to see if there will be a hint of QE III or other tricks up his sleeve.
Of course we are talking about Bernanke and Not President Obama. The President has little to offer because anything he say has to be approved by the Senate, his ideas have not been well accepted and he has a credibility issue at the moment. Even if he had the silver bullet for job growth (the key agenda here-and why didn't he use the silver bullet when he controlled the Senate?) he has to get it passed by the blockheads in the GOP. The republicans will not approve anything this guys wants because they know they have him on the ropes and that is the only chance in heel they have of winning the next election. Sad, but my party is being butt heads at the expense of our economy. Bernanke might give a tell about a QE III that will help the economy. We will put Bernanke's speech at the top and Obama's off to the side.
Thursday we will know the latest on the jobless claims number and the expectation is 408,000. That would be a hair lower than last week. With the inclement weather last week we think we will see an increase above 410,000. Any higher and that straight edge will have to go to the bottom part of the puzzle.
So you have a lot of the straight edge pieces ready to start to piece together. You might be able to find a few more by checking to see what companies will be reporting. Since we are a month away from a new earnings quarter, there are not too many influential companies earning reports this week. PBY Pep Boys and MW Men's Warehouse report this week but will only be a little influence as they help us understand the retail sector. Look for a beat by PBY and a miss from MW. We can't even call these straight edge pieces.
When you lay out all the edge pieces for next week you get a good frame across the bottom meaning the market will be hard pressed to rally. Because of all the bad economic data and the Eurozone news look for the banking sector to get hit again. Look for the overall market to be down 1% this week. We thin there will be a lot of sideways trading until Bernanke speaks. Friday will definitely be the day we define the direction for the next few weeks. We are going to play a VXX option, perhaps a Dec 34-36 call option. We will look to add to core positions on the expected drops.
