On the surface, the big rally on the first work day of the new Obama Administration appeared to be a mirror image of the massive down day that preceded it. Yet the internals were quite different.
On Inauguration Day, 95% of all volume was down. On Wednesday, just 88% of all volume was up. So while the jump appeared robust, there was little to suggest it was anything more than a one-day wonder that left the major indexes well below the key resistance level of 850 on the S&P 500 and 8,370 for the Dow Jones Industrials.
Some investors were heartened to learn that a couple of the big banks’ CEOs bought shares of their own stocks on Tuesday.
Yet I hasted to note that this has happened many times before on the banks’ march to oblivion, and each time there’s been a rally followed by a another cascading collapse.
There are so many ways for boards to compensate CEOs for these purchase it’s not even funny, so don’t think for a minute that they are taking a real risk.
It’s some canny PR, and they might make a few bucks — but it’s not the sort of genuine insider-buying signal that has stood the test of time.
Financials, Energy and Tech Led the Way
One of the oddities in the Wednesday action was that after the big bounce back in financials and energy, the only other outperformer among sectors was technology.
Defensive groups like consumer staples, utilities and health care were all down. This could have be taken as a positive, as those kinds of groups are usually dumped by fund managers when they’re ready to buy high-beta groups like tech and energy.
But it shoved up against my view that we really want to see broad-based, enthusiastic buying before declaring that it’s safe to add heavily to stock positions. And in any case, tech traded straight back down on Thursday.
Companies Cutting Aggressively
What’s going wrong?
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To be honest, almost everything. We received word this week that industrial production in the tech sector plunged more in the fourth quarter of 2008 than it did during the bursting of the tech bubble in 2001.
That’s a little hard to believe, but the analysts at ISI Group in New York swear it’s true, and the chart above proves it. This is the result of the consolidation in financial services companies and weakness in communications.
This measure will weigh heavily in the cap-ex equipment component of GDP, which means the number for the whole shebang in Q4 08 will likely be around -5%.
This reminds us that a lot of things start happening when layoffs crescendo. It’s not just the loss of buying power by families. Companies also need to buy a lot less stuff to support their workers.
Remember that most PCs are bought for new employees, so when companies are contracting instead of growing they buy a lot less Dell desktops and Hewlett-Packard printers.
More Layoffs a Drag on the Economoy
Speaking of which, companies that cut employees aggressively in the fourth quarter are at it again even more aggressively so far in the first quarter of 2009.
Leading the pack for layoff announcements in the past week were:
- Circuit City, 34,000 layoffs
- Hertz, 4,000 layoffs
- Motorola, 4,000 layoffs
- LA Board of Education, 3,000 layoffs
- Mead/Westvaco, 2,300 layoffs
- Delta Airlines, 2,000 layoffs
- Cessna, 2,000 layoffs
The list goes on and on until reaching 60,000 — almost double the 13-week average of around 13,700.
Meanwhile, over in China, ISI reports that China real GDP probably slowed to 6.5% year over year in the fourth quarter, which amounts to a -0.5% annual rate of decline.
We’ve talked a lot about how much China is slowing, and are pretty sure the country will never post the numbers accurately if they fall too low. But on Tuesday Bloomberg reported that China’s official urban unemployment rate jumped to 4.2%, which is the worst level since 1980.
Europe is also seeing a world of hurt. Germany’s economy is on track to shrink 2.5% in 20009, while Japan’s exports are collapsing and tool orders have actually collapsed 75% below last year’s levels.
It is hard to fathom the pain that this contraction is causing families as well as companies. But our focus has to be on our own portfolios, so during these are hard times for the world economic system, learn how to short stocks on rallies in my Trader’s Advantage advisory service.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
