Zeev's Turnips Patch-No Politics (ZEEV)

[Joe Stocks]

This is from Option Investor. com. Very good subscription newsletter. 2 week free trial. Worth the money in my book. The commentary is just a small part of what they provide every night along with several picks. It's just not for options.

>>>>>>>>>>>>>>>>http://www.optioninvestor.com/index.asp
What a day to be a fund manager. The economic reports are the
worst in months and you have to buy stocks to appear fully
invested and ready for the new bull market. It is like getting
caught doing something wrong in front of your friends in high
school and being told to report to the principal's office before
going to class tomorrow. You have to keep up pretenses for the rest
of the day to avoid losing face with your crowd but knowing that
you are going to get serious licks by the principal the next
morning. I am obviously dating myself and speaking from personal
experience. They probably don't give "licks" any more in high
school but I racked up 17 consecutive days once in the mid 60's.

Back to the point. Funds that were forced to go long today to
save face are likely to get whacked at the open tomorrow. The
terrible economic news is eventually going to strike home and
Friday could be the start of that process.

The day began with a GDP for Q3 that at 3.1% was far below
consensus of 3.7%. Inventories rose only $1.9 billion which
indicates that businesses are not expecting any recovery anytime
soon. This was down from $4.9 billion in Q2. This paints a
lower profit picture for Q4 since lack of inventory prevents
sales growth. What GDP growth there was came from auto sales
which were 22.7% of the growth. Economists have been saying
that the quarter began with a bang and ended with a sigh. The
majority of the gains came in July when growth spurted to +4%
for several weeks on the back of summer auto sales but slowed
to the current estimates of only 1.7% by quarter end.

This paints a very negative picture of the current economy.
Auto sales have dried up. Mortgage applications fell -20% last
week and it was the third weekly drop in a row. The housing
bubble is bursting and the refinancing wave is over. Estimates
of GDP for the 4Q are less than 2.0%. Several analysts
pointed to a 6% jump in business equipment and software as
evidence of a recovery but they forgot about the one time sale
that Microsoft held when it changed its licensing method.
Remember the record bounce in MSFT earnings reported this month
from that one time event. Ditto for the internal GDP numbers.
Take that away and the overall number would even be worse.

The Chicago PMI also fell significantly below estimates of 49.5
to 45.9 and indicating a signification contraction in the Midwest
economy. This is the lowest level since January and as the second
month in negative territory signals the end of a seven month
recovery. The PMI also showed continued weakness in payrolls.

The combined GDP, PMI and higher than expected Jobless Claims
numbers today paint a dreary picture for Friday's critical reports.
The PMI is a leading indicator for the more important ISM numbers
and the ISM was already showing negative growth last month at
49.5. The nonfarm payrolls, estimated at -15,000 for tomorrow,
could also be at risk despite a slight rise in help wanted ads.
We will also see the Personal Income and Spending and Construction
Spending on Friday. October vehicle sales could be the last nail
in the coffin. It will be a very full morning.

The Dow finished the month about 30 points from posting the best
October on record, ever. Coming in second best was no small feat
with a +10.6% gain. This was the best monthly gain for the Dow
since Jan-1987. Unfortunately, every time the Dow has posted a
double digit gain since 1926 the following month showed a high
single digit drop. Every time! That does not mean November is
a guaranteed drop but I would not bet against it based on the
fundamentals. The outlook for the 4Q is so bad that even food
stores are issuing warnings. Albertsons said it expected profits
to drop based on a steeper than expected drop in sales. It also
cut expectations for the entire year. Wal-Mart was blamed in
part for stealing business from food chains but even Wal-Mart
has warned that sales are falling.

The wild card here is the Fed meeting on Wednesday. If there was
no impending Fed meeting the market numbers would already be more
scary than anything that will come knocking on your door tonight.
There are so many conflicting guesses about the Fed's move that
the outcome is far from clear. The market has priced in more than
a 25 point cut but almost zero chance of a 50 point cut. There
are many analysts that think the Fed will not cut at all and
will stick with the "current stimulus is adequate" mantra and
not risk scaring investors with an "oh my gosh, it is really bad"
type of reaction. Since there has been no Fedspeak leaning toward
a rate cut there is a feeling they will hold pat and put pressure
on the ECB to cut rates first. The Fed does not want to weaken
the dollar any more unless the ECB follows suit. Not cutting
next week would put the pressure on them.

Many feel they will cut 25 points to show they feel our pain
even though it would have zero impact on the economy for at least
six months. At 1.75% we already have the lowest funds rate in
decades and according to all published Fed comments they feel
it is sufficient to fuel the recovery.

This is the way it is shaping up for me. A .25% cut is priced into
the market already. A .25% cut would leave the markets depressed
and we could see a negative reaction. A .50% cut would bring out
concerns of deeper problems than we can see and while there might
be an immediate bounce in the markets it should not last more than
a couple days before current fundamentals take hold again. With
no rate cut we could get the instant drop as the current expectations
are taken out of the market but then a rebound as the Fed will go
on the campaign trail to promote the "current stimulus is adequate"
story.

Whatever will happen is of course still four trading days away.
This means the verbal battle will continue in the press with
everyone getting their 15 min of face time on TV. They will
rationalize the drop in consumer spending and try to spin the
kinder gentler slow growth economy as "recovering" instead of
dipping. The confusion is going to keep investors on the sidelines
and without positive Fedspeak there will be plenty who will close
positions and move to the sidelines to avoid the possible unknowns.
Add into this the gains in the last two weeks as mutual finds
stacked their portfolio decks and you have a very good chance of
that house of cards collapsing.

Friday could be explosive or implosive. If the economic reports
come in better than expected then the initial reaction will be to
celebrate but they will then start discounting the chances of a
rate cut. Mass confusion. If the reports are worse than expected
the hopes for a rate cut will rise but the economic fundamentals
will have worsened. We have not seen any strong impact from the
last 12 cuts and one more is not likely to do any better. What
we are going to have is four more days of trading confusion with
a probable downward trend. Remember, a 25 point cut is already
priced in and everything else is just smoke. You have to ask
yourself why anyone would risk the precious capital they have
left by going long in front of the Fed meeting. Also, remember
the Fed needs to save its ammo for a response to a future
terrorist attack and in case the war in Iraq goes badly. They
do not want to be in the same shape as Japan with a zero interest
rate, no more bullets and the economy still falling.

Now that I have totally confused you I think that you should also
remember that the election is on Tuesday. Incumbents typically
do badly when the markets are crashing on election day. That
sets up another possibility of artificial manipulation that only
conspiracy theorists will admit to. Can we please just fast
forward to next Thursday and end the pain of uncertainty? No
such luck I am afraid.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor