Mystery Trader

Anyone who thinks old-line stocks don’t carry a lot of risk should look at the performance of Sears Holdings this week. We’ve been watching the retail sector because this is supposed to be a make-or-break period for the big-box retailers, providing some clues about whether consumer spending can hold off an economic recession.

Share prices for Sears were up as much as $11 Thursday from the low of the week before closing at $116.34. Then prices collapsed as much as $20, falling below $100, Friday after Sears announced earnings of 1 cent a share versus $1.57 for the same period last year and expectations of 53 cents. What a ride, especially for those who got caught up in buying Thursday’s rallly!!!! Sears accountants, executives or other insiders could probably see what was happening with the numbers, but what about the individual investor or even the pension fund managers? No wonder I and others are so wary of individual stocks, where we seem to be totally at the mercy of whatever news a company releases and the fickle responses of traders reacting to the news.

Well, it’s now official. If a stock market “correction” is defined as a 10% decline from a recent high, then the Dow Jones Industrial Average made it Monday with its close at 12,743, down from its high close of 14,164 on Oct. 9. E-mini S&P 500 Index futures pushed below the 10% correction threshold last week, and Nasdaq reached the 10% level in the first 10 days of November. It’s the first 10% setback since March 2003.

Never mind that stocks turned right back around and shot up again Tuesday in what has been a volatile up-down seesaw pattern recently. According to media reports, Tuesday’s optimism was based, in part, on Abu Dhabi investing $7.5 billion in Citigroup stock, which the market sees as a sign that Citigroup will be able to stabilize its position after taking losses related to the subprime mortgage debacle. Shares that were valued at 55 as late as the end of May apparently looked like a value to someone in the low 30s.

Seems a little suspect to me. If a firm has to sell a piece of itself to rescue itself . . . I will leave the high-finance deals up to the wizards, but it sounds like the news at Citi could be worse than revealed. We shall see.

Dead ahead for the stock market are the August lows — 1374 for E-mini S&P futures and 12,517 for the Dow. If a 20% decline denotes an “official” bear market, there is still a ways to go to those checkpoints — 11,332 for the Dow and 1261 for the E-mini S&P. The Dow transports have almost reached the bear market target already.

Anybody who trades forex has probably been amazed by the rise and fall of the Canadian dollar. Of course, no one can be absolutely certain the value of the U.S. dollar has bottomed or that the C-dollar has put in a historic top, but evidence is picking up to indicate that’s the case, and the dollars may end up at par. Wonder how long it will take marketing people to adjust the two-tier pricing for a lot of products — for example, a magazine I got the other day has a cover price of “U.S. $6.95, Canada $8.95.” Oops . . .

The U.S. Dollar Index has a lot of ground to make up to confirm it has put in a bottom, but if a bottom is in, it could have a lot to do with the outlook for the price of gold, oil and a number of other commodities. Gold has backed down from its assault on its $850 record, crude oil has slipped in its attempt to reach $100 . . . copper, often viewed as a gauge of the economy, is now suggesting either the U.S. dollar decline may have ended or the U.S. economy is really weakening — or both — by trading below $3 a pound Monday for the first time since last spring.

If there is one thing that does seem like a sure thing in the forex market, it is that the value of the Chinese yuan will rise relative to the U.S. dollar. No less a guru than Jim Rogers said so recently, and judging by the economic growth we’ve seen firsthand in China, we would have to agree. But be patient . . .

China’s strong economic growth has made it a hot prospect for investors of all types, and after a trip to China in October, we are among those who have seen the growth potential firsthand and are now watching major Chinese stocks more carefully. (See an earlier blog entry for my comments on China’s construction and overall boom.)

But the investment route looks like it will continue to be rough and rocky to profit from Chinese “opportunities” even in well-established companies, not to mention the new companies now open to public investment.

PetroChina, for example, the big energy company, was above $260 as recently as Oct. 31, even after that astute investor Warren Buffet dumped all of his shares, but the company has since plunged to a low below $185, shot back above $205 and then sagged again to near $190 Thursday. China Mobile, the telecom giant, went from above $100 on Oct. 31 to near $80, back to $93 and then down again.

Of course, U.S. share prices such as the retail stocks I also wrote about in an earlier blog entry have also had their share of gyrations. For example, Sears Holdings fell from a close at $134.79 on Oct. 31 to lows around $120, jumped more than $6.50 in two days and fell back $9 to new lows in the last two days.

Not to mention the stock indexes. Maybe I should stick with something more stable . . . like soybean futures.

If consumers account for two-thirds of the U.S. gross domestic product, as generally reported, the prospects for continued economic weakness look very real – and maybe even that other R word, recessionary – when you look at share prices of major retail stocks recently.

Banks and building and some other sectors of the stock market haven’t done so well lately either, but the showing of the major big-box retailers seems especially ominous after another rough day Friday considering the clout consumer spending is supposed to have on the economy. Perhaps it’s the higher prices for energy or food or the tightening credit market or the loss of jobs or some other factor that’s finally catching up with consumers. Look at what’s happening to the value of these stocks:

 Kohl’s (KSS), which closed at 47.58 Friday, hasn’t been below 50 since the spring of 2006.
 Target (TGT), which closed at 56.19, is also at its lowest level since 2006 after a July high above 70.
 Sears Holdings (SHLD) sank Friday to 120.87, also its lowest level since 2006.
 Home Depot (HD) has fallen to its lowest level since 2003.
 Wal Mart Stores (WMT) is threatening to drop below 42 to its lowest price since 1999 – now that’s rolling back prices, as their television ads tout.
 Even Nordstrom (JWN), at the other end of the economic spectrum from Wal Mart, has seen its shares fall from near 60 early this year to about half that, going back to lows from mid-2005.

There may be a variety of reasons to explain the setbacks in these stocks, but we are now at the most critical season of the year for most of these retailers. If consumers don’t step up . . . well, let’s just say it could be a pretty bleak holiday for stock index bulls.

One of the bellwethers of the stock market for some time has been Merrill Lynch. Looking at the latest quotes, the outlook for stock market bulls ain’t pretty. And it’s not so good either for bears using short option strategies on financial institutions or stock indexes.

You may recall that the share price of Merrill (MER) plunged from the 90 to the 70 vicinity in the late July period as Merrill’s decline preceded the slide of the major stock indexes. The news has only gotten worse for Merrill since then with the crash of the last few weeks — and as much as $12 Friday — taking Merrill below 55 to its lowest level since mid-2005. Some apparent major misjudgments about risk associated with the collapse of mortgage-backed securities and hedge funds cost Merrill CEO Stanley O’Neal his job. (But I’m sure he will come out okay with his reported $160 million payout. Makes me wonder where I can get a job like that, screw up so badly and still come out with big bucks, as seems to be routine in the corporate world these days.)

And the worst news may still not be out for Merrill and other investment firms and others like it caught up in the world of collateralized debt obligations and structured investment vehicles. Press reports indicate there may have been a lot of other shenanigans going on with these transaction in an effort to keep the real situation from looking as bad as it is. Who knows how deep the problems go in other firms beyond Merrill Lynch?

You may recall the situation at Bear Stearns, which more or less launched the latest financial crisis with its revelation of failed hedge funds. When Bear Stearns formed a billion dollar alliance with CITIC Securities Co. in China a few weeks ago, even a columnist in China wondered about the logic of such a matchup. Why should a quasi-state company like CITIC use Chinese citizens’ tax money in what appears to be a bailout of a U.S. firm that made some poor business decisions? Time will tell if the deal makes sense.

Seems like some financial leaders haven’t learn much from the previous generation’s savings and loan debacle in the late 1980s.