Enzio's Clock

Background

1. Last Friday's market review by Bloomberg

Going by her contribution that follows, Elizabeth Stanton is a bright journalist. Reflect on our previous "Collateral Damage" series when reading her succinct review. We are not surprised that - barring Taiwan, China and Pakistan - markets throughout Asia fell in follow-on fashion today.

"U.S Stocks Drop for a Third Week on Recession Speculation", by Elizabeth Stanton, Bloomberg, 12th January 2007

Jan. 12 (Bloomberg) -- U.S. stocks fell for a third straight week, the longest streak since August, after forecasts from AT&T Inc., American Express Co. and Tiffany & Co. bolstered speculation that the six-year economic expansion is ending.

AT&T dropped the most since 2003 on the New York Stock Exchange after saying customer demand weakened. American Express had the steepest loss since September 2001 after adopting a ``cautious view'' for the year. Tiffany tumbled the most in 5 1/2 years on slower holiday sales. Goldman Sachs Group Inc. economists said the U.S. may already be in a recession, joining counterparts at Morgan Stanley and Merrill Lynch & Co.

The Standard & Poor's 500 Index fell 0.8 percent to 1,401.02 this week, bringing its year-to-date loss to 4.6 percent for the worst start since 1982, according to Bloomberg data. The measure fell to an almost 10-month low on Jan. 8. The Dow Jones Industrial Average sank 1.5 percent to 12,606.30. The Nasdaq Composite Index declined 2.6 percent to 2,439.94.

``We certainly have another couple of months to go before we see the bottom of this thing,'' said Richard Weiss, who helps manage about $60 billion as chief investment officer at City National Bank in Beverly Hills, California. ``The duration of the downturn is still unknown.''

AT&T fell 6.6 percent to $38.20 this week for the third- largest decline in the Dow average behind American Express and Alcoa Inc. Chief Executive Officer Randall Stephenson said slowing economic growth led to ``softness'' in the home-phone and Internet businesses.

Delinquencies Rise

American Express retreated 10 percent to $44. The third- largest U.S. credit-card network reported a $275 million charge amid signs the housing slump is spreading to consumer spending. December cardholder spending slowed and delinquencies rose, particularly in California, Florida and other areas affected by the housing slump, Chief Executive Officer Kenneth Chenault said in a statement.

Tiffany, the world's second-largest luxury-jewelry retailer, dropped 13 percent to $35.80. A drop in holiday sales prompted the company to cut its profit forecast and consider lowering 2008 targets.

Tiffany led merchants in the S&P 500 to a 3.3 percent drop. Gap Inc. fell 13 percent, the most since August 2004, to $17.20. Sales at U.S. stores open at least a year rose 2.2 percent in November and December, the smallest increase in five years, the International Council of Shopping Centers said Jan. 10.

`Kill The Consumer'

``It's very difficult to kill the consumer,'' said Lawrence Creatura, who helps manage about $2.6 billion at Clover Capital Management Inc. in Rochester, New York. But ``with declining home prices, and the contraction in credit, and an increase in unemployment and an increase in the cost of living, we're going to find out if we can kill the consumer.''

The unemployment rate jumped to a two-year high in December and job growth was the slowest since August 2003, the Labor Department said Jan. 4. A private report the same week showed the largest decline in manufacturing in five years.

Yields on Treasury securities sank after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates further to prop up the economy. The two-year note fell 0.19 point to 2.55 percent, the lowest since October 2004. Futures contracts for the first time gave more than zero odds that the central bank will cut its benchmark to 3.50 percent from 4.25 percent this month.

Crude oil fell 5.3 percent to a three-week low of $92.69 a barrel in New York on speculation that a global economic slowdown will cut energy consumption.

Lowest Since 2000

Countrywide Financial Corp., which tumbled 79 percent last year, lost a quarter of its value after Bank of America Corp. agreed to purchase the mortgage lender for less than its market price. Countrywide dropped to $6.33, the lowest since March 2000. Bank of America slumped 3.4 percent to $38.50, a four-year low.

MEMC Electronic Materials Inc. and Nvidia Corp. led semiconductor and semiconductor equipment makers in the S&P 500 to a 17-month low on speculation that computer demand will slow. The group lost 4.4 percent, the second-steepest loss after phone companies among 24 industries in the S&P 500. MEMC fell 12 percent, the most since July 2006, to $71.75. Nvidia fell 9.8 percent to $27.05.

S&P 500 companies scheduled to report quarterly results next week include Citigroup Inc., General Electric Co., Intel Corp., International Business Machines Corp., JPMorgan Chase & Co. and Merrill Lynch & Co. Analysts expect fourth-quarter profit for index members as a group to fall 10 percent, resulting in the first back-to-back quarterly declines since the six months ended March 2002, according to data compiled by Bloomberg.

69.3 Percent Decline

The financial industry, the biggest among 10 in the S&P 500, may report a 69.3 percent decline in earnings, as falling home prices and rising adjustable mortgage rates has rendered many homeowners unable to stay current on the payments that back debt securities held by Wall Street firms. Eight industries will report profit gains, led by 31 percent and 22 percent increases at telephone and technology companies, respectively.

``Earnings are going to continue to be pretty good for most of the market,'' said Michael Vogelzang, who oversees $2.3 billion as president and chief investment officer at Boston Advisors LLC in Boston. ``Unfortunately the largest sector in the S&P 500 is financials and we can expect to see miserable and difficult earnings in financials.''

Technology stocks have fallen the most so far this year in the S&P 500, losing 9.5 percent. Financial shares have retreated 5.4 percent. Health-care stocks have risen 3.4 percent, while utilities have added 1.7 percent.

Sales at U.S. retailers stalled in December, capping the weakest holiday-shopping season in five years, economists said before reports next week. Purchases were unchanged, following a 1.2 percent gain in November, according to the median estimate in a Bloomberg survey before the Commerce Department's Jan. 15 report. Other reports may show residential construction fell and inflation eased."

2. So what's "official"?

"It's the economy, stupid." Well, will Bill Clinton campaigning as First Husband (ever, at that!), the pronouncement is more aptly attributed to the sage, Prof. Ben Bernanke: "Bernanke signals need for rate cuts to bolster growth". Golly, I love his honesty. He is telling us that things are getting bad. Recent figures suggest (that) the outlook for ''2008 has worsened and the downside risks to growth have become more pronounced." That is why he is cutting rates. This equates to the first official view.

The second, official view comes from our wealthy ventriloquists. Three "big" banks - Goldman Sachs. Morgan Stanley and Merill Lynch - also have decided that "recession" is on the books. The "official" bit is that you, the retail investor, are paying such commercial pariahs, millions of dollars for 20/20, hindsight. But, markets go where such folks head, so head for the cliff and not for the hills... Again, The Economic Clock™ for America already was giving us the first whiff of recession/stagflation in Spring of 1986 - nearly 2 years and about 10% in market performance ago!

3. And what's not?

Look to the gold market for your answers. We recently read that gold is being bought for two reasons:

• growth is slowing, so US interest rates will be slashed yet again on 30th January, and
• inflation is growing, so the value of non-gold assets is falling.

All of which leaves some folks scratching their heads. Read on about our long-held views concerning stagflation

Indeed, in today's Financial Times (FT) we got more harbingers of gathering storm clouds in America (have you noticed that any foreign storm clouds are conspicuous in their absence?):

• Injections. Kuwait will put more money Merrills, who now are looking for an additional US$4 billion, and may invest a further $3 bn into Citi, whose dividends will be slashed by 40% this year;
• More mortgage-related write downs. Soon banks and brokers will reveal their 4Q07 profits. It is likely that they will want to write down another $40 billion;
• Two more financial messes worth $575 bn. The FT's Wolfgang Muenchau highlights on page 9 that next to the sub-prime mess, credit cards may face problems. Witness what happened to the Amex stock in the Bloomberg market wrap that we launched this piece with. We have guesstimated that the potential sub-prime damage could reach about $325 bn; Mr. Muenchau reckons that the credit card damage could reach similar amounts. Then there is the whole issue of credit default swaps, CDS: these allow "...bond holders to insure against default. Those who sell such protection receive a quarterly premium." This market is worth $45 trillion, or about three times the size of the U.S. economy! He cites Bill Gross, MD of PIMCO: "...the losses from credit default swaps caused by a rise in bankruptcies could be $250 bn or more..." Muenchau writes that "...as insolvency rates go up, so will be the payment obligations under the CDS contracts...So the general health of this market crucially depends on the rate of insolvencies. This, in turn, depends on the economy." Subscribers know that this has been our view all along, what with stagflation looming. Add all three messes, and the projected loss is in the region of $900 bn - shall we say, $ 1 trillion? And you are buying stocks? Good luck!!
• Peak profits. Another FT star, Tony Jackson, voices concern over analysts' "sunny" profit forecasts - something that we have warned you about for some time, too.

4. How our advice of 3rd January 2008, in "Collateral Damage" (3) has paid you

Sitting amongst the swaying palm trees in Phuket, Thailand on said day, we issued the following edicts from our rattan chair. Here us how the various Bloomberg-coded instruments have performed for our subscribers. The first instrument, SDS:US, is one whereby you can short the U.S. stock market. All other sector codes are for going "long" of various U.S. market sectors,;but we suggested on 3rd January that you "short" these, too. Here is how each position has performed, in percentage points, until last Friday, 11th January:

Need we say more? The U.S. slowdown is truly underway. Auf Wiedersehen, "this time it's different"!

5. Four more secure money-making strategies in turbulent times

1. Always consult your financial adviser first!
2. Stick with our "shorting" ideas that we have tabulated for you just now.
3. In addition, here are some other stocks to go short of. All codes are provided by Bloomberg.com

Back to the safe harbour of The Economic Clock™: with an excess supply of goods about to get very pronounced in America, courtesy of all of these three financial messes (sub-prime, credit cards and credit default swaps) leading to an excess demand for money, corporate profits have to tank - while corporate bankruptcies have to rise. So up goes unemployment and social unrest - and down goes any form of unnecessary shopping. So down go Asia's exports to America. Auf Wiedersehen, de-coupling!