GO FIGURE

By Charles Payne, CEO & Principal Analyst



NEW YORK, NY

Not for nothing but what in the hell is going on with the market? There is a ton of excitement but that doesn't begin to explain the kind of action seen in the last few days. Yes, I'm speaking first and foremost about American International Group (AIG), but other names as well. It's crazy. It's also somewhat amusing too, having investors brag about making money in the stock after they've been losing in it massively for months, maybe years. But, once something gets a spark in this market it's like the movie "Field of Dreams", build a little momentum and they will come...and buy...and believe (even if they aren't sure what they are believing in). You know the old saying (and song from Billy Preston) nothing from nothing leaves nothing? Well, not for nothing, but in the stock market nothing from nothing can leave you with a lot of money in your pocket if timed right.



By the way, I've always hated that saying: not for nothing. I can only recall New Yorkers using it, but it makes no sense. Now, "go figure" I like. And, these days, I'm always saying to myself go figure, but don't waste too much time in the process. You have to suspend a fair amount of intellect.



In this kind of atmosphere behavioral analysis should play a much larger role in your trading decisions.



Technical View



1,000, 1G, or a grand are the kinds of numbers that carry a lot of weight, they always have. The number is now resistance for the S&P 500, and the last time it was resistance the inability to break through resulted in heartbreak. Back in November last year the S&P 500 made another stab at breaking through 1,000 and failed again. The pullback was swift and punishing. On the other hand, a breakout should mean the index has a clear shot to 1,300. In other words, this is the proverbial crossroads.







Economic Data



Non-Farm Payrolls



Who would have thought the day would come when calling a load of job losses "good" was acceptable. Well, that's exactly the path we are charting right now, as July non-farm payroll data was good all things considered. The U.S. economy shed 247,000 jobs in July, much better than the consensus estimate. The unemployment rate actually improved ten basis points to 9.4% from 9.5%. The return of autoworkers in the month looks to have added 28,000 jobs, but if one wants to adjust accordingly the July non-farm tally was improved versus prior months. Healthcare added a solid 20,000 jobs. If anything, hourly earnings were weak, implying a sluggish recovery is forthcoming as consumers remain cost minded.



The jobs report numbers and revision are big positive surprises, even though most Wall Street firms were lowering their expectations all week long. What I find odd is the initial reaction; I thought the market would be higher.







Apparently, the move in AIG was legitimate, and obviously the news was leaked earlier in the week. Most of the better known companies that released earnings since yesterday's close saw better-than-expected results.

IN A FLASH (FINAL EDITION)

By Charles Payne, CEO & Principal Analyst



NEW YORK, NY

In 1940, comic character "Flash" was born by DC, unveiled as a super fast hero to the world. The story of Flash has changed several times, but essentially he was a guy that got caught in a lab while an experiment went wrong. In gayer times, he was known as the "Scarlet Speedster." These days, the technique of flash trading is also viewed as an experiment that has gone wrong. Just one component of so-called High Frequency Trading (HFT) flash trading uses technology to provide traders with an edge of seeing orders before execution and getting in front of them. While this sounds unfair, the real aim of somehow bringing Goldman Sachs (GS) down a peg will not be achieved.


It was reported yesterday that Goldman enjoyed 46 days of $100.0 million plus trading days in 2Q, up from 34 days in 1Q. Politicians hate that and have been powwowing on how to stop this company, which is faster than a speeding bullet, from being able to leap embedded regulations in a single bound. Still, at the end of the day, the playing field should be as level as possible. At the same time, we have to congratulate when our first instinct is to hate, and that goes especially to Goldman as long as the firm is playing by the rules.



Buy or Sell Signal?



I mentioned not long ago the action in some banks that were written off was looking compelling, particularly Bank of America (BAC). Well, in hindsight, we should have featured the dang on stock. Be that as it may, I was wondering if the action foretold of the kind of last inning speculation that could signal an end to the March rally. Well, as it turns out, there is another level of stocks beneath Bank of America when it comes to risky speculation. Government owned and controlled businesses were on fire yesterday. I guess the theory is that these companies can never go out of business. Earlier this week there was even scuttlebutt about AIG needing more government money.

• AIG


• FRE


• FNM

The moves in these stocks were simply mind boggling. There is no real justification for the moves, although it could prove rational down the road (way down the road) this is the kind of market that is getting frothy. When in-play stocks get hot they get super hot in a flash. So, to answer the question I think that this is a short-term buy signal and long-term sell signal. If there is an attack of lunacy then I don't mind playing the game, but keep in mind that it's probably just a game. This is where all those investors that waited it out begin coming in, and they need to do it based on a hit story. With respect to the financials, there was a general epiphany that the worst is over.


I'm not sure how much hot water will be tossed on this seismic change of heart but Prudential (PRU), the nation's second largest insurer, posted a strong earnings result but offered subpar guidance. Prudential's management offered full year guidance of $5.00 to $5.20 per share versus their previous outlook range of $5.25 to $5.65 per share.



Auto-related stocks also enjoyed the hype over "cash for clunkers," while agricultural stocks were sprouting on belief there will be major consolidation in the space. There is also betting that the program will continue even as the Senate vote was pushed off until Saturday.



"And he smiled a kind of sickly smile, and curled up on the floor, and the subsequent proceedings interested him no more." -Bret Harte



John Chambers was once the man because of his ability to work a conference call into a frenzy (think Angus Young over a speakerphone). Then, he was the man for playing it straight and narrow even as other CEOs were playing it fast and loose with assumptions and exuding the best, and only the best. These days he's not really the man to the broad market or even the tech sector, and maybe he's being cautious to a fault. Saying that there are "positive signs" the Cisco (CSCO) chief executive also said it's "too soon to call a recovery."



I was also disappointed with the reaction in Ocean Freight (OCNF), a small-cap dry bulk shipper that posted earnings after the bell and saw its share price get hammered. The action in the dry bulk shippers belies any notion of a global recovery. It's hard to imagine that with commodity prices sky-rocketing these stocks can't recapture even a fraction of their old fire. It simply doesn't jive.



If this is the week when we unofficially put the recession to bed then the shorts are going to be wiped out. I know they made boatloads of money for a long time but the March rally was bruising, and a move to 9,600 on the Dow Jones Industrial Average would be the final blow. Think of the movie "300" as these Spartans have their backs to the edge of a cliff. It has been a valiant run, but they could be done in a flash.







Economic Data



Initial Jobless Claims



The Labor Department announced this morning that the number of recently laid-off workers seeking unemployment insurance fell last week to 550,000 from a revised 588,000 figure the previous week, fresh evidence that layoffs are easing. However, to counteract this good news, the department says that the tally of people continuing to claim benefits rose by 69,000 to 6.3 million. For the fifth straight week there were fewer than 600,000 claims which only proves that employers are not laying off workers as quickly as before (however, they still aren't hiring). U.S. employers have eliminated 6.5 million positions since the recession began in December 2007, the most of any downturn since the Great Depression. The report this morning, while a slight positive, will keep the market in limbo as most are already looking towards tomorrow's job report.







Same-Store Sales Review


Brian Sozzi, Research Analyst



Comparable store sales results for July were downright ugly, with most companies falling shy of consensus by wide degrees. There haven't been any earnings bombs for 2Q09, though I would say that sales for the three-month period have largely missed consensus. As I suspected, the shift of tax free holidays to the first week of August has negatively impacted the results. Retailers will have no easy excuse to fall back on should the August numbers come in flat, as the back to school sets are in stores, tax free holidays are in play, and the lead up to Labor Day brings shoppers out for deals.



Of the 30 retailers that we track for same-store sales and earnings, five of them managed to deliver EPS upside for 2Q. Companies such as Kohl's (KSS), Gymboree (GYMB), and Aeropostale (ARO) all issued material earnings guidance revisions, under a few common threads. First, well balanced product and price drove market share gains; Aeropostale has been a share gainer for over a year, so let's break down Kohl's for a moment. Despite the company's store base being situated mostly in hard hit manufacturing areas, it had positive comps in discretionary merchandise categories while rival Target was deeply in the negative in these same categories. This is almost textbook market share improvement. Second, solid inventory management was a factor, as these companies are not over building inventories rather flowing in goods as demand warrants. Thus, this limits markdown risk and preserves gross margins. And, third, product costs are coming down finally across the industry. Deflation is hurting discounters, such as BJ's Wholesale (BJ), but for a company like Aeropostale it's able to receive this lower sourced product and mark it up while remaining a price leader. Talk about a business model to have during a recession.



We are receiving many client inquiries on how to be positioned in the retail sector pre-holiday. I hate to give a party line type answer, but it's really a matter of sticking to companies that have executed in recent months. Most of the sector is trading at valuation multiples to future earnings that simply do not quantify enough of a risk factor from continued consumer balance sheet de-leverage and joblessness. For example, Abercrombie & Fitch (ANF) trades at almost 19.0x estimated earnings for next year, in spite of horrid sales trends and a robust capital expenditure commitment that is eating into free cash flow. In my opinion, having exposure to this stock is a dangerous proposition as market share is ceded during back to school and holidays and the pricing structure is subsequently revised. It's no longer a time to bet on recovery earnings stories, as that trade has all but died. Consistent to my views coming into the year, at some point a focus will need to be on companies growing sales, and I believe that adjustment period is fast approaching as inventory is at artificially low levels and unproductive stores have been weeded from the mix.



As I sit here at the moment with coffee in one hand and pen in the other, the holiday season for the retail sector, though not as discount crazy as last year given low sector inventories, is shaping up to be very competitive once again. Perhaps competitive to a point where consensus EPS estimates are at risk of being too rosy as retailers focus on pricing and give up attempting to maximize margin.

JOBS ANXIETY

By Charles Payne, CEO & Principal Analyst



NEW YORK, NY

Just a couple days after the big jobs report, there is a bevy of worrisome economic reports out today that all hint at a disappointing Friday morning. I'm not sure how much we should rely on these reports; although they are credible, there isn't always a direct correlation with employment data gathered by the Bureau of Labor Statistics.

• Challenger, Gray & Christmas


• ADP


• ISM Services

The Institute for Supply Management's services index came in at a reading of 46.4 versus consensus of 48.2, and disappointed investors closed out a few positions and have decided to cool their heels. The report could have come in line or maybe even beaten the expert assumptions if input prices hadn't dropped to 41.3 from 53.7. New orders were just about unchanged, but the employment segment dipped to a reading of 41.5 from 43.3. It's exciting to see the economy rebound, but it's frustrating to continue to see it stall on the doorstep of expansion. Still, I don't think that there is any sense of panic in the air, plus there are other signs that suggest the worst is over.







On the earnings front, mortgage insurer Radian Group (RDN) posted earnings that significantly beat the consensus estimate. Moreover, management sounded extremely bullish on the economy. This is a company that was sinking fast and desperately looking for ways to raise money. The share price for Radian is up 50.0% today, but came into the session trading at less than 20.0% of book value. The same situation with American International Group (AIG); up 38.0% the stock was trading at less than 10.0% of book value, although nobody is really sure what book value is. It doesn't hurt that there is a 17.0% short position in AIG ... a few bodies are being taken out on their shields today.



Factory orders came in better than expected, +0.4 versus consensus of -0.8. Mortgage applications edged higher (both purchases and refinancing), and petroleum inventory data was mixed.

AUTOPILOT (FINAL EDITION)

By Charles Payne, CEO & Principal Analyst



NEW YORK, NY

Right now, the market is on autopilot, just waiting until Friday morning for the ultimate "green shoot" in the form of a sharp decline in the number of job losses during the month of July. The problem with autopilot is that one can become too comfortable or take their eye off the ball, but that's not likely to happen over the next two days. The biggest risk is to ignore negative signs, though there really hasn't been many with respect to year-long trends. Numbers in and of themselves have been just plain old ugly, but compared with results from earlier in the year it's like it is beauty and the beast. Still, it's safe to be skeptical because there is the legitimate question of sustainability and quality. Just as a blow-up doll could only fly an airplane so far, earnings beats predicated on massive job cuts and gutting important costs can't be expected to hold up a rally indefinitely. But, for now, it has been a pretty smooth ride. I took off my seatbelt and moved about the cabin.



Shame Shame Shame



"We now turn away from the checkered spectacle of so much glory and so much shame."



-Lord Macaulay



I don't think that it worked with bond investors like those retirees called "greedy" for putting their nest eggs in U.S. companies they thought were good investments. It worked with Wall Street, which is a four-lettered word among the general public. So, will it work on banks and mortgage servicers that have been reluctant to modify mortgages? The government is going to embark on a program of shaming mortgage servicers to modify more mortgages. (It's a tactic that will hit health insurers like the blitzkrieg.) It's amazing that the government has no shame of its own as it continues to play a heavy hand to force through its objectives (I haven't even touched on the verbal blitz Geithner hit Shelia Bair, Ben Bernanke, and Mary Shapiro with.) Both Presidents Bush and Obama let the banks get away with a fast one, and now to save face the only recourse is to shame these banks into doing things they obviously don't want to do.



I wish aide for taxpayers would have gone directly to them instead of being flushed down a toilet and then asking everyone to wait by the septic tank to see what happens. In this case, nothing is happening. Will bankers repeat that old mantra their mothers taught them when back in school they were picked on for getting straight "A" grades and being wisenheimers about it all?



"Sticks and stones may break my bones, but names will never hurt me."



The fact of the matter is that under normal circumstances the government has zero rights to force banks to do things they don't want to do, especially a government that pledges to eliminate risky behavior. Considering how many modified mortgages are falling back into trouble this year I understand why banks are hoarding money. If the government is going to shame these entities they should at least shame themselves in the process and toss in house flippers and people that fibbed on their mortgage applications. When the administration unveiled its plan, it said that millions would reap the benefits...how about a quarter of a million. Only 15.0% of eligible loans have been offered a plan and only 9.0% have been given trial modifications. The government is once again going on the offensive, and now will try to shame an industry that has no shame to begin with.







Don't look now but stocks are expensive! At the rate earnings are coming in stocks are creeping higher and higher on the price to earnings metric. It could be another reason for those that missed the entire move to explain why they are still on the outside looking in, or it could be a sign that smart investors want to be in the game. Let's face it, everyone knows where PE ratios are and yet they continue to buy.







Our auto sector analyst, David Silver, has completed an update on "cash for clunkers." Many of his views on the program differ from mine; if you want a copy of his report send him an email at david.silver@wstreet.com.



Economic Data



The ADP and Challenger, Gray & Christmas reports were slightly disappointing this morning. According to ADP, 370,000 private non-farm jobs were shed (consensus: 350,000), with declines across all major buckets of the measurement pool. Manufacturing, however, did eke out a slower pace of job loss than evidenced in prior months. Somewhat offering a conflicting view on the possibility of overall jobs market improvement as 2009 moves along, Challenger, Gray & Christmas said that job layoff announcements spiked in July from a very low level in June. Although a month to month rebound was assumed, commentary by John Challenger that job layoff announcements will continue to increase tosses cold water on the recovery thesis.

GREEN SHOOTS AND GIDDINESS

By Charles Payne, CEO & Principal Analyst


NEW YORK, NY

The market seems content with being able to coast the rest of today's session and perhaps the next two as well given the big news coming on Friday. What's really interesting is that the jobs report was a major bust last time around and yet the market found a way to rally off so-so earnings reports that maybe weren't as impressive as the 1Q09 reports. I'm not sure if the rationalization hype holds up under a disappointing jobs report, however. This time, there is more than concealed hope; investors are wearing the need for a big positive surprise on their sleeves. There's good reason for investors to be hyped; "green shoots" are growing into something more impressive. It's not the stuff of Jack and the Beanstalk yet, but it can be seen without a magnifying glass. Today, a couple additional economic reports added to the beanstalk list.



Pending home says increased 3.6%; consensus was for an increase of 0.7%. All regions of the country enjoyed month over month increases during the month of June. The news has put a serious spark under homebuilder stocks which began the day under pressure from subpar earnings results. Although banks have been hoarding money and government programs have been largely ineffective, it seems like housing has at the very least hit bottom. This means that many would-be buyers will feel compelled to jump on board. Just like the cash for clunkers program brought out all those waiting for better deals, a sudden surge in demand could trigger a spike in home prices. While it would be like the proverbial rabbit jumping in front of a footrace and fading quickly to a more normal pace, the lingering result would be optimism (a critical component of any economic recovery).







Personal income stumbled much more than expected, and yet spending came in ahead of consensus. It seemed weird on the face of it, and indeed the reason this occurred is because people began to tap into those fresh savings. I personally feel that it's too early for households to spend their replenished savings but the Street loves it.







The market is peppy, but is hoping to become outright giddy on Friday morning. I must say that I'm a little peppy myself.