Monday, August 17, 2009

Return of the Fear Trade/Ariad Initiation by Oppenheimer/Japan Returns to Growth/Consumers Still Reluctant to Spend/Empire State Manufacturing Survey

1. Japan Experiences 2nd Quarter Growth in GDP: Japanese GDP grew .09% in 2nd quarter, or at 3.7% annualized rate, the first positive number in Japan since the Q/E March 2008. Investors are apparently back into the groove of emphasizing the negative. The Japanese market responded to this news by falling over 3%. The WSJ story on this positive news was fairly typical, starting the second paragraph with a "But". The growth was not based on domestic demand but on inventory adjustments and "a rise in exports and government spending". Then, to throw more cold water on the news, the WSJ pointed out that the .09% rise was less than the 1% consensus prediction. By the time I finished reading the third paragraph, I am just about convinced that positive growth in the world's second largest economy is bad news. One problem with the Japanese economy, and last quarter is no different than the last fifty years, is that it stands or falls based on exports and government spending. The structural problem noted by the WSJ, a lack of growth in domestic demand, has been omnipresent for decades and is one of the primary reason the Japanese stock market reached its peak in the late 1980s. Japan's Stock Market Japan-US Comparisons Continued The Japanese stock market is one that had to be traded frequently since the last 1980s in order to make money, a buy and hold strategy would have been a loser. NIKKEI 225 Index Chart

2. U.S. Consumers-Lowe's Earnings Report: The fear that permeates the market this morning is based on concerns that the U.S. consumer will not be leading the U.S. to an economic recovery anytime soon. Any information that feeds that concern is magnified in importance now, with any contrary or inconsistent information either ignored or downplayed in significance. The worse-than-expected earnings from Lowe's this morning is further fuel for those concerns. Lowe's earnings fell 19% to 51 cents a share compared with the consensus estimate of 54 cents. LOW further guided its 3rd quarter earnings estimate to a range of 21 to 25 cents, below the estimate of 27 cents. The retail stocks have had tremendous rallies this year based largely on a hope of the consumers' return to normal spending patterns. It is that hope which is being dashed, at least for now. I do not accept-yet- that the American consumer has changed their stripes permanently, more like a temporary hiatus.

3. Ariad Pharmaceuticals (ARIA-Lottery Ticket): Oppenheimer initiated coverage this morning on Ariad with a $4 price target, and the analyst expects Ariad's cancer drug to be approved for sarcoma, based on media reports. The analyst apparently uses the phrase "good probability" to describe that approval. I do not have access to this research report. I would note that Oppenheimer was the lead underwriter on ARIAD's recent stock issuance. Ariad is a Lottery Ticket purchase, and I recently added links to my posts on it in the Gateway Post on this asset class: LOTTERY TICKET PURCHASES: LINKS IN ONE POST (it is easier to use the google search box on the right hand side of this blog, underneath the FeedJit widget)

4. RETURN OF THE FEAR TRADE: The Dollar is gaining strength this morning, the long treasury bond is rising in price and falling in yield, the Japanese Yen is rising, commodities are falling, and the VIX is up over 16% in early trading to over 28. I would like to buy back some of the stocks recently sold, as I discussed in a weekend post, and welcome a sharp and quick pull back. Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009 The whipsaw pattern in the VIX is characteristic of a Phase 1 Unstable VIX Pattern in the Vix Asset Allocation model: USING THE VIX MODEL AS A TIMING INDICATOR FOR LONGER TERM STOCK ALLOCATIONS Vix Asset Allocation Model Explained Simply With as Few Words as Possible I am still hopeful that this unstable pattern will find resolution later this year in the formation of a Stable VIX Pattern: Volatility Indexes Continue Movement Toward a Stable Vix Pattern/More from Abelson and Rosenberg/

5. New York Fed Empire State Manufacturing Survey: This report of conditions among manufacturers in New York improved dramatically to 12.1, rising 13 points from the last survey. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York This was much better than expectations: FINRA - Investor Information - Market Data - Economic Indicator Calendar

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