by NewstraderFX
Friday's review:
The retail sales and consumer sentiment numbers did not provide a psychological consensus of thinking in the market because what they said was open to interpetation depending on how an observer looked at them. Retail sales including auto's showed a gain while ex-autos showed a decline. Using the number the BEA uses for calculating GDP (ex-autos, gas and building materials) a small gain was indicated. Consumer sentiment remained near yearly lows, but the actual number was a few 10th's higher then expected. What's the conclusion here? Sales and sentiment remain low, but are not providing evidence that the consumer is taking a big sub-prime related hit. That means the glass is either half empty or half full depending on how one looks at it. We want to trade when everyone agrees the glass is either empty or full. You can rest assured that if the consumer number would have been close to 80- no one could have said the consumer looked anything other then bad and the glass would have looked empty. Fear would've existed. That would've been our trade.
What they do show is an exact mirror of the market as a whole. There have been some very serious problems in both the mortgage and commercial credit markets. Central banks have had to provide $500B of emergency liquidity. The ABCP market was completly siezed up a few weeks ago. Numerous hedge funds have keeled over. Recession talk is in the air. The markets have taken a hit but if you really look at where they are, they've actually held up very well in spite of the challenges. The DOW, with all the problems present, is only off about 4% from 14,000 and are still positive for the year. Markets have taken a "lickin", but so far seem to still be "tickin".
I think that some valuable trading info was gained for future reference on Friday. Merryl announced that is was marking its CDO paper to market and that 3rd quarter profits would be taking a hit. Sounds ominous, but let's dig a little deeper.
Are you surprised to hear that an investment bank is going to suffer a sub prime related loss? I'm certainly not and I don't think that anyone else is either. In my experience, when a big investment bank talks the street hears what they say but if what they say offers no surprise, then nothing happens. As we often say as traders, the information is already "priced in". I think that the probability is strong that further announcements along these lines are also priced in and likely will not have an effect on the equity markets. What is not priced in at this time in my opinion is hard evidence that the consumer is going to take a big hit.
The reason i'm saying this is because if the U.S. consumer stops spending, recession will inevitably occur. Since equity markets remain in positive territory for the year, I don't believe we can say that a recesssion is priced in. Therefore the potential for big hits to the equity markets, should they occur, are likely to come from consumer data (jobs, wages, spending and sentiment).
As i've said many times, the market exists in 3 states: greed, fear and confusion. Trade the first two and take the day off when the third exists.
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