Painting Some Broad Strokes

• August 27, 2001
• Dave Floyd

Staying
with my current theme of extending time frames on my trades, I wanted
to share my observations with you from my weekend reading and research. Despite
being very active in my trading account, I also maintain many positions in my
other accounts, which certainly would not qualify as short-term. These
positions may be speculative overnight plays, technical setups that last a few
days, or “theme” trades based on fundamental and economic research combined
with technical analysis to isolate entry and exit points. 

That being said, let
me paint some broad strokes as we embark on the “fall” trading season.
Remember, the fundamental research that I do, or perhaps that you do, MUST
not influence your intraday trades. These
trades are too short-term in nature to be influenced by your macro views. However,
like all successful traders, we need to invest wisely the income we make, so
being well-rounded is essential.

My general thoughts
as we head into the fall are one of cautious optimism. I,
like all traders, want to have a robust market which is ripe with trading
opportunities, so naturally a bull leg is welcome to invite money back into the
market and induce some volatility. The
reality, however, is not quite that simple. 

Technically, the
major indices look terrible. Both
the S&P and Nasdaq futures continue to make lower highs and cannot break
above their 50-day moving averages. Each
time there is a rally, someone proclaims the bottom. The
economic evidence, as well as valuations, refute this.

• Unemployment
  continues to rise

• Consumer
  credit is shrinking (there goes Mr. Greenspan’s panacea to save this
  economy)

• Earnings
  (not the pro forma ones) and margins are lousy and sure to get worse

• $5
  trillion was lost in the market slide

• The
  upper end ($1 million+) of the real estate market is showing serious signs
  of slowing. (Check out the most recent Forbes.)

You get the picture. Somehow
though, most people, including Wall Street, seem to be oblivious to these facts. Ignorance is bliss. 

But who am I to make
all these dire predictions? If the
collective mass of traders and investors decide to put their money to work, my
observations are worthless. This is
certainly a possibility. 

I share these
thoughts with you for one simple reason: Knowledge
and awareness will make you a better trader/investor, provided you don’t get
so wrapped up in your arguments that you miss what is going on right in front of
you. I
do not have to be right. I just want to win, and win big. That
being said, having a solid grasp of the “macro view” in terms of technicals
and fundamentals can only help you as a trader. The
next time there is a precipitous selloff or massive rally, not only will you be
on board, but you will know the reasons behind it, thereby adding conviction, a
must for enduring the duration of the move.

Before I move on to
today’s comments, I want to share with you some ideas I have on the Retailing
Sector. This sector is being deemed
the one remaining solid leg holding up this economy. Scratch
the surface however, and the numbers tell a different story. The
three leading retailers, Wal-Mart
(
WMT |
Quote |
Chart |
News |
PowerRating),
Home Depot
(
HD |
Quote |
Chart |
News |
PowerRating) and Costco
(
COST |
Quote |
Chart |
News |
PowerRating) are all showing an increase in revenues but decreasing margins,
certainly not a sign of a viable business model. Pricing
pressure is tremendous. Granted,
these retailers are not selling dollar bills for 90 cents (like Amazon’s
ludicrous business model), but if these retailers, which I would consider cater
to non-discretionary consumers, are having a tough time, what does that say for
retailers whose products are clearly discretionary in nature?

Take a look at the
S&P Retailing Index chart below. The
index has weathered the poor market thus far for the year. However,
if the earnings continue to come in weak, this index is quite vulnerable.
I am keenly interested in Best Buy
(
BBY |
Quote |
Chart |
News |
PowerRating).
This stock has been a stellar performer over the years, but with the
current economic climate, I speculate it is ripe for a downturn. Yes,
Wall Street will pump stocks like this with the usual “Back To School” and
“Christmas Season” hoopla, but if Best Buy is not growing its margins like
so many other retailers, the party will eventually die off.
I am waiting for the earnings announcement on Sept. 18, however. If
things continue to deteriorate on the economic front, I will more than likely be
short ahead of that announcement, anticipating bad news. With a PE of 32, a bad report is not an option. 

Bear in mind this
type of logic does not always prevail. Witness
Williams Sonoma
(
WSM |
Quote |
Chart |
News |
PowerRating) on Friday, up over
$3, despite a 73% drop in earnings year over year and declining margins. Wall
Street chose to celebrate because they beat the much lowered EPS.

As
I mentioned last week, the week ahead of Labor Day can be notoriously slow,
although with several economic reports out, volatility may be evident. Either
way, trade selectively.

Key
Technical Numbers: 
(futures)

Have
a great trading day, and feel free to send me your comments and questions.

Dave